Newegg Commerce (NEGG) F-1Registration statement (foreign)

As filed with the Securities and Exchange Commission on October 26, 2020

Registration No. 333 – [●]

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

Lianluo Smart Limited

(Exact name of registrant as specified in its charter)

Room 611, 6th Floor, Beikong Technology Building

No. 10 Baifuquan Road, Changping District

Beijing 102200, People’s Republic of China

Telephone: +86-10-89788107

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Cogency Global Inc.

122 East 42^nd Street, 18^th Floor

New York, NY 10158

Tel: 800-221-0102

(Name, address, including zip code, and telephone number, including area code, of agent for service)

With a Copy to:

Approximate date of commencement of proposed sale to the public: Promptly after the effective date of this registration statement.

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

CALCULATION OF REGISTRATION FEE

The information in this prospectus is not complete and may be changed. We may not sell the securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting any offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

As submitted to the Securities and Exchange Commission on October 26, 2020

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED [●], 2020

[●] Common Shares

Lianluo Smart Limited/Newegg Commerce, Inc.

This prospectus relates to a public offering (the “Offering”) of [●] shares of Common Shares of Lianluo Smart Limited (which will be changed to Newegg Commerce, Inc. upon completion of this offering) in connection with simultaneous restructure transactions consisting of a proposed merger, which is a business combination under common control, (the “Merger”) and a proposed disposition (the “Disposition”, together with the Merger, the “Restructure”). Pursuant to the terms of the Merger, our wholly owned subsidiary, Lightning Delaware Sub, Inc., a Delaware company (the “Merger Sub”) will merge into Newegg Inc. (“Newegg”), a company incorporated under the laws of Delaware. Upon consummation of the Merger, Newegg will be the surviving entity and our wholly owned subsidiary. At the same time, pursuant to the terms of Disposition, we will sell all of the business, assets and liabilities of our wholly owned subsidiary, Lianluo Connection Medical Wearable Device Technology (Beijing) Co., Ltd. (“Lianluo Connection”), a PRC company, to Beijing Fenjin Times Technology Development Co., Ltd. (“Fenjin Times”). The closing of the Restructure and this Offering is contingent on the closing of each other transaction. In connection with the Restructure and the Offering, we will amend our Memorandum and Articles of Associations to reflect, among other things, the share redesignation, the share combination, the share increase, certain rights of certain of our principal shareholders, and the name change upon the consummation of this Offering and Restructure (the Memorandum and Articles of Associations as amended, “Fifth Amended and Restated Memorandum and Articles of Association”). We anticipate that the public offering price of our Common Shares will be $[●].

Upon the completion of the Restructure and this Offering, we will be a “controlled company” as defined under the NASDAQ Listing Rules because Mr. Zhitao He, the chairman of the board of directors of the post-closing issuer, will beneficially own [●] of our Common Shares and will be able to exercise [●]% of our total voting power assuming the underwriters do not exercise their over-allotment option, or [●]% of our total voting power if the underwriters exercise their over-allotment option in full. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules, including an exemption from the rule that a majority of our board of directors must be independent directors or that we have to establish a nominating committee and a compensation committee composed entirely of independent directors. As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

In addition, upon the completion of the Restructure and this Offering, the board of post-closing issuer shall consist of up to seven directors. Initially, four of the directors shall be appointed by Digital Grid (Hong Kong) Technology Co., Limited, which will own approximately [●]% of our total voting power upon completion of this Offering, and three of the directors shall be appointed by a “Minority Representative” which is selected by a majority of Newegg’s stockholders other than Digital Grid (the “Legacy Shareholders”). The Legacy Shareholders will collectively own approximately [●]% of our total voting power upon completion of this Offering. The initial Minority Representative is Fred Chang. The number of directors that Digital Grid and the Minority Representative are entitled to appoint will decrease proportionately with the decrease of the respective voting power of Digital Grid and the Legacy Shareholders pursuant to our Fifth Amended and Restated Memorandum and Articles of Association. Any director positions which neither Digital Grid nor the Legacy Shareholders are entitled to appoint shall be appointed by the remaining directors, or by any other means allowed under the Fifth Amended and Restated Memorandum and Articles of Association. Immediately upon closing of the Offering, you will have no right to appoint any director to our board.

On October 21, 2020, we filed the Fourth Amended and Restated Memorandum and Articles of Association (the “Fourth Amended and Restated Memorandum and Articles of Association”) to effectuate an one-for-eight reverse stock split of its authorized share capital, effective on October 21, 2020. Pursuant to the Fourth Amended and Restated Memorandum and Articles of Association, we are authorized to 6,250,000 common shares of par value of $0.021848 each, of which 4,736,111 would be designated as Class A Common Shares of par value of $0.002731 each, and 1,513,889 be designated as Class B Common Shares of par value of $0.021848 each. In this registration statement, unless explicitly stated, such one-for-eight reverse stock split has been reflected in the shares numbers.

Our Class A Common Shares are listed on the NASDAQ Capital Market under the symbol “LLIT”. We are applying to change our symbol of our Common Shares to “N”, effective upon the closing of this Offering. On October 23, 2020, the closing price of our Class A Common Shares was $3.25 per share.

Investing in our Common Shares involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” beginning on page 11 to read about factors you should consider before buying our Common Shares.

The underwriters are selling our Common Shares in this Offering on a firm commitment basis.

We do not intend to close this Offering unless the Restructure closes and the Common Shares is qualified for listing on NASDAQ.

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Sole Book-Running Manager

Maxim Group LLC

The date of this prospectus is [●], 2020.

TABLE OF CONTENTS

About this Prospectus

We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by us or on our behalf or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the Common Shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted or where the person making the offer or sale is not qualified to do so or to any person to whom it is not permitted to make such offer or sale. For the avoidance of doubt, no offer or invitation to subscribe for Common Shares is made to the public in the British Virgin Islands. The information contained in this prospectus is current only as of the date on the front cover of the prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

Other Pertinent Information

Unless otherwise indicated or the context requires otherwise, references in this prospectus to:

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. A forward-looking statement is a projection about a future event or result, and whether the statement comes true is subject to many risks and uncertainties. These statements often can be identified by the use of terms such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “approximate” or “continue,” or the negative thereof. The actual results or activities of the Company will likely differ from projected results or activities of the Company as described in this prospectus, and such differences could be material. 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results and performance of the Company to be different from any future results, performance and achievements expressed or implied by these statements. In other words, our performance might be quite different from what the forward-looking statements imply. You should review carefully all information included in this prospectus.

You should rely only on the forward-looking statements that reflect management’s view as of the date of this prospectus. We undertake no obligation to publicly revise or update these forward-looking statements to reflect subsequent events or circumstances. You should also carefully review the risk factors described in other documents we file from time to time with the SEC. The Private Securities Reform Act of 1995 contains a safe harbor for forward-looking statements on which the Company relies in making such disclosures. In connection with the “safe harbor,” we are hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by us or on our behalf. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Risk Factors.”

RISK FACTORS

In addition to the other information contained or incorporated by reference in this registration statement, including those risk factors related to our business set forth in our Annual Report on Form 20-F for the year ended December 31, 2019, filed on May 15, 2020, you should carefully consider the following risk factors:

Risks Relating to the Proposed Restructure

The proposed Merger is subject to a number of conditions, including, among others, the approval of our shareholders, and the simultaneous completion of the Disposition and the consummation of this Offering, which may not be accomplished, or on a timely basis.

Completion of the proposed Merger is conditioned upon, among other matters, the approval of our shareholders, the simultaneous closing of the Disposition of Lianluo Connection and this Offering. There can be no assurance that any of these conditions will be satisfied, or that all of them will be satisfied on a timely basis. Any failure to meet these conditions on a timely basis may result in the delay or abandonment of the proposed Restructure.

Certain of our director, executive officer and major shareholders have interests in the proposed Merger that are different from, and may potentially conflict with, our interests and the interests of our unaffiliated shareholders.

Certain of our directors, executive officers and major shareholders have interests in the proposed Merger that may be different from, or in addition to, the interests of our unaffiliated shareholders and that may create potential conflicts of interest. Ms. Yingmei Yang, our Chief Financial Officer and a director, also serves on the board of Newegg. In addition, Mr. Zhitao He, our former Chairman and former Chief Executive Officer, controls approximately 86.6% of our total voting power, consisting of 58,937 Class A Common Shares held by Hyperfinite Galaxy Holding Limited and 1,388,888 Class B Common Shares held by Hangzhou Lianluo. Through Digital Grid, Mr. He also holds 490,706 shares of Newegg’s Class A Common Stock and 24,870,027 shares of Newegg’s Series AA Preferred Stock and 12,782,546 shares of Newegg’s Series A Preferred Stock, which collectively represents 61.33% of all issued and outstanding shares of Newegg. The beneficial ownership of our major shareholders and directorship of our officer in Newegg may create additional conflicts of interest in respect of the proposed Merger described in this registration statement.

Upon consummation of the Restructure and immediately prior to the closing of Offering, Mr. Zhitao He, will beneficially own approximately 61.11% of the voting power of the issued and outstanding shares and continue to exert significant influence on our operations.

Prior to the consummation of the Restructure and the Offering, Mr. Zhitao He controls approximately 86.6% of our total voting power. Upon the consummation of the Restructure and immediately prior to the closing of Offering, Mr. Zhitao He, who will be the Chairman of the post-Restructure entity, will own approximately 61.11% of the voting power of the issued and outstanding shares. Accordingly, Mr. Zhitao He will continue to be able to exercise substantial influence over our operations. Such concentration of voting power could have the effect of delaying, deterring, or preventing a change of control or other business combination, which may, in turn, have an adverse effect on the market price of our shares or prevent our shareholders from realizing a premium over the then-prevailing market price for their shares.

We will be a “controlled company” within the meaning of the NASDAQ Capital Market rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that are subject to such requirements.

After completion of this Offering, Mr. Zhitao He, through Hangzhou Lianluo, Hyperfinite Galaxy Holding Limited, and Digital Grid will continue to control a majority of the voting power of our outstanding Common Shares. As a result, we will be a “controlled company” within the meaning of the NASDAQ’s corporate governance standards. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company.” For so long as we remain a controlled company under this definition, we are permitted to elect to rely on certain exemptions from corporate governance rules, including:

As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

The Fifth Amended and Restated Memorandum and Articles of Association which provides certain rights to the Principal Shareholders of the post-closing issuer will limit your ability to appoint director and influence corporate matters and could discourage others from pursuing any change of control transactions that minority holders of Common Shares may view as beneficial.

Upon the completion of the Restructure and this Offering, the board of post-closing issuer shall consist of up to seven directors. Initially, four of the directors shall be appointed by Digital Grid (Hong Kong) Technology Co., Limited, which will own approximately [●]% of our total voting power upon completion of this Offering, and three of the directors shall be appointed by a “Minority Representative” which is selected by a majority of the Legacy Shareholders, who collectively will own approximately [●]% of our total voting power upon completion of this Offering. The number of directors that Digital Grid and the Minority Representative are entitled to appoint will decrease proportionately with the decrease of the respective voting power of Digital Grid and the Legacy Shareholders. Any director positions which neither Digital Grid nor the Minority Representative are entitled to appoint shall be appointed by the remaining directors, or by any other means allowed under the Fifth Amended and Restated Memorandum and Articles of Association.

Immediately upon Closing of the Offering you will have no right to appoint any director to our board. The Fifth Amended and Restated Memorandum and Articles of Association will limit your ability to appoint persons for service on the post-closing entity’s board of directors and may discourage proxy contests for the election of directors and purchases of substantial blocks of shares by making it more difficult for a potential acquirer to gain control of post-closing entity’s board of directors.

We may not have the ability to repurchase certain warrants.

In February and March 2020, we sold warrants exercisable for an aggregate of 1,373,750 shares of our Class A Common Shares to certain investors in private placements in conjunction with a number of registered direct offerings. The warrants are exercisable for five and one-half years from the date of issuance. On June 8, 2020, the registration statement on Form F-1 registering for the resale of the Class A Common Shares issuable upon the exercise of such warrants went effective.

Under certain circumstances, if a fundamental transaction (as defined in the warrants) occurs, holders of the warrants may require us to repurchase the remaining unexercised portion of such warrants for an amount of cash equal to the value of the warrant as determined in accordance with the Black Scholes option pricing model and the terms of the warrants. Our ability to repurchase the warrants depends on our available cash resources at such time. We cannot assure you that we will maintain sufficient cash reserves or that our business will generate cash flow from operations at levels sufficient to permit us to repurchase the warrants.

In addition, the Merger may also trigger certain anti-dilution adjustment rights and the warrant holders may be able to exercise the warrants at a lower price which may negatively affect our financial statements.

Failure to complete the proposed Restructure could negatively impact our business, financial condition, results of operations or share price.

Completion of the proposed Restructure is conditioned upon the satisfaction of certain closing conditions, including those discussed above, and other closing conditions customary for a transaction of this size and type. The required conditions to closing may not be satisfied in a timely manner, if at all. If the proposed Restructure is not consummated for these or any other reasons, we may be subject to a number of adverse effects, including:

Furthermore, if the Restructure is not completed, there can be no assurance that we will be able to find another target business on terms as favorable as those of the Merger Agreement.

Following the Restructure, the Company’s business may suffer as a result of the lack of public company operating experience of new management.

Prior to the completion of the Restructure, Newegg has been a privately-held company. Most members of Newegg’s management will become members of the Company’s management after the Restructure but have limited experience managing a publicly-traded company and complying with reporting and other obligations under securities law. The new management may not successfully manage Newegg’s transition into a public company which will be subject to significant regulatory oversight, reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new responsibilities may require significant attention from Newegg’s management and could divert their attention and resources from the management of Newegg’s business, which could negatively affect the new management’s ability to achieve the anticipated benefits of the proposed Restructure.

The transition to becoming the subsidiary of a public company will require changes in the way that Newegg operates its business and incur additional expenses pertaining to SEC reporting obligations and SEC compliance matters, and the post-closing issuer’s disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Private companies often have less regulated methods of operation than public companies. This results in less transparency and presents greater risks of noncompliance with rules and regulations. In anticipation of the proposed transactions, Newegg’s management has begun to implement a variety of measures to ensure that the company follows the rules applicable to public companies in the United States. To the extent these new procedures and policies could not change historical behaviors that might be inconsistent with the rules regulating U.S. public company, Newegg could be at risk of violation or poor reporting as a public company following this transaction. In the event Newegg’s directors or executive officers inadvertently fail to identify, review or disclose a new relationship or arrangement causing the post-closing issuer to fail to properly disclose any related party transaction disclosures or in the event that it fails to comply with SEC reporting and internal controls and procedures, the post-closing issuer may be subject to securities laws violations that may result in additional compliance costs or costs associated with SEC judgments or fines, both of which will increase our costs and negatively affect our potential profitability and our ability to conduct our business.  The public reporting requirements and controls are new for the management of the post-closing issuer, and may require the post-closing issuer to obtain outside assistance from legal, accounting or other professionals that will increase the costs of doing business.

Newegg is not a publicly traded company, making it difficult to determine the fair market value of Newegg.

The outstanding capital stock of Newegg is privately held and is not traded on any public market, which makes it difficult to determine the fair market value of Newegg. There can be no assurance that the Merger consideration to be issued to Newegg stockholders will not exceed the actual value of Newegg.

We may fail to uncover all liabilities of Newegg’s business through the due diligence process prior to the proposed Merger, exposing us to potentially large, unanticipated costs.  

Prior to completing the proposed Merger, we have and expect to continue to perform, certain due diligence reviews of the Newegg’s business. In view of timing and other considerations relevant to our successfully achieving the closing of the proposed Merger, our due diligence reviews will necessarily be limited in nature and may not adequately uncover all of the contingent or undisclosed liabilities we may incur as a consequence of the proposed Merger. Any such liabilities could cause us to potentially experience significant losses, which could materially adversely affect our business, results of operations and financial condition.

We have incurred and expect to continue to incur substantial transaction-related costs in connection with the proposed Restructure.

We have incurred, and expect to continue to incur, a number of non-recurring transaction-related costs associated with completing the Restructure. These fees and costs have been, and will continue to be, substantial. Non-recurring transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, filing fees and printing costs. Additional unanticipated costs may be incurred, which may be higher than expected and could have a material adverse effect on the new business’s financial condition and operating results.

The market price of our Common Shares may decline as a result of the proposed Restructure.

We could encounter larger than anticipated transaction-related costs, may fail to realize some or all of the benefits anticipated from the proposed Restructure or be subject to other factors that may adversely affect preliminary estimates of the results of the proposed Restructure. Any of these factors could delay the expected accretive effect of the proposed Restructure and contribute to a decrease in the price of our Common Shares.

In addition, we are unable to predict the potential effects of the issuance of Common Shares as the purchase price for the Merger of Newegg and in the concurrent Offering on the trading activity and market price of our Common Shares. The Common Shares issued in connection with the concurrent Offering can be freely traded on the NASDAQ Capital Market following the lapse of applicable lock-up periods. Sales of a substantial number of our Common Shares in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our Common Shares.

Certain of our current shareholders will have reduced ownership and voting power after the proposed Restructure.

As consideration for the proposed Merger, we will issue to the stockholders of Newegg in aggregate of approximately 363,325,542 Common Shares, which will entitle the holder thereof to one votes per share on any matter submitted to a vote of the post-closing issuer’s shareholders. Upon consummation of the Restructure and immediately prior to the closing of Offering, these shares would represent approximately 99.08% of the total voting power. Our current shareholders will, therefore, have proportionately less ownership and voting power in us following the proposed Merger than they have now.

Our future results following the proposed Restructure may differ materially from the unaudited pro forma financial information included in this registration statement.

The unaudited pro forma financial information contained in this prospectus is presented for purposes of presenting our historical consolidated financial statements with the historical financial statements of Newegg, as adjusted to give effect to the proposed Restructure, and is not necessarily indicative of the financial condition or results of operations of the business following the proposed Restructure. The assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect our financial condition and results of operations following the Proposed Restructure. Any change in our financial condition or results of operations may cause significant variations in the price of our Common Shares. See the section of this registration statement captioned “Unaudited Pro Forma Financial Information” for more information.  

NASDAQ may not list our Common Shares on its exchange, which could prevent consummation of the Restructure or limit investors’ ability to make transactions in our shares. Consequently, we may be subject to additional trading restrictions.  

It is a closing condition to the Merger that our Common Shares are listed on NASDAQ. The post-Merger entity will be required to meet the initial listing standards of NASDAQ. We may not be able to meet those initial listing requirements. Even if our securities are so listed, we may be unable to maintain the listing of our securities in the future. If we fail to meet the initial listing requirements, neither we nor Newegg would be required to consummate the Merger. In the event that we and Newegg elected to waive this condition, our Company and the shareholders could face significant material adverse consequences, including: 

Newegg may not realize anticipated growth opportunities.

Newegg expects that it will realize growth opportunities and other financial and operating benefits as a result of the Restructure. Newegg cannot predict with certainty if or when these growth opportunities and benefits will occur, or the extent to which they actually will be achieved. For example, the benefits from the Restructure may be offset by costs incurred as a result of being a public company. See “Risks Relating to Newegg’s Business” below for more discussion of the risks relating to Newegg following the Restructure.

Certain provisions of Newegg’s Amended Shareholders Agreement may delay or prevent us from raising funding in the future and may have an adverse impact on us and the liquidity and market price of our Common Shares.

Prior to the Restructure and this Offering, Newegg’s shareholders have entered into certain shareholders agreement, dated March 30, 2017 (the “Shareholders Agreement”). In connection with the Merger Agreement, Newegg, Digital Grid, the Principal Shareholders and we agreed to enter into certain amendment to the Shareholders Agreement, dated October 23, 2020 (such amendment, the “Amended Shareholders Agreement”), pursuant to which we agreed to assume all of the rights and obligations of Newegg under the Shareholders Agreement upon the closing of the Restructure.

Under the Amended Shareholders Agreement, the Principal Shareholders will have pre-emptive rights to acquire additional shares when the post-closing issuer issues or sells additional securities in the future, except for the “excluded issuance” as defined in the Amended Shareholders Agreement or Common Shares offered pursuant to a registration statement filed with the SEC.

In addition, the post-closing issuer and the Principal Shareholders also has rights of first refusal pursuant to the Amended Shareholders Agreement and subject to compliance with applicable laws and NASDAQ’s rules. If any Principal Shareholders receives a bona fide offer from any person other than its affiliate for any of the Common Shares such Principal Shareholders received in connection with the Merger (the “ROFR Shares”), then the post-closing issuer has a right of first refusal, but not the obligation, to elect to purchase all (and not less than all) of the ROFR Shares, at the same price, and on the same terms and conditions offered by the purchaser (the “ROFR Terms”). In the event the post-closing issuer does not decide to purchase such ROFR Shares or decides to purchase for less than all of the ROFR Shares, then each of the Principal Stockholders other than the selling Principal Shareholders shall have a right of first refusal to elect to purchase all (and not less than all) of its Pro Rata Share of the ROFR Shares on the ROFR Terms. For the purpose of this Amended Shareholders Agreement, “Pro Rata Share” means the percentage which corresponds to the ratio which each selling Principal Stockholder’s “Percentage Interest” (which is calculated by dividing (i) the number of the Common Shares owned by such Principal Stockholder, by (ii) total number of the then outstanding shares of the Common Shares held by all Principal Stockholders) bears to the total Percentage Interests of all Principal Stockholders exercising their right of first refusal. In the event that the ROFR Shares are in exchange for non-cash consideration, then such right of first refusal shall be exercisable based on the fair market value determined in good faith by the board of such non-cash consideration.

Such right of first refusal and pre-emptive rights may delay or prevent us from raising funding in the future and may have an adverse impact on the liquidity and market price of our Common Shares.

Risks Relating to Newegg’s Business

The impact of COVID-19 may adversely affect Newegg’s business and financial results.

The spread of the novel coronavirus (“COVID-19”), which was declared a pandemic by the World Health Organization in March 2020, has caused different countries and cities to mandate curfews, including “shelter-in-place” and closures of most non-essential businesses as well as other measures to mitigate the spread of the virus.

Newegg’s online business and warehouse operations have remained active to serve its customers during the COVID-19 outbreak, and to-date the Newegg has seen increased demand for its products and services during the outbreak. By contrast, some of the Newegg’s brick-and-mortar competitors have been forced to close down at least some of their retail locations temporarily, while some competitors have de-emphasized certain lines of business, such as computers and electronics, which represent the Newegg’s core business. Both of these industry trends have contributed to increased sales and market share for Newegg. However, the course of the outbreak remains uncertain, and a prolonged global economic slowdown and increased unemployment could have a material adverse impact on economic conditions, which in turn could lead to a reduced demand for Newegg’s products and services.

As a consequence of the COVID-19 outbreak, Newegg has experienced occasional supply constraints, primarily in the form of delays in shipment of inventory. Newegg has also experienced some increases in the cost of certain products, as well as a drop in promotions by some manufacturers. While it considers such events to be relatively minor and temporary, continued supply chain disruptions could lead to delayed receipt of, or shortages in, inventory and higher costs, and negatively impact sales in fiscal year 2020 and beyond.

COVID-19 impacted the supply chain of Newegg’s brand partners and Marketplace sellers, and Newegg’s ability to timely fulfill orders and deliver such orders to it customers, particularly as a result of mandatory shutdowns in different countries and cities to mitigate the spread of the virus.

Although Newegg cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have an adverse effect on the results of future operations of Newegg. The potential negative impact of COVID-19 on Newegg’s operations remains uncertain and potentially wide-spread, including:

The COVID-19 pandemic remains highly volatile and continues to evolve on a daily basis and therefore, there can be no assurance that these potential negative impacts will not materialize, and these and other impacts of COVID-19 may adversely affect Newegg’s future business, financial condition, cash flow, liquidity and results of operations.

Newegg faces risks related to system interruption, including failures caused or experienced by third-party service providers, and lack of redundancy and timely upgrades.

Newegg’s success depends on its ability to successfully receive and fulfill orders and to promptly deliver such orders to its customers. It could lose existing customers or fail to attract new customers, potentially resulting in a decline in net sales, if its online platforms are inaccessible or if its transaction processing systems, order fulfillment processes or network infrastructure are not operational or performing to its customers’ satisfaction.

Any internet network interruptions, latency or problems with its online platforms’ availability could prevent customers from accessing, browsing and placing orders on its online platforms, and impact its ability to fulfill orders or bill customers, which may cause customer dissatisfaction and damage its reputation and brand. Newegg has experienced brief computer system interruptions in the past, and it believes that others will occur from time to time in the future. Its systems and operations potentially are vulnerable to damage or interruption from a number of sources, including the following:

Newegg has not yet created sufficient redundancy for its information technology systems and data, and it does not presently maintain backup copies of all of its data. Newegg has a limited disaster recovery plan in effect and may not have sufficient insurance for losses that may occur from natural disasters, catastrophic events or the resulting business interruption. Newegg is generally self-insured outside the United States. Any substantial damage to, or disruption of, its technology infrastructure could cause interruptions or delays, loss of data, or reduced system availability, which could have a material adverse effect on its business, financial condition and results of operations.

Newegg may be unable to accurately project the rate or timing of traffic flow, including any traffic increases, or successfully and cost-effectively upgrade its systems and infrastructure in a timely manner to accommodate higher traffic levels on its online platforms. If the volume of traffic on its online platforms or the number of purchases made by its customers increases substantially, it may experience unanticipated system disruptions, slower response times, reduced levels of customer service and impaired quality and delays in reporting accurate financial information. For example, it experiences surges in online traffic and orders associated with promotional activities and holiday seasons, especially during the Christmas season, which can put additional demands on its technology platform at specific times.

Additionally, Newegg must continue to upgrade and improve its technology and infrastructure to support its business growth, and failure to do so could impede its growth. However, Newegg cannot assure you that it will be successful in executing these system upgrades and improvement strategies. Any such upgrades to its systems and infrastructure could require substantial investments. In particular, its systems may experience interruptions during upgrades, and the new technologies or infrastructures may not be fully integrated with the existing systems on a timely basis, or at all. If its existing or future technology and infrastructure do not function properly, it could cause system disruptions and slow response times, affecting data transmission, which in turn could materially and adversely affect its business, financial condition and results of operations.

Newegg relies on third-party payment processors to process deposits and withdrawals made by users of its marketplace, and if Newegg cannot manage its relationships with such third parties and other payment-related risks, its business, financial condition and results of operations could be adversely affected.

Newegg relies on a limited number of third-party payment solutions to process deposits and withdrawals made by users of its marketplace. If any third-party payment solution terminates its relationship with Newegg or refuses to renew its agreement with Newegg on commercially reasonable terms, Newegg would need to find an alternate payment solution, and may not be able to secure similar terms or replace such payment solution in an acceptable time frame. Further, the software and services provided by Newegg’s third-party payment solutions may not meet its expectations, contain errors or vulnerabilities, be compromised or experience outages. Any of these risks could cause Newegg to lose its ability to accept online payments or other payment transactions or make timely payments to users of its marketplace, any of which could make Newegg’s marketplace less trustworthy and convenient and adversely affect its ability to attract and retain its users.

Nearly all of Newegg’s users’ payments are made by credit card, debit card or through other third-party payment services, which subjects Newegg to certain regulations and to the risk of fraud. Newegg may in the future offer new payment options to users that may be subject to additional regulations and risks. Newegg is also subject to a number of other laws and regulations relating to the payments Newegg accepts from its users, including with respect to money laundering, money transfers, privacy and information security. If it fails to comply with applicable rules and regulations, Newegg may be subject to civil or criminal penalties, fines and/or higher transaction fees and may lose its ability to accept online payments or other payment card transactions, which could make its marketplace less convenient and attractive to the users. If any of these events were to occur, Newegg’s business, financial condition and results of operations could be adversely affected.

Additionally, Card Organizations, including Visa, require Newegg to comply with payment card network operating rules, which are set and interpreted by the payment card networks. The payment card networks could adopt new operating rules or interpret or reinterpret existing rules in ways that might prohibit Newegg from providing certain offerings to some users, be costly to implement or difficult to follow. Newegg have agreed to reimburse its payment processors for fines, penalties or assessments they are assessed by Card Organizations, if Newegg or the users on its marketplace violate these rules. Any of the foregoing risks could adversely affect its business, financial condition and results of operations.

Newegg’s business faces intense domestic and international competition.

The e-commerce market is intensely competitive with limited barriers to entry. Newegg’s current and potential competitors include retailers, manufacturers and distributors that offer a wide range of similar product categories and companies that provide D2C platform services, fulfillment and logistics services and other e-commerce related services. It is expected that the competition in this market will intensify in the future as companies develop new business models and enhanced technologies, new competitors enter the market, competitors forge new business combinations or alliances, and established companies in other market segments expand to become competitive with the business of Newegg.

Many of Newegg’s current and potential online and brick-and-mortar competitors have larger bases of customers and marketplace sellers, better brand recognition and greater financial, marketing, technical, management and other resources than it does. In addition, some of its competitors have used and may continue to use aggressive pricing or promotional strategies, may have stronger supplier relationships with more favorable terms and inventory allocation and may devote substantially greater resources to their online platforms and system development than it does. Increased competition may result in reduced operating margins, reduced profitability, loss of market share and diminished brand recognition for Newegg.

Newegg competes with online retailers such as Amazon and traditional retailers like Best Buy and Walmart, who sell through brick-and mortar stores and their online websites. In addition, Newegg also faces competition in the international markets it participates in or may enter in the future. Certain other competitors in countries where it operates are subsidiaries of e-commerce competitors in the United States with established local operations and brands and with greater experience and resources than Newegg has. In other countries that Newegg may enter, there may be incumbent online and multi-channel online or brick-and-mortar competitors presently selling IT and CE products. These incumbents may have advantages that could impede Newegg’s expansion and growth in these markets.

Newegg could also experience significant competitive pressure if any of its manufacturers or distributors were to initiate or expand their own online retail operations. Because Newegg’s manufacturers and distributors have access to merchandise at a lower cost than it, they could sell products at lower prices and maintain a higher gross margin on their product sales than Newegg can, and they may have the ability to directly connect with buyers at relatively low cost. This could result in Newegg’s current and potential buyers deciding to purchase directly from these manufacturers and distributors instead of from Newegg. Increased competition from any manufacturer or distributor capable of maintaining high sales volumes and acquiring products at lower prices than Newegg could significantly reduce Newegg’s market share and adversely impact Newegg’s operating results.

There is no assurance that Newegg will be able to compete successfully against current and future competitors. Competitive pressures may materially and adversely affect Newegg’s business, financial condition and results of operations.

A decline in demand for IT and CE products could adversely affect Newegg’s operating results.

Newegg and its Marketplace sellers primarily sell IT and CE products that are often discretionary purchases rather than necessities for consumers. Consequently, Newegg’s results of operations tend to be sensitive to changes in macroeconomic conditions and their impact on consumer spending. Factors including customer confidence, employment levels, conditions in the residential real estate and mortgage markets, access to credit, interest rates, tax rates, customer debt levels and fuel and energy costs could reduce customer spending or change customer purchasing habits in ways that materially and adversely affect demand for the products that Newegg and its Marketplace sellers offer.

There could be declines in the sales of the products offered by Newegg and its Marketplace sellers due to several factors, including:

Additionally, it is expected that some of Newegg’s future growth should be driven by product releases or upgrades that may occur in the near future. If such product releases do not occur or do not drive sales of IT products to the extent expected, Newegg’s future sales may be less than predicted, negatively impacting Newegg’s net sales and net income.

The loss of key employees or the failure to attract qualified personnel could have a material adverse effect on Newegg’s ability to run its business.

The loss of any of Newegg’s current executives, key employees or key advisors, or the failure to attract, integrate, motivate and retain additional key employees, could have a material adverse effect on Newegg’s business. Although Newegg has employment agreements with its executive officers, all of its executive officers are employed “at-will” and could terminate their employment at any time. If Newegg loses one or more of its executive officers or other key employees, its ability to implement its business strategy successfully could be seriously harmed. Furthermore, replacing executive officers or other key employees with other highly skilled and qualified candidates may be difficult and may take an extended period of time. Recruiting skilled personnel is highly competitive. Although to date Newegg has been successful in recruiting and retaining qualified personnel, there can be no assurance that it will continue to attract and retain the personnel needed for its business. The failure to attract or retain qualified personnel could have a material adverse effect on Newegg’s business.

If Newegg is unable to provide a satisfactory customer experience, its reputation would be harmed and it could lose customers.

The success of Newegg’s business depends largely on its ability to provide a superior customer experience to maintain and grow its customer base and keep its customers highly engaged on its online platforms, which in turn depends on a variety of factors. These include Newegg’s ability to continue to maintain a wide range of product offerings with attractive pricing, provide timely and reliable order fulfillment and provide high-quality customer support and service. If Newegg’s customers are not satisfied with its platforms, products or services, or its online platforms are severely interrupted or otherwise fail to meet its customers’ requests, Newegg’s reputation could be adversely affected.

As an e-commerce company, Newegg has limited ability to allow buyers to touch, test and feel products, personally interact with sales and customer service representatives, and receive or return products without waiting or paying for the products to be shipped, like brick-and-mortar retailers or online retailers that have brick-and-mortar operations do. Therefore, it is important that Newegg continues to improve its online platforms, including efforts to encourage the creation of more high-quality and useful user-generated content, such as reviews and commentary, on the products Newegg and its Marketplace sellers offer. If Newegg does not continue to make investments in the development of its online platforms and customer service operations and, as a result, or due to other reasons, fails to provide a high-quality customer experience, Newegg may lose customers, which could adversely impact its operating results.

Newegg currently operates customer service centers in California and Texas and has customer service representatives working remotely in Indiana, Nevada and New Jersey, focusing on serving North American buyers. To enhance its service capabilities and maintain increased access, Newegg operates an Asia-based multilingual customer service center that is available 24 hours a day, seven days a week via e-mail and instant messaging. Any material disruption or slowdown in its customer support services resulting from telephone or internet failures, power or service outages, natural disasters, labor disputes or other events could make it difficult or impossible for Newegg to provide adequate customer support. In addition, the future volume of customer complaints and inquiries may exceed Newegg’s present system capacities. If this occurs, Newegg could experience delays in responding to customer inquiries and addressing customer complaints and concerns. Newegg’s current level of customer support may also fail to meet the expectations of customers. Failure to provide satisfactory levels of customer service may harm Newegg’s reputation, causing potential loss of existing customers and difficulty in acquiring new customers.

Newegg may not succeed in promoting and strengthening its Newegg brand, which may materially and adversely affect its business and results of operations.

Brand recognition is a primary competitive factor in the e-commerce market and will be a key factor in maintaining and expanding Newegg’s customer base, market position and bargaining power with vendors. Any loss of trust in Newegg’s brand could harm its reputation and result in consumers, sellers, brands, vendors and other participants reducing their activity level in Newegg’s business, which could materially reduce its profitability.

If Newegg does not, or is unable to continue to, promote and strengthen the Newegg brand, or if the brand fails to continue to be viewed favorably, Newegg may not be successful in attracting new customers and Marketplace sellers, which could have a material adverse effect on its financial condition and results of operations. Additionally, Newegg competes not only for customers and Marketplace sellers, but also for favorable product allocations and cooperative advertising support from its vendors. If Newegg fails to maintain favorable recognition of its brand, it may not be successful in maintaining and strengthening its relationships with vendors in existing and new product categories or in maintaining existing offerings and sourcing new products at competitive prices and with adequate levels of inventory.

Adverse publicity about Newegg may arise from time to time. Negative comments about its online platforms, the products and services offered by it and its Marketplace sellers or its management may appear in internet postings and other media sources from time to time, and there is no assurance that other types of negative publicity of a more serious nature will not arise in the future. For example, if Newegg’s customer service representatives fail to satisfy the individual needs of the customers, the customers may become disgruntled and disseminate negative comments about Newegg’s customer service. In addition, Newegg’s Marketplace sellers and brand partners may also be subject to negative publicity for various reasons, such as customers’ complaints about the quality of their products and related services or other public relations incidents, which may adversely affect the sales of their products through Newegg and indirectly affect Newegg’s reputation. Moreover, negative publicity about other online retailers or the e-commerce industry in general may arise from time to time and cause customers to lose confidence in the products and services Newegg offers. Any such negative publicity, regardless of veracity, may have a material adverse effect on its business, reputation and financial condition.

Newegg is, or may become, subject to risks associated with its international operations, principally in Canada, which may harm its business.

Newegg began operations on its Canadian retail website, www.newegg.ca, in October 2008. Newegg also has a physical presence in China, Taiwan and the UK. While Newegg is investing in building its business in other markets, it may not be able to successfully manage the challenges associated with its current and future international operations due to risks, such as:

Any one of the foregoing factors could cause Newegg’s business, financial condition and results of operations to suffer.

Newegg’s expansion into new product categories, services, technologies and geographic regions subjects it to additional business, legal, financial and competitive risks.

An important element of Newegg’s business strategy is to expand into new product categories, services, technologies and regions, such as its expansion into Canada and other countries, and its plans to offer various D2C platform services for third parties. In directing its focus into these new areas, Newegg faces numerous risks and challenges, including alienating its core customer base, facing new competitors, having the increased need to develop new strategic relationships and straining its management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. There is no assurance that Newegg’s strategy will result in increased net sales or net income. Furthermore, growth into new business areas may require changes to its existing business model and cost structure, modifications to its infrastructure, and exposure to new regulatory and legal risks related to operating in new jurisdictions, any of which may require expertise in areas in which it has little or no experience. These risks may pose a material adverse risk to Newegg’s business, financial condition and results of operations.

Any interruption in Newegg’s fulfillment operations may have an adverse impact on its business.

Newegg’s ability to process and fulfill orders accurately and provide high-quality customer service depends on the smooth operation of its fulfillment infrastructure, including its warehouses and order processing centers. If it does not optimize and operate its fulfillment infrastructure successfully and efficiently, it could result in excess or insufficient fulfillment capacity, an increase in costs or impairment charges and a reduction in its gross profit margin, or harm its business in other ways. If Newegg does not have sufficient fulfillment capacity or experiences a problem fulfilling orders in a timely manner or if certain products are out of stock, its customers may experience delays in receiving their orders, which could harm its reputation and its relationship with its customers.

Newegg’s fulfillment infrastructure may be vulnerable to damage caused by fire, floods, power outages, telecommunications failures, break-ins, earthquakes, human error and other events. For example, its warehouse located in Indianapolis experienced a significant fire in January 2019, causing damage to its inventory. Its fulfillment infrastructure and processes may also contain undetected errors or design flaws that may cause its fulfillment operations to fail and materially impact its business and results of operations. If, for example, any of its warehouses were rendered incapable of operations, Newegg may be unable to fulfill any orders in areas that rely on that warehouse. The occurrence of any of the foregoing risks could have a material adverse effect on Newegg’s business, prospects, financial condition and results of operations.

Newegg depends on its vendors to source sufficient quantities of merchandise on favorable terms. If Newegg fails to maintain strong vendor relationships or if its vendors are otherwise unable to supply products that meet its standards in a timely manner, its net sales and net income could suffer.

Newegg’s contracts or arrangements with vendors generally do not guarantee the availability of merchandise or provide for the continuation of particular pricing or other practices. Newegg’s vendors may not continue to sell their inventory to it on current terms or at all, and, if the terms are changed, Newegg may not be able to establish new supply relationships on similar or better terms. In most cases, Newegg’s relationships with its vendors do not restrict them from selling their products through its competitors. Newegg competes with other retailers for favorable product allocations and vendor incentives from product manufacturers and distributors, including marketing dollars and volume-based sales incentive programs. Some of Newegg’s competitors could enter into exclusive or favorable distribution arrangements for certain products with its vendors, which would deny Newegg complete or partial access to those products and marketing and promotional resources. In addition, some vendors whose products are offered on Newegg’s online platforms also sell their products directly to customers. If Newegg is unable to develop and maintain relationships with vendors that permit it to obtain sufficient quantities of desirable merchandise on favorable terms, Newegg’s business, financial condition and results of operations could be adversely impacted.

Newegg’s relationship with any particular vendor is dependent on its sales of products manufactured or distributed by that vendor. For certain products, Newegg does not currently, and in the future may not be able to, meet the sales volumes or other requirements necessary to receive favorable treatment from the manufacturer of that product. As a result, Newegg may not receive favorable pricing, vendor incentives or other considerations from those vendors. During times of short supply for highly desirable products, Newegg may not receive adequate, or any, allocation of a popular product, leading to lost sales and customer dissatisfaction.

Certain products help create and maintain customer loyalty to the Newegg brand. Failing to maintain an adequate supply of these products could damage its ability to retain customers. Newegg currently does not carry the full product portfolio of, and in some cases does not carry any products of, certain well-known brands. As a result, consumers who are searching for those brands may not be able to purchase products from Newegg or purchase them at the most favorable prices, leading to potentially reduced net sales and net income.

Certain vendors provide a significant portion of Newegg’s merchandise. In the United States and Canada, for the six months ended June 30, 2020, ASI Corporation, an IT and CE product distributor, and Newegg’s 10 largest suppliers (including ASI Corporation) accounted for approximately 12.4% and 70.9% of the merchandise Newegg purchased, respectively. Failure to maintain a positive relationship with these key suppliers could impact Newegg’s ability to sell to customers the products they want.

Newegg’s vendors’ financial performance, liquidity and access to capital may be materially adversely affected by many factors, including but not limited to general economic factors, such as a continued slowdown in the U.S. or global economy or an uncertain economic outlook; political or financial instability; merchandise quality issues; product safety concerns; trade restrictions; work stoppages; tariffs; international trade war; foreign currency exchange rates; transportation capacity and costs; inflation; or outbreak of pandemics. These and other issues may affect their ability to maintain their inventories, production levels and/or product quality and could cause them to raise prices, lower production levels or cease their operations, all of which may in turn materially adversely affect Newegg’s net sales and net income.

If Newegg fails to attract, retain and engage appropriately skilled personnel, including senior management and technology and fulfillment professionals, Newegg’s business may be harmed.

Newegg’s future success depends on its retention of executives. Competition for well-qualified and skilled employees is intense globally, and Newegg’s future success also depends on its continuing ability to attract, develop, motivate and retain highly qualified and skilled employees, including, in particular, software engineers, data scientists and technology and fulfillment professionals. Newegg’s continued ability to compete effectively depends on its ability to attract new employees and to retain and motivate existing employees. All of its senior management and key personnel are employees at will and, as a result, any of these employees could leave with little or no prior notice. If any member of its senior management team or other key employees leave Newegg, its ability to successfully operate its business and execute its business strategy could be adversely affected. Newegg may also have to incur significant costs in identifying, hiring, training and retaining replacements of departing employees.

Newegg’s international sales and operations require access to international markets and are subject to applicable laws relating to trade, export and import controls and economic sanctions, the violation of which could adversely affect its operations.

Newegg must comply with all applicable U.S. export and import laws and regulations. Such laws and regulations include, but are not limited to, the Export Administration Act and the Export Administration Regulations. Newegg must also comply with U.S. sanctions laws and regulations, which are primarily administered by the U.S. Department of Treasury’s Office of Foreign Assets Control, as well as other U.S. government agencies. U.S. sanctions generally prohibit transactions by U.S. persons, including us, involving sanctioned countries, entities and persons, without U.S. government authorization (which will rarely be granted). Non-U.S. subsidiaries of U.S. companies are required to comply with U.S. sanctions against Cuba and Iran.

Violations of U.S. laws and regulations relating to trade, export and import controls and economic sanctions could result in significant civil and/or criminal penalties on Newegg or on its foreign subsidiaries, including fines, prohibitions on exporting and importing, prohibitions on receiving government contracts or other government assistance and other trade-related restrictions. U.S. enforcement of such laws and regulations continues to increase.

Newegg must also comply with applicable foreign laws relating to trade, export and import controls and economic sanctions. Newegg may not be aware of all of such laws applicable in the markets in which it does business, which subjects it to the risk of potential violations.

Newegg conducts marketing activities to help attract visitors to its online platforms, and if it is unable to attract these visitors or convert them into customers in a cost-effective manner, Newegg’s business and results of operations could be harmed.

Newegg’s success depends on its ability to attract visitors to its online platforms and convert them into customers in a cost-effective manner. Newegg relies on search engines, social media, shopping comparison sites and other affiliate networks to provide content, advertising banners and other links that direct visitors to its online platforms. As of June 30, 2020, approximately 36% of its website and mobile app visitors were referred to it through paid and unpaid search engine listings, shopping comparison sites and other affiliate networks that provide links to its online platforms. In particular, Newegg relies on search engines, such as Google, Microsoft Bing and Yahoo!, as important marketing channels. If search engines change their search engine algorithms periodically or penalize Newegg for non-compliance with their guidelines while using their algorithms, terms of service, or display and featuring of search results, or if competition increases for advertisements, Newegg may be unable to cost-effectively drive visitors to its websites and mobile apps. Newegg also sometimes pays these third parties to include or highlight its websites in their search results. If such third parties modify or terminate their relationship with Newegg or increase the price they charge to Newegg, if Newegg’s competitors offer them greater fees for traffic, or if any free third-party platforms on which Newegg relies begin charging fees for listing or placement, Newegg’s expenses could rise and traffic to its websites could decrease, resulting in harm to its operations.

Newegg’s success also depends on its ability to convert its visitors to its websites and mobile apps into paying customers, a process which is partially reliant upon its ability to identify and purchase relevant keyword search terms, provide relevant content on its online platforms and effectively target its other marketing programs, such as internet portal referrals, e-mail campaigns and affiliate programs. If Newegg is unable to attract visitors to its websites and mobile apps and convert them into customers cost-effectively, its business and financial results may be harmed.

Newegg is partially dependent on third parties to perform a number of its e-commerce functions. If such third parties are unwilling or unable to continue providing these services, Newegg’s business could be harmed.

As of June 30, 2020, approximately 29.3% of Newegg’s Gross Merchandise Value (“GMV”) were generated by the sale of products fulfilled through third parties. These third parties provide various services on Newegg’s behalf, including inventory maintenance and order processing. Newegg has no effective means to ensure that these third parties will continue to perform these services to its satisfaction, in a manner satisfactory to its customers or on commercially reasonable terms. Newegg’s customers may become dissatisfied and cancel their orders or decline to make future purchases if these third parties fail to deliver products on a timely basis. If Newegg’s customers become dissatisfied with the services provided by these third parties, Newegg’s reputation and brand could suffer.

If Newegg fails to manage its inventory effectively, its financial condition, results of operations and liquidity may be materially and adversely affected.

Newegg’s scale and business model require it to manage a large volume of inventory effectively. As Newegg may continue expanding its product offerings, Newegg expects to include more SKUs in its inventory, which could make it more challenging for Newegg to manage its inventory effectively and put more pressure on its warehousing system.

Newegg purchases most of the merchandise that it sells directly to customers on its online platforms from manufacturers or distributors. Newegg assumes inventory damage, theft, obsolescence, and price erosion risks for its inventory. These risks are especially significant as most of the merchandise sold on its online platforms is characterized by rapid technological change, obsolescence and price erosion. For the six months ended June 30, 2020, Newegg recorded inventory write-offs or write-downs totaling $1.5 million, or 0.2% of its cost of goods sold. Newegg may sell obsolete or dated merchandise at a discount or loss. If there were unforeseen product developments or if vendors were to change their terms and conditions, Newegg’s inventory risks could increase. Newegg also periodically takes advantage of cost savings associated with certain opportunistic bulk inventory purchases offered by its vendors. These bulk purchases increase Newegg’s exposure to inventory obsolescence. Newegg’s success depends on its ability to sell its inventory rapidly, purchase inventory at attractive prices relative to its resale value and manage customer returns and the shrinkage resulting from theft, loss and misrecording of inventory. If Newegg is unsuccessful in any of these areas, it may be forced to write down or write off substantial amounts of inventory, or sell it at a discount or loss, which could materially and adversely impact Newegg’s business, financial condition and results of operations.

Newegg depends on its demand forecasts for various kinds of products to make purchase decisions and to manage its inventory. Newegg is exposed to inventory risks as a result of seasonality, new product launches, rapid changes in product cycles and pricing, defective merchandise, changes in consumer demand, tastes and spending patterns, and other factors. While Newegg endeavors to accurately predict these trends and avoid overstocking or understocking products it sells, the demand for products can change significantly between the time inventory is ordered and the date of sale, and Newegg may be unable to sell products in sufficient quantities as it expects. Furthermore, Newegg may in the future open additional warehouses and duplicate part of the inventory for its direct sales business that is stored at its current warehouses to increase its overall fulfillment efficiency as it grows its business, which will also increase the inventory risks its direct sales business faces. Failure to effectively manage its inventory risk could have a material adverse effect on Newegg’s business, financial condition and results of operations.

Newegg has incurred net loss in the past and may continue to experience losses in the future.

Newegg incurred a net loss of $17.0 million and $33.6 million in 2019 and 2018, respectively. We cannot assure you that Newegg will be able to generate net profits or positive cash flow from operating activities in the future. Newegg’s ability to achieve and maintain profitability will depend in large part on its ability to, among other things, source and sell more high margin products, grow and diversify its supplier base, and optimize its cost structure. Newegg may not be able to achieve any of the above. As Newegg continues to grow and expand its business, its operating expenses may increase further. As a result of the foregoing, we believe that Newegg may incur net losses for in the future.

If Newegg fails to adopt new technologies or adapt its websites, mobile apps and systems to changing customer requirements or emerging industry standards, its business may be materially and adversely affected.

To remain competitive, Newegg must continue to enhance and improve the responsiveness, functionality and features of its online platforms, including its websites and mobile apps. The internet and the e-commerce industry are characterized by rapid technological evolution, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices, and changes in customer requirements and preferences, any of which could render Newegg’s existing technologies and systems obsolete. Newegg may be required to devote substantial resources to developing proprietary technologies or license technologies, enhancing its existing websites and mobile apps, developing new services and technology that address the increasingly sophisticated and varied needs of its current and prospective customers and adapting to technological advances and emerging industry and regulatory standards and practices in a cost-effective and timely manner. The development of proprietary technology entails significant technical and business risks. There can be no assurance that Newegg’s efforts to develop proprietary technologies will succeed or that any technology licenses will be available on commercially reasonable terms. Substantial investments will be required to remain technologically competitive, and Newegg’s failure to do so may harm its business and results of operations.

The seasonality of Newegg’s business places increased strain on its operations.

Newegg historically experiences higher sales in the fourth quarter due to the holiday season. If Newegg does not stock or restock popular products in sufficient amounts such that it fails to meet customer demand, it could significantly affect its revenue and future growth. If Newegg overstocks products, Newegg may be required to take significant inventory markdowns or write-offs and incur commitment costs, which could reduce profitability. Newegg may experience an increase in its net shipping cost due to complimentary upgrades, split-shipments and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too many customers access its online platforms within a short period of time due to increased holiday demand, Newegg may experience system interruptions that make its online platforms unavailable or prevent it from efficiently fulfilling orders, which may reduce the volume of goods sold through its online platforms and the attractiveness of its products and services. In addition, Newegg may be unable to adequately staff its fulfillment and customer service capability during these peak periods.

As Newegg tends to experience higher sales in the fourth quarter, Newegg experiences an increase in its cash position at year-end, as compared to the first, second and third quarters when sales are lower. As of December 31 of each year, Newegg’s cash, cash equivalents, and marketable securities balances typically reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities). In anticipation of higher sales during the holiday season, Newegg typically begins building up inventory levels in the later part of the third quarter. As a result of this inventory build-up and faster inventory turnover during the fourth quarter, Newegg’s accounts payable are typically at their highest levels at year-end. As sales begin to slow in the first and second quarters, inventory levels decrease, inventory turnover lengthens, and accounts payable and cash balances decrease as Newegg pays its vendors. The COVID-19 pandemic has resulted in increased cash and accounts payable balances at June 30, 2020 due to an increased demand for Newegg’s products. Inventory levels increased and turned faster than normal as a result of increased sales.

The successful operation of Newegg’s business depends upon the performance, reliability and security of the internet infrastructure in the countries where it operates.

Newegg’s business depends on the performance, reliability and security of the telecommunications and internet infrastructure in the countries where it operates. Newegg has several servers located in China providing development, testing and quality control services. Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology of the People’s Republic of China, or the MIIT. In addition, the national networks in China are connected to the internet through state-owned international gateways, which are the only channels through which a domestic user can connect to the internet outside China. Newegg may face similar or other limitations in other countries in which it operates. Newegg may not have access to alternative networks in the event of disruptions, failures or other problems with the internet infrastructure in China or elsewhere. In addition, the internet infrastructure in the countries in which it operates may not support the demands associated with continued growth in internet usage.

The failure of telecommunications network operators to provide Newegg with the requisite bandwidth could also interfere with the speed and availability of Newegg’s websites and mobile apps. If the prices that Newegg pays for telecommunications and internet services rise significantly, Newegg’s gross margins could be adversely affected. In addition, if internet access fees or other charges to internet users increase, Newegg’s user traffic may decrease, which in turn may significantly decrease its revenues.

If Newegg is unable to manage its growth or execute its strategies effectively, Newegg’s business and prospects may be materially and adversely affected.

Newegg’s success depends upon its ability to manage the growth of its operations effectively. Newegg anticipates expanding further as it pursues its growth strategies. Newegg’s expansion increases the complexity of its business and places a significant strain on its management, operations, technical systems, financial resources and internal control over financial reporting functions. Newegg’s current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage its future operations, especially as it employs personnel in several geographic locations. In addition, Newegg’s growth will require it to improve its operational and financial systems, procedures and controls, successfully manage international operations and hire additional personnel. These efforts may not be successful, and Newegg may be unable to improve its systems, procedures and controls in a timely manner. Delays or problems associated with any of these initiatives could harm its business and operating results. These initiatives will also cause its operating expenses to increase. If Newegg fails to accurately estimate and assess its growth or fails to increase net sales to match its increased operating expenses, Newegg’s financial condition and results of operations could suffer.

An adverse change in the vendor payment terms and conditions may have a material adverse effect on Newegg’s business, financial condition and results of operations.

Newegg purchases its inventory from vendors on trade accounts typically requiring payment between 15 and 45 days after the date the inventory is shipped to Newegg. As of June 30, 2020, its accounts payable balance was approximately $221.9 million with 55 days of payables outstanding. Newegg’s accounts payable balances as of June 30, 2020 represented 46.3% of its liabilities, temporary equity and stockholders’ equity. An adverse change in its vendors’ payment terms and conditions would significantly increase its working capital requirements and have a material adverse effect on Newegg’s business, financial condition and results of operations.

Because many of the products that Newegg sells are manufactured abroad, Newegg may face delays, increased cost or quality control deficiencies in the importation of these products, which could reduce its net sales and profitability.

Many of the products that Newegg purchases for direct sale on its online platforms are manufactured in countries outside the United States. These imported products subject Newegg to the risk of changes in import duties or quotas, new restrictions on imports, work stoppages, delays in shipment, freight cost increases, product cost increases due to foreign currency fluctuations or revaluations and economic uncertainties (including the imposition of antidumping or countervailing duty orders, safeguards, remedies or compensation and retaliation due to illegal foreign trade practices) and instability in the political and economic environments of the countries in which the manufacturers of these products operate. If any of these or other factors were to cause a disruption of trade from these countries, Newegg may be unable to obtain sufficient quantities of these imported products to satisfy its requirements or its cost of obtaining such products may increase. Historically, instability in the political and economic environments of the countries in which Newegg’s suppliers operate has not had a material adverse effect on its operations. However, the effect that future changes in economic or political conditions in the foreign countries where Newegg’s supplying manufacturers are located may have on its operations cannot be predicted. Potential disruptions or delays in supply due to economic or political conditions in foreign countries could adversely affect Newegg’s results of operations unless and until alternative supply arrangements are made.

Newegg may not be able to adequately protect its intellectual property rights.

Newegg relies on trademark and copyright law, trade secret protection and confidentiality or licensing agreements with employees, buyers, third-party sellers, brand partners and others to protect its proprietary rights. These steps may be inadequate, agreements may be violated or there may be inadequate remedies for a violation of such agreements. Newegg’s competitors may independently develop equivalent proprietary information and rights or may otherwise gain access to Newegg’s trade secrets or proprietary information, which could affect Newegg’s ability to compete in the market. There is no assurance that the steps that Newegg has taken will adequately protect its proprietary rights, especially in countries where the laws or enforcement of the laws may not protect its rights to the same extent or in the same way as in the United States.

In addition, third parties may infringe or misappropriate Newegg’s proprietary rights, and Newegg could be required to enforce its intellectual property rights, which could require expenditure of significant financial and managerial resources. Newegg has registered and common law trademark rights in the United States and certain foreign jurisdictions, as well as pending trademark applications for a number of marks and associated domain names. Even if it obtains approval for such pending applications, the resulting registrations may not adequately cover its trademarks or protect it against infringement or dilution by others. Effective trademark, service mark, copyright, patent and trade secret protection may not be available in every country or jurisdiction in which Newegg’s products may be made available online, which may cause Newegg’s business and operating results to suffer. In addition, Newegg may be unable to acquire or protect relevant domain names in the United States and in other countries. If Newegg is not able to acquire or protect its trademarks, domain names or other intellectual property, it may experience difficulties in achieving and maintaining brand recognition and customer loyalty.

Assertions, claims and allegations, even if not true, that Newegg has infringed or violated intellectual property rights could harm Newegg’s business and reputation.

Third parties have, and likely will in the future, assert allegations and claims of intellectual property infringement against Newegg on the items or their descriptions listed on Newegg’s websites and mobile apps. Any such claims, disputes or litigation, even if resolved in Newegg’s favor or not true, could be time-consuming and costly to defend, and could divert its management’s efforts from growing its business. Newegg has intellectual property complaint and take-down procedures in place to address communications alleging that items listed on online platforms, including the Newegg Marketplace, infringe third-party copyrights, trademarks or other intellectual property rights. Newegg follows these procedures to review complaints and relevant facts to determine the appropriate action, which may include removal of the item from its online platforms and, in certain cases, discontinuing its relationship with a Marketplace seller or brand partner who violates Newegg’s policies. However, these rules and procedures may not effectively reduce or eliminate Newegg’s liability. In particular, Newegg may be subject to civil or criminal liability for activities carried out, including products listed, by sellers or brands on its online platforms.

If any third parties prevail in their intellectual property rights claims against Newegg, Newegg may be required to pay significant licensing fees, damages and attorney’s fees, and may even be liable for punitive damages if Newegg is found to have willfully infringed third parties’ proprietary rights. Newegg may have to stop using certain technology or solutions and need to develop or acquire alternative, non-infringing technology or solutions, which could require significant time and resources. Newegg could even be required to obtain a license to use certain technologies, although such licenses may not be available on reasonable terms or at all, which may result in substantial payments and royalties and significantly increase its operating expenses. If Newegg cannot develop non-infringing technology or license the appropriate technology at commercially reasonable rates, an intellectual property claim successfully asserted against it could cause significant business interruptions in Newegg’s operations, which could restrict Newegg’s ability to compete effectively and have a material adverse effect on its financial condition and results of operations.

Newegg may be subject to product liability claims, which could be costly and time-consuming to defend.

The majority of the products sold on Newegg’s online platforms are manufactured by third parties, and some of them may be defectively designed or manufactured. If any product Newegg sells were to cause physical injury or injury to property, an injured party could bring claims against Newegg as the retailer of the product. Furthermore, Newegg also offers IT components and peripherals under its private labels on its platforms or through other e-commerce platforms, such as eBay, which could potentially create more exposure for Newegg with respect to product liability than if Newegg simply acted as a retailer of third-party products. Newegg’s insurance coverage may not be adequate against such product liability claims. If a successful claim were brought against Newegg in excess of its insurance coverage, it could adversely affect Newegg’s financial condition and results of operations. Even unsuccessful claims could result in the expenditure of significant funds and management time in defending them and could have a negative impact on Newegg’s reputation and business.

Some of Newegg’s software and systems contain open source software, which may pose particular risks to Newegg’s proprietary software and solutions.

Newegg has incorporated open source software code into some of its internal software and systems and expects to continue to use this open source software in the future. The licenses applicable to open source software typically require that the source code subject to the license be made available to the public and that any modifications or derivative works to open source software continue to be licensed under open source licenses. From time to time, Newegg may face intellectual property infringement claims from third parties, demands for the release or license of the open source software or derivative works that Newegg developed using such software (which could include Newegg’s proprietary source code) or claims that otherwise seek to enforce the terms of the applicable open source license. These claims could result in litigation and could require Newegg to purchase a costly license, publicly release the affected portions of Newegg’s source code, be limited in the licensing of Newegg’s technologies or cease offering the implicated solutions unless and until Newegg can re-engineer them to avoid infringement or change the use of the implicated open source software. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties, indemnities or other contractual protections with respect to the software (for example, non-infringement or functionality). Newegg’s use of open source software may also present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to breach Newegg’s websites, mobile apps and systems that rely on open source software. Any of these risks could be difficult to eliminate or manage and, if not addressed, could have a material adverse effect on Newegg’s business, financial condition and results of operations.

Newegg and its Marketplace sellers’ pricing strategy may not meet customers’ price expectations or result in net income.

Demand for Newegg’s products is generally highly sensitive to price. Its pricing strategies have had, and may continue to have, a significant impact on its net sales and net income. Newegg often offers discounted prices, free or discounted shipping or bundled products as a means of attracting customers and encouraging repeat purchases. Such offers and discounts may reduce its margins. Moreover, Newegg’s competitors’ pricing and marketing strategies are beyond its control and can significantly impact the results of its pricing strategies. If Newegg fails to meet its customers’ price expectations in any given period, or if its competitors decide to engage in aggressive pricing strategies, its business and results of operations would suffer.

In addition, under applicable federal and state unfair competition laws, including the California Consumer Legal Remedies Act, and U.S. Federal Trade Commission regulations, Newegg is required to accurately identify product offerings, not make misleading claims on its platforms, and use qualifying disclosures where and when appropriate. Newegg is particularly subject to the risks associated with its discounting pricing practices as a result of the aggressive judicial interpretations of deceptive pricing laws, particularly in California, which has led to numerous class action settlements by online and brick-mortar retailers over the past few years. For example, Newegg was named as the defendant in a putative class action accusing it of violating the False Advertising Law, the Unfair Competition Law and the Consumer Legal Remedies Act by using allegedly deceptive list prices with allegedly overstated discounts for its electronic products. While the trial court had sustained without leave to amend Newegg’s demurrer to such lawsuit, in July 2018, a California appellate panel reversed the trial court’s judgment and reinstated the action against it. This matter is still pending as of the date of this registration statement. There can be no assurance that Newegg will be able to prevail in the foregoing action or that we will be able to settle the dispute on terms favorable to us. Any adverse outcome of the foregoing class action or other lawsuits challenging deceptive pricing against it could have a material adverse effect on Newegg’s reputation, business and financial condition.

Newegg does not control the pricing strategies of its Marketplace sellers, which could affect its net income and its ability to effectively compete on price with other e-commerce retailers and brick-and-mortar stores. Its Marketplace sellers may determine that they can more competitively price their products through other distribution channels and may choose such other channels instead of listing products on Newegg’s Marketplace, which could adversely affect its business, financial condition, results of operations and prospects. Additionally, retailers and brands often employ different pricing based on the geographical location of consumers, which is accomplished online through geo-blocking that blocks a consumer’s ability to access certain websites based on geography. Legislation in the European Union removed certain types of geo-blocking in the European Union. This could allow Newegg’s consumers registered in the European Union to access and make purchases through its Marketplace at the prices listed in different European geographies irrespective of their country of residence in Europe. This could adversely affect Newegg’s business, financial condition, results of operations and prospects.

Newegg may incur additional costs due to tax assessments resulting from ongoing and future audits by tax authorities.

In the ordinary course of business, Newegg is subject to tax examinations by various governmental tax authorities. The global and diverse nature of its business means that there could be additional examinations by governmental tax authorities and the resolution of ongoing and other probable audits which could impose a future risk to the results of Newegg’s business. For example, in February 2018, Newegg received from the Commonwealth of Massachusetts Department of Revenue a notice of intent to assess sales and use taxes relating to a prior tax period, which subsequently resulted in an assessment of $295,910.68, including penalties and interest. In May 2020, Newegg received from the Commonwealth of Massachusetts Department of Revenue another notice of assessment for sales and use taxes for additional prior tax periods in the amount of a total assessment of $2,721,369.77, including penalties and interest. Newegg has appealed these assessments and Newegg intends to vigorously protest the assessments. The outcome of the matter or the timing of such payment, if any, cannot be predicted at this time. However, the ultimate results, if unfavorable, could have a material impact on Newegg’s consolidated financial position, cash flows, and results of operations.

Significant developments stemming from recent U.S. government actions and proposals concerning tariffs and other economic proposals could have a material adverse effect on us.

As of June 30, 2020, approximately 59% of Newegg’s products that were sold through its platforms were manufactured in China. Recent U.S. government actions are imposing greater restrictions and economic disincentives on international trade impacting imports and exports. The U.S. government has adopted changes, and intends to adopt further changes, to trade policy and in some cases, to renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements. It has initiated the imposition of additional tariffs on certain foreign goods, including steel and aluminum, semiconductor manufacturing equipment and spare parts thereof. The government has amended export regulations regarding sales to companies on the U.S. Entity List. These changes prevent sales of foreign produced direct product of the U.S. that is manufactured using controlled U.S.-origin equipment, technology, and software located outside the United States to companies on the U.S. Entity List.

Examples of recent actions are tariffs on steel and aluminum product imports announced by the U.S. Department of Commerce in March 2018, the scope of which increased on February 8, 2020, and a 25% tariff on certain products that originate in China announced by the United States Trade Representative (“USTR”) in June 2018. The USTR also announced in June and July 2018 two additional supplemental lists of products that are subject to tariffs if the goods imported into the United States originate in China, which would increase the cost of imported products. These supplemental lists issued by the USTR added an additional 25% tariff on certain semiconductor equipment and parts originating in China that are sold by it or used in its business in the United States. In August 2018, the second list was made effective with a 25% tariff and in September 2018 the third list was made effective with a 10% tariff, increasing to 25% in May 2019. A fourth list was proposed by USTR in May 2019 for all remaining items originating in China. A portion of the fourth list (“4a”), was made effective September 1, 2019, with an additional tariff of 15%, reduced to 7.5% on February 14, 2020. The remainder of the fourth list (“4b”) was scheduled to have an additional tariff of 15% go into effect on December 15, 2019; however on December 13, 2019, the tariffs for list 4b were suspended after the U.S. announced it would enter into a trade agreement with China (the “Phase 1 Agreement”). Although the Phase 1 Agreement was signed January 15, 2020, implementation has been delayed due to COVID-19; however, Phase 1 will have no impact on the tariffs imposed on Company products. A Phase 2 Agreement could be announced after the U.S. elections in November of 2020. Any increase in the cost of importing such goods and parts could decrease its margins, reduce the competitiveness of its products, or inhibit its ability to sell products or purchase necessary parts, which could have a material adverse effect on Newegg’s business results, results of operations, or financial condition.

On April 28, 2020 the U.S. Department of Commerce issued new rules that (1) expand the definition of military end use and (2) eliminate the applicability of certain license exceptions for exports to countries on Country Group D of Supplement No. 1 to part 740 of the Export Administration Regulations. These changes expand export license requirements for U.S. companies to sell certain items to companies in China that have operations that could support military end uses, even if the items sold by the U.S. companies are for civilian end use and they reduce the applicability of license exceptions for exports to those countries listed on Country Group D, including China. Additionally, amendments to General Prohibition Three (Foreign-Produced Direct Product Rule) and the Entity List were effective May 15, 2020. These amendments expand the restrictions on the sale of foreign-made goods that are based on U.S. technology, and software located outside the United States to companies on the U.S. Entity List, and regulate the use of U.S. origin semiconductor manufacturing equipment that produces semiconductor devices for companies on the U.S. Entity List. The rule changes for export controls may reduce or impair Newegg’s customers’ ability to sell products internationally, which could in turn decrease the demand for its products and have a material adverse effect on Newegg’s revenues and profitability. At this time, the additional proposed rule changes are not anticipated to impact the Company’s sales of non-U.S. products; however, any unpredicted rule changes could adversely affect Newegg’s business results, operations, or financial condition.

Changes in U.S. trade policy could result in one or more U.S. trading partners adopting responsive trade policy making it more difficult or costly for Newegg to export its products to those countries. As indicated above, these measures could also result in increased costs for goods imported into the U.S. This in turn could require Newegg to increase prices to its customers which may reduce demand, or, if Newegg is unable to increase prices, result in lowering its margin on goods and services sold. To the extent that trade tariffs and other restrictions imposed by the U.S. increase the price of semiconductor equipment and related parts imported into the U.S., the cost of its materials may be adversely affected and the demand from customers for products and services may be diminished, which could adversely affect Newegg’s revenues and profitability.

We cannot predict future trade policy, the terms of any renegotiated trade agreements or additional imposed tariffs and their impact on Newegg’s business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for its products, its costs, its customers, its suppliers, and the U.S. economy, which in turn could adversely impact Newegg’s business, financial condition and results of operations.

Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where it currently develops and sells products, and any negative sentiments towards the United States as a result of such changes, could adversely affect Newegg’s business. In addition, negative sentiments towards the United States among non-U.S. customers and among non-U.S. employees or prospective employees could adversely affect sales or hiring and retention, respectively.

Employment laws in some of the countries in which Newegg operates are relatively stringent.

As of June 30, 2020, Newegg had 1,508 full-time employees, of whom approximately 52% were located in the United States, 38% in China, 8% in Taiwan, 2% in Canada and 0% in other countries and regions. In some of the countries in which it operates, employment laws may grant significant job protection to employees, including rights on termination of employment and setting maximum number of hours and days per week that a particular employee is permitted to work. In addition, in certain countries in which it operates, Newegg is or may be required to consult and seek the advice of employee representatives and/or unions. These laws, coupled with the requirement to consult with any relevant employee representatives and unions, could impact its ability to react to market changes and the needs of its business.

Newegg and certain of its subsidiaries are parties to a revolving credit agreement, which contain a number of covenants that may restrict Newegg’s current and future operations and could adversely affect Newegg’s ability to execute business needs.

Newegg and certain of its subsidiaries have entered into a credit agreement with financial institutions which contain a number of covenants that limit its ability and its subsidiaries’ ability to, among other things, incur indebtedness, create liens, make investments, merge with other companies, dispose of its assets, prepay other indebtedness and make dividends and other distributions. The obligations under the credit agreements are also guaranteed by assets of Newegg or those of Newegg’s subsidiaries. The terms of the credit agreements may restrict Newegg’s current and future operations and could adversely affect Newegg’s ability to finance its future operations or capital needs or to execute business strategies in the means or manner desired. In addition, complying with these covenants may make it more difficult for it to successfully execute its business strategy, invest in its growth strategy and compete against companies who are not subject to such restrictions. The credit agreements also contain financial covenants that require Newegg to maintain certain minimum financial ratios and maintain an operating banking relationship with the financial institutions. Although Newegg has been in compliance with the financial covenants, it cannot guarantee that it will continue to be able to generate sufficient cash flow or sales to meet the financial covenants or pay the principal or interest under the credit agreements.

If Newegg is unable to comply with its payment requirements, the financial institutions may accelerate Newegg’s obligations under the credit agreement and foreclose upon the collateral, or it may be forced to sell assets, restructure its indebtedness or seek additional equity capital, which would dilute shareholders’ interests. If Newegg fails to comply with any covenant it could result in an event of default under the agreement and the lenders could make the entire debt immediately due and payable. If this occurs, Newegg might not be able to repay the debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be on terms that are acceptable to Newegg.

Risks Relating to the Common Shares and this Offering

An active trading market for our Common Shares may not develop and the trading price for the Common Shares may fluctuate significantly.

Prior to the completion of this Offering, our Class A Common Shares are trading on the NASDAQ. We have also applied to NASDAQ to list our Common Shares upon the consummation of the Restructure and this Offering when our dual class structure is eliminated, but we cannot assure you that a liquid public market for our Common Shares will develop, especially given the our Principal Shareholders will own approximately [●]% of the Company’s Common Share assuming gross proceeds of $30 million from this Offering. If an active public market for our common shares does not develop following the completion of this Offering, the market price and liquidity of our common shares may be materially and adversely affected. The offering price for our common shares shall be determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of our common shares after this Offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their common shares.

The trading price of the Common Shares is likely to be volatile and could fluctuate widely due to multiple factors, some of which are beyond our control.

This may happen because of broad market and industry factors. In addition to market and industry factors, the price and trading volume for the Common Shares may be highly volatile due to other factors, including the following:

Our directors, officers and we may be involved in investigations or other forms of regulatory or governmental inquiry which may cause reputational harm to the Company, incur additional expenses, and distract our management from our day-to-day operations.

From time to time, our directors, officers and we may be involved in investigations or other forms of regulatory or governmental inquiry covering a range of possible issues including but not limited to securities laws compliance. These inquiries or investigations could lead to administrative, civil or criminal proceedings involving us and could result in fines, penalties, restitution, other types of sanctions, or the need for us to undertake remedial actions, or to alter its business, financial or accounting practices. Our practice is to cooperate fully with regulatory and governmental inquiries and investigations.

For example, on August 6, 2020, Hangzhou Lianluo and Mr. Zhitao He received an investigation notice from China Securities Regulatory Commission (“CSRC”) for alleged violation of laws and regulations regarding information disclosures of Hangzhou Lianluo. Hangzhou Lianluo is a PRC company with shares listed on Shenzhen Stock Exchange. Mr. He is the Chairman and Chief Executive Officer of Hangzhou Lianluo. Hangzhou Lianluo is also the largest shareholder of the Company and Mr. He was the former Chairman and the former Chief Executive Officer of LLIT and will be appointed as the chairman of the board of the post-closing issuer immediately prior to the completion of this Offering. Hangzhou Lianluo has announced this investigation on August 7, 2020 and stated that it will fully cooperate with CSRC in the investigation. As the investigation is still at a relatively early stage, the Company is currently unable to assess the likely outcomes of such proceedings. On September 28, 2020, Hangzhou Lianluo announced that it has received a letter of advance notice of administrative punishment from Zhejiang Regulatory Bureau of CSRC, which provides, among others, that (i) Hangzhou Lianluo is receiving a warning and required to correct its unlawful acts and pay a fine of RMB 300,000, and (ii) Mr. Zhitao He is receiving a warning and required to pay a fine of RMB 400,000. The unfavorable ultimate outcome regarding this investigation could cause reputational harm to us.

Legal proceedings, inquiries and regulatory investigations are often unpredictable, and it is possible that the ultimate resolution of any such matters, if unfavorable, may be material to the our results of operations in any future period, depending, in part, upon the size of the loss or liability imposed and the operating results for the period, and could have a material adverse effect on the our business. In addition, regardless of the ultimate outcome of any such legal proceeding, inquiry or investigation, any such matter could cause us to incur additional expenses, which could be significant, and possibly material, to our results of operations in any future period.

Any of these factors may result in large and sudden changes in the volume and price at which the Common Shares will trade.

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

Because our offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase Common Shares in this Offering, you will pay more for the Common Shares than the amount paid by our existing shareholders for their Common Shares on a per-Common Share basis. As a result, you will experience immediate and substantial dilution of approximately $[●] per Common Share, based on an assumed offering price of $[●] per Common Share, being the midpoint of the estimated range of the offering price shown on the cover of this prospectus. See “Dilution” for a more complete description of how the value of your investment in the Common Shares will be diluted upon the completion of this Offering.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the Common Shares, the market price for the Common Shares and trading volume could decline.

The trading market for the Common Shares will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade the Common Shares, the market price for the Common Shares would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for the Common Shares to decline.

Investors may have difficulty enforcing judgments against us, our directors and management.

We are incorporated under the laws of the BVI and many of our directors and some of our officers reside outside the United States. Moreover, many of these persons do not have significant assets in the United States. As a result, it may be difficult or impossible to effect service of process within the United States upon these persons, or to recover against us or them on judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws.

The courts of the BVI would not automatically enforce judgments of U.S. courts obtained in actions against us or our directors and officers, or some of the experts named herein, predicated upon the civil liability provisions of the U.S. federal securities laws, or entertain actions brought in the BVI against us or such persons predicated solely upon U.S. federal securities laws. Further, there is no treaty in effect between the United States and the BVI providing for the enforcement of judgments of U.S. courts in civil and commercial matters, and there are grounds upon which BVI courts may decline to enforce the judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including remedies available under the U.S. federal securities laws, may not be allowed in the BVI courts if contrary to public policy in the BVI. Because judgments of U.S. courts are not automatically enforceable in the BVI, it may be difficult for you to recover against us or our directors and officers based upon such judgments.

Certain types of class or derivative actions generally available under U.S. law may not be available as a result of the fact that we are incorporated in the BVI and the exclusive jurisdiction clause included in our IPO memorandum and articles of association. As a result, the rights of shareholders may be limited.

Shareholders of BVI companies may not have standing to initiate a shareholder derivative action in a court of the United States. The BVI courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law or to impose liabilities against us, in original actions brought in the BVI, based on certain liability provisions of U.S. securities laws that are penal in nature.

You may have more difficulty protecting your interests than you would as a shareholder of a U.S. corporation.

Our corporate affairs will be governed by the provisions of our memorandum and articles of association, as amended and restated from time to time, and by the provisions of applicable BVI law. The rights of shareholders and the fiduciary responsibilities of our directors and officers under BVI law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law.

These rights and responsibilities are to a large extent governed by the British Virgin Island Business Companies Act, 2004 as amended from time to time (the “BVI Act”) and the common law of the BVI. The common law of the BVI is derived in part from judicial precedent in the BVI as well as from English common law, which has persuasive, but not binding, authority on a court in the BVI. In addition, BVI law does not make a distinction between public and private companies and some of the protections and safeguards (such as statutory pre-emption rights, save to the extent expressly provided for in the memorandum and articles of association) that investors may expect to find in relation to a public company are not provided for under BVI law.

There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, the BVI regulations governing the securities of BVI companies may not be as extensive as those in effect in the United States, and the BVI law and regulations regarding corporate governance matters may not be as protective of minority shareholders as state corporation laws in the United States. Therefore, you may have more difficulty protecting your interests in connection with actions taken by our directors and officers or our Principal Shareholders than you would as a shareholder of a corporation incorporated in the United States.

The laws of BVI provide limited protections for minority shareholders, so minority shareholders will not have the same options as to recourse in comparison to the United States if the shareholders are dissatisfied with the conduct of our affairs.

Under the laws of the BVI there is limited statutory protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protections under BVI statutory law are derivative actions, actions brought by one or more shareholders for relief from unfair prejudice, oppression and unfair discrimination and/or to enforce the BVI Act or the memorandum and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the BVI Act and the memorandum and articles of association, and are entitled to payment of the fair value of their respective shares upon dissenting from certain enumerated corporate transactions.

There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the BVI is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to seek to have the affairs of the company conducted properly according to law and the constitutional documents of the company. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum and articles of association, then the courts may grant relief. Generally, the areas in which the courts will intervene are the following: (i) a company is acting or proposing to act illegally or beyond the scope of its authority; (ii) the act complained of, although not beyond the scope of the authority, could only be effected if duly authorized by more than the number of votes which have actually been obtained; (iii) the individual rights of the plaintiff shareholder have been infringed or are about to be infringed; or (iv) those who control the company are perpetrating a “fraud on the minority.”

These rights may be more limited than the rights afforded to minority shareholders under the laws of states in the United States.

Shareholders of British Virgin Islands exempted companies like us have no general rights under British Virgin Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association that will become effective immediately prior to completion of this Offering to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the BVI Act and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

Techniques employed by short sellers may drive down the market price of the Common Shares.

Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions and allegations regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality.

Because we do not expect to pay dividends in the foreseeable future after this Offering, you must rely on a price appreciation of the Common Shares for a return on your investment.

We currently intend to retain most, if not all, of our funds and any future earnings after this Offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in the Common Shares as a source for any future dividend income.

Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of British Virgin Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under British Virgin Islands law, a British Virgin Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions, and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in the Common Shares will likely depend entirely upon any future price appreciation of the Common Shares. There is no guarantee that the Common Shares will appreciate in value after this Offering or even maintain the price at which you purchased the Common Shares. You may not realize a return on your investment in the Common Shares and you may even lose your entire investment in the Common Shares.

You may experience dilution of your holdings due to the inability to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of Common Shares unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of Common Shares, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of Common Shares may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

As a company incorporated in the British Virgin Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NASDAQ corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the NASDAQ’s corporate governance listing standards.

As a British Virgin Islands company listed on NASDAQ Capital Market, we are subject to NASDAQ’s Capital Market corporate governance listing standards. However, NASDAQ Capital Market rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the British Virgin Islands, which is our home country, may differ significantly from the NASDAQ corporate governance listing standards. We intend to follow British Virgin Islands corporate governance practices in lieu of the following corporate governance requirements of the NASDAQ that listed companies must have for as long as we qualify as a foreign private issuer: (i) a majority of independent directors; (ii) a nominating/corporate governance committee composed entirely of independent directors; and (iii) a compensation committee composed entirely of independent directors. To the extent we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would enjoy under NASDAQ’s corporate governance listing standards applicable to U.S. domestic issuers.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NASDAQ. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. investors in the Common Shares.

In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income; or (ii) 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a non-U.S. corporation that owns, directly or indirectly, at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Cash is a passive asset for these purposes. Based on the expected composition of our income and assets and the value of our assets, including goodwill, which is based on the expected price of the Common Shares in this Offering, we do not expect to be a PFIC for our current taxable year. Because we will hold a substantial amount of cash following this Offering, and because our PFIC status for any taxable year will depend on the composition of our income and assets and the value of our assets from time to time (which may be determined, in part, by reference to the market price of the Common Shares, which could be volatile), there can be no assurance that we will not be a PFIC for our current or any future taxable year. If we were a PFIC for any taxable year during which a U.S. taxpayer holds Common Shares, certain adverse U.S. federal income tax consequences could apply to such U.S. taxpayer. See “Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company Rules.”

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current expectations and views of future events, all of which are subject to risks and uncertainties. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by the use of words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “will,” “would,” “should,” “could,” “may” or other similar expressions in this prospectus. These statements are likely to address our growth strategy, financial results and product and development programs. You must carefully consider any such statements and should understand that many factors could cause actual results to differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

We describe material risks, uncertainties and assumptions that could affect our business, including our financial condition and results of operations, under “Risk Factors.” We base our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may, and are likely to, differ materially from what is expressed, implied or forecast by our forward-looking statements. Accordingly, you should be careful about relying on any forward-looking statements. Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this prospectus, whether as a result of new information, future events, changes in assumptions, or otherwise.

INDUSTRY

Upon the closing of this Offering and the Restructure, our sole business will be the business of Newegg. Therefore, this section analyzes the e-commerce industry and the IT/CE segments of such industry, in which Newegg operates. All the information and data presented in this section have been derived from Frost & Sullivan (“Frost & Sullivan”)’s industry report commissioned by Newegg in September 2020 titled “The E-Commerce Industry Landscape” (the “Frost & Sullivan Report”) unless otherwise noted. Frost & Sullivan has advised Newegg that the statistical and graphical information contained herein is drawn from its database and other sources. The following discussion contains projections for future growth, which may not occur at the rates that are projected or at all.

Overview of the Global and North American E-Commerce Market

Global and North American Retail E-Commerce Market

E-commerce’s share of retail spend has steadily been on the rise, growing from 10.5% in 2016 to 16% in 2019. We expect this steady growth to continue and that the market size of the global retail e-commerce market will be able to generate $8.56 trillion in revenue in 2025.

In addition, the ongoing COVID-19 pandemic has simultaneously forced millions of retailers to accelerate their digital transformation and invest in e-commerce in order to survive and caused a significant change in consumer behavior towards online marketplaces for groceries, home goods etc. Even as brick and mortar retail re-opens around the world, we expect e-commerce to be an integral and increasing portion of retail in the years to come.

Global and North American B2B E-Commerce Market

The global B2B e-commerce industry accounted for $12.2 trillion in 2019, driven by the increased adoption of digital technology by businesses worldwide with the goal of saving costs and improving efficiencies. COVID-19 has also accelerated the B2B transformation to e-commerce in an unprecedented way. 80% of business leaders are expected to retain their new, digital selling models, even after the pandemic ends.

North America formed 12% of the global market, as greater numbers of businesses relied on e-commerce for their procurement needs. North American B2B e-commerce will grow at a compound annual growth rate of 20.7% from $1.77 trillion in 2020 to $4.53 trillion in 2025.

Overview of the Global and North American IT/CE E-Commerce Market

As global lockdowns were announced during the COVID-19 pandemic, there were significant jumps reported across the world for B2C and B2B IT/CE sales.

Global and North American IT/CE Retail E-Commerce Market

There have been significant spikes in e-commerce activity for IT/CE since March with peaking in April/May. A large chunk of the growth in consumer electronics was led by the new “normal” whereby millions of people adjusted to working from home during the COVID-19 pandemic.

North American households are expected to significantly contribute to the increase in e-commerce spend for IT/CE products, resulting from the need to work from home and enable distance learning for students. Apart from IT/CE products for learning and work productivity, in-home entertainment CE products (such as for gaming and video streaming) have also gained significantly during the pandemic as US parents tried to keep children occupied through the summer.

Global and North American IT/CE B2B E-Commerce Market

We believe the B2B IT/CE e-commerce industry has the following market drivers:

Companies use experience in B2C e-commerce to drive sales in B2B market. E-commerce solutions provide intuitive, self-service platforms that enable easy price comparisons as well as better relationship management with buyers. B2B companies are increasingly being run by millennials who are also B2C consumers. A higher affinity to shopping online, supported by the convenience and best-offer prices, is expected to drive a similar trend in enterprise procurement. B2B sellers can significantly increase conversion rates and drive up overall sales through effective engagement and serving the needs of enterprise customers.

Increasing office automation and newer technology offerings driving IT/CE purchases in businesses. Release of newer products and technology upgrades such as 5G and AI/ML accelerates the office automation trend, spurring the need to upgrade existing enterprise IT/CE equipment. 5G networks for instance will enable IoT office environments, boosting the demand for smarter conference rooms with real-time communications, AR/VR devices and AI-integrated office automation products. B2B IT/CE e-commerce will benefit as a result. In the COVID-19 era, technologies that support employees as they work from home are the biggest priority in the short and medium term as we await a rebound in 2021.

COVID-19 induced shift to digital in B2B enterprises. Digital channels have taken center stage as a must-have for B2B companies during COVID-19 with more than 90% of B2Bs having transitioned to a virtual sales model during the pandemic. According to B2B research from McKinsey, customers are showing a strong preference for digitally enabled sales interactions with suppliers’ mobile app downloads and social media apps seeing a strong spike since the pandemic began. Buyers also strongly preferred self-service options.

Competitive Landscape of the North American IT/CE E-Commerce Market

The COVID-19 pandemic has shifted buying habits around the world, driving many to shop online for the first time ever. In order to survive, most brick and mortar stores have taken their businesses online, accelerating the growth of an already booming e-commerce industry. Increased industry competition and continually evolving online shopping behavior translates into a need for differentiation to remain relevant and maximize success during an unprecedented time.

The IT/CE retail e-commerce marketplace in North America is dominated by a handful of companies, including but not limited to: Amazon, BestBuy, Wal-Mart, eBay, Newegg, Costco, AliExpress, and Wish. Apart from these retailers, there are many other IT/CE companies such as Apple, Samsung, and Dell that have a significant portion of their sales coming from selling direct to consumers online.

According to Frost & Sullivan’s survey among 515 consumers in the US and Canada, Amazon leads in the e-commerce retailer selection process and is the first choice for over half of the consumers. Newegg comes fifth, after other key players, yet is considered by almost half of consumers, and its rejection rate is very low. Newegg is also perceived as a trusted retailer that evokes a positive purchasing experience. The products offered are of attractive pricing and variety.

We believe the following are the key success factors in the e-commerce industry:

Data-driven personalization. Data-driven personalization serves as a key factor of success, providing consumers with a customized experience. Online transactions by nature lack traditional retail’s benefits of human touch points. E-commerce vendors can mimic this behavior by personalizing the customer’s online journey through targeted recommendations based on browsing and purchasing history, and personal preferences and other demographic data.

Interactive product visualization. In-person retail offers an interactive, intuitive experience and enables customers to touch, see, listen to, and test merchandise before making a purchasing decision. E-commerce can closely replicate this experience through interactive product visualization, allowing customers to fully interact with and visually customize products, and learn product feature and specification details. Positive pre-purchase interaction in a digital setting can increase brand loyalty and consumer mindshare. Interactive product visualization can be achieved through ever evolving 3-D, virtual reality, and augmented reality technologies.

Excellent user experience. A user friendly interface and ease of navigation provide the foundation for a simple, enjoyable, and successful purchasing experience. User experience is influenced by a combination of factors, namely the look and feel of the online storefront; the ease of finding the desired item or obtaining recommendations for alternate/additional products; the ability to access product details, specifications, and peer reviews; and buyer confidence in a secure checkout experience. Increasingly, e-commerce vendors have been offering free/low-cost and fast shipping, providing customers near instantaneous gratification as if purchasing from a physical store.

ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated under the laws of the British Virgin Islands as an exempted company with limited liability. We changed our domicile to the British Virgin Islands because of certain benefits associated with being a British Virgin Islands corporation, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the British Virgin Islands have a less developed body of securities laws that provides significantly less protection to investors as compared to the securities laws of the United States. In addition, British Virgin Islands companies may not have standing to sue before the federal courts of the United States.

According to our local British Virgin Islands counsel, there is uncertainty as to whether the courts of the British Virgin Islands would recognize as a valid judgment, a final and conclusive judgment in personam obtained in a competent federal or state court of the United States of America against the Company under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment; (b) such courts did not contravene the rules of natural justice of the British Virgin Islands; (c) such judgment was not obtained by fraud; (d) the enforcement of the judgment would not be contrary to the public policy of the British Virgin Islands; (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the British Virgin Islands; and (f) there is due compliance with the correct procedures under the laws of the British Virgin Islands

British Virgin Islands counsel further advised that, although there is no statutory enforcement in the British Virgin Islands of final and conclusive monetary judgments obtained in a competent federal or state court of the United States for a definite sum (and the British Virgin Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), such a judgment obtained in such jurisdiction can be expected to be recognized and enforced in the courts of the British Virgin Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the British Virgin Islands, provided such judgment (i) is given by a foreign court of competent jurisdiction; (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given; (iii) is final; (iv) is not in respect of taxes, a fine or a penalty; (v) is not inconsistent with a British Virgin Islands judgment of the same matter; (vi) was not obtained on grounds of fraud; and (vii) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the British Virgin Islands. However, the British Virgin Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the British Virgin Islands to give rise to obligations to make payments that are penal or punitive in nature.

USE OF PROCEEDS

We estimate that the net proceeds from this Offering will be approximately $[●], or $[●] if the underwriters exercise their option to purchase additional common shares in full, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this Offering are to satisfy the listing requirements of NASDAQ, facilitate access to the public equity markets, increase our visibility in the marketplace, as well as to obtain additional capital. We intend to use the net proceeds from this Offering for working capital, to fund incremental growth and other general corporate purposes, including possible acquisitions. However, we do not currently have any definitive or preliminary plans with respect to the use of proceeds for such purposes.

We may also use a portion of the net proceeds to acquire or invest in complementary businesses, products, websites or technologies or to enter into strategic relationships with third parties. We have no present understandings, commitments or agreements to enter into any acquisitions or investments. The amount actually expended for the purposes listed above will depend upon a number of factors, including the growth of our sales and customer base, competitive developments in e-commerce, the actual cost of capital expenditures and our cash flow from operations and the growth of our business. The amount of what, and timing of when, we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations and the other factors described in “Risk Factors.” Accordingly, we will have broad discretion in deploying the net proceeds of this Offering.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this Offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this Offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this Offering differently than as described in this prospectus. To the extent that the net proceeds we receive from this Offering are not immediately used for the above purposes, we intend to invest our net proceeds in short-term, interest-bearing bank deposits or debt instruments.

DIVIDEND POLICY

To date, we have not paid any cash dividends on our shares. As a BVI company, we may only declare and pay dividends if our directors are satisfied, on reasonable grounds, that immediately after the distribution (i) the value of our assets will exceed our liabilities and (ii) we will be able to pay our debts as they fall due. We currently anticipate that we will retain any available funds to finance the growth and operation of our business and we do not anticipate paying any cash dividends in the foreseeable future. Additionally, our cash held in foreign countries may be subject to certain control limitations or repatriation requirements, limiting our ability to use this cash to pay dividends.

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2020:

You should read this capitalization table in conjunction with “Use of Proceeds,” “Selected Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes appearing elsewhere in this prospectus.

DILUTION

If you invest in our Common Shares, your interest will be diluted for each Common Shares you purchase to the extent of the difference between the offering price per Common Shares and our net tangible book value per Common Shares after this Offering. Dilution results from the fact that the offering price per Common Shares is substantially in excess of the net tangible book value per Common Shares attributable to the existing shareholders for our presently outstanding Common Shares.

The following table illustrates this per share dilution:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. The additional or unforeseen effects from the COVID-19 pandemic amplify many of these risks. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth in the sections entitled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” and elsewhere in this prospectus. We have prepared our financial statements in accordance with U.S. GAAP.

Pursuant to the Merger Agreement and the Disposition Agreement, upon consummation of the Restructure, Merger Sub will merge into Newegg and LLIT will dispose of Lianluo Connection. Upon closing of the Merger, Newegg will then be the wholly owned Subsidiary of the Company. Pursuant to the Merger Agreement the Company will issue a certain number of Common Shares to Newegg Stockholders based on the LLIT Conversion Ratio. As a result, Newegg Stockholders will become the controlling shareholder of the Company. The Merger is accounted for as a reverse merger under common control effected by a share exchange, wherein Newegg is considered the acquirer for accounting and financial reporting purposes.

Newegg’s Business Overview and COVID-19 Update

Newegg is a tech-focused e-commerce company in North America, and ranked second after Best Buy as the global top electronics online marketplace according to Web Retailer’s report, as measured by 32.4 million visits per month in 2019. Through Newegg.com, its flagship retail site, and other online platforms, Newegg connects its global customer base to a wide and increasing assortment of tech products and a massive pool of brands, sellers, suppliers, manufacturers, distributors and third-party service providers.

Headquartered in California, Newegg’s reach is global. Leveraging its extensive fulfillment and warehousing network and the global footprint of its suppliers and sellers, Newegg is able to offer merchandise sourced from over 35 countries and regions to customers located in over 20 countries and regions, and deliver customer services in multiple languages.

Newegg has built a massive base of loyal and highly engaged customers. As of June 30, 2020, Newegg had 3.7 million active customers (defined as unique email addresses with at least one item purchased on its platforms in the past 12 months), with a 32.5% repeat purchase rate, as measured by the percentage of customers who made at least two purchases in the preceding year, and an average order value of $296, as calculated by dividing sales by transactions during the relevant 12-month measurement period. Newegg achieves this through its deep understanding of its customers’ needs, preferences and tastes and its ability to offer an extensive product assortment, superior customer services, flexible payment options, and speedy, reliable and efficient shipping and fulfilment. As of June 30, 2020, Newegg offered 32.6 million SKUs across over 1,730 categories, which Newegg believes makes it one of the top online shopping destinations for tech consumers. Newegg also maintains a global fulfilment network that ensures speedy and reliable delivery, supported by its six strategically located warehouses in the United States and Canada. Newegg has the capacity to deliver goods to essentially 100% of the population in the United States and to approximately 84% of the population in Canada within just two business days using multiple service level offerings.

Newegg maintains longstanding and extensive relationships with its suppliers, sellers and business partners to source merchandise at competitive pricing with early or preferential access to the latest, highly sought-after tech products, fulfilling its promise to provide its customers with all things tech. Newegg is a trusted partner and the go-to channel for many leading tech product brands and is increasingly establishing relationships with brands in a growing number of other product categories. As of June 30, 2020, Newegg sourced merchandise from at least 2,117 brand partners for its direct sales business, and Newegg featured the official online stores of various brand partners, including some of the most well-known IT/CE brands, such as Intel, AMD, HP, Asus, Acer, Lenovo, MSI, Nvidia, and Samsung.

Newegg strategically employs a dynamic mix of its established direct sales business and a scalable marketplace model. Built upon its success in direct sales, Newegg Marketplace has grown in recent years and significantly complemented its direct sales business. As the number of sellers and brands on its Marketplace continues to grow, the choices available to customers should also increase, generating a strong momentum for its continued growth. As of June 30, 2020, the Newegg Marketplace connected its customers to over 13,897 third-party sellers from 35 countries and regions offering approximately 32.5 million SKUs.

For the years ended December 31, 2017, 2018, 2019, and for the six months ended June 30, 2020, Newegg recorded net sales of $2.2 billion, $2.0 billion, $1.5 billion, and $0.9 billion, respectively. For the same periods, its total GMV was approximately $2.5 billion, $2.4 billion, $1.9 billion, and $1.1 billion, respectively. Newegg recorded net loss of $12.0 million, $33.6 million, and $17.0 million for the years ended December 31, 2017, 2018, and 2019, and net income of $18.9 million for the six months ended June 30, 2020. For the same periods, its adjusted EBITDA was $2 million, $(17.8) million, $1.4 million, and $25 million, respectively. See “—Non-GAAP Financial Measures.”

The spread of COVID-19, which was declared a pandemic by the World Health Organization in March 2020, has caused different countries and cities to mandate curfews, including “shelter-in-place” and closures of most non-essential businesses as well as other measures to mitigate the spread of the virus.

Newegg’s online business and warehouse operations have remained active to serve its customers during the COVID-19 outbreak, and to-date, the Company has seen increased demand for its products and services during the outbreak. By contrast, some of the Company’s brick-and-mortar competitors have been forced to close down at least some of their retail locations temporarily, while some competitors have de-emphasized certain lines of business, such as computers and electronics, which represent the Company’s core business. However, the course of the outbreak remains uncertain, and a prolonged global economic slowdown and increased unemployment could have a material adverse impact on economic conditions, which in turn could lead to a reduced demand for its products and services.

As a consequence of the COVID-19 outbreak, Newegg has experienced occasional supply constraints, primarily in the form of delays in shipment of inventory. The Company has also experienced some increases in the cost of certain products, as well as a drop in promotions by some manufacturers. While the Company considers such events to be relatively minor and temporary, continued supply chain disruptions could lead to delayed receipt of, or shortages in, inventory and higher costs, and negatively impact sales in fiscal year 2020.

COVID-19 impacted the supply chain of Newegg’s brand partners and Marketplace sellers, and its ability to timely fulfill orders and deliver such orders to its customers, particularly as a result of mandatory shutdowns in different countries and cities to mitigate the spread of the virus.

Although Newegg cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have an adverse effect on the Company’s results of future operations. The potential impact of COVID-19 on its operations remain uncertain and potentially wide-spread.

Newegg’s Business Model

GMV is the primary driver of Newegg’s net sales, as it derives a significant majority of net sales from the GMV transacted on its online platforms, net of cancellations and returns. Newegg defines GMV as the total dollar value of products sold on Newegg’s websites, directly to customers and by its Marketplace sellers through Newegg Marketplace, net of returns, discounts, taxes, and cancellations. Newegg generates GMV and net sales primarily from the following sources:

Factors Affecting Newegg’s Results of Operations

Newegg’s financial condition and results of operations have been, and will continue to be, affected by a number of important factors, including the following:

Newegg’s ability to grow its customer base and increase their engagement level

Newegg believes the principal factors necessary to maintain and grow its GMV and net sales include the number of visits to its online platforms, its ability to convert those visits to orders, and the level of its customers’ engagement with its platforms.

Newegg monitors the following key operating metrics to evaluate its user traffic, its ability to convert visits into orders, and the size and engagement of its customer base:

Note:

Newegg uses conversion rates to measure its ability to convert visits to orders. Newegg’s conversion rates have varied from time to time, and there are a number of factors that may affect conversion rates, including overall economic trends, product mix, new product releases, the level of competition Newegg faces, its merchandise sourcing ability and the purchasing patterns of consumers. The numbers of customers and active customers and repeat purchase rates are indicators of the size and engagement of its customer base. Total active customers have been relatively stable over the last two years.

Newegg’s product mix

While Newegg is a tech-focused e-retailer, Newegg also offers merchandise in a broad and increasing number of product categories, including apparel and accessories, home furnishings, personal goods and certain other products of IT– adjacent categories. As of June 30, 2020, Newegg offered a total of 32.6 million SKUs across over 1,730 categories. Products are offered on its online platforms across a range of types, brands and price points. Newegg believes that customers are attracted to its online platforms primarily by the breadth and depth of its product offerings, a critical component of its ability to increase sales and drive long-term profitability.

Newegg’s results of operations are affected by its merchandise mix, as products of different categories, brands and price points have a range of margin and profitability profiles. For example, categories where the company holds lower market share and the company strives to grow at an accelerated rate over market may offer relatively lower margins. Newegg’s merchandise mix may shift over time due to the combination of a variety of factors, including consumer demands and preferences, average selling prices, its ability to maintain and expand its supplier relationships, its ability to forecast market trends, and its marketing and promotional efforts. Newegg continuously monitors the GMV and margin mix of its product offerings and Newegg seeks to increase the percentage of GMV and net sales from categories and brands with attractive margin profiles.

Expansion of Newegg Marketplace 

A key component of Newegg’s long-term strategy is to continue to grow its Newegg Marketplace, which Newegg believes is an important driver of future profitable growth.

Newegg Marketplace has grown in recent years with an increasing contribution to Newegg’s total sales. In 2017, 2018, 2019, and for the six months ended June 30, 2020, its Newegg Marketplace generated GMV of $412.8 million, $472.1 million, $495.2 million, and $335.0 million, respectively, representing a CAGR of 6%, for the years 2017 to 2019, and accounted for approximately 16.7%, 19.6%, 25.6%, and 29.3%, respectively, of its total GMV. During the same periods, its Newegg Marketplace generated net sales of $37.2 million, $43.2 million, $46.0 million, and $33.5 million, respectively, representing a CAGR of 7% for the years 2017 to 2019, and accounted for 1.8%, 2.2%, 3.0%, and 3.9%, respectively, of its total net sales. Over time, Newegg expects its Marketplace GMV, both in absolute amount and as a percentage of total GMV, to continue to grow.

Newegg believes the Marketplace model provides it with a number of benefits. As compared with direct sales, the use of the marketplace model contributes to its working capital and cash flow as there is no need to maintain inventory. Additionally, as the number of sellers and brands on the Newegg Marketplace continues to expand, the choices available to customers also should grow, generating strong momentum for its continued growth. Newegg believes that the integration of its direct sales and Marketplace operations has created a virtuous, self-reinforcing cycle.

Newegg’s results of operations have been, and will continue to be, influenced by shifts over time in the GMV mix between direct sales and Marketplace. This is primarily due to the difference in revenue recognition - Newegg recognizes revenues from direct sales on a gross basis, while Newegg recognizes revenues from the Newegg Marketplace on a net basis. See “—Key Components of Results of Operations” for details. Accordingly, for the same amount of GMV, direct sales generates more net sales than Marketplace and, therefore, an increase in the GMV contribution of Marketplace as a portion of the total GMV would have a negative impact on its net sales.

Newegg’s ability to forecast consumer needs and preferences

The IT/CE e-commerce market in North America and globally is characterized by rapidly evolving technologies, fast-changing consumer requirements and preferences and frequent releases of new products and introductions of updated industry standards and practices. Newegg must effectively respond to these changes to remain competitive. Newegg may have difficulty anticipating consumer demand and preferences, and the goods offered on its online platforms may not be accepted by the market or may be rendered obsolete or uneconomical. Newegg’s inability to adapt to these developments may lead to excessive or deficient inventories or a failure to attract new customers and retain existing customers, which could materially and adversely affect its financial condition and results of operations.

Newegg’s ability to source products from key suppliers on favorable terms

As of June 30, 2020, Newegg offered over 131,763 direct sales SKUs sourced from at least 365 suppliers globally. Newegg maintains extensive, long-standing and mutually beneficial relationships with many of the biggest tech product brands and distributors globally. However, its contracts or arrangements with such suppliers generally do not guarantee the availability of merchandise, or provide for the continuation of particular pricing or other practices. Newegg’s suppliers may not continue to sell their inventory to it on current terms or at all, and, if the terms are changed, Newegg may not be able to establish new supply relationships on similar or better terms.

Newegg competes with other retailers and direct marketers for favorable product allocations and vendor incentive programs from product manufacturers and distributors. Some of its competitors could enter into exclusive or favorable distribution arrangements for certain products with its vendors, which would deny it complete or partial access to those products and marketing and promotional resources. In addition, some vendors whose products are offered on its online platforms also sell their products directly to customers. If Newegg is unable to develop and maintain relationships with suppliers that permit it to obtain sufficient quantities of desirable merchandise on favorable terms, its results of operations could be adversely impacted.

Segment Information

Newegg’s chief operating decision maker (i.e. chief executive officer) reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by countries or regions for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Based on qualitative and quantitative criteria established by Accounting Standards Codification (“ASC”) 280, “Segment Reporting”, Newegg considers ourselves to be operating within one reportable segment.

Key Components of Results of Operations

Net Sales

Newegg’s net sales consist of direct sales revenues, Marketplace revenues and services revenues. See “—Newegg’s Business Model” for more information about these sources of net sales.

Newegg’s net sales are reported net of anticipated discounts, returns, allowances, sales tax and credit card chargebacks, which are all estimated from historical experience. Newegg also offers customer promotional programs, which Newegg records as reductions in sales based on anticipated redemption rates estimated from historical experience.

The following table sets forth the components of its net sales in absolute amounts and as percentages of total net sales, for the periods indicated.

Cost of Sales

The largest component of its cost of sales is the purchase price of goods that Newegg directly sells to customers. Cost of sales also includes (i) costs relating to its service revenues, which include personnel expenses and other costs relating to its third-party logistics services; (ii) inbound and outbound freight costs; and (iii) inventory write-offs relating to refurbished, slow-moving and obsolete inventories and adjustments for vendor incentives related to inventory still on hand at the reporting date.

Cost of sales is partially offset by payments Newegg earns under vendor incentive programs, or VIPs, such as purchase rebates, marketing development funds that vendors give it to advertise their products, cooperative marketing programs jointly funded with vendors, and price protection refunds to offset reductions in the manufacturer’s suggested retail price. These VIPs are sometimes tied to the volume of its purchases or sales and represent a reduction of the selling price of the suppliers’ products. Therefore, Newegg treats these program payments as reductions to cost of sales.

The following table sets forth the components of its cost of sales, in absolute amounts and as percentages of total net sales, for the periods indicated.

Other Operating Income / (Expense)

During 2019, Newegg entered into a sale leaseback transaction for one of its real estate properties in the United States. Newegg sold the property for a gross proceed of $38.5 million, and recognized a gain of $28.8 million from the transaction, which is included as other operating income in its consolidated statement of operations.

Selling, General and Administrative Expenses

The largest component of its selling, general and administrative expenses, or SG&A expenses, is salary and other compensation costs, consisting of expenses relating to the employment of its employees, as well as temporary personnel to meet its needs in areas such as customer service and fulfillment during seasonal peaks in orders.

Other significant components of SG&A expenses include advertising and marketing expenses, payment and credit card processing fees, depreciation, rent expenses, warehouse costs, office expenses, legal expenses and other general corporate costs.

The following table sets forth the components of its SG&A expenses, in absolute amounts and as percentages of net sales, for the periods indicated.

Interest Income and Expense

Interest income is earned on (i) its loans to affiliates; and (ii) cash invested in money market accounts or certificates of deposit. See “Related Party Transactions—Other Related Party Transactions” for more information about its loans to affiliates. Interest expense represents the interest Newegg is charged on its borrowings, including term loan, line of credit and capital leases.

Other income, net

Newegg recorded Other income, net of $2.8 million, $4.2 million, $1.6 million, and $1.1 million for the six months ended June 30, 2020 and for the years ended December 31, 2019, 2018, and 2017, respectively. For the six months ended June 30, 2019, Other income, net, primarily consisted of insurance proceeds from the fire loss in one of the warehouses in the U.S., and vendor incentives, and property rental income in China. In 2019, its Other income mainly consisted of insurance proceeds primarily related to the fire loss in one of Newegg’s warehouses in the U.S., and property rental income in China. Other income, net of $1.6 million in 2018 primarily consisted of property rental income in China while Newegg recorded Other income, net of $1.2 million in 2017 primarily from business interruption insurance recovery in connection with several instances of distributed denial-of-service attacks that Newegg experienced in November 2015.

Gain from Sale of and Equity Income from Equity Method Investments 

Newegg accounts for investment under the equity method for investees over which Newegg has the ability to exercise significant influence but does not have a controlling interest. Newegg recorded a gain on equity method investment of $0.2 million, $9.6 million and $21.8 million, respectively, in 2017, 2018 and 2019. Newegg’s gain on equity method investment in 2018 was attributed to the equity income from its equity method investment in Mountain Capital Fund L.P. (“Mountain Capital”). The gain in 2019 primarily included gains from the partial sale of its investment in Mountain Capital. Mountain Capital sold a portion of its investment in One97 Communication Limited (“One97”), a leading Indian e-wallet provider and one of Mountain Capital’s portfolio companies, to various third-party buyers. Newegg’s ownership percentage in Mountain Capital was approximately 8.0% as of June 30, 2020 and December 31, 2019.

Results of Operations

The following table summarizes its consolidated results of operations in absolute amounts and as percentages of its net sales for the periods indicated. Period-to-period comparisons of historical results of operations should not be relied upon as indicative of future performance.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Net sales

Net sales increased by 8.2% for the six months ended June 30, 2020 compared to the comparable prior year period from $797.4 million in 2019 to $862.7 million in 2020, which was mainly due to the increase in GMV from its U.S.-focused direct sales platforms from $888.3 million for the six months ended June 30, 2019, to $1,043.9 million for the six months ended June 30, 2020.

Such increase in GMV was primarily due to (i) a change in buying behavior of consumers from brick-and-mortar stores to online retailers due to the COVID-19 pandemic; and (ii) strong demand in computer components as a result of working and schooling from home.

Cost of Sales & Gross profit

For the six months ended June 30, 2020, its cost of sales increased by 2.7% compared to the comparable prior year period from $718.8 million in 2019 to $738.1 million in 2020, generally reflective of the increase in its net sales. During the same period, its gross profit increased by 58.5% from $78.6 million for the six months ended June 30, 2019 to $124.6 million for the six months ended June 30, 2020.

Newegg’s profit margin increased from 9.9% for the six months ended June 30, 2019 to 14.4% for the six months ended June 30, 2020, primarily due to a strategy change where the company focused on selling high margin products such as desktop PCs and gaming notebooks. Newegg also moved over its low margin products, such as TVs, from its direct sale business to marketplace, where the company can receive a higher commission. Newegg also ceased selling low margin video game console categories and applied a minimum margin policy to components, storage, and memory products.

Selling, general and administrative expenses

As of June 30, 2020, SG&A expenses decreased from $115.5 million in 2019 to $107.1 million in 2020, which mainly resulted from (i) a decrease in personnel expenses from $53.4 million in 2019 to $47.1 million in 2020, and (ii) a decrease in advertising and marketing expenses from $15.3 million in 2019 to $11.7 million in 2020, which was due to more effective control over marketing and branding efforts. These decreases were partially offset by (i) an increase in credit card charges from $19.1 million in 2019 to $22.0 million in 2020, which is directly related to the increase in net sales in 2020.

Interest income and expense

For the six months ended June 30, 2020, interest income increased from $0.2 million in 2019 to $0.6 million in 2020. This increase was primarily driven by an increase of $0.4 million in interest income on its loan to an affiliate.

Interest expense decreased from $2.0 million for the six months ended June 30, 2019 to $0.4 million for the six months ended June 30, 2020, which was generally due to a decrease in the average outstanding debt balance in 2020, as compared to that of 2019.

Other income, net

For the six months ended June 30, 2020, Newegg recorded other income, net of $2.8 million, compared to other income, net of $3.5 million for the six months ended June 30, 2019. This decrease was mainly due to the insurance proceeds of $0.9 million received in 2019 from the fire loss in one of Newegg’s warehouses in the U.S.

Gain from sale of and equity income from equity method investments

Newegg did not record an equity income from equity method investments for the six months ended June 30, 2020. For the six months ended June 30, 2019, Newegg recorded a gain on equity method investment of $24.1 million. This gain was mainly due to a gain on the sale of equity method investment in Mountain Capital.

Provision for income taxes

Newegg’s provision for income taxes decreased from $4.4 million for the six months ended June 30, 2019, to $1.8 million for the six months ended June 30, 2020. The decrease in its provision for income taxes was mainly due to the expense of withholding tax in first half of 2019 associated with the sale of its investment in One97 through Mountain Capital.

Net Income

As of June 30, 2020, Newegg recorded a net income of $18.9 million in 2020, as compared to a net loss of $15.5 million for the same period in 2019. The increase in net income is primarily driven by a growth in its net sales, improvement in gross margin, and improvement in selling, general, and administrative expenses in 2020 compared to 2019.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Net sales

Net sales decreased by 24.2%, from $2,022.4 million in 2018 to $1,533.9 million in 2019, which was mainly due to a decline in the GMV from its U.S.-focused direct sales platforms from $1,745.3 million in 2018 to $1,293.5 million in 2019. Such decline in GMV was also due to the reduced price competitiveness of its product offerings as Newegg expanded the collection of sales tax in an increasing number of U.S. states in 2019. As of December 31, 2019, Newegg collected sales tax in 42 states whereas as of December 31, 2018 Newegg collected sales tax in 25 states.

The decline in the GMV from its U.S.-focused platforms was primarily due to (i) softening demand in computer components; (ii) increased import tariffs that resulted in price increases; and (iii) shortages in supply, particularly in CPU and VGA graphic cards.

The increase in the GMV contribution by the Newegg Marketplace to the total GMV was mainly due to (i) an increase in the amount of GMV from the Newegg Marketplace on its U.S.-focused platforms from $441.4 million in 2018 to $460.5 million in 2019, reflective of its strategic focus in growing its Marketplace operations and adding new sellers to expand the total product offerings on its platforms; and (ii) a partial shift in orders from the direct sales model to the Newegg Marketplace model. 

Cost of Sales & Gross profit

From 2018 to 2019, Newegg’s cost of sales decreased by 24.6% from $1,816.8 million to $1,369.1 million, generally reflective of the decline in its net sales. During the same period, its gross profit decreased by 19.8% from $205.6 million to $164.9 million.

Newegg’s profit margin increased from 10.2% in 2018 to 10.7% in 2019, primarily due to a strategy change where the company focused on selling high margin products such as desktop PCs and gaming notebooks. Newegg also moved over its low margin products, such as TVs, from its direct sale business to marketplace, where the company can receive a higher commission. Newegg also ceased selling low margin video game console categories and applied a minimum margin policy to components, storage, and memory products.

Selling, general and administrative expenses

SG&A expenses decreased from $247.2 million in 2018 to $229.2 million in 2019, which mainly resulted from (i) a decrease in advertising and marketing expenses from $34.8 million in 2018 to $25.8 million in 2019, which was due to more effective control over marketing and branding efforts; (ii) a decrease in credit card fees from $44.2 million in 2018 to $37.6 million in 2019, which are directly related to the decrease in sales; and (iii) a decrease in stock-based compensation from $3.9 million to $0.7 million due to an adjustment made in 2018 as part of a repurchase of shares. These decreases were partially offset by an increase in bonus from $1.6 million in 2018 to $5.6 million in 2019, primarily due to the profit sharing and bonus related to the sale of its equity investment in Mountain Capital in 2019.

During 2019, Newegg entered into a sale leaseback transaction for one of its real estate properties in United Sates. Newegg sold the property for a gross proceed of $38.5 million, and recognized a gain of $28.8 million from the transaction, which is included as other operating income in its consolidated statement of operations. The Company concurrently leased back the property from the buyer under a lease agreement for ten years, resulting in ROU lease asset of $14.1 million and a lease liability of $13.9 million as of the lease commencement date.

Interest income and expense

Interest income decreased from $1.5 million in 2018 to $0.6 million in 2019. This decrease was primarily driven by a decrease of $0.9 million in interest income on its loans to affiliates, resulting from significant amounts paid by such affiliate to it under these loans in 2019;

Interest expense increased from $1.6 million in 2018 to $2.9 million in 2019, which was generally due to an increase in the average outstanding debt balance in 2019, as compared to that of 2018. In 2018, Newegg entered into a number of credit agreements and a long-term revolving loan agreement with certain financial institutions; see “—Liquidity and Capital Resources —Cash flows and working capital” and “Contractual Obligation” for more details of these agreements.

Other income, net

Other income, net was $4.2 million in 2019, compared to Other income, net of $1.6 million in 2018. In 2019, its Other income mainly consisted of insurance proceeds of approximately $2.0 million primarily related to the fire loss in one of Newegg’s warehouses in the U.S., property rental income of $1.2 million from one of its idle warehouses in China, and government subsidies of an insignificant amount, while Newegg recorded Other income, net of $1.6 million in 2018 mainly from property rental income of $1.0 million from one of its idle warehouses in China, and government subsidies of an insignificant amount partially offset by other expense of $0.5 million.

Gain from sale of and equity income from equity method investments

Newegg recorded a gain on equity method investment of $21.8 million in 2019, as compared to $9.6 million in 2018. This increase was mainly due to a gain on the sale of equity method investment in Mountain Capital of $21.8 million. Mountain Capital sold a portion of its investment in One97 to various third-party buyers, which resulted in disposal of all of Newegg’s investment in One97. The proceeds from the sale of the investment were distributed to Newegg in 2019. In 2018, Newegg accounted for the Mountain Capital investment under the equity method, and recognized a gain on this equity method investment of $9.6 million.

Provision for income taxes

Newegg’s provision for income taxes increased significantly from $1.6 million in 2018 to $4.6 million in 2019. The increase in its provision for income taxes was mainly due to the expense of withholding tax since Newegg was generating losses and may not be able to use the tax credit. The tax withholding is for the gain from the sale of its investment in One 97 through Mountain Capital and equity income from equity method investments.

Net Loss

As a result of the foregoing, Newegg recorded a net loss of $17.0 million in 2019, as compared to a net loss of $33.6 million in 2018.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Net sales

Net sales decreased by 6.3% from $2,158.1 million in 2017 to $2,022.4 million in 2018, which was mainly due to (i) a decline in the GMV from its U.S.-focused direct sales platforms from $1,900.1 million in 2017 to $1,745.3 million in 2018; (ii) partially offset by an increase in the contribution by the Newegg Marketplace to the total United States GMV from 17.2% in 2017 to 20.2% in 2018 that provided an increase of $5.7 million in Net Sales; and (iii) partially offset by an increase in GMV generated from its internationally-focused platforms from $183.1 million in 2017 to $216.4 million in 2018.

As discussed in “—Factors Affecting Newegg’s Results of Operations—Expansion of Newegg Marketplace,” due to the difference in revenue recognition model, an increase in the GMV contribution from Newegg Marketplace versus direct sales tends to have a negative impact on its net sales. Such decline in GMV was also due to the reduced price competitiveness of its product offerings as Newegg began to collect sales tax in an increasing number of states in 2018. As of December 31, 2018, Newegg collected sales tax in 25 states whereas as of December 31, 2017 Newegg collected sales tax in only five states.

The decline in the GMV from its U.S.-focused direct sales platforms was primarily due to (i) a softening of demand for graphic cards and a shortage in CPUs that resulted in a $51.6 million decline in GMV for these two categories, which historically accounted for a significant portion of its sales.

The increase in the GMV contribution by the Newegg Marketplace to the total GMV was mainly due to (i) an increase in the amount of GMV from the Newegg Marketplace on its U.S.-focused platforms from $393.5 million in 2017 to $441.4 million in 2018 or an increase of $5.7 million in Net Sales, reflective of its strategic focus in growing its Marketplace operations and adding new sellers to expand the total product offerings in its platforms; and (ii) a partial shift in orders from the direct sales model to the Newegg Marketplace model.

The increase in GMV generated from its internationally-focused platforms was driven by its increased international marketing and branding initiatives. In November 2017, Newegg launched its Global 50 initiative, a sales and marketing campaign designed to increase its shipment destinations to up to 50 countries and regions globally and to increase its brand awareness and its ability to offer dedicated local currency pricing in those markets. The Global 50 initiative had its first full year of operations in 2018, expanding from 46 countries to 50 by the end of 2018, which significantly boosted the growth in the GMV from internationally-focused platforms. In 2018, Newegg achieved GMV of $38.0 million attributable to its Global 50 initiative, as compared to $13.9 million in 2017. The remaining increase in international net sales is driven by growth in Canada, with GMV from Canada growing from $169.2 million in 2017 to $178.4 million in 2018, as the company continued growing market share in the country.

Cost of Sales & Gross profit

From 2017 to 2018, Newegg’s cost of sales decreased by 5.7% from $1,926.0 million to $1,816.8 million, generally reflective of the decline in its net sales. During the same period, its gross profit decreased by 11.4% from $232.1 million to $205.6 million.

Newegg’s profit margin decreased from 10.8% in 2017 to 10.2% in 2018, primarily due to a decrease in the sales of high-margin products in 2018 as compared to 2017. In 2017, driven by price spikes of crypto currencies, Newegg had a significant increase in the sales of high-margin crypto miners and other crypto related products, including graphic cards, motherboards and CPUs, in the fourth quarter of 2017, which significantly improved its profit margin on a full year basis. The decrease in its profit margin between 2017 and 2018 was also due to its increased sales with promotional pricing to offset the impact of the softening demand for IT/CE products in 2018 and increased competition for market share from competitors. In addition, freight margin declined, as Newegg moved towards more free shipping and faster delivery to customers to match its competition. Freight margin contributed 30 basis points to the decrease in margins, with product mix contributing 60 basis points, partially offset by 30 basis points of improvement from increased proportion of marketplace sales.

Selling, general and administrative expenses

SG&A expenses increased slightly from $246.1 million in 2017 to $247.2 million 2018, which mainly came from (i) an increase in salary and other compensation costs from $96.6 million in 2017 to $103.5 million in 2018, mainly driven by increased headcount to support Newegg’s initiatives to grow its B2B business and marketplace operations; and (ii) an increase in other expenses from $55.5 million in 2017 to $54.5 million in 2018, primarily due to a $2.2 million lease closure liability recorded as a result of the closure of one of its warehouses. The number of Newegg’s employees increased from 2,308 as of December 31, 2017 to 2,476 as of December 31, 2018. These increases were partially offset by (i) a decrease in advertising and marketing expenses from $38.0 million in 2017 to $34.8 million in 2018, which was due to more effective control over marketing and branding efforts; and (ii) a decrease in credit card fees from $45.4 million in 2017 to $44.2 million in 2018 primarily due to realized cost savings from negotiations with payment service providers and a decrease in GMV.

Although SG&A expenses remained generally flat between 2017 and 2018, Newegg’s SG&A expense as a percentage of net sales increased from 11.4% in 2017 to 12.2% in 2018, primarily due to the decrease in net sales and the fixed nature of the majority of its SG&A expenses.

Interest income and expense

Interest income decreased from $1.8 million in 2017 to $1.5 million in 2018. This decrease was primarily driven by (i) a decrease in the interest income on Newegg’s loans to affiliates, resulting from significant amounts paid by such affiliates to it under these loans in 2018; and, (ii) to a lesser extent, a decrease in the interest income generated from cash and cash equivalents invested in money market accounts.

Interest expense increased from $1.1 million in 2017 to $1.6 million in 2018, which was generally due to (i) an increase in the average outstanding debt balance in 2018, as compared to that of 2017; and (ii) an increase in its weighted average interest rate during the same period. In 2018, Newegg entered into a number of credit agreements and a long-term revolving loan agreement with certain financial institutions; see “—Liquidity and Capital Resources —Cash flows and working capital” and “Contractual Obligation” for more details of these agreements.

Other income, net

Other income, net was $1.6 million in 2018, compared to $1.2 million in 2017. In 2018, its Other income mainly consisted of property rental income of $1.0 million from one of its idle warehouses in China, and government subsidies of an insignificant amount partially offset by other expenses, totaling $1.6 million, while Newegg recorded Other income, net of $1.3 million in 2017 from business interruption insurance recovery in connection with several instances of distributed denial-of-service attacks that Newegg experienced in November 2015.

Gain from sale of and equity income from equity method investments

Newegg recorded a gain on equity method investment of U$9.6 million in 2018, as compared to $0.2 million in 2017. This increase was mainly due to an increase in the value of its investment in Mountain Capital, which in turn was driven by the performance of One97 in 2018.

Provision for income taxes

Newegg’s provision for income taxes increased from $0.2 million in 2017 to $1.6 million in 2018. The increase in its provision for income taxes was mainly due to the change of the valuation allowance Newegg recorded against the net deferred tax assets.

Net Loss

As a result of the foregoing, Newegg recorded a net loss of $33.6 million in 2018, as compared to a net loss of $12.0 million in 2017.

Non-GAAP Measures

Newegg has included GMV and Adjusted EBITDA, non-GAAP financial measures, in this prospectus. Newegg believes that these are key measures used by its management and board of directors to evaluate its operating performance, generate future operating plans, and make strategic decisions regarding the allocation of capital.

GMV

GMV is the total dollar value of products sold on Newegg’s websites, directly to customers and by its Marketplace sellers through Newegg Marketplace, net of returns, discounts, taxes, and cancellations, and excluding the following: (i) sales by Newegg’s Asia subsidiaries, (ii) service revenues, and (iii) sales of Rosewill and Nutrend products made through third party platforms. It helps Newegg assess and analyze changes in revenues, and if reviewed in conjunction with net sales and other GAAP financial measures, it can provide more information in evaluating Newegg’s current performance and in assessing its future performance. See “Newegg’s Business Model.”

Adjusted EBITDA

Adjusted EBITDA is a financial measure that includes the removal of various one-time, irregular, and non-recurring items from EBITDA. Newegg believes that exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis and excludes items that Newegg does not consider to be indicative of its core operating performance. Accordingly, Newegg believes that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating its operating results in the same manner as its management and board of directors.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of its results as reported under GAAP. Some of these limitations are:

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, operating profit and its other GAAP results.

The following table reflects the reconciliation of net loss to Adjusted EBITDA for each of the periods indicated.

Liquidity and Capital Resources

Cash flows and working capital

Newegg has historically funded its operations through existing working capital, credit facilities, bank loans, return from investing activities, and equity financings. See Note 7 and 8 to its consolidated financial statements included elsewhere in this prospectus for more information about the line of credit and long-term debt that Newegg obtains from financial institutions and Notes 11 and 12 to its consolidated financial statements included elsewhere in this prospectus for more information about its equity financings.

Newegg’s cash and cash equivalents consist primarily of cash on deposit, certificates of deposit, and money market accounts. Cash equivalents are all highly liquid investments with original maturities of three months or less. Amounts receivable from credit card processors are also considered cash equivalents as they are both short term and highly liquid in nature, and are typically converted to cash within three business days. Amounts due to it from credit card processors that are classified as cash and cash equivalents totaled 13.2 million and $9.2 million at June 30, 2020 and December 31, 2019, respectively. Newegg anticipates that its existing cash and funds generated from operations will be sufficient to meet its working capital needs and expected capital expenditures for at least 12 months from the date of the filing of this prospectus. Newegg’s cash and cash equivalents are primarily denominated in U.S. dollars.

Newegg historically experiences higher sales in the fourth quarter due to the holiday season. In anticipation of such higher sales, Newegg typically begins building up its inventory levels in the late third quarter. Such inventory build-up may require it to expend cash faster than Newegg generates by its operations during these periods. Also as a result of this inventory build-up and faster inventory turnover during the fourth quarter, its accounts payable are typically at their highest levels at year-end, as compared to the first, second and third quarters when sales are lower. The COVID-19 pandemic has resulted in a higher accounts payable balance at June 30, 2020 than expected, due to an increased purchase volume to meet its increased sales demand.

Newegg intends to finance its future working capital requirements and capital expenditures from cash generated from operating activities and funds raised from financing activities, including the net proceeds Newegg will receive from this Offering, and return from investing activities. Newegg’s future capital requirements may, however, vary materially from those now planned or anticipated. Changes in its operating plans, lower than anticipated net sales, increased expenses or other events, including those described in “Risk Factors,” may cause it to seek additional debt or equity financing in the future. If its existing cash is insufficient to meet its requirements, Newegg may seek to issue debt or equity securities or obtain additional credit facilities. Financing may not be available on acceptable terms, on a timely basis, or at all, and its failure to raise adequate capital when needed could negatively impact its growth plans and its financial condition and results of operations. Issuance of additional equity securities, including convertible debt securities, would dilute its earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict its operations and its ability to pay dividends to its shareholders. If Newegg is unable to obtain additional equity or debt financing as required, its business operations and prospects may suffer.

Historical Cash Flows

The following table sets forth its selected consolidated cash flow data for the six months ended June 30, 2020 and 2019, and the years ended December 31, 2017, 2018 and 2019.

Operating activities

Net cash provided by operating activities was $64.9 million for the six months ended June 30, 2020. The adjustments for non-cash expenses are primarily comprised of (i) $4.5 million of depreciation and amortization that was associated with property and equipment; and (ii) $1.0 million of provision for obsolete and excess inventory. The changes in operating assets and liabilities represented a $39.3 million increase in cash provided by (i) a decrease in accounts receivable of $15.5 million; (ii) an increase in accounts payable of $56.0 million; (iii) a decrease in accrued liabilities and other liabilities of $2.9 million; and (iv) an increase in deferred revenue of $11.1 million, partially offset by (i) an increase in inventory of $33.9 million; and (ii) an increase in prepaid expenses and other assets of $6.4 million.

Net cash used in operating activities was $10.1 million in 2019. Net loss was $17.0 million in 2019. The adjustments for non-cash expenses are primarily comprised of (i) $10.7 million of depreciation and amortization that was associated with property and equipment; (ii) $4.3 million of provision for obsolete and excess inventory; and (iii) $21.8 million of gain on equity method investment. The changes in operating assets and liabilities represented a $42.8 million cash provided by (i) a decrease in accounts receivable and inventory of $33.1 million and $110.1 million, respectively; and (ii) an increase in accrued liabilities and other liabilities of $8.0 million, partially offset by (i) a decrease in accounts payable of $100.7 million, and (ii) a decrease in deferred revenue of $11.2 million.

Net cash used in operating activities was $62.9 million in 2018. Net cash used in operating activities consists of net loss as adjusted for non-cash expenses and changes in operating assets and liabilities. Net loss was $33.6 million in 2018. The adjustments for non-cash expenses are primarily comprised of (i) $10.2 million of depreciation and amortization associated with property and equipment; (ii) $9.6 million of gain on equity method investment; and (iii) $3.9 million of stock-based compensation. Changes in operating assets and liabilities represented a $39.2 million use of cash, primarily comprised of (i) a decrease in accounts payable of $18.5 million; (ii) an increase in inventories of $6.3 million; and (iii) a decrease in the accrued liabilities and other liabilities of $5.9 million, partially offset by a decrease in prepaid expenses and other assets of $2.2 million.

Net cash used in operating activities was $21.2 million in 2017. Net loss was $12.0 million in 2017. The adjustments for non-cash expenses are primarily comprised of (i) $10.6 million of depreciation and amortization that was associated with property and equipment; (ii) $4.0 million of stock-based compensation; and (iii) $3.6 million of provision for obsolete and excess inventory. Changes in operating assets and liabilities represented a $28.5 million use of cash, primarily comprised of (i) a decrease in accounts payable of $25.9 million; and (ii) an increase in inventories of $16.9 million, partially offset by (i) an increase in deferred revenue of $10.1 million; and (ii) an increase in accrued liabilities and other liabilities of $4.9 million.

Investing activities

Net cash used in investing activities was $2.5 million for the six months ended June 30, 2020, which was primarily attributable to the payments made to acquire property and equipment of $2.6 million.

Net cash provided by investing activities was $84.7 million in 2019, which was mainly due to (i) proceeds on disposal of a warehouse of $38.6 million, and (ii) proceeds on sales of equity method investment of $77.5 million, partially offset by (i) payments of $10.3 million made to acquire property and equipment; (ii) equity investments of $7 million; and (iii) loans to an affiliate of $15 million. See “Related Party Transactions-Other Related Party Transactions.”

Net cash used in investing activities was $16.0 million in 2018, which was mainly attributable to (i) equity investments of $58.0 million in connection with its investment in Mountain Capital and Bitmain (ii) loans to an affiliate of $20.0 million; and (iii) payments of $8.0 million made to acquire property and equipment, primarily for ongoing maintenance and upkeep of technology infrastructure, partially offset by loan repayments from an affiliate of $70.0 million. Newegg entered into several term loan agreements with one of its affiliates; as of December 31, 2018, there was no outstanding principal balance receivable from affiliate. See “Related Party Transactions—Other Related Party Transactions.”

Net cash used in investing activities was $55.1 million in 2017, which was primarily attributable to (i) loans to an affiliate of $62.6 million; and (ii) payments made to acquire property and equipment of $5.4 million, partially offset by loan repayments from an affiliate of $12.0 million. In April 2017, Newegg loaned $12.0 million to one of its affiliates under a term loan agreement with a maturity date of April 18, 2017. In June 2017, Newegg loaned $50.0 million to such affiliate under a term loan agreement with a maturity date of June 15, 2018. See “Related Party Transactions—Other Related Party Transactions.”

Financing activities

Net cash used in financing activities was $0.1 million for the six months ended June 30, 2020, due to the repayment of its long-term debt.

Net cash used in financing activities was $49.7 million in 2019, which was mainly due to (i) net repayment under its line of credit of $36.4 million; and (ii) repayment of its long-term debt of $13.3 million.

Net cash provided by financing activities was $2.0 million in 2018, which was mainly due to (i) borrowings under its line of credit of $123.3 million; and (ii) borrowings of long-term debt of $13.0 million, partially offset by (i) repayments under its line of credit of $88.7 million; and (ii) payment for share repurchases of $45.1 million.

Net cash provided by financing activities was $144.0 million in 2017, which was mainly attributable to (i) net proceeds from issuance of preferred stock of $168.6 million; and (ii) borrowings under its line of credit of $63.3 million, partially offset by (i) repayments under its line of credit of $67.5 million; and (ii) repayments of long-term debt of $17.7 million.

Capital Expenditures

Newegg’s capital expenditures are incurred primarily in connection with purchases of property and equipment and leasehold improvements. Newegg’s capital expenditures were $5.4 million, $8.0 million, $10.3 million, and $2.6 million in 2017, 2018, 2019, and for the six months ended June 30, 2020, respectively. Newegg intends to fund its future capital expenditures with its existing cash balance and proceeds from this Offering.

Credit Agreements

In July 2018, Newegg entered into a credit agreement with East West Bank and PCN Bank that provided a revolving credit facility of up to $100.0 million with a maturity date of July 27, 2021. Prior to July 27, 2020 and subject to certain terms and conditions, the Maximum Revolving Advance Amount, as defined in the loan agreement, could be increased up to $140.0 million. The revolving credit facility includes a letter of credit sublimit of $25.0 million, which can be used to issue standby and trade letters of credit, and a $10.0 million sublimit for swingline loans. Advances from this line of credit will be subject to interest at LIBOR plus the Applicable Margin, as defined in the loan agreement, or the Alternate Base Rate (to be defined as the highest of the financial institution’s prime rate, the Overnight Bank Funding Rate plus 0.50%, or the daily LIBOR plus 1.0%) plus the Applicable Margin. For LIBOR loans, Newegg may select interest periods of one, two, or three months. Interest on LIBOR loans shall be payable at the end of the selected interest period. Interest on Alternate Base Rate loans is payable monthly. The line of credit is guaranteed by certain of Newegg’s U.S. subsidiaries and is collateralized by certain of the assets of Newegg. Such assets include all Receivables, equipment and fixtures, general intangibles, Inventory, Subsidiary Stock, securities, investment property, and financial assets, contract rights, and ledger sheets, as defined in the loan agreement. To maintain availability of funds under the loan agreement, Newegg will pay on a quarterly basis, an unused commitment fee of either 0.25% of the difference between the amount available and the amount outstanding under the facility if the difference is less than one-third of the Maximum Revolving Advance Amount or 0.40% of the difference between the amount available and the amount outstanding under the facility if the difference is equal to or greater than one-third of the Maximum Revolving Advance Amount. As of December 31, 2019, there was no balance outstanding under this line of credit. The credit facility contains customary covenants, including covenants that limit or restrict Newegg’s ability to incur capital expenditures and lease payments, make certain investments, enter into certain related-party transactions, and pay dividends. The credit facility also requires Newegg to maintain certain minimum financial ratios and maintain an operation banking relationship with the financial institutions. As of December 31, 2019, Newegg was in compliance with all financial covenants related to the line of credit.

Contractual Obligations

The following table sets forth its contractual obligations and commitments as of June 30, 2020.