SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
the fiscal year ended
Date of event requiring this shell company report
For the transition period from __ to __
(Exact name of registrant as specified in its charter)
|(Jurisdiction of incorporation or organization)|
Telephone: (626) 271-9700
(Address of principal executive offices)
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
|Title of each class||Trading Symbols||Name of each exchange on which registered|
Securities registered or to be registered pursuant to Section 12(g) of the Act. None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
of December 31, 2021, there were
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒
this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. ☒
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||☐||Non-accelerated filer||☐|
|Accelerated filer||Emerging growth company|
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† 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.
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|U.S. GAAP||☒||International Financial Reporting Standards as issued by the International Accounting Standards Board||☐||Other||☐|
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17 ☐ Item 18
this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). ☐ Yes
Background and Certain Defined Terms
As used in this annual report, unless otherwise specified, the terms “we,” “our,” “us,” the “Company” and “Newegg” refer to the registrant, Newegg Commerce, Inc. (previously known as “Lianluo Smart Limited” or “LLIT”).
References to the “Merger” refer to the merger of Newegg Inc. with Lianluo Smart Limited, which subsequently changed its name to Newegg Commerce, Inc.
Hangzhou Liaison Interactive Information Technology Co., Limited (“Hangzhou Lianluo”), is a publicly traded company in China and a majority owner of Newegg Commerce, Inc. through a wholly-owned subsidiary, Digital Grid (Hong Kong) Technology Co., Limited (“Digital Grid”).
TABLE OF CONTENTS
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS||1|
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE||1|
|ITEM 3. KEY INFORMATION||1|
|ITEM 4. INFORMATION ON THE COMPANY||27|
|ITEM 4A. UNRESOLVED STAFF COMMENTS||45|
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS||45|
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES||61|
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS||70|
|ITEM 8. FINANCIAL INFORMATION||72|
|ITEM 9. THE OFFER AND LISTING||73|
|ITEM 10. ADDITIONAL INFORMATION||73|
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK||88|
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES||89|
|ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES||90|
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS||90|
|ITEM 15. CONTROLS AND PROCEDURES||90|
|ITEM 16. [RESERVED]||91|
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT||91|
|ITEM 16B. CODE OF ETHICS||92|
|ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES||92|
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES||92|
|ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS||92|
|ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT||93|
|ITEM 16G. CORPORATE GOVERNANCE||93|
|ITEM 16H. MINE SAFETY DISCLOSURE||93|
|ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS||93|
|ITEM 17. FINANCIAL STATEMENTS||F-1|
|ITEM 18. FINANCIAL STATEMENTS||F-1|
|ITEM 19. EXHIBITS||94|
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This annual report 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 annual report. 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:
|●||future financial and operating results, including revenues, income, expenditures, cash balances and other financial items;|
|●||our ability to execute our growth, and expansion, including our ability to meet our goals;|
|●||current and future economic and political conditions;|
|●||our ability to compete in an industry with low barriers to entry;|
|●||our capital requirements and our ability to raise any additional financing which we may require;|
|●||our ability to attract customers, and further enhance our brand recognition;|
|●||our ability to hire and retain qualified management personnel and key employees in order to enable us to develop our business;|
|●||trends and competition in the e-commerce industry;|
|●||uncertainty about the spread of the COVID-19 virus and the impact it may have on the Company’s operations, the demand for the Company’s products, supply chains, and economic activity in general;|
|●||inflationary pressures that have affected and may continue to affect our business and financial condition; and|
|●||other assumptions described in this annual report underlying or relating to any forward-looking statements.|
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 annual report, whether as a result of new information, future events, changes in assumptions, or otherwise.
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
An investment in the Company’s securities involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with the other information set forth in this annual report. If any of the following risks or uncertainties actually occurs, our business, financial position and results of operations could be materially and adversely affected. In such case, the trading price of our securities could decline and you may lose all or part of your investment. Our business, financial condition, prospects, results of operations or cash flows could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. We cannot assure you that any of the events discussed in the risk factors below will not occur. The risks described below are organized by risk type and are not listed in order of their priority to us.
Summary of Factors That May Affect Our Future Results
The following summarizes the principal factors that make an investment in the Company speculative or risky. This summary should be read in conjunction with the remainder of this “Risk Factors” section and should not be relied upon as an exhaustive summary of the material risks facing our business. The occurrence of any of these risks could harm our business, financial condition, and results of operations or cause our actual results to differ materially from those contained in forward-looking statements we have made in this annual report. You should consider all of the risk factors described in our public filings when evaluating our business, including risks relating to:
|●||the impact of COVID-19 on our business and financial results;|
|●||our reputation and business if we or Newegg Marketplace sellers sell pirated, counterfeit, illegal or “gray market” items;|
|●||the intense domestic and international competition we face;|
|●||any decline in demand for IT/CE products;|
|●||our inability to provide a satisfactory customer experience;|
|●||our use of software and systems contain open source software;|
|●||pricing strategies not meeting customers’ price expectations or resulting in profitability;|
|●||system interruptions, including failures caused or experienced by third-party service providers, and lack of redundancy and timely upgrade;|
|●||our reliance on and relationships with third-party payment processors to process deposits and withdrawals made by users of our Marketplace;|
|●||the loss of key employees or the failure to attract or retain qualified personnel;.|
|●||any significant inadvertent disclosure or breach of confidential or personal information we hold;|
|●||our ability to promote and strengthen Newegg brand;|
|●||our international operations (principally in Canada);|
|●||our expansion into new product categories, services, technologies and geographic regions;|
|●||any interruption in our fulfillment operations;|
|●||our dependence on and relationships with vendors to source sufficient quantities of merchandise on favorable terms;|
|●||access to international markets and applicable laws relating to trade, export and import controls and economic sanctions;|
|●||our marketing activities to help attract visitors to our online platforms;|
|●||delays, increased cost or quality control deficiencies in the importation of products manufactured broad;|
|●||our dependence on third parties to perform a number of our e-commerce functions;|
|●||management of our inventory;|
|●||the fact that we have incurred net losses in the past and may experience losses in the future;|
|●||failure to adopt new technologies or adapt our websites, mobile apps and systems to changing customer requirements or emerging industry standards;|
|●||the seasonality of our business;|
|●||the performance, reliability and security of the internet infrastructure in the countries where we operate;|
|●||management of our growth or execution of our strategies;|
|●||any adverse change in the vendor payment terms and conditions;|
|●||our disclosure controls and procedures;|
|●||the material weaknesses we identified in our internal control over financial reporting;|
|●||our revolving credit agreement, which contains a number of covenants that may restrict our current and future operations;|
|●||claims, litigation, government investigations, and other proceedings may adversely affect our business and results of operations|
|●||our ability to adequately protect our intellectual property rights;|
|●||any assertions, claims and allegations that we have infringed or violated intellectual property rights;|
|●||product liability claims, which could be costly and time-consuming to defend;|
|●||any additional costs incurred due to tax assessments resulting from ongoing and future audits by tax authorities;|
|●||significant developments stemming from recent U.S. government actions and proposals concerning tariffs and other economic proposals;|
|●||relatively stringent employment laws in some of the countries in which we operate;|
|●||our ability to use our net operating loss carryforwards and certain other tax attribute;|
|●||our being treated as a U.S. corporation for all U.S. federal tax purposes;|
|●||the extreme volatility of the market price of our common shares has been extremely volatile and may continue to be volatile due to numerous circumstances beyond our control.|
|●||Mr. Zhitao He and Mr. Fred Chang’s approximate 60.5% and 35.7% control, respectively, and 96.2%, collectively, of the voting power of our issued and outstanding common shares;|
|●||our status as a “controlled company” within the meaning of the Nasdaq Listing Rules and the corresponding exemptions from certain corporate governance requirements;|
|●||certain provisions of Newegg’s Amended Shareholders Agreement that 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;|
|●||any shareholder litigation due to the volatility in the price of our common shares, which may result in substantial costs and a diversion of our management’s attention and resources;|
|●||our failure to maintain compliance with Nasdaq Listing Rules, which may lead to us delisted from Nasdaq, which would result in a limited public market for trading our shares and make obtaining future debt or equity financing more difficult;|
|●||any involvement of our directors and officers in investigations or other forms of regulatory or governmental inquiry which may cause reputational harm to the Company, result in additional expenses, and distract our management from our day-to-day operations;|
|●||securities or industry analysts not publishing research or reports about our business or adversely changing their recommendations regarding our common shares;|
|●||techniques employed by short sellers to drive down the market price of our common shares;|
|●||difficulty enforcing judgments against us, our directors and management.|
|●||unavailability of certain types of class or derivative actions under British Virgin Islands law and other interests under U.S.;|
|●||protecting shareholder interests that would otherwise be normally available to shareholders of a U.S. corporation;|
|●||our expectation not to pay dividends in the foreseeable future;|
|●||certain home country (British Virgin Island) practices in relation to corporate governance matters that differ significantly from Nasdaq’s corporate governance listing standards, which may afford less protection to shareholders; and|
|●||our foreign private issuer status, which exempts us from certain reporting requirements applicable to U.S. domestic public companies.|
Risks Relating to Our Business
The impact of COVID-19 may adversely affect our 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.
Our online business and warehouse operations have remained active to serve our customers during the COVID-19 outbreak, and we have seen increased demand for our products and services during the outbreak. By contrast, some of our 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 our 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 our products and services.
As a consequence of the COVID-19 outbreak, we have experienced occasional supply constraints, primarily in the form of delays in shipment of inventory. We have also experienced increases in the cost of certain products, as well as a decrease in promotions by some manufacturers. While we consider 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.
COVID-19 impacted the supply chain of our brand partners and Marketplace sellers, and our ability to timely fulfill orders and deliver such orders to our customers, particularly as a result of mandatory shutdowns in different countries and cities to mitigate the spread of the virus.
Although we cannot estimate the length or severity 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 our future operations. The potential negative impact of COVID-19 on our operations remains uncertain and potentially widespread, including:
|●||our ability to successfully forecast sales and execute our long-term growth strategy during these uncertain times;|
|●||the build-up of excess inventory as a result of lower consumer demand;|
|●||supply chain disruptions experienced by brand partners and Marketplace sellers, resulting from closed factories, reduced workforces, scarcity of raw materials, and scrutiny or embargoing of goods produced in infected areas, along with increased freight costs for us;|
|●||our ability to access capital sources and maintain compliance with our credit facilities, as well as the ability of our key customers, suppliers, and vendors to do the same in regard to their own obligations;|
|●||our ability to collect outstanding receivables from our customers;|
|●||our ability to attend and participate in industry and trade shows; and|
|●||diversion of management and employee attention and resources from key business activities and risk management outside of COVID-19 response efforts, including cybersecurity and maintenance of internal controls, with resulting potential loss of employee productivity.|
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 our future business, financial condition, cash flow, liquidity and results of operations.
Newegg’s reputation and business may be harmed if Newegg or the Newegg Marketplace sellers sell pirated, counterfeit, illegal or “gray market” items.
We receive from time to time, and may receive in the future, communications alleging that Newegg or the Newegg Marketplace sellers sold pirated, counterfeit, illegal or “gray market” items. These and future claims could increase our cost of doing business as a result of legal expenses, adverse judgments or settlements, and reputational harm, and require us to change our business practices in a way that would be less efficient and more costly. In addition, key manufacturers and vendors, for instance, may be less likely to offer us favorable terms or authorization to carry their products if we sell products of theirs, purchased on the “gray market.” We currently do not have any insurance to cover the types of claims that could be asserted in such litigation or in legal or administrative actions initiated by customers of such products, or by government agencies. If a claim were brought against us successfully, it could expose us to significant liability, which could have a material adverse effect on our business and operations.
Our business faces intense domestic and international competition.
The e-commerce market is intensely competitive with limited barriers to entry. Our current and potential competitors include retailers, manufacturers and distributors that offer a wide range of similar product categories and companies that provide Direct-to-Consumer (“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 our business.
Many of our 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 we do. In addition, some of our 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 we do. Increased competition may result in reduced operating margins, reduced profitability, loss of market share and diminished brand recognition for Newegg.
We compete 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, we also face competition in the international markets in which we participate or may enter in the future. Certain other competitors in countries where we operate are subsidiaries of e-commerce competitors in the United States with established local operations and brands and with greater experience and resources than we have. In other countries that we may enter, there may be incumbent online and multi-channel online or brick-and-mortar competitors presently selling Information Technology/Consumer Electronic (“IT/CE”) products. These incumbents may have advantages that could impede our expansion and growth in these markets.
We could also experience significant competitive pressure if any of our manufacturers or distributors were to initiate or expand their own online retail operations. Because our manufacturers and distributors have access to merchandise at a lower cost than we do, they could sell products at lower prices and maintain a higher gross margin on their product sales than we can, and they may have the ability to directly connect with buyers at relatively low cost. This could result in our 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 we can, could significantly reduce our market share and adversely impact our operating results.
There is no assurance that we will be able to compete successfully against current and future competitors. Competitive pressures may materially and adversely affect our business, financial condition and results of operations.
A decline in demand for IT/CE products could adversely affect our operating results.
We and our Marketplace sellers primarily sell IT/CE products that are often discretionary purchases rather than necessities for consumers. Consequently, our 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 we and our Marketplace sellers offer.
There could be declines in the sales of the products offered by us and our Marketplace sellers due to several factors, including:
|●||decreased demand for IT/CE products, particularly computer components and parts that have historically generated a significant portion of our net sales;|
|●||poor economic conditions and any related decline in customers’ demand for the products we and our Marketplace sellers offer;|
|●||increased price competition from our competitors; or|
|●||technological obsolescence of the products that we and our Marketplace sellers offer.|
Additionally, it is expected that some of our 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/CE products to the extent expected, our future sales may be less than predicted, negatively impacting our net sales and net income.
If we are unable to provide a satisfactory customer experience, our reputation would be harmed and we could lose customers.
The success of our business depends largely on our ability to provide a superior customer experience to maintain and grow our customer base and keep our customers highly engaged on our online platforms, which in turn depends on a variety of factors. These include our 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 our customers are not satisfied with our platforms, products or services, or our online platforms are severely interrupted or otherwise fail to meet our customers’ requests, our reputation could be adversely affected.
As an e-commerce company, we have 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 we continue to improve our 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 we and our Marketplace sellers offer. If we do not continue to make investments in the development of our online platforms and customer service operations and, as a result, or due to other reasons, fail to provide a high-quality customer experience, we may lose customers, which could adversely impact our operating results.
We currently operate customer service centers in California and Texas and have customer service representatives working remotely in California, Indiana, Nevada, New Jersey and Texas, focusing on serving North American buyers. To enhance our 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 email and instant messaging. Any material disruption or slowdown in our 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 us to provide adequate customer support. In addition, the future volume of customer complaints and inquiries may exceed our present system capacities. If this occurs, we could experience delays in responding to customer inquiries and addressing customer complaints and concerns. Our current level of customer support may also fail to meet the expectations of customers. Failure to provide satisfactory levels of customer service may harm our reputation, causing potential loss of existing customers and difficulty in acquiring new customers.
Some of our software and systems contain open source software, which may pose particular risks to our proprietary software and solutions.
We have incorporated open source software code into some of our internal software and systems and expect 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, we may face intellectual property infringement claims from third parties, demands for the release or license of the open source software or derivative works that we developed using such software (which could include our 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 us to purchase a costly license, publicly release the affected portions of our source code, be limited in the licensing of our technologies or cease offering the implicated solutions unless and until we 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). Our 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 our 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 our business, financial condition and results of operations.
We and our Marketplace sellers’ pricing strategy may not meet customers’ price expectations or result in profitability.
Demand for our products is generally highly sensitive to price. Our pricing strategies have had, and may continue to have, a significant impact on our net sales and net income. We often offer 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 our margins. Moreover, our competitors’ pricing and marketing strategies are beyond our control and can significantly impact the results of our pricing strategies. If we fail to meet our customers’ price expectations in any given period, or if our competitors decide to engage in aggressive pricing strategies, our 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, we are required to accurately identify product offerings, not make misleading claims on our platforms, and use qualifying disclosures where and when appropriate. We are particularly subject to the risks associated with our 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-and-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 our products. While the trial court had sustained without leave to amend our demurrer to such lawsuit, in July 2018, a California appellate panel reversed the trial court’s judgment and reinstated the action against us. This matter is still pending as of the date of this annual report. There can be no assurance that we 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 us could have a material adverse effect on our reputation, business and financial condition.
We do not control the pricing strategies of our Marketplace sellers, which could affect our net income and our ability to effectively compete on price with other e-commerce retailers and brick-and-mortar stores. Our 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 our Marketplace, which could adversely affect our 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 our consumers registered in the European Union to access and make purchases through our Marketplace at the prices listed in different European geographies irrespective of their country of residence in Europe. This could adversely affect our business, financial condition, results of operations and prospects.
We face risks related to system interruption, including failures caused or experienced by third-party service providers, and lack of redundancy and timely upgrades.
Our success depends on our ability to successfully receive and fulfill orders and to promptly deliver such orders to our customers. We could lose existing customers or fail to attract new customers, potentially resulting in a decline in net sales, if our online platforms are inaccessible or if our transaction processing systems, order fulfillment processes or network infrastructure are not operational or performing to our customers’ satisfaction.
Any internet network interruptions, latency or problems with our online platforms’ availability could prevent customers from accessing, browsing and placing orders on our online platforms, and impact our ability to fulfill orders or bill customers, which may cause customer dissatisfaction and damage our reputation and brand. We have experienced brief computer system interruptions in the past and believe that others will occur from time to time in the future. Our systems and operations potentially are vulnerable to damage or interruption from a number of sources, including the following:
|●||natural disaster or other catastrophic event such as earthquake, fire, power loss or interruption, telecommunications failure, hurricane, volcanic eruption, flood or terrorist attack. For example, our headquarters and the majority of our infrastructure, including some of our servers, are located in Southern California, a seismically active region. In addition, California has in the past experienced power outages as a result of limited electric power supply;|
|●||diseases or pandemics (including COVID-19) that have affected and may continue to affect the supply chain of our brand partners and Marketplace sellers, and our logistics in the future due to inconsistent and unanticipated order patterns, other diseases or pandemics or unforeseen natural disasters;|
|●||computer malware, physical or electronic break-ins and similar disruptions;|
|●||security breaches and hacking attacks;|
|●||failure by third-party vendors, including data center and bandwidth providers, to provide steady and high-speed access to our online platforms and systems. Any disruption in our network access or co-location services, which are the services that house some of our servers and provide internet access to them, provided by these third-party providers or any failure of these third-party vendors to handle existing or higher volumes of use could significantly harm our business. Any financial or other difficulties these vendors face could also adversely affect our business; and|
|●||incidents of fraud.|
We have not yet created sufficient redundancy for our information technology systems and data, and we do 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, Canada, China, and Taiwan. Any substantial damage to, or disruption of, our technology infrastructure could cause interruptions or delays, loss of data, or reduced system availability, which could have a material adverse effect on our business, financial condition and results of operations.
We may be unable to accurately project the rate or timing of traffic flow, including any traffic increases, or successfully and cost-effectively upgrade our systems and infrastructure in a timely manner to accommodate higher traffic levels on our online platforms. If the volume of traffic on our online platforms or the number of purchases made by our customers increases substantially, we 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, we experience surges in online traffic and orders associated with promotional activities and holiday seasons, especially during the Christmas season, which can put additional demands on our technology platform at specific times.
Additionally, we must continue to upgrade and improve our technology and infrastructure to support our business growth, and failure to do so could impede our growth. However, we cannot assure you that we will be successful in executing these system upgrades and improvement strategies. Any such upgrades to our systems and infrastructure could require substantial investments. In particular, our 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 our 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 our business, financial condition and results of operations.
We rely on third-party payment processors to process deposits and withdrawals made by users of our Marketplace, and if we cannot manage our relationships with such third parties and other payment-related risks, our business, financial condition and results of operations could be adversely affected.
We rely on a limited number of third-party payment solutions to process deposits and withdrawals made by users of our Marketplace. If any third-party payment solution terminates its relationship with Newegg or refuses to renew its agreement with Newegg on commercially reasonable terms, we 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 our third-party payment solutions may not meet our expectations, contain errors or vulnerabilities, be compromised or experience outages. Any of these risks could cause us to lose our ability to accept online payments or other payment transactions or make timely payments to users of our Marketplace, any of which could make our Marketplace less trustworthy and convenient and adversely affect our ability to attract and retain our users.
Nearly all of our 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. We may in the future offer new payment options to users that may be subject to additional regulations and risks. We are also subject to a number of other laws and regulations relating to the payments we accept from our users, including with respect to money laundering, money transfers, privacy and information security. If we fail to comply with applicable rules and regulations, we may be subject to civil or criminal penalties, fines and/or higher transaction fees and may lose our ability to accept online payments or other payment card transactions, which could make our Marketplace less convenient and attractive to our users. If any of these events were to occur, our 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 us from providing certain offerings to some users, be costly to implement or difficult to follow. We have agreed to reimburse our payment processors for fines, penalties or assessments that are assessed by card organizations if we or the users on our Marketplace violate these rules. Any of the foregoing risks could adversely affect our business, financial condition and results of operations.
The loss of key employees or the failure to attract or retain qualified personnel can have a material adverse effect on our ability to run our business.
The loss of any of our current executives, key employees or key advisors, or the failure to attract, integrate, motivate and retain additional key employees, can have a material adverse effect on our business. Competition for well-qualified and skilled employees has been increasingly intense, and our future success also depends on our 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. Although we have employment agreements with our executive officers, all of our executive officers are employed “at-will” and could terminate their employment at any time. If we lose one or more of our executive officers or other key employees, our ability to implement our business strategy successfully can be seriously harmed. Furthermore, replacing executive officers or other key employees with other highly skilled and qualified candidates has been and may continue to be difficult, taking an extended period of time. Recruiting skilled personnel is highly competitive. The increased availability of flexible or remote work arrangements, accelerated by the COVID-19 pandemic, has both intensified and expanded competition. There can be no assurance that we will continue to attract and retain the personnel needed for our business. The failure to attract or retain qualified personnel could have a material adverse effect on our business.
A significant inadvertent disclosure or breach of confidential or personal information we hold could be detrimental to our business, reputation and results of operations.
Our business requires the storage, transmission and utilization of data, including personal information, much of which must be maintained on a confidential basis. These activities have made, and may in the future make, us a target of cyber-attacks by third parties seeking unauthorized access to the data we maintain, including our customer data, or to disrupt our ability to provide service. As a result of the types and volume of personal data on our systems, we believe that we are a particularly attractive target for such breaches and attacks. For example, in 2018, Newegg suffered an intrusion of a portion of its network, as a result of which access was gained to a limited amount of credit card information.
In recent years, the frequency, severity and sophistication of cyber-attacks, computer malware, viruses, social engineering, and other intentional misconduct by computer hackers has significantly increased, and government agencies and security experts have warned about the growing risks of hackers, cyber criminals and other potential attackers targeting information technology systems. Such third parties could attempt to gain entry to our systems for the purpose of stealing data or disrupting the systems. In addition, our security measures may also be breached due to employee error, malfeasance, system errors or vulnerabilities, including vulnerabilities of our vendors, suppliers, their products, or otherwise. Third parties may also attempt to fraudulently induce employees or customers into disclosing sensitive information such as usernames, passwords or other information to gain access to our customers’ data or our data, including intellectual property and other confidential business information.
While we have implemented security measures designed to protect against security breaches, these measures could fail or may be insufficient, particularly as techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until launched against a target, resulting in the unauthorized disclosure, modification, misuse, destruction, or loss of our or our customers’ data or other sensitive information. Any failure to prevent or mitigate security breaches and improper access to or disclosure of the data we maintain, including personal information, could result in litigation, indemnity obligations, regulatory enforcement actions, investigations, fines, penalties, mitigation and remediation costs, disputes, reputational harm, diversion of management’s attention, and other liabilities and damage to our business.
We believe we have taken appropriate measures to protect our systems from intrusion, but we cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities in our systems and attempts to exploit those vulnerabilities, physical system or facility break-ins and data thefts or other developments will not compromise or breach the technology protecting our systems and the information we possess.
We may incur significant costs in protecting against or remediating cyber-attacks. Any security breach could result in operational disruptions that impair our ability to meet our customers’ requirements, which could result in decreased revenue. Also, whether there is an actual or a perceived breach of our security, our reputation could suffer irreparable harm, causing our current and prospective customers to reject our products and services in the future, deterring data suppliers from supplying us data or customers from uploading their data on our platform, or changing consumer behaviors and use of our technology. Further, we could be forced to expend significant resources in response to a security breach, including those expended in notifying individuals and providing mitigating services, repairing system damage, increasing cybersecurity protection costs by deploying additional personnel and protection technologies, and litigating and resolving legal claims or governmental inquiries and investigations, all of which could divert the attention of our management and key personnel away from our business operations. Federal, state and foreign governments continue to consider and implement laws and regulations addressing data privacy, cybersecurity, and data protection laws, which include provisions relating to breaches. In any event, a significant security breach could materially harm our business, operating results and financial condition.
We may not succeed in promoting and strengthening the Newegg brand, which may materially and adversely affect our 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 our customer base, market position and bargaining power with vendors. Any loss of trust in our brand could harm our reputation and result in consumers, sellers, brands, vendors and other participants reducing their activity level in our business, which could materially reduce our profitability.
If we do not, or are unable to continue to, promote and strengthen the Newegg brand, or if the brand fails to continue to be viewed favorably, we may not be successful in attracting new customers and Marketplace sellers, which could have a material adverse effect on our financial condition and results of operations. Additionally, we compete not only for customers and Marketplace sellers, but also for favorable product allocations and cooperative advertising support from our vendors. If we fail to maintain favorable recognition of our brand, we may not be successful in maintaining and strengthening our 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 our online platforms, the products and services offered by us and our Marketplace sellers or our 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 our customer service representatives fail to satisfy the individual needs of the customers, the customers may become disgruntled and disseminate negative comments about our customer service. In addition, our 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 our 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 our business, reputation and financial condition.
We are, or may become, subject to risks associated with our international operations, principally in Canada, which may harm our business.
Newegg began operations on our Canadian retail website, www.newegg.ca, in October 2008. We also have a physical presence in China and Taiwan. While Newegg is investing in building our business in other markets, we may not be able to successfully manage the challenges associated with our current and future international operations due to risks, such as:
|●||international economic and political conditions or geopolitical events and security issues (including terrorist attacks, war, or other armed hostilities);|
|●||changes in, or impositions of, legislative or regulatory requirements on e-commerce businesses and companies, such as U.S. sanctions laws and regulations, and limitations on our ability to directly own or control key assets, such as overseas warehouses;|
|●||the legal and regulatory environment in foreign jurisdictions, including with respect to consumer privacy and data protection laws, tax, law enforcement, network security, trade compliance and intellectual property matters, as well as consumer litigation;|
|●||tax laws, regulations and treaties, including U.S. taxes on foreign operations and repatriation of funds;|
|●||difficulties in identifying, attracting, hiring, training and retaining qualified personnel, and overseeing international operations, including the efficient management of our international operations;|
|●||delays or additional costs resulting from import/export controls, duties, tariffs or other barriers to trade; and|
|●||currency exchange controls or changes in exchange rates, which could make our pricing less competitive or reduce our profit margins.|
Any one of the foregoing factors could cause our business, financial condition and results of operations to suffer.
Our expansion into new product categories, services, technologies and geographic regions subjects us to additional business, legal, financial and competitive risks.
An important element of our business strategy is to expand into new product categories, services, technologies and regions, such as our expansion into Canada and other countries, and our offerings under Newegg Partner Services (“NPS”) for third parties. In directing our focus into these new areas, we face numerous risks and challenges, including alienating our core customer base, facing new competitors, having the increased need to develop new strategic relationships and straining our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. There is no assurance that our strategy will result in increased net sales or net income. Furthermore, growth into new business areas may require changes to our existing business model and cost structure, modifications to our 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 we have little or no experience. These risks may pose a material adverse risk to our business, financial condition and results of operations.
Any interruption in our fulfillment operations may have an adverse impact on our business.
Our ability to process and fulfill orders accurately and provide high-quality customer service depends on the smooth operation of our fulfillment infrastructure, including our warehouses and order processing centers. If we do not optimize and operate our 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 our gross profit margin, or harm our business in other ways. If we do not have sufficient fulfillment capacity or experience a problem fulfilling orders in a timely manner or if certain products are out of stock, our customers may experience delays in receiving their orders, which could harm our reputation and our relationship with our customers.
Our 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, our warehouse located in Indianapolis experienced a significant fire in January 2019, causing damage to our inventory. Our fulfillment infrastructure and processes may also contain undetected errors or design flaws that may cause our fulfillment operations to fail and materially impact our business and results of operations. If, for example, any of our warehouses were rendered incapable of operations, we 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 our business, prospects, financial condition and results of operations.
We depend on our vendors to source sufficient quantities of merchandise on favorable terms. If we fail to maintain strong vendor relationships or if our vendors are otherwise unable to supply products that meet our standards in a timely manner, our net sales and net income could suffer.
Our contracts or arrangements with vendors generally do not guarantee the availability of merchandise or provide for the continuation of particular pricing or other practices. Our vendors may not continue to sell their inventory to us on current terms or at all, and, if the terms are changed, we may not be able to establish new supply relationships on similar or better terms. In most cases, our relationships with our vendors do not restrict them from selling their products through our competitors. Newegg competes with other retailers for favorable product allocations and vendor incentives from product manufacturers and distributors, including but not limited to marketing dollars and volume-based sales incentive programs. Some of our competitors could enter into exclusive or favorable distribution arrangements for certain products with our vendors, which would deny us complete or partial access to those products and marketing and promotional resources. In addition, some vendors whose products are offered on our online platforms also sell their products directly to customers. If we are unable to develop and maintain relationships with vendors that permit us to obtain sufficient quantities of desirable merchandise on favorable terms, our business, financial condition and results of operations could be adversely impacted.
Our relationship with any particular vendor is dependent on our sales of products manufactured or distributed by that vendor. For certain products, we do 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, we may not receive favorable pricing, vendor incentives or other considerations from those vendors. During times of short supply for highly desirable products, we 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 our ability to retain customers. We currently do not carry the full product portfolio of, and in some cases do 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 us or purchase them at the most favorable prices, leading to potentially reduced net sales and net income.
Certain vendors provide a significant portion of our merchandise. In the United States and Canada, for the twelve months ended December 31, 2021, our ten largest suppliers accounted for approximately 69% of the merchandise we purchased. Three of our ten largest suppliers, Asus, ASI Corporation, and MSI, accounted for approximately 32% of our purchases for the same period. Failure to maintain a positive relationship with these key suppliers could impact our ability to sell to customers the products they want.
Our 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 our net sales and net income.
Our 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 our 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 us or on our 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.
We must also comply with applicable foreign laws relating to trade, export and import controls and economic sanctions. We may not be aware of all of such laws applicable in the markets in which we do business, which subjects us to the risk of potential violations.
We conduct marketing activities to help attract visitors to our online platforms, and if we are unable to attract these visitors or convert them into customers in a cost-effective manner, our business and results of operations could be harmed.
Our success depends on our ability to attract visitors to our online platforms and convert them into customers in a cost-effective manner. We rely on search engines, social media, shopping comparison sites and other affiliate networks to provide content, advertising banners and other links that direct visitors to our online platforms. As of December 31, 2021, approximately 34% of our website and mobile app visitors were referred to us through paid and unpaid search engine listings, shopping comparison sites and other affiliate networks that provide links to our online platforms. In particular, we rely 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 us 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, we may be unable to cost-effectively drive visitors to our websites and mobile apps. We also sometimes pay these third parties to include or highlight our websites in their search results. If such third parties modify or terminate their relationship with us or increase the price they charge to us, if our competitors offer them greater fees for traffic, or if any free third-party platforms on which we rely begin charging fees for listing or placement, our expenses could rise and traffic to our websites could decrease, resulting in harm to our operations.
Our success also depends on our ability to convert visitors to our websites and mobile apps into paying customers, a process which is partially reliant upon our ability to identify and purchase relevant keyword search terms, provide relevant content on our online platforms and effectively target our other marketing programs, such as internet portal referrals, email campaigns and affiliate programs. If we are unable to attract visitors to our websites and mobile apps and convert them into customers cost-effectively, our business and financial results may be harmed.
Because many of the products that we sell are manufactured abroad, we may face delays, increased cost or quality control deficiencies in the importation of these products, which could reduce our net sales and profitability.
Many of the products that we purchase for direct sale on our online platforms are manufactured in countries outside the United States. These imported products subject us 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, we may be unable to obtain sufficient quantities of these imported products to satisfy our requirements or our cost of obtaining such products may increase. Historically, instability in the political and economic environments of the countries in which our suppliers operate has not had a material adverse effect on our operations. However, the effect that future changes in economic or political conditions in the foreign countries where our supplying manufacturers are located may have on our operations cannot be predicted. Potential disruptions or delays in supply due to economic or political conditions in foreign countries could adversely affect our results of operations unless and until alternative supply arrangements are made.
We are partially dependent on third parties to perform a number of our e-commerce functions. If such third parties are unwilling or unable to continue providing these services, our business could be harmed.
As of December 31, 2021, approximately 6.1% of our gross merchandise value (“GMV”) was generated by the sale of products fulfilled through third parties. These third parties provide various services on our behalf, including inventory maintenance and order processing. We have no effective means to ensure that these third parties will continue to perform these services to our satisfaction, in a manner satisfactory to our customers or on commercially reasonable terms. Our 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 our customers become dissatisfied with the services provided by these third parties, our reputation and brand could suffer.
If we fail to manage our inventory effectively, our financial condition, results of operations and liquidity may be materially and adversely affected.
Our scale and business model require us to manage a large volume of inventory effectively. As we may continue expanding our product offerings, we expect to include more SKUs in our inventory, which could make it more challenging for us to manage our inventory effectively and put more pressure on our warehousing system.
We purchase most of the merchandise that we sell directly to customers on our online platforms from manufacturers or distributors. We assume inventory damage, theft, obsolescence, and price erosion risks for our inventory. These risks are especially significant as most of the merchandise sold on our online platforms is characterized by rapid technological change, obsolescence and price erosion. For the year ended December 31, 2021, we recorded inventory write-offs or write-downs totaling $8.2 million, or 0.4% of our cost of goods sold. We 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, our inventory risks could increase. We also periodically take advantage of cost savings associated with certain opportunistic bulk inventory purchases offered by our vendors. These bulk purchases increase our exposure to inventory obsolescence. Our success depends on our ability to sell our inventory rapidly, purchase inventory at attractive prices relative to our resale value and manage customer returns and the shrinkage resulting from theft, loss, and misrecording of inventory. If we are unsuccessful in any of these areas, we 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 our business, financial condition and results of operations.
We depend on our demand forecasts for various kinds of products to make purchase decisions and to manage our inventory. We are 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 we endeavor to accurately predict these trends and avoid overstocking or understocking products we sell, the demand for products can change significantly between the time inventory is ordered and the date of sale, and we may be unable to sell products in sufficient quantities as we expect. Furthermore, we may in the future open additional warehouses and duplicate part of the inventory for our direct sales business that is stored at our current warehouses to increase our overall fulfillment efficiency as we grow our business, which will also increase the inventory risks our direct sales business faces. Failure to effectively manage our inventory risk could have a material adverse effect on our business, financial condition and results of operations.
We have incurred net losses in the past and may experience losses in the future.
We incurred net losses of $17.0 million and $33.6 million in 2019 and 2018, respectively, and reported net income of $36.3 million and $30.4 million in 2021 and 2020, respectively. However, we cannot assure you that we will be able to continue to generate net profits or positive cash flow from operating activities in the future. Our ability to achieve and maintain profitability will depend in large part on our ability to, among other things, source and sell higher margin products, grow and diversify our supplier base, and optimize our cost structure. We may not be able to achieve any of the above. As we continue to grow and expand our business, our operating expenses may increase further. As a result of the foregoing, we may incur net losses in the future.
If we fail to adopt new technologies or adapt our websites, mobile apps and systems to changing customer requirements or emerging industry standards, our business may be materially and adversely affected.
To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our online platforms, including our 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 our existing technologies and systems obsolete. We may be required to devote substantial resources to developing proprietary technologies or license technologies, enhancing our existing websites and mobile apps, developing new services and technology that address the increasingly sophisticated and varied needs of our 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 our 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 our failure to do so may harm our business and results of operations.
The seasonality of our business places increased strain on our operations.
Newegg historically experiences higher sales in the fourth quarter due to the holiday season. If we do not stock or restock popular products in sufficient amounts such that we fail to meet customer demand, it could significantly affect our revenue and future growth. If we overstock products, we may be required to take significant inventory markdowns or write-offs and incur commitment costs, which could reduce profitability. We may experience an increase in our 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 our online platforms within a short period of time due to increased holiday demand, we may experience system interruptions that make our online platforms unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods sold through our online platforms and the attractiveness of our products and services. In addition, we may be unable to adequately staff our fulfillment and customer service capability during these peak periods.
As we tend to experience higher sales in the fourth quarter, we generally experience an increase in our cash position at year-end, as compared to the first, second and third quarters when sales are lower. Historically, our 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) at December 31 of each year. In anticipation of higher sales during the holiday season, we typically begin 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, our 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 we pay our vendors. The COVID-19 pandemic has resulted in increased cash and accounts payable balances due to an increased demand in our products, and inventory levels increased and turned faster than normal as a result of increased sales.
The successful operation of our business depends upon the performance, reliability and security of the internet infrastructure in the countries where we operate.
Our business depends on the performance, reliability and security of the telecommunications and internet infrastructure in the countries where we operate. We have several servers located in China that provide 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. 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. We may face similar or other limitations in other countries in which we operate. We 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 we operate 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 our websites and mobile apps. If the prices that we pay for telecommunications and internet services rise significantly, our net income could be adversely affected. In addition, if internet access fees or other charges to internet users increase, our user traffic may decrease, which in turn may significantly decrease our revenues.
If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.
Our success depends upon our ability to manage the growth of our operations effectively. We anticipate expanding further as we pursue our growth strategies. Our expansion increases the complexity of our business and places a significant strain on our management, operations, technical systems, financial resources and internal control over financial reporting functions. Our current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage our future operations, especially as we employ personnel in several geographic locations. In addition, our growth will require us to improve our operational and financial systems, procedures and controls, successfully manage international operations and hire additional personnel. These efforts may not be successful, and we may be unable to improve our systems, procedures and controls in a timely manner.
Delays or problems associated with any of these initiatives could harm our business and operating results. These initiatives will also cause our operating expenses to increase. If we fail to accurately estimate and assess our growth or fail to increase net sales to match our increased operating expenses, our 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 our business, financial condition and results of operations.
We purchase our inventory from vendors on trade accounts typically requiring payment between 15 and 45 days after the date the inventory is shipped to us. As of December 31, 2021, our accounts payable balance was $235.9 million with 42 days of payables outstanding. Our accounts payable balances as of December 31, 2021 represented 37.4% of our liabilities and shareholders’ equity. An adverse change in our vendors’ payment terms and conditions would significantly increase our working capital requirements and have a material adverse effect on our business, financial condition and results of operations.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Since the Merger, we have implemented 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 have not changed historical behaviors that might be inconsistent with the rules and practices regulating a U.S. public company, we could be at risk of violation or poor reporting as a public company. If our directors or executive officers inadvertently fail to identify, review or disclose a new relationship or arrangement causing the Company to fail to properly disclose any related party transaction or in the event that we fail to comply with SEC reporting and internal controls and procedures, we 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 our management since completion of the Merger in May 2021 and may require us to obtain outside assistance from legal, accounting or other professionals that will increase our costs of doing business.
We identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which could result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
We have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We have concluded that material weaknesses arose because we did not have the proper business processes, systems, personnel, and related internal controls in place.
For a description of the identified material weaknesses, see Item 15, “Controls and Procedures.” In connection with management’s identification of these material weaknesses, management has concluded that our disclosure controls and procedures were not effective as of December 31, 2021.
As further described in Item 15 “Controls and Procedures,” we have undertaken steps to improve our internal control over financial reporting. We expect that we will need to improve existing procedures and controls, and implement new ones, to remediate the material weaknesses. We may not be successful in making the improvements necessary to remediate the material weaknesses identified by management or be able to do so in a timely manner. Any inability to remediate the material weaknesses effectively or in a timely manner, or the identification of any new material weaknesses in the future, could limit our ability to prevent or detect a misstatement of our accounts or disclosures and could result in a material misstatement of our annual or interim financial statements. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and the price of our common stock may decline as a result.
We and certain of our subsidiaries are parties to a revolving credit agreement, which contains a number of covenants that may restrict our current and future operations and could adversely affect our ability to execute business needs.
We and certain of our subsidiaries have entered into a credit agreement with financial institutions which contains a number of covenants that limit our ability and our subsidiaries’ ability to, among other things, incur indebtedness, create liens, make investments, merge with other companies, dispose of our assets, prepay other indebtedness and make other distributions. The obligations under the credit agreements are also guaranteed by our assets or those of our subsidiaries. The terms of the credit agreement may restrict our current and future operations and could adversely affect our ability to finance our 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 to successfully execute our business strategy, invest in our growth strategy and compete against companies who are not subject to such restrictions. The credit agreement also contains financial covenants that require us to maintain certain minimum financial ratios and maintain an operating banking relationship with the financial institutions. Although we are currently in compliance with the financial covenants, we cannot guarantee that we 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 we are unable to comply with our payment requirements, the financial institutions may accelerate our obligations under the credit agreement and foreclose upon the collateral, or we may be forced to sell assets, restructure our indebtedness or seek additional equity capital, which would dilute shareholders’ interests. If we fail 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, we 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 us.
Our business, operating results, and cash flows may be adversely impacted by a rising rate of inflation.
Due to labor and supply chain constraints, including those stemming from effects of the ongoing COVID-19 pandemic, there has been an inflationary environment resulting in significant increases to the cost of components, labor and freight costs and other expenses. These inflationary pressures have affected, and may continue to affect, wages, the cost and our ability to obtain products, the price of our goods and services, our ability to meet customer demand, discretionary consumer spending that may lead to lesser demand for our products, our gross margins and operating profit. If we are unable to successfully manage the effects of inflation, our business, operating results, cash flows and financial condition may be adversely affected. In addition, inflation may amplify or exacerbate many of the other risks discussed in this “Risk Factors” section.
Legal and Regulatory Risks
Claims, Litigation, Government Investigations, and Other Proceedings May Adversely Affect Our Business and Results of Operations
We are subject to actual and threatened claims, litigation, investigations, and other proceedings, involving a wide range of issues, including patent and other intellectual property matters, taxes, labor and employment, privacy, data use, data protection, data security, network security, consumer protection, commercial disputes, goods and services offered by us and by third parties, and other matters. Any of these types of proceedings can have an adverse effect on us because of legal costs, disruption of our operations, diversion of management resources, negative publicity, and other factors. The outcomes of these matters are inherently unpredictable and subject to significant uncertainties. Determining legal reserves or possible losses from such matters involves judgment and may not reflect the full range of uncertainties and unpredictable outcomes. Until the final resolution of such matters, we may be exposed to losses in excess of the amount recorded, and such amounts could be material. Should any of our estimates and assumptions change or prove to have been incorrect, it could have a material effect on our business or results of operations.
We may not be able to adequately protect our intellectual property rights.
We rely 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 our proprietary rights. These steps may be inadequate, agreements may be violated or there may be inadequate remedies for a violation of such agreements. Our competitors may independently develop equivalent proprietary information and rights or may otherwise gain access to our trade secrets or proprietary information, which could affect our ability to compete in the market. There is no assurance that the steps that we have taken will adequately protect our proprietary rights, especially in countries where the laws or enforcement of the laws may not protect our rights to the same extent or in the same way as in the United States.
In addition, third parties may infringe or misappropriate our proprietary rights, and we could be required to enforce our intellectual property rights, which could require expenditure of significant financial and managerial resources. We have 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. Such pending applications are not certain to be approved, and even if we obtain approval for such pending applications, the resulting registrations may not adequately cover our trademarks or protect us 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 our products may be made available online, which may cause our business and operating results to suffer. In addition, we may be unable to acquire or protect relevant domain names in the United States and in other countries. If we are not able to acquire or protect our trademarks, domain names or other intellectual property, we may experience difficulties in achieving and maintaining brand recognition and customer loyalty.
Assertions, claims and allegations, even if not true, that we have infringed or violated intellectual property rights could harm our business and reputation.
Third parties have, and likely will in the future, assert allegations and claims of intellectual property infringement against us on the items or their descriptions listed on our websites and mobile apps. Any such claims, disputes or litigation, even if resolved in our favor or not true, could be time-consuming and costly to defend, and could divert our management’s efforts from growing our business. We have 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. We follow these procedures to review complaints and relevant facts to determine the appropriate action, which may include removal of the item from our online platforms and, in certain cases, discontinuing our relationship with a Marketplace seller or brand partner who violates our policies. However, these rules and procedures may not effectively reduce or eliminate our liability. In particular, Newegg may be subject to civil or criminal liability for activities carried out, including products listed, by sellers or brands on our online platforms.
If any third parties prevail in their intellectual property rights claims against Newegg, we 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. We 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. We 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 our operating expenses. If we cannot develop non-infringing technology or license the appropriate technology at commercially reasonable rates, an intellectual property claim successfully asserted against us could cause significant business interruptions in our operations, which could restrict our ability to compete effectively and have a material adverse effect on our 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 our online platforms are manufactured by third parties, and some of them may be defectively designed or manufactured. If any product we sell were to cause physical injury or injury to property, an injured party could bring claims against us as the retailer of the product. Furthermore, we also offer IT components and peripherals under our private labels on our 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 we had simply acted as a retailer of third-party products. Our insurance coverage may not be adequate against such product liability claims. If a successful claim were brought against Newegg in excess of our insurance coverage, it could adversely affect our 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 our reputation and business.
We 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 our 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 our business. For example, in February 2018, we 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 approximately $0.3 million, plus penalties and interest. In May 2020, we 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 $2.7 million, including penalties and interest. We have appealed these assessments and intend 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 our 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 December 31, 2021, approximately 70% of our products that were sold through our platforms, both direct sales and marketplace, were manufactured in China. U.S. government actions since 2018 have imposed greater restrictions and economic disincentives on international trade impacting imports and exports. The U.S. government has adopted changes, and may 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, and has amended export regulations regarding sales to companies on the U.S. Entity List. These changes prevent sales of foreign produced direct products of the U.S. that are manufactured using controlled U.S.-origin equipment, technology, and software located outside the United States to certain 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 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 increased the cost of these 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 Newegg or used in our 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”). A Phase 2 Agreement has not been announced as of the date of this annual report. On April 1, 2022, the U.S. Court of International Trade upheld the List 3 and List 4a tariffs and rejected arguments brought by plaintiff importers that the tariffs exceeded the authority of the USTR to impose. Certain procedural issues with the tariffs were remanded to USTR to reconsider. It is expected that this litigation, which only covers tariffs imposed on goods originating from China, will continue into 2023.
Any increase in the cost of importing goods and parts could decrease our margins, reduce the competitiveness of our products, or inhibit our ability to sell products or purchase necessary parts, which could have a material adverse effect on our 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 have been made to General Prohibition Three (Foreign-Produced Direct Product Rule) and the Entity List, the most recent of which were effective August 17, 2020. These amendments expand the restrictions on the sale of goods manufactured outside the United States that are produced using certain controlled U.S. technology or software 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 our ability to sell products internationally, which could in turn decrease the demand for our products and have a material adverse effect on our 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 our 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 us to export our 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 us to increase prices to our customers, which may reduce demand or, if we are unable to increase prices, result in lowering our 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 our materials may be adversely affected and the demand from customers for products and services may be diminished, which could adversely affect our revenues and profitability. See “— Newegg’s Business Model” for more information about direct sales and marketplace.
We cannot predict future trade policy, the terms of any renegotiated trade agreements or additional imposed tariffs and their impact on our 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 our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could adversely impact our 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 we currently develop and sell products, and any negative sentiments towards the United States as a result of such changes, could adversely affect our 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 we operate are relatively stringent.
As of December 31, 2021, we had 2,205 full-time employees, of whom approximately 55% were located in the United States, 38% in China, 6% in Taiwan, and 1% in Canada and other countries and regions. In some of the countries in which we operate, 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 we operate, 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 our ability to react to market changes and the needs of our business.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited and could adversely impact our business, financial condition and operating results.
Under Sections 382 and 383 of the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by one or more “5% shareholders” (as defined under U.S. income tax laws) that exceeds 50 percentage points over a rolling three-year period. Similar rules apply under state tax laws. We believe it is possible that we may experience an ownership change in the future as a result of shifts in our stock ownership, some of which are outside our control, in which case we may be limited in our ability to use our net operating loss carryforwards and other tax assets to reduce taxes owed on the net taxable income that we earn. If finalized, Treasury Regulations currently proposed under Section 382 of the Code may further limit our ability to utilize our pre-change net operating losses and tax credit carryforwards if we undergo such an ownership change.
We are treated as a U.S. corporation for all U.S. federal tax purposes.
We believe that we are an inverted corporation for U.S. federal tax purposes. This means that, notwithstanding that we are a company incorporated in the BVI, we will be treated for all U.S. federal tax purposes as if we are a U.S. corporation and you will be treated for all U.S. federal tax purposes as holding the stock of a U.S. corporation.
Risks Related to our Common Shares
The market price of our common shares has been extremely volatile and may continue to be volatile due to numerous circumstances beyond our control.
The market price of our common shares has fluctuated, and may continue to fluctuate, widely, due to many factors, some of which may be beyond our control. These factors include, without limitation:
|●||comments by securities analysts or other third parties, including blogs, articles, message boards and social and other media;|
|A.||actual or anticipated fluctuations in our financial and operating results;|
|●||risks and uncertainties associated with the ongoing COVID-19 pandemic;|
|●||shifts in the timing or content of certain promotions or service offerings;|
|●||announcements of new products and services by us or our competitors;|
|●||the effect of changes in tax rates in the jurisdictions in which we operate;|
|●||announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;|
|●||the mix of earnings in the countries in which we operate;|
|●||changes in foreign currency exchange rates;|
|●||announcements about our earnings that are not in line with analysts’ expectations;|
|●||changes in financial estimates by securities analysts;|
|●||negative public perception of us, our competitors, or industry;|
|●||release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;|
|●||potential litigation or regulatory investigations; and|
|●||overall general market fluctuations.|
Stock markets in general and our share price in particular have recently experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies and our company. For example, on July 7, 2021, our common shares experienced an intra-day trading high of $79.07 per share and a low of $28.19 per share. In addition, from May 12, 2021 to August 4, 2021, the closing price of our common shares on Nasdaq ranged from as low as $6.04 to as high as $67.57 and daily trading volume ranged from approximately 68,300 to 76,187,000 shares. During this time, we have not experienced any material changes in our financial condition or results of operations that would explain such price volatility or trading volume. These broad market fluctuations may adversely affect the trading price of our common shares. In particular, a large proportion of our common shares has been and may continue to be traded by short sellers which has put and may continue to put pressure on the supply and demand for our common shares, further influencing volatility in its market price. Additionally, these and other external factors have caused and may continue to cause the market price and demand for our common shares to fluctuate, which may limit or prevent investors from readily selling their shares of common shares and may otherwise negatively affect the liquidity of our common shares.
Mr. Zhitao He and Mr. Fred Chang control approximately 60.5% and 35.7%, respectively, and 96.2%, collectively, of the voting power of our issued and outstanding common shares. They will exert significant influence on our business and operations and may have a conflict of interest with our other shareholders.
Mr. Zhitao He and Mr. Fred Chang control approximately 60.5% and 35.7%, respectively, of the voting power of our issued and outstanding common shares, and 96.2%, collectively. Additionally, Mr. Zhitao He and Mr. Fred Chang, both of whom serve as our directors, will be able to exercise substantial influence over our business and operations. They may also have a conflict of interest with our other shareholders. Where such a conflict exists, our other shareholders will be dependent upon Mr. He, Mr. Chang, and other directors exercising, in a manner fair to all of our shareholders, their fiduciary duties. Also, Mr. He and Mr. Chang will have the ability to control the outcome of most corporate actions requiring shareholder approval, including the sale of all or substantially all of our assets and amendments to our Memorandum and Articles of Association. Moreover, 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 are a “controlled company” within the meaning of the Nasdaq Listing Rules and, as a result, qualify for exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that are subject to such requirements.
Mr. Zhitao He, through Hangzhou Lianluo, Hyperfinite Galaxy Holding Limited, and Digital Grid, controls a majority of the voting power of our outstanding common shares. As a result, we are a “controlled company” within the meaning of 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:
|●||an exemption from the rule that a majority of our board must be independent directors;|
|●||an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and|
|●||an exemption from the rule that our director nominees must be selected or recommended solely by 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.
The Amended and Restated Memorandum and Articles of Association limit your ability to appoint directors 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.
Digital Grid and Mr. Fred Chang, who beneficially owns approximately 60.5% and 35.7%, respectively, of our total voting power, have the right to appoint four directors and three directors, respectively, with Mr. Fred Chang acting as a “Minority Representative” selected by a majority of the Legacy Shareholders, who collectively own approximately 96.2% of our total voting power. 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 is entitled to appoint shall be appointed by the remaining directors, or by any other means allowed under the Amended and Restated Memorandum and Articles of Association.
The Amended and Restated Memorandum and Articles of Association limit your ability to appoint or elect persons for service on our board 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 our board.
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.
We are party to an amended and restated shareholders agreement (the “Amended Shareholders Agreement”) with Digital Grid, Mr. Fred Chang and certain other shareholders (the “Principal Shareholders”).
Under the Amended Shareholders Agreement, the Principal Shareholders have pre-emptive rights to acquire additional shares when the Company issues or sells additional securities in the future, except for “excluded issuances” as defined in the Amended Shareholders Agreement or common shares offered pursuant to a registration statement filed with the SEC.
In addition, the Company and the Principal Shareholders also have rights of first refusal over certain transfers of the common shares by the Principal Shareholders, pursuant to the Amended Shareholders Agreement, as amended, and subject to compliance with applicable laws and Nasdaq’s Listing Rules. If any Principal Shareholder receives a bona fide offer from any person other than its affiliate to acquire any of the Principal Shareholder’s common shares (the “ROFR Shares”), then the Company 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 Company does not decide to purchase all such ROFR Shares, then each of the Principal Shareholders other than the selling Principal Shareholder 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 the Amended Shareholders Agreement, “Pro Rata Share” means the percentage which corresponds to the ratio which each selling Principal Shareholder’s “Percentage Interest” (which is calculated by dividing (i) the number of the common shares owned by such Principal Shareholder, by (ii) total number of the then outstanding shares of the common shares held by all Principal Shareholders) bears to the total Percentage Interests of all Principal Shareholders 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.
We may be subject to shareholder litigation due to the volatility in the price of our common shares, which may result in substantial costs and a diversion of our management’s attention and resources.
In the past, shareholders of a public company often brought securities class action suits following periods of instability in the market price of a 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.
If we fail to maintain compliance with Nasdaq Listing Rules, we may be delisted from Nasdaq, which would result in a limited public market for trading our shares and make obtaining future debt or equity financing more difficult for us.
Our common shares are traded and listed on Nasdaq under the symbol “NEGG.” However, there is no assurance that we will be able to continue to maintain compliance with Nasdaq continued listing requirements. If we fail to do so, our common shares may lose their status on Nasdaq and they would likely be traded on the over-the-counter market, including the Pink Sheets market. As a result, selling our common shares could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may not arise. In addition, in the event our common shares are delisted, broker dealers would bear certain regulatory burdens which may discourage broker dealers from effecting transactions in our common shares and further limit the liquidity of our shares. These factors could result in lower prices and larger spreads in the bid and ask prices for our common shares. Such delisting from Nasdaq and continued or further declines in our common share price could also greatly impair our ability to raise additional necessary capital through equity or debt financing and could significantly increase the ownership dilution to shareholders caused by our issuing equity in financing or other transactions.
We and our directors and officers may be involved in investigations or other forms of regulatory or governmental inquiry which may cause reputational harm to the Company, result in additional expenses, and distract our management from our day-to-day operations.
From time to time, we and our directors and officers 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 our 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 the 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 the Shenzhen Stock Exchange and is a majority owner of Newegg through Digital Grid, a wholly-owned subsidiary. Mr. He is the Chairman and Chief Executive Officer of Hangzhou Lianluo. Mr. He was the former Chairman and the former Chief Executive Officer of Lianluo Smart Limited (the predecessor company of Newegg prior to the Merger) and is currently the chairman of our board. On October 19, 2020, Hangzhou Lianluo announced that it has received a notice of administrative punishment from the Zhejiang Regulatory Bureau of CSRC, which provided, among other things, that (i) Hangzhou Lianluo received a warning and would be required to correct its unlawful acts and pay a fine of RMB 300,000, and (ii) Mr. Zhitao He received a warning and was required to pay a fine of RMB 400,000.
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 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 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.
Shareholders of a public company often bring securities class action suits against the company following periods of instability in the market price of that company’s securities or in conjunction with mergers and acquisitions such as the Merger and disposition of Lianluo Smart Limited’s wholly owned subsidiary, Lianluo Connection Medical Wearable Device Technology (Beijing) Co., Ltd. (“Lianluo Connection”). 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.
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 could be influenced by research or reports that industry or securities analysts may publish about our business in the future. Currently no securities analysts cover our company. If any analysts cover us in the future and downgrade the common shares, the market price for the common shares would likely decline. If no analysts initiate coverage of 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.
Techniques employed by short sellers may drive down the market price of our 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 appear to have, in the past, led to selling of our 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. We may not be able to defend against any such short seller attacks and 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.
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.
In addition, under PRC law, a foreign judgment, which does not otherwise violate basic legal principles, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. As currently there exists no treaty or other form of reciprocity between China and the U.S. governing the recognition and enforcement of judgments, including those predicated upon the liability provisions of the U.S. federal securities laws, there is uncertainty whether and on what basis a PRC court would enforce judgments rendered by U.S. courts.
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. 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 Companies 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 our 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 our shareholders, so our 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 our shareholders other than the provisions of the Companies 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 Companies Act or the memorandum and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the Companies 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 our shareholders under the laws of states in the United States.
Under the Companies Act, members of the general public, on payment of a nominal fee, can obtain copies of the public records of a company available at the office of the Registrar which will include the company’s certificate of incorporation, its memorandum and articles of association (with any amendments) and records of license fees paid to date and will also disclose any articles of dissolution, articles of merger and a register of charges if the company has elected to file such a register.
A member of a company is entitled, on giving written notice to the company, to inspect:
|a.||the memorandum and articles;|
|b.||the register of members;|
|c.||the register of directors; and|
|d.||the minutes of meetings and resolutions of members and of those classes of members of which he is a member; and to make copies of or take extracts from the documents and records referred to in (a) to (d) above.|
Subject to the memorandum and articles of association, the directors may, if they are satisfied that it would be contrary to the company’s interests to allow a member to inspect any document, or part of a document, specified in (b), (c) or (d) above, refuse to permit the member to inspect the document or limit the inspection of the document, including limiting the making of copies or the taking of extracts from the records. Where a company fails or refuses to permit a member to inspect a document or permits a member to inspect a document subject to limitations, that member may apply to the British Virgin Islands Court for an order that he or she should be permitted to inspect the document or to inspect the document without limitation.
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 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 Companies Act and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Shares — Differences between the Law of Different Jurisdictions.”
Because we do not expect to pay dividends in the foreseeable future, 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 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 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 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. 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 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. Additionally, because we are a holding company, our ability to pay dividends on our common shares may be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions that are imposed under the terms of the agreements governing our subsidiaries’ loan and credit facilities. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of such dividend.
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 Nasdaq’s corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with Nasdaq’s corporate governance listing standards.
As a British Virgin Islands company listed on Nasdaq, we are subject to Nasdaq’s corporate governance listing standards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain provision in the Companies Act relating to corporate governance in the British Virgin Islands, which is our home country, may differ significantly from Nasdaq’s corporate governance listing standards. We intend to follow the relevant provisions in the Companies Act in lieu of the following corporate governance requirements of 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.
In addition, in September 2018, California’s Senate Bill 826 was signed into law. Senate Bill 826 generally requires public companies with principal executive offices in California to have a minimum number of females on its board of directors. As of December 31, 2019, each public company with principal executive offices in California was required to have at least one female on its board of directors. As of December 31, 2021, each public company was required to have at least two females on its board of directors if the company has at least five directors, and at least three females on its board of directors if the company has at least six directors.
Our board of directors currently includes one female director. There is uncertainty as to whether this law applies to foreign private issuers with their principal executive offices in California, like us. If the law is deemed to apply to foreign private issuers, we will be out of compliance. An initial violation of Senate Bill 826 can result in a fine from the California Secretary of State in the amount of $100,000, with each subsequent violation resulting in a fine of $300,000. We cannot assure you that we can recruit, attract and/or retain qualified members of the board and meet gender requirements under California law, which may expose us to financial penalties and adversely affect our reputation.
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:
|●||the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;|
|●||the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;|
|●||the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and|
|●||the rules under Regulation FD governing selective disclosure rules of material nonpublic information.|
We are and will continue to 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 semi-annual basis as press releases, distributed pursuant to the rules and regulations of 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.
Item 4. Information on the Company
|A.||History and Development of the Company|
Newegg Commerce, Inc. (previously known as “Lianluo Smart Limited”) was incorporated as an international business company under the International Business Companies Act, 1984, in the British Virgin Islands on July 22, 2003. The Company’s registered office is located at 17560 Rowland Street, City of Industry, CA 91748 and its telephone number is (626) 271-9700, and its website address is www.Newegg.com. The address of the Company’s registered agent is Vistra License Holdings (BVI) Limited, Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands. The SEC maintains an internet site that contains reports, proxy information, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
We are a technology-focused e-commerce company in North America, and ranked No. 1 as the global top electronics online Marketplace according to Web Retailer’s report as of April 2021, as measured by 32.6 million visits per month in 2021. Since 2005, we have recognized GMV of approximately $39 billion and have processed over 176 million orders. In 2021, 3.5 million buyers purchased over 675,000 items from us, making us one of the largest e-commerce business in the U.S. In 2021, we offered more than 38 million SKUs for sale on our platform, representing over 56,000 brands in the IT, consumer electronics and other related categories. We offer brands and sellers a wide range of options to sell through our platform, as well as services that we offer to help make their online businesses more efficient and effective. Our Direct offering allows brands to sell directly to us and we manage the inventory and transaction directly with our consumers. Our Marketplace offering allows brands to leverage our platform, buyer audience and e-commerce solutions in order to generate sales on the Newegg platform.
The Newegg Ecosystem
Founded in 2001, we have developed a technology-focused e-commerce ecosystem that enables all of our participants to discover, engage and transact with each other. We take pride in connecting customers to a wide and increasing selection of technology products and a large range of brands, sellers, suppliers, manufacturers, distributors and third-party service providers.
We have developed a powerful online marketplace that delivers value to consumers, brands and sellers in the technology products sector. Our new product and service introductions are aimed at continually improving our value proposition to these key constituents of our ecosystem and marketplace. For consumers, on the demand side, we provide access to a vast, yet curated selection of technology products sourced globally. On the supply side, we create value for brand partners, Marketplace sellers and suppliers by connecting them to one of the largest audiences of technology product consumers online. Additionally, our platforms offer a comprehensive suite of e-commerce solutions, including product listing, fulfillment, marketing, customer service and other value-added tools and services.
Key Ecosystem Participants and How We Create Value for Them
There are three key participants of our ecosystem: customers, Marketplace sellers, and brand partners.
We have built a large, highly engaged and loyal customer base. As of December 31, 2021, we had over 3.5 million active customers, defined as a unique customer ID with at least one item purchased on our platforms in the past 12 months.
Our core customers include both our business-to-consumer (“B2C”) customers and our business-to-business (“B2B”) customers. See “Our Business Models” for more information about our B2C and B2B businesses.
We believe that we offer the following compelling value propositions to our customers:
|●||Wide range of technology-focused products. With approximately 38.7 million SKUs and 1,808 categories as of December 31, 2021, we are viewed by our customers as a one-stop shop for a vast selection of technology products, ranging from brand-name IT/CE products and in-house brands of computer hardware to peripherals under our private labels. Our extensive product offerings enable us to meet the diverse needs of a group of sophisticated customers, which is difficult for brick-and-mortar retailers to match due to shelf space constraints.|
|●||Data-driven shopping experience.|
|◦||Content-rich, user-friendly interface. Our platforms are user-friendly and easy to navigate, with features enabling customers to easily discover new products and trends, such as intelligent product recommendations and curated, personalized content supported by data and analytics. We also empower customers to make informed purchasing decisions by offering detailed product information, customer opinions, peer reviews, product tutorials and the opportunity to network with other members of the Newegg community. We operate in-house video production that generates original content to engage and inform customers, and we continue to enhance these capabilities in order to produce more and better content. Our platforms also provide an extensive portfolio of user-generated content, including over 4.5 million reviews as of December 31, 2021.|
|◦||Timely, secure and reliable fulfillment. Leveraging our reliable logistics network and infrastructure, we are able to maintain a high level of shipping accuracy and reliability and timely delivery. See also “— Logistics and Fulfillment.” As of December 31, 2021, we achieved, for orders directly fulfilled by us, an over 99.9% average accuracy rate, a 98.9% one-business day fulfillment rate in the United States and Canada if ordered prior to our 3:00 p.m. local time order cut-off, and a 99.8% two-business day fulfillment rate in the United States and Canada.|
|●||Vibrant community of tech-savvy customers. While expanding our range of product offerings, we continue to maintain a large and vibrant community of tech-savvy customers, providing inspiration for visitors to discover new technology trends and products and valuable decision-making intelligence typically not found at traditional retailers. We have continued to offer additional functionalities to foster this community by launching Newegg Media Services, which includes Unbox This and The Gamer Lounge, and Newegg Live, where like-minded technology enthusiasts can get information about Newegg and technology products.|
|◦||Competitive Pricing. We are able to offer competitive pricing across a broad range of categories because of our scale, strong supplier and Marketplace seller relationships, and our ability to maintain a cost-efficient infrastructure. Our experienced product management team leverages data to cost-effectively match demand with supply, minimize inventory and reduce infrastructure costs associated with brick-and-mortar retailers. We are also able to find optimized pricing points by leveraging our data and analytics capabilities and by monitoring our major competitors’ pricing trends.|
|◦||Flexible payment options. We accept a variety of payment options and have sought to add new payment methods to cater to the needs of our customers. We also offer open-term accounts for business and public sector customers. For example, in response to increasing customer demand, we introduced Bitcoin payment solution in 2014 and Apple Pay in 2016. In Q4 2020, we also started offering a Pay-in-4 program, where customers are given the freedom and flexibility to spread their payment in four interest-free installments. See also “— Payment.”|
On our Newegg Marketplace, third-party sellers offer their products to our customers through our platforms and pay us commissions on their sales. See “— Our Business Models — Marketplace” for more details. Our Newegg Marketplace has over 14,500 sellers, approximately 38.1 million SKUs and over 1,600 categories as of December 31, 2021.
We are a business enabler for our Newegg Marketplace sellers in many ways. We believe that our Marketplace sellers choose to partner with us not just because we offer a large online sales channel, but also because we deliver the following additional value:
|●||Scaled access to technology-focused consumers. Our Marketplace connects sellers, whether wholesalers or retailers, to a large and growing customer base, the majority of whom are tech-savvy, in more than 20 countries and regions as of December 31, 2021, without expanding their physical footprint. In 2021, approximately 1.7 million active customers purchased $742.4 million in gross merchandise value from our Marketplace business. In addition to consumers, our Newegg Marketplace also provides smaller vendors and retailers with access to profitable B2B opportunities that would otherwise be difficult to reach due to the challenges associated with providing specialized support for business’ purchasing needs.|
|●||Access to premium e-commerce solutions. Sellers generally face high barriers entering the e-commerce market, including logistics and scalable economics. Our Marketplace addresses these challenges by providing sellers with a comprehensive suite of e-commerce solutions, including an API-enabled portal, on-site promotions, a curated marketing program, and fulfillment and delivery services. Particularly, we provide Marketplace sellers with valuable data insights, which help them to market their products more effectively, generate additional traffic and increase conversion.|
|●||Human touch. Our Marketplace is a key component of our ecosystem. Since we launched our Marketplace model in 2010, we have carefully nurtured our relationships with Marketplace sellers and have invested in their success, which we believe drives our continued growth in the long run. For example, we assign dedicated account managers to qualified sellers to help them tackle the variety of challenges associated with operating a virtual storefront.|
We are a trusted partner and a go-to channel for many leading technology product brands and are increasingly establishing partnerships with brands in a growing number of adjacent product categories. As of December 31, 2021, we sourced merchandise from at least 3,250 brand partners for our direct sales business, and featured the official online stores of a number of brand partners, including some of the most well-known brands such as AMD, Asus, Facebook Oculus, Intel, Lenovo, Microsoft, MSI, Nvidia, and Samsung. Our partnerships with newer adjacent brands now total over 578,500 SKUs across over 1,100 product categories and over 3,200 brands.
We provide the following benefits for our brand partners:
|●||Access to a targeted customer base. Enabling brands to cost-effectively reach target audiences, our existing, loyal customer base is highly valued by companies targeting ready-to-buy, tech-savvy customers as well as foreign brands seeking to sell products and build brand awareness in markets in North America, Asia, and the Middle East.|
|●||Comprehensive and cost-efficient distribution channel. Leveraging Newegg’s customer-friendly online platforms, established logistics network and infrastructure and extensive e-commerce experience and expertise, we offer to our brand partners comprehensive and cost-efficient distribution channels and comprehensive supply chain capabilities, including marketing, warehousing, fulfillment and customer service.|
|●||Brand building and promotion solutions. We offer our brand partners solutions and support to run special promotions and targeted marketing and brand-building campaigns through our platforms utilizing data and interactive media in ways that cannot be achieved through traditional media. See “— Our Business Models — Marketing Services.”|
|●||Flexible selling options. By providing both Direct and Marketplace options, we offer brand partners multiple ways to sell on our platforms. Our Direct business allows brand partners to sell products directly to us, where we handle all aspects of the transaction, from customer acquisition to product warehousing and fulfillment. Our Marketplace business allows brand partners to control more of the selling process and enables brands to leverage our tools and solutions for marketplace selling and management.|
|●||Data insights. We collect insights from our customers’ interactions on the platform using our data and analytics capabilities. We use these insights, coupled with customer feedback and our knowledge of the e-commerce market, to facilitate our brand partners’ product and marketing decision-making.|
Newegg’s Competitive Strengths
We believe that we maintain a market leading position by continually refining the following key competitive advantages.
Strong brand recognition
We have a long and proven operational history. We have operated for over twenty years and during this time have built an excellent reputation among technology enthusiasts — earning consistent recognition as one of the leading destinations for purchasing products in the online IT/CE category. This has been driven by our broad selection of IT/CE products, our competitive pricing, our focus on customer support, and our consistent delivery performance. We have built our reputation via these four factors and have occupied consumers’ minds, as the go-to platform to buy electronics.
Robust platform of Marketplace sellers
Our large customer base allows our platform to attract top tier Marketplace sellers. These sellers provide their product assortment, competitive pricing, fulfillment and marketing, thus increasing the value of our platform to our customers. Marketplace sellers are responsible for the vast majority of the SKUs available for sale on our platforms. Additionally, we offer our Sponsored Product Ads Program to our sellers, which strengthens visibility and sales of key seller items.
We have built robust, long-term relationships with many of the most recognized brands in IT/CE including AMD, Asus, Intel, Microsoft, Nvidia, etc. Many of these brands have done business with us for the last two decades, since our inception. These relationships allow us to secure favorable terms, inventory allocations, and programs that allow us to be able to match supply to consumer demand at competitive pricing. We also launched a partnership program in 2020 that consists of our top brand partners that commit to our businesses, which includes a process of quarterly strategic planning and execution of sales and marketing initiatives to help achieve our mutual goals. We not only have the ability to secure existing relationships, but we also have the know-how to build up and keep a stable and long-lasting partnership when entering new markets.
Excellence in supply chain management
We have implemented cost-effective, automated solutions that provide accuracy and speed in fulfillment, including Bastian’s OPEX Perfect Pick and Pick to Light. These warehouse automation systems allow us to achieve 99%+ same-day e-commerce fulfillment (defined as the processing of an order for shipment) and inventory accuracy rates. We have leveraged our expertise in warehousing, logistics and distribution to offer it as a service to our Marketplace sellers and vendors via Newegg Logistics. Newegg Logistics has expanded our third-party logistics (“3PL”) portfolio over time to include a variety of services, including Shipped by Newegg.
Industry leading customer service
Our customer service is well known, with a proven track record of delivering excellent customer service for two decades. Our Net Promoter Score is 79%, ahead of key players like Amazon, BestBuy, and eBay.
Comprehensive service offerings to Sellers
We offer our Marketplace sellers a whole suite of services, addressing nearly all the needs of a seller including logistics, Newegg Web Service (enabling sellers to have fully-featured e-commerce websites on their own domains powered by Newegg), advertising (including Promoted Listing and self-service email service), media and more, through our Newegg Partner Services. We believe by providing these services, we create additional value for our business partners and customers and ultimately benefit our ecosystem and all its participants.
Newegg’s Growth Strategies
Our goal is to enhance our position as a leading technology-focused e-commerce company and to continue to expand globally and into new, related businesses. We plan to achieve this through the following:
Further strengthen our position as a leading technology-focused e-commerce company
We have cultivated a large and loyal customer base. We intend to further expand and engage with our customer base by increasing the efficiency of our platforms and implementing new features to augment our platforms’ mobile functionality. We also plan to continue enhancing our award-winning customer service function.
We intend to engage in brand promotion campaigns and other marketing activities across online and offline channels to further drive our growth and enhance our brand recognition worldwide. We plan to continue engaging our existing customers and reaching out to new customers utilizing social media, customer interactions on our platforms and offline marketing events in both domestic and overseas markets.
Increase our product assortment and introduce new product categories
We will continue to grow our Direct sales and Marketplace businesses by increasing our product assortment and introducing new product categories, such as 3D printers, IoT devices, automotive (auto parts and accessories), cellphones (unlocked cellphones and accessories), wearables (fitness trackers and smart watches), and sporting goods (e-bikes, treadmill, Yoga accessories, etc.).
We believe that our suppliers and Marketplace sellers will increase their offerings on our platforms if we continue to offer a compelling value proposition and further develop our data-led insights, real-time visibility of customer preference shifts and fulfillment and logistics capabilities. We also intend to attract new third-party sellers to our Marketplace, with a focus on China, by providing them with access to our growing customer base and our ancillary e-commerce solutions. This will enable us to further enhance our sourcing capabilities, expand the diversity and availability of our merchandise and penetrate into additional IT/CE related categories.
Expand private label business
We launched our private label initiative through Rosewill in 2004 and relaunched our ABS products in 2014 in order to diversify our product offering, leverage our data and insights of customer needs, and to improve our profitability. In 2021, private label products represented 7.6% of total GMV, up from 2.6% in 2020. We intend to further expand our Rosewill and ABS private label assortment by continuing to offer what we believe are high-quality, feature-rich, value-priced products. As of December 31, 2021, private label products (consisting of Rosewill and ABS products) across all our platforms (Newegg.com, Newegg.ca and NeweggBusiness.com) constituted collectively only 0.002% of our total active SKU count.
We plan to further expand our offerings under our Rosewill brand in targeted categories, which we believe will provide strong growth potential and higher margins, including DIY components, gaming accessories, gaming chairs, headsets, home automation and IoT connected devices. Under our ABS brand, our goal is to continue to drive significant growth in our line of gaming and business-grade PCs by leveraging our large audience of gamers and business customers who seek a high-quality, high-powered PC. Both brands are offered globally through our cross-border initiative and are expected to be included in future cross-border expansion.
Grow our small- and medium-sized business and public sector segments
We seek to expand our B2B business by further penetrating into small- and mid-sized businesses and public sector institutions and continuously enhancing our value proposition tailored to meet the needs of our target verticals. We plan to offer additional electronic tools and content that allow B2B customers to troubleshoot issues on their own without having to wait for a customer representative. We are also expanding our broad assortment of business-class products from top brands at competitive prices, which we offer with rapid delivery options and seamless customer and technical services.
We aim to continue to attract new customers and increase existing customers’ retention and repeat purchase rates by emphasizing our personal touch in customer relationships and focusing on comprehensive online and offline marketing campaigns, effective customer engagement via social media and referrals, deals and promotions and efficient conversion of high-value accounts from Newegg.com.
Further develop our IT infrastructure and expand globally and into new businesses
We plan to capitalize on our leading technology and infrastructure to enter into new markets and new businesses. We expect to further develop our IT infrastructure and mobile e-commerce platform to include big data applications, supply chain management systems and AI-driven analytical capabilities by integrating commercial software packages and open-source components into our software and systems. In 2021, sales originated from outside of the U.S. and Canada represented over 2% of total GMV. We aim to build on our success in certain countries, such as Canada, and apply our model to expand into fast-growing markets where there are attractive opportunities, like Gulf Cooperation Council countries.
Pursue selective strategic partnership, investments and acquisition opportunities
We intend to selectively pursue strategic alliances and partnerships that are complementary to our business and operations, including opportunities that can help us further promote our brand to new customers, increase our product offerings, improve our technology and fulfillment infrastructure, and expand our presence to more markets with a focus on Southeast Asia.
Increase service offerings
We aim to expand our offering of value-added D2C platform services and solutions. We believe by providing these services, we create additional value for our business partners and customers and ultimately benefit our ecosystem and all its participants. Currently, we offer 3PL, including Shipped by Newegg® Service, Newegg Logistics, Newegg Staffing, a PC Builder tool, and Newegg personal computer assembly service.
Our Business Models
Our primary business model is to help customers find and purchase their desired products through our platforms. From a customer base and target audience perspective, we categorize our business model into B2C and B2B operations. We strive to offer a compelling online shopping experience, reliable and timely order fulfilment and superior customer service across our B2C and B2B operations through our Direct sales, Marketplace and NPS.
The following chart sets forth our business models:
Our B2C business model features selling products directly to consumers. We have maintained a B2C business since launching our e-commerce platform in 2001. As of December 31, 2021, we had approximately 39.6 million registered B2C customers.
With a focus on selling IT/CE products, our B2C business has expanded to include an increasingly wide range of products, including small home appliances, health & fitness, home living, sports, personal grooming, drones, auto electronics & parts, etc.
Our B2C customers consist primarily of sophisticated IT professionals, gamers, do-it-yourself technology enthusiasts and early technology adopters who generally occupy a well-educated, affluent, and IT trendsetting demographic with relatively high purchase frequency and strong willingness to embrace technology trends and try new products. We believe our success is built upon our ability to cater to the preferences, tastes and habits of this demographic. As of December 31, 2021, through our three major platforms, namely Newegg.com, Newegg.ca and Newegg Global, we served customers in the U.S., Canada and over 20 additional countries and regions. For details of these platforms, see “— Our Platforms — B2C Platforms.” Our B2C operations generated GMV of $2.4 billion and $2.3 billion for the years ended December 31, 2021 and 2020, respectively.
Although business customers have been able to shop on our Newegg.com platform since its launch in 2001, we did not begin focusing on building our B2B operations until 2009 when we launched NeweggBusiness.com, a dedicated B2B e-commerce platform, to tap into the burgeoning B2B opportunity. With a focus on providing office and IT equipment, NeweggBusiness.com offers an increasingly extensive assortment, including access to account executives with expertise in sourcing technology for business and processing industry specific requirements. Our B2B operations generated GMV of $537.6 million and $349.8 million for the years ended December 31, 2021 and 2020, respectively.
Our B2B customers span across a range of verticals, including healthcare providers, K12 and higher educational institutions, government agencies, and businesses of all sizes, and our B2B operations have been focused on providing specialized support for their industry- and business-specific needs. As a major business development strategy, we focus our B2B efforts on serving small office/home office, or SOHO, small- and medium-sized businesses, or SMBs, and private and public sector markets. As of December 31, 2021, we had over 700,000 registered accounts on NeweggBusiness.com.
Currently, while we position NeweggBusiness.com as our dedicated B2B website, a significant number of our B2B customers also shop via our account managers, or on our flagship retail platform, Newegg.com. See “— Our Platforms — B2B Platforms” for more information about these platforms.
How We Deliver Our Service
We sell products to our B2C and B2B businesses through direct sales and Marketplace.
For years since we commenced operations, we operated primarily as a direct sales, e-commerce platform and built a well-recognized brand, a large, loyal, technology-focused customer base, a reliable logistics network and strong supplier relationships. Leveraging these existing competitive advantages, the know-how and expertise from our direct sales business, in 2010 we launched Newegg Marketplace to complement our direct sales operations. Our Marketplace has allowed us to significantly expand our global reach and product assortment that we otherwise could not offer efficiently, while incurring minimal inventory risk and costs associated with building additional supplier relationships. The products sourced by us, together with those offered on the Marketplace, provide our customers access to an unparalleled product assortment. Our online platforms (direct and Marketplace) offered approximately 38.7 million SKUs as of December 31, 2021.
We believe that the integration of our direct sales and Marketplace operations has created a virtuous, self-reinforcing cycle. Our Marketplace is built on the success of our direct sales business, and we believe that many sellers are attracted to our Marketplace by our direct sales credentials. On the other hand, as the number of sellers and brands on our Marketplace continues to grow, the choices available to customers also should increase, generating strong momentum for our continued growth. We believe that this self-reinforcement, coupled with our reliable logistics network, has made it a top online destination for IT/CE products.
We acquire products directly from our partners that consist of manufacturers, distributors and wholesalers, and sell them directly to our B2C and B2B customers. For our direct sales, we generally source the products, take inventory risk, process customer payments, prepare packages for shipment and delivery, and provide customer service and support. We stock and ship from our own warehouses, and also drop-ship directly to customers from our partners’ warehouses.
The success of our direct sales business depends largely upon our ability to secure a broad selection of products from suppliers at competitive costs. Since the commencement of our operations, we have sought and cultivated deep, longstanding relationships with some of the biggest IT brands in the world and many of the largest, most important IT distributors. We continuously seek to build similar relationships with suppliers in new and emerging categories and geographies. Due to our strong supplier relationships and our purchasing volume, we are able to obtain favorable pricing, early allocation of new products, preferential allocation of products in shortage, and funding for product promotion and cooperative marketing. We also enjoy exclusive arrangements with certain suppliers where we are able to offer highly demanded products exclusively on our platforms. For more information about merchandise sourced for direct sales, see “— Merchandise Sourcing.”
Direct sales have been the basis of our business, generating approximately 72.5% of our GMV for the year ended December 31, 2021. We leverage the traffic, customers, infrastructure, brand promise and overall goodwill generated by our direct sales relationships to enable entry into new models, businesses, and geographies. This has allowed us to continuously improve our value proposition to our customers and reach new customers and geographies, while improving our relationships with our partners.
Our Marketplace operations enable customers to discover and purchase products from qualified third-party sellers from over 47 countries and regions globally as of December 31, 2021. As of December 31, 2021, our Marketplace consisted of over 5,200 active sellers based in the U.S., over 7,600 active sellers based in China, and over 1,600 active sellers coming from other countries. Our Marketplace operations consist of the Newegg Marketplace that launched in 2010, the Newegg B2B Marketplace, the International Seller Program that launched in 2011, a cross-border selling program designed to allow qualified international sellers to list products on our platforms for sale across at least 20 countries and regions, and the Newegg Canada Marketplace that launched in 2014. As of December 31, 2021, our Marketplace connected B2C and B2B customers to over 14,500 third-party sellers offering approximately 38.1 million SKUs. Our Marketplace offers a wide and increasing portfolio of categories, including emerging smart home automation, VR, lifestyle electronics, health and beauty technology products, and houses online stores of some of the most well-known brands in the technology industry, such as Dyson and Lenovo.
Our Marketplace sellers can use the Newegg Marketplace Seller Portal, a unified, application programming interface enabled system, which enables sellers to manage items, orders, accounts and reports, for the day-to-day operations of their online stores, including product listings, inventory management, order fulfillment, customer service, promotional content, and service reviews and returns. We also offer the following additional features and tools to help Marketplace sellers drive traffic and maximize sales:
|●||Curated Marketing programs. We have a dedicated marketing team specializing in providing sellers with both highly effective marketing tools as well as curated marketing programs, including sponsored product ads, A+ content, email communication program, social media campaigns, video creation, and more.|
|●||On-site promotion. We offer Marketplace sellers numerous on-site promotion options, such as homepage banners, placements to showcase flash sales and featured products, as well as personalized post-purchase emails.|
|●||Shipped by Newegg fulfillment. We give sellers the option to use Shipped by Newegg, an efficient and price-conscious fulfillment service in which we house their inventory, and pick, pack, and ship their products.|
|●||Shipping Label Service. We give sellers the ability to fulfill their own orders and print a shipping label on their own network or in the office.|
|●||Integration Providers. We partner with a variety of qualified integration service providers to help Marketplace sellers fill the gaps in the integration process with item creation, inventory management, order processing, as well as returns and refunds.|
|●||Newegg Elite Seller program. We offer the Newegg Elite Seller program, a membership program designed to give qualified sellers premium access to post-purchase customer engagement, Seller Store, and other numerous value-added operational services with significant discounts.|
While we encourage Marketplace sellers to offer the most attractive prices, they have the flexibility to price the products sold through our Marketplace. Due to our partnership, unique customer base, scale and large visitor traffic, some of the Marketplace sellers also set aside exclusive offers, promotion, and product supplies for us and offer some of the best offers tailored specifically to our customers. We have a rigorous process in place to assess our Marketplace sellers. We select Marketplace sellers based on a number of factors, including service level, logistics capability, operation efficiency, category focus, sales volume, brand assortment, customer rating and market reputation. We also require third-party sellers to meet our strict standards and protocols in terms of product authenticity, customer service, and delivery and fulfillment so that customers are confident that they receive the same level of buying experience and customer service that they expect when buying directly from us. See also “— Customer Service and Support — Marketplace monitoring.” Only those sellers that meet our criteria are selected, and any that fall below our standards will not continue to sell on our Marketplace.
Our Marketplace sellers pay us commissions on their sales, with published commission rates varying from 8% to 15% according to product category. We also charge membership fees for the additional value-added services and tools that we provide to sellers based on their enrollment. As of December 31, 2021, the average commission rate was 9.0% and in 2020, the average commission rate was 8.8%.
As of December 31, 2021, we offered over 38.6 million SKUs, consisting of over 578,500 direct sales SKUs sourced from at least 385 suppliers globally and approximately 38.1 million SKUs on our Marketplace from over 14,500 third-party sellers globally. As of December 31, 2021, approximately 35.5% of our direct sales inventory was purchased from distributors, 62.7% directly from manufacturers and 1.8% from other sources. As of December 31, 2021, the 10 largest suppliers and distributors, whom we have worked with for at least five years, accounted for 69% of the merchandise we purchased for direct sales.
The table below shows our major product categories offered through our platforms and their selected featured brands and the number of SKUs in each category:
|Category||Products||Selected Featured Brands||SKUs
|Computer System||Desktops, laptops, gaming laptops, peripherals and accessories||Asus, MSI, HP, Lenovo, Acer, Microsoft, Samsung, LG, Gigabyte, Westinghouse||Approx. 8.1 million|
|Components||CPU/processors, Graphic Cards, Motherboards, storage devices and computer accessories||Intel, AMD, Asus, MSI, Corsair, Gigabyte, ASRock, EVGA, Western Digital, Seagate, Samsung, G.Skill||Approx. 1.9 million|
|Electronics||Home Video, Home Audio, Headphones, Pro Audio/Video, Cellphones, Wearables, Digital Cameras||Samsung, LG, Denon, Yamaha, Polk Audio, Klipsch, Jabra, JBL, Sennheiser, Bose, Beyerdynamic||Approx. 9.0 million|
|Gaming||Xbox, PlayStation, legacy gaming, gaming titles||Sony Playstation, Microsoft Xbox||Approx. 0.26 million|
|Networking & Smart Home||Home networking, commercial networking, server & components and smart home products||Google, Asus, TP-Link, Netgear, SonicWall, Polycom, Yealink||Approx. 2.9 million|
|Office Solutions||Display & printing, office technology furniture, office supplies and mailing & inventory supplies||HP, Brother, Epson, Xerox, Lexmark, Zebra, Honeywell, ELO Touch, Sony, Sharp, Asus, Acer, Samsung, Eureka Ergonomic, COUGAR||Approx. 2.7 million|
|Software & Services||Software, Digital Downloads, Warranty & Services, 3rd Party Gift Cards, and Entertainment Products||Microsoft, Adobe, Norton, LifeLock, Intuit, Allstate||Approx. 0.09 million|
|Automotive & Industrial||Car electronics, Marine and Aviation, Motorcycles and ATV, Performance Parts, Tools and Equipment, Wheels and Tires||Alpine, Kenwood, Garmin, Pioneer, Continental Tires, Goodyear Tires, Bridgestone Tires, Polaris, ACDelco, Bosch, Denso, Dorman Products||Approx. 2.2 million|
|Home & Tools||Home improvement tools, home appliances, kitchen utensils, outdoor & garden furniture, and pet supplies, Generators||Dyson, Cuisinart, Frigidaire, iRobot, Hoover, Ninja, Shark DEWALT, Black & Decker, LG, Intex, 3M, Kitchenaid||Approx. 5.4 million|
|Health & Sports||Fitness, sports and health and beauty supplies||Huffy, Vilano, Razor, Garmin, Callaway Golf, BestMassage, Sonicare, Philips, Zgrills, GT Racing, DXRacer, DJI||Approx. 1.0 million|
We strive for a steady supply of products and optimized pricing and allocation, and as a result, we maintain multiple sourcing arrangements for most of our products. We deploy a flexible sourcing model, utilizing different distribution channels when economically and logistically beneficial while maintaining our reseller authorizations and relationships with our brand partners. As we increase in scale in new or emerging product categories, we endeavor to increase our purchases directly from manufacturers and, where appropriate, to become an authorized reseller, which we believe provides improved product pricing and better access to preferred product allocation.
Our technology savvy customer base, our online marketing and merchandising expertise and our ability to quickly and efficiently launch new products make us the go-to channel for many manufacturers and distributors. We are particularly strong in the components categories where we are one of the largest channels online or offline and we continue to gain significant traction with suppliers in other categories, such as desktop PCs, laptops, and input/output devices.
We maintain extensive and longstanding relationships with many of the biggest technology product brands and distributors globally. We employ a team of merchandising professionals consisting of 58 employees as of December 31, 2021, specifically trained to cultivate and manage relationships with large international IT brands, such as AMD, Asus, Intel, Lenovo, Microsoft, MSI, Nvidia, and Samsung. Our merchandising professionals review our product categories and brands on a regular basis to assess demand and trends so that we offer our customers access to the most current and desirable products. We purchase our inventory from vendors on trade accounts typically requiring payment between 15 and 45 days after the date the inventory is shipped to us.
Leveraging our scale, brand and global footprint, we seek to enter into exclusive agreements with selected suppliers and third-party distributors for some or all of their products with favorable terms. We have created a manufacturer portal where our suppliers can access reports regarding inventory and purchase history of the manufacturers’ products, view our vast record of customer reviews, and analyze information about our customer purchases of their products. Our suppliers can access this information to assist in their marketing and product development efforts.
In 2004, Newegg began to offer our private label products by launching Rosewill, our first private label brand on Newegg.com. We leverage our data and insights from customers and activity on the platform to determine products and features to focus our investment. The private label assortment is primarily focused around categories where we believe that we can compete at higher than average margins while delivering lower cost, high quality options to our customers. We offer our private label products both across our platforms and on other e-commerce platforms, such as Walmart, Amazon, and eBay.
Our major private labels currently include Rosewill, which is focused on offering feature-rich computer components, gaming peripherals and home electronics, and ABS, a private label of Newegg that was re-launched in 2014 after our initial gaming machine line had been phased out previously, offering high-end gaming PCs for consumers and custom configured computers for business applications requiring the performance of a gaming GPU.
Other Services and Solutions
In addition to online retail sales, we also generate revenues from a range of ancillary value-added partner services. We believe by providing these services, we create additional value for our business partners and customers and ultimately benefit our ecosystem and all its participants.
Supply Chain Third-party (3PL) Services
|●||Shipped by Newegg® Service. We began to offer Shipped by Newegg, a comprehensive suite of warehousing and fulfillment services, to our Marketplace sellers in 2013. Enrolled Newegg Marketplace sellers deliver their products to one of our fulfillment centers, and we handle the fulfillment of orders placed in the sellers’ online stores and charge service fees based on the size of the products and the shipping methods requested.|
|●||Newegg Logistics. We launched Newegg Logistics in 2014, a division dedicated to providing end-to-end e-commerce logistics and supply chain solutions covering warehousing, inventory management, order processing, packing, and shipping, designed to reduce inventory costs and streamline supply chain efficiencies, to our business partners, manufacturers, whole-sellers, Marketplace sellers and B2B clients. We provide our clients recommendations based on their supply chain strategy and roadmap. To address our clients’ concerns in managing customer returns, we customize a cost-effective reverse logistics solution catered to their businesses. Our solutions range from small parcel delivery to Less Than Truckload, heavy freight, and all the way up to intermodal transport and cross-border shipping, with easy access to road, rail, water, and air transport. We typically enter into a master service agreement with our Newegg Logistics customers and charge service fees at a fixed rate.|
|●||Newegg Staffing: We launched Newegg Staffing in 2020 with a focus on providing both direct placement and seasonal placement of employees to help our partners, offering clerical, manufacturing, and logistics employee placement. Clients such as vendor partners utilize these services as a one-stop shop solution for all their business needs.|
|●||Newegg PC Assembly Service: We recently launched a PC building service known as ENIAC that offers professional assembly service, custom skins, and liquid cooling loops assembly service. This service primarily operates in two kinds of builds, BTS (Build-to-Stock) & BTO (Build-to-Order).|
In 2020 we began rolling out the first of our marketing services for Newegg Marketplace sellers. We offer flexible marketing packages consisting of advertising sales, event organization and other marketing campaigns to our brand partners. We help brands reach a potential audience by leveraging our online portals, marketing affiliates and promotional emails. We have a global professional marketing team consisting of 56 employees as of December 31, 2021, who help our brand partners and Marketplace sellers design marketing activities with highly effective cost of sales. In addition, we also use social media to market our brand partners to over three million social fans across various internet platforms, including Facebook, Twitter, YouTube and Instagram, by offering promotions, sweepstakes, and reviews in order to maximize our brand partners’ exposure.
Our websites and mobile applications, which we refer to as the “Newegg platforms,” are the foundation of our ecosystem. While each Newegg platform is strategically focused on different market segments, customers and/or product categories, the platforms share a common Newegg brand and are supported by our integrated logistics and fulfillment capability, operational expertise and technology infrastructure, and we offer the same level of customer service and dedication across all these platforms.
|●||Newegg.com. Launched in 2001 in the United States, Newegg.com is our first online platform and currently our flagship e-commerce platform. Newegg.com offers a typical range of IT/CE categories with the continuous addition of emerging categories across the internet of things (IoT), home automation, robotics, drones, auto electronics and more. While Newegg.com operates predominantly as a B2C e-commerce platform, Newegg.com supports both direct sales, where we sell merchandise directly to customers, and the Marketplace model where third-party sellers offer their inventory to our customers. As of December 31, 2021, Newegg.com fulfilled orders originating from various countries, mostly in North America.|
|●||Newegg.ca. We launched Newegg.ca in 2008 to sell IT/CE products in Canada with a business model similar to that of Newegg.com. Newegg.ca is a leading e-commerce platform focusing on IT/CE products in Canada, with approximately 1.7 million customers, and GMV of $244.3 million for the year ended December 31, 2021 and $181.0 million for the year ended December 31, 2020. Currently, nearly half of orders on Newegg.ca are fulfilled from our warehouses. We also deliver to our Canadian customers via Shipped by Newegg or other third-party shipping companies. Orders for merchandise offered by Canada-based Marketplace sellers are fulfilled locally by such sellers in Canada as well.|
|●||Newegg Global. We launched Newegg Global in 2017 as an expansion of our footprint in the global e-commerce market. Newegg Global can automatically detect a customer’s IP address and offer the customer an option to go to their local website or to use the U.S. website. Newegg Global currently fulfills orders originating from 20 countries or regions and offers five payment methods and one to seven business day door-to-door delivery services. Newegg Global had over 1 million registered customers outside North America as of December 31, 2021 and had a GMV of $65.4 million and $63.9 million for the year ended December 31, 2021 and 2020, respectively.|
|●||Mobile apps. Since the launch of our first mobile app in 2008, we have accumulated millions of downloads of our mobile apps. We currently have a mobile app for Apple devices and for Android devices, and we launch updated versions of our apps periodically. As of December 31, 2021, our mobile app for Apple devices has a customer rating of 4.8 out of 5.0, and a customer rating for our Android mobile app of 4.5. For more details, see “— Technology — Our IT Capability — Mobile site and apps.”|
In 2009, we launched NeweggBusiness.com, a site that currently supports substantially all of our B2B operations. Over the years, we have built NeweggBusiness.com into a dedicated B2B e-commerce platform offering a full range of IT, office and industrial products and solutions with a wide customer base ranging from government agencies, healthcare institutions, and education institutions to other businesses of all sizes. NeweggBusiness.com supports both direct sales and a B2B Marketplace that connects our B2B customers with over 3,200 third-party sellers globally.
In addition to the major Newegg platforms discussed above, we also operate Newegglogistics.com, a platform dedicated to providing reliable logistics and supply chain solutions through 3PL operations. For details of Newegg’s 3PL services, see “— Our Business Models — Supply Chain Third-party (3PL) Services.”
Logistics and Fulfillment
We have a reliable logistics network and infrastructure designed to prioritize timely and accurate shipment of large quantities of orders. This has allowed us to deliver over 27,962 parcels per day on average, with an average accuracy rate of over 99.9%, a 98.9% one-business day fulfillment rate in the United States and Canada if ordered prior to our 3:00 p.m. local time order cut-off and a 99.8% two-business day fulfillment rate in the United States and Canada, as of December 31, 2021.
We stock and ship the vast majority of our direct sales products. Fulfillment of orders from our Marketplace is executed by the sellers except for orders shipped through our Shipped by Newegg services, where the items will be shipped from one of our warehouses.
Our logistics and fulfillment infrastructure and capabilities include:
|●||Warehouses. We believe the best approach in serving our customers is to maintain reasonable inventory levels and to ship directly from our own inventory. As of December 31, 2021, we operated nine strategically located fulfillment centers, including eight warehouses located in North America and one in China, covering more than 2 million square feet in total. Each of our warehouses is able to process about 11,000 inbound pieces and over 11,000 outbound pieces on average per day. We maintain regional warehouses in Southern California, New Jersey, Indiana, Georgia, and Ontario, Canada to fulfill customer orders in the United States and Canada. The geographical placement of our warehouses in North America enables us to reach approximately 96% of the North American population in two business days.|
|●||Cooperation with reliable logistics service providers. We capitalize on a robust transportation framework that connects international air and sea transport, domestic over-the-road carriers, and last-mile delivery to residential consumers such as United States Postal Service, Purolator, OnTrac and UPS. We have also engaged and are working with multiple logistics partners to offer a wide array of flexible delivery options.|
|●||Virtual fulfillment. We ship certain products to customers directly from vendors and distributors who meet our quality fulfillment standards without going through our warehouses, a practice which we refer to as virtual fulfillment. Virtual fulfillment is fully utilized to broaden our product assortment and avoid loss of sales when SKUs are out of stock. In the United States, virtual fulfillment accounted for approximately 6.1% of direct sales for the year ended December 31, 2021.|
Our logistics and fulfillment focus on reliable, efficient, and flexible delivery.
|●||Reliability. We have a reliable technology platform and order process for our fulfillment operation. Each order is verified at least twice before being shipped. Customers can track the shipping status of their purchases through links to our email and/or our websites and mobile applications. Our inventory management and tracking also have redundant capabilities to enable each facility, if necessary, to fulfill most of our direct orders. This redundancy could allow us to continually fulfill most orders, albeit less efficiently, as long as a single warehouse is operational.|
|●||Efficiency. We have a well-designed, fully customized, warehousing management software system that is adopted by all warehouses, featuring smart categorization of inventory assortment in various warehouse locations to maximize logistics efficiency. When we order product from a supplier, we track the receipt of the merchandise and can “material optimize,” or direct, the inventory to a specific warehouse to match customer demand in a geographical area; when a purchase order is received, we match the order to our inventory and distribute a specific order fulfillment assignment to one or more warehouses for processing. We use advanced, “pick-to-light” conveyer systems to allow our warehouse staff to fulfill orders quickly.|
|●||Flexibility. Our customers may choose various shipping methods, including basic ground delivery and expedited overnight shipping, and we have continuously optimized our available delivery options to upgrade the shopping experience of our customers. For example, in 2019, in collaboration with UPS, we introduced an option allowing customers to pick up the products they purchase at a nearby UPS location instead of having them delivered at their own addresses. This is a safe and convenient shipping option and reduces the waiting time customers would otherwise experience between the time an order is placed and when their products are received.|
Customer Service and Support
We have built our brand on the principle of superior customer service. We provide high-quality customer service and support throughout our customers’ entire engagement with us, from purchase to returns.
|●||Customer service. Our in-house customer service staff are trained to resolve customers’ inquiries as quickly as possible. We currently operate customer service centers in California and Texas, and have customer service representatives working remotely in California, Indiana, Nevada, New Jersey and Texas, focusing on serving North American buyers. To enhance our 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 email and instant messaging. As of December 31, 2021, we employed approximately 234 experienced customer service representatives responsible for handling general customer inquiries, taking orders, and investigating the status of orders, shipments, and payments. Our multilingual customer service representatives are available by phone, live-chat, chatbot or email. During Christmas and other peak sales periods, we also hire part-time personnel to meet increased sales and customer inquiries.|
|●||Marketplace monitoring. When customers purchase items from our Marketplace sellers, we make them confident that they receive the same level of customer service they expect from our direct sales. With that in mind, we closely monitor the performance of our Marketplace sellers to monitor compliance with Newegg Marketplace rules, have a reliable logistics network, provide customers with quality customer support, ship orders on time, and respond to customer queries in a timely fashion. We have adopted a zero-tolerance policy on counterfeit products and have rules in place to take down allegedly counterfeit or pirated products and disqualify sellers selling counterfeit or pirated products. For more information, see “Risk Factors — Risks Related to Newegg’s Business — Our reputation and business may be harmed if we or our Marketplace sellers sell pirated, counterfeit, illegal or “gray market” items.”|
|●||Newegg Marketplace Guarantee service. We also offer a special customer service program, Newegg Marketplace Guarantee, for Marketplace orders. With Newegg Marketplace Guarantee, if a Marketplace seller fails to reimburse the customer for products that are damaged, defective, or materially different from what was displayed on our platform by that seller, the customer can submit a claim directly to us and may be eligible for reimbursement of the purchase price of any product they purchase from a Newegg Marketplace seller, up to $1,000.|
|●||Return policy. Our standard return policy generally allows certain items that are directly sold and shipped by us to be returned within 30 days of the delivery date for a full refund or replacement. Restocking fees are waived for all items directly sold by Newegg, but may be charged on items sold by third-party sellers on our marketplace.|
From a customer service perspective, in addition to customers, we broadly define our customers to also include our Marketplace sellers, from whom we earn commissions, and purchasers of our 3PL services and other ancillary e-commerce solutions and services. See “— The Newegg Ecosystem — Key Ecosystem Participants and How We Create Value for Them — Marketplace Sellers” and “— Our Business Models — Supply Chain Third-party (3PL) Services” for more information about our engagement with these customers.
We provide our customers with the flexibility to choose from a number of traditional online payment options, along with certain alternative payment solutions that are popular with our predominantly technology-enthusiast customers.
|●||B2C payment options. We offer various mainstream online payment options to customers on our B2C platform, including credit cards, debit cards and prepaid gift cards. We offer customers the opportunity to pay for items purchased on our platforms with the Newegg Store Credit Card, a private-label credit card that Newegg launched in partnership with Synchrony Financial, a U.S. consumer financial services company. Newegg Store Credit Card has a revolving credit line and offers numerous attractive financing options, including, for example, zero interest for everyday purchases for up to 12 months, and up to 36 months on purchases of certain items on our platforms, which we believe improves customer loyalty and purchase frequency and results in increased sales. In 2014, we introduced support for Bitcoin as a payment option. We allow customers to use Bitcoin and Bitcoin cash to pay for purchases made on our platforms. In Q4 2020, we started offering Pay in 4 that allows customers to pay in four interest-free installments within a six-week timeframe. This payment option is offered through Zip. In Q4 2021, we began offering Affirm to our customers to allow them to pay at their own pace for up to a period of 12 months.|
|●||B2B payment options. B2B customers can make payment during checkout or request credit and pay on terms via the above-mentioned online payment options or via ACH, wire transfer, or bank check. We also offer open-term accounts for business and public sector customers. In most cases, the payment term that we grant to our B2B customers is 30 days.|
Sales and Marketing
Our marketing strategy includes generating customer traffic, increasing our brand recognition, acquiring customers cost-efficiently, building customer loyalty and maximizing repeat purchases. Our integrated marketing framework represents a core competency that we regard as essential to the success of our platforms. We are focused on continuing to enhance our brand awareness through a variety of online and offline marketing and brand promotion activities, while leveraging technology to drive scalability and sustainability and eventually achieve optimal return on investment and highly effective cost of traffic as well as sales.
We benefit significantly from word-of-mouth referrals and positive product reviews, and we believe our reputation as a one-stop–technology shop has led to strong word-of-mouth promotion, especially among the technology-savvy. We believe our investment in non-IT product categories is also driving expansion and growth. We have efficient customer acquisition strategies, because the majority of our web traffic is free. Free traffic includes mobile apps, email & SMS, social media, and brand mentions, reviews and shares. Paid traffic includes affiliate marketing, sponsorships, influences, connected TV, and paid searches. In 2021, 84% of traffic was free, as compared to the paid traffic of 16%. In 2020, free traffic was at 79% as compared to the paid traffic of 21%. We also provide live-streaming product reviews on our platforms and Newegg Gallery, through which our customers can see other customers’ thoughts on the product directly. In 2021, we launched Newegg Media, which creates innovative and evocative digital content to educate and inspire viewers. Our team creates custom content for brands with a focus on delivering customers the true hands-on experience with the latest technology to provide insightful, educational commentary that builds long-term value for brands.
We conduct the majority of our marketing efforts online through targeted marketing via affiliates, search engines, promotional emails, social media traffic, targeting and personalization, and online promotion campaigns.
|●||Paid search engine marketing. Search engine marketing is an important driver of our traffic and customer acquisition. For the year ended December 31, 2021, our spending on paid search engine marketing represented approximately 68% of our total marketing spending and 12% of total traffic to Newegg’s website, including desktop, mobile, and app traffic. We bid for specific keywords and products on search engine sites, such as Google, Yahoo! and Microsoft Bing, for optimum visibility in the displayed results. Our broad and evolving product selection enables us to utilize a large quantity of keywords that we frequently test and measure for their effectiveness. We also use sophisticated software to strategically manage our keyword and SKU-level bids to maximize marketing performance at an efficient rate.|
|●||Affiliate marketing. We also engage in affiliate marketing programs where we offer affiliated websites commissions for sales resulting from directing customer traffic to our websites through embedded hyperlinks. Such affiliates are typically deal sites that advertise retailer deals to their audiences. Affiliate marketing is our second largest paid marketing channel and represents approximately 16% of our total marketing expense for the year ended December 31, 2021.|
|●||Targeting and personalization marketing. Targeting and personalization have proved to be highly effective in terms of conversion and customer acquisition. Our Customer Relationship Management Marketing Team runs various and highly diversified marketing programs through personalization and segmentation on multiple channels including website, email, social, paid search engine, and more. Based on customers’ onsite behavioral data and purchase history data, we are able to identify prospective customers (that is, visitors sharing similar shopping patterns with current Newegg customers) as well as existing customers and display our brand and product advertising ads to them when they are on social media or Google search or other affiliate sites.|
|●||Other online marketing channels. Other online marketing channels include click-through based advertising on shopping comparison engines, targeted messages, email distribution, banner advertisements on high-traffic portals, social networking via major social media sites and our own branded portal, and onsite promotions and cross-selling opportunities on our websites, such as Daily Deals and Marketplace Spotlight. We have approximately 14 million email subscribers and successfully delivered about 2.7 billion emails to targeted customers, which is far ahead of industry benchmarks.|
We also devote marketing resources to various offline formats, including displaying offline advertisement through multiple channels and sponsoring or organizing offline events.
While in the past we have utilized offline events in states where we have a physical presence to engage directly with customers, vendors and brand partners, the COVID-19 pandemic caused us to scale back our in-person events in 2020 and 2021. We will reevaluate future live events as the pandemic continues to evolve, with a focus on the health and safety of our employees and event attendees.
Our technology systems are a critical component of our success and designed to enhance efficiency and scalability. Our research and development team, coupled with our proprietary technology infrastructure and the large volume of data generated and collected on our platforms, has created opportunities for continuous improvements in our technology capabilities, empowering reliability, scalability, and flexibility. Our technology strategy is to develop our own proprietary software and license technologies from third parties as appropriate in order to simplify and improve the shopping experience, as well as facilitate our fulfillment, financial and customer service operations.
We have built our technology platform by relying primarily on software and systems that we have developed in-house and, to a lesser extent, on third-party software. Our global research and development team consists of more than 600 IT professionals and engineers as of December 31, 2021, working to design and maintain Newegg’s IT infrastructure to support our growth. Our technology infrastructure is designed for scalability and reliability to support business growth. We utilize high-availability clusters comprising groups of servers to provide sufficient redundancy and maintain continued service in the event of single point server failure due to hostile attacks, systematic errors or other reasons. Our high-availability data system are designed so that back-up servers instantly connect to our network once master servers experience technical difficulties.
We currently have two company-owned data centers in City of Industry, California and two co-location data centers at facilities in Los Angeles, California, and New Jersey to provide redundancy for our e-commerce data. We maintain approximately 1,500 servers stored in our data centers and approximately 300 network devices. Our IT infrastructure enables us to support over 130 million page views per day and provides the capability to process up to 0.75 million orders per day. Our platform obtained PCI Level 1 certification in 2010.
Our IT Capability
|●||Websites. Our website incorporates proprietary technology internally developed on a primarily Microsoft.NET platform. It provides product descriptions, search and ordering functionalities, and product reviews.|
|●||Mobile site and apps. Customer activity on mobile devices is growing, and we are investing significantly in mobile technology to increase sales to customers using mobile devices. Our mobile app aims to create a convenient shopping experience for our customers by, for example, enabling users to save their profiles and payment information for future purchases, and to provide helpful tools to Marketplace sellers by, for example, offering a mobile dashboard allowing them to better manage their inventory and orders on the go.|
|●||Data and analytics. Data collected from our operations, including inventory data, behavioral and transactional data and pricing data, are housed in our data centers. We have deployed commercial business intelligence software to analyze this data and improve the shopping experience. We apply various AI capabilities and deep learning technologies across our platforms to enhance the shopping experience. Our sophisticated user behavior analysis system leverages our large customer database to create customized product recommendations, allowing us to efficiently acquire new customers and increase sales. Also, we have leveraged our AI capabilities to allow category extraction for different products based on the unstructured content and images, the results of which have been used to provide miscategorization correction and site search relevancy improvement.|
|●||Inventory management. Our supply chain management system includes price optimization, inventory balancing, and inventory forecasting and other subsystems. It enables effective sales forecasting and inventory management that increases the efficiency of our supply chain and helps us control costs. Our inventory availability is coordinated through our technology platform. We have added functionality to update our platforms on a real-time basis when items become out of stock in our fulfillment centers. This feature limits the number of orders placed for out-of-stock items, allowing us to better manage aging inventory and minimize customer dissatisfaction by eliminating backorder merchandise.|
|●||Transaction management. We have developed and deployed a scalable back office platform that allows us to monitor transactions and changes to financial data as well as provide our management with daily updates. We utilize both proprietary and third-party applications for accepting and validating purchase orders, placing and tracking orders with suppliers, managing inventory and assigning it to purchase orders, and ensuring proper shipment of products to customers.|
|●||Fulfillment management. We have software for our fulfillment operations that tracks customer orders from placement through packing and shipping. We have installed sophisticated, “pick-to-light” conveyor systems and associated software. We have also developed software modules that efficiently manage the sorting and picking process of our products. Our systems are integrated with those from our primary U.S. shipping vendor to facilitate tracking of the orders after shipment.|
|●||Anti-fraud monitoring. Online fraud is a constant threat to the security and reliability of e-commerce retailers. We work with third-party vendors to monitor our network security devices and secure our online payment systems. We have developed proprietary tools in-house to monitor our online traffic for suspicious activities. Our websites have earned certifications from organizations and agencies like Tevora, based on our meeting of their information protection and fraud prevention standards.|
Research & Development Team
Our global research and development team, consisting of more than 600 IT professionals and engineers as of December 31, 2021, is focused on innovation through software development, algorithm design and development, and IT infrastructure design and maintenance. Our research and development personnel continually upgrade our platforms and test new features to improve our customer experience. Our research and development team also develops custom-built proprietary systems and engages third-party solutions to support our specific customer, vendor and Marketplace seller requirements, including handling heavy traffic on our platforms, and providing quick and efficient fulfillment services to meet customer expectations.
We are committed to protecting information security across all Newegg platforms. We use a variety of techniques to protect the integrity of our networks and the confidential data we collect and store. Confidential information concerning our customers, sellers and suppliers is encrypted and protected using SSL encryption software. In addition, we use multiple layers of network segregation and hierarchical levels of firewall technology to protect against attacks or unauthorized access to our networks, servers, and databases. We also continue to build new procedural safeguards as part of our comprehensive privacy program. We operate in a secured and locked facility that requires all of our employees to check in and wear valid ID badges.
We rely on a combination of trademark, trade secret and other intellectual property laws as well as confidentiality agreements with our employees and suppliers for the purpose of protecting the proprietary rights associated with the products branded under our private labels. We control access to use and distribution of our intellectual property through license agreements, confidentiality procedures, non-disclosure agreements with third parties and our employment and contractor agreements.
Our intellectual property portfolio includes numerous domain names for websites that we use in our business. We have registered the domain names Newegg.com, Newegg.ca and NeweggBusiness.com and their variations. Our “Newegg” trademark and logo have also been registered with the relevant authorities in the United States, Canada and China (as well as in other regions, such as the European Union and Brazil). Furthermore, we have also registered the trademarks and logos of our major private labels, such as Rosewill and ABS.
In addition to the protection of our intellectual property, we are focusing on ensuring that our product offerings (especially our private-label products) do not infringe on the intellectual property of others. Generally, our agreements with suppliers contain provisions to safeguard us against potential intellectual property infringement by our suppliers and impose penalties in the event of any infringement. We reserve the right to refuse to work with or terminate our relationship with suppliers where we become aware that they are violating the intellectual property rights of a third party.
The worldwide market in which we compete is evolving rapidly and intensely competitive, and we face a broad array of competitors from many different industry sectors around the world. Our current and potential competitors include: (i) online, offline and multichannel retailers, publishers, vendors, distributors, manufacturers, and producers of the products we offer and sell to customers; (ii) companies that provide ancillary D2C platform services and solutions, including website development, advertising, customer service and payment processing; (iii) companies that provide fulfillment and logistics services for themselves or for third parties, whether online or offline; and (iv) companies that design, manufacture, market, or sell consumer electronics, telecommunication, and electronic devices.
We believe the principal competitive factors in our market are:
|●||breadth and quality of product offerings;|
|●||brand recognition and reputation;|
|●||ability to respond more quickly to changing consumer preferences;|
|●||ability to reach a geographically broader set of customers; and|
|●||ability to be more flexible in marketing to a specific set of potential customers.|
Some of our current and potential competitors have greater resources, longer histories, more customers, greater brand recognition, and greater control over inputs critical to our various businesses. They may secure better terms from suppliers, adopt more aggressive pricing, pursue restrictive distribution agreements that restrict our access to supply, direct consumers to their own offerings instead of ours, lock-in potential customers with restrictive terms, and devote more resources to technology, infrastructure, fulfillment, and marketing. Each of our businesses is also subject to rapid change and the development of new business models and the entry of new and well-funded competitors. Other companies also may enter into business combinations or alliances that strengthen their competitive positions.
In the United States, we compete with retail stores and resellers, including superstores such as Best Buy, Costco and Walmart, hardware and software vendors that sell directly to end users, online retailers such as Amazon, and other marketers and resellers of IT/CE products. We also face competition in the international markets we participate in, such as Mongkok Computer Centre (HK), Umart (Australia), Best Bargain Computer (Singapore), and Noon in the Middle East, or may enter in the future.
See also Item 3 under the heading “Risk Factors,” the subheading “Our business faces intense domestic and international competition.”
Awards and Accolades
We have been recognized by a number of mainstream media outlets and leading trade publications for our growth and service. We have also been rated a number of times as a top e-commerce site for IT and electronics products. We also have been a Better Business Bureau Accredited business since September 2011 with a rating of A+.
In 2020 and 2021, we received a number of national awards and ratings for our business, including:
|●||No. 1 “Electronics Online Marketplaces” on Web Retailer’s list of “World’s Top Online Marketplaces 2021”|
|●||Included in Supply & Demand Chain Executive 2020 Green Supply Chain Awards|
|●||Included in Multichannel Merchant’s 2021 Top 3PL Providers|
|●||Included in Newsweek’s America’s Best Online Trending Shops 2021|
|●||No. 17 on Dealerscope’s 2020 list of Top 101 Retailers|
|●||Included in Newsweek’s 2021 list of America’s Best Loyalty Programs|
Our business performance is subject to seasonal fluctuations. We have undergone and expect to continue to undergo an increase in activity during the year-end holiday period. These seasonal effects cause differences in revenues and expenses among the various quarters of any financial year, which means that the individual quarters should not be directly compared with one another or be used to predict annual financial results. This intra-year seasonal fluctuation in demand is in accord with historic experience in the retail and e-commerce industries, with increased volumes during the fourth calendar quarter of the year.
We are subject to U.S. federal and state consumer protection laws, including laws protecting the privacy of customer personal information and regulations prohibiting unfair and deceptive trade practices. Other existing and future laws cover issues such as user privacy, spyware and the tracking of consumer activities, marketing emails and communications, other advertising and promotional practices, money transfers, pricing, content and quality of products and services, taxation, electronic contracts and other communications and information security.
Particularly, under applicable federal and state laws and regulations addressing privacy and data security, we must provide notice to consumers of our policies with respect to the collection and use of personal information, and our sharing of personal information with third parties and notice of changes to our data handling practices. In some instances, we may be obligated to give customers the right to prevent sharing of their personal information with third parties. Under applicable federal and state laws, we also are required to comply with a number of requirements when sending commercial email to consumers, including identifying advertising and promotional emails as such, ensuring that subject lines are not deceptive, giving consumers an opportunity to opt out of further communications and clearly disclosing our name and physical address in each commercial email. Regulation of privacy and data security matters is an evolving area, with new laws and regulations enacted frequently. For example, California enacted legislation that, among other things, requires new disclosures to California consumers, and affords such consumers new abilities to opt out of certain sales of personal information, which was effective on January 1, 2020. In addition, under applicable federal and state unfair competition laws, including the California Consumer Legal Remedies Act, and U.S. Federal Trade Commission, regulations, we must accurately identify product offerings, not make misleading claims on our platforms, and use qualifying disclosures where and when appropriate.
There is also great uncertainty over whether or how existing laws governing issues such as property ownership, sales and other taxes, auctions, libel, and personal privacy apply to the Internet and commercial online services. For example, tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject us to additional state sales and income taxes. Additionally, new state legislation may also subject us to other types of taxes. New legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the Internet and commercial online services could result in significant additional taxes or regulatory restrictions on our business or may necessitate changes to our business practices. These obligations or changes could have an adverse effect on our financial position and results of operations.
Our international operations are subject to foreign laws and regulations addressing topics such as customs duties and taxes, advertising and marketing practices, privacy, data protection and information security and consumer rights, as well as additional laws and regulations, including restrictions on imports from, exports to, and services provided to persons located in certain countries and territories, any of which might apply by virtue of our operations in foreign countries and territories or our contacts with consumers in such foreign countries and territories. For example, in Canada, we are subject to labor and employment laws, laws governing advertising, privacy and data security laws, safety regulations and other laws, including consumer protection regulations that apply to online retailers and/or the promotion and sale of merchandise and the operation of stores and warehouse facilities. We monitor changes in these laws, regulations, treaties, and agreements, and believe that we are in material compliance with applicable laws.
See Exhibit 8.1 for a list of our significant subsidiaries.
|D.||Property, Plants and Equipment|
As of December 31, 2021, we leased the following principal facilities:
|Description of Use||Approximate|
|Corporate office facilities||149,057||North America||12/31/2022 through|
|Fulfillment and warehouse operations||1,818,954||North America||07/31/2023 through|
As of December 31, 2021, Newegg owned the following principal facilities:
|Description of Use||Approximate|
|Corporate office facilities||391,362||China|
|Corporate office facilities||2,707||Taiwan|
|Fulfillment and warehouse operations||109,473||China|
Our corporate headquarters is located in the City of Industry, California. We also lease additional corporate office facilities and fulfillment and warehouse operations throughout North America, principally in California, Indiana, Georgia, and New Jersey in the United States, and Toronto in Canada. Outside of North America, we also own or lease corporate office facilities and fulfillment and warehouse operations, principally in China and Taiwan. Our Asia headquarters is in Shanghai. We periodically evaluate our facility requirements as necessary and believe our existing and planned facilities will be sufficient for our needs for at least the next twelve months.
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. 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 “Disclosure Regarding Forward-Looking Statements” and elsewhere in this annual report. We have prepared our financial statements in accordance with U.S. GAAP.
Newegg’s Business Overview
Newegg is a technology-focused e-commerce company in North America, and ranked No. 1 as of April 2021 as the global top electronics online marketplace according to Web Retailer’s report, as measured by 32.6 million visits per month in 2021. Through Newegg.com, our flagship retail site, and other online platforms, we connect our 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 our extensive fulfillment and warehousing network and the global footprint of our suppliers and sellers, we are able to offer merchandise sourced from over 40 countries and regions to customers located in over 20 countries and regions and deliver customer services in multiple languages.
We have built a large base of loyal and highly engaged customers. As of December 31, 2021, we have 3.5 million active customers (defined as unique customer ID with at least one item purchased on our platform in the past 12 months), with a 32% 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 $442, as calculated by dividing sales by transactions during the relevant 12-month measurement period. These statistics are the result of our deep understanding of our customers’ needs, preferences and tastes and our ability to offer an extensive product assortment, superior customer service, flexible payment options, and speedy, reliable and efficient shipping and fulfilment. As of December 31, 2021, we offered approximately 38.7 million SKUs across over 1,800 categories, which we believe makes us one of the top online shopping destinations for tech consumers. We also maintain a global fulfillment network that prioritizes speedy and reliable delivery, supported by our nine strategically located warehouses in the United States, Canada, and China, as of December 31, 2021. We have the capacity to deliver goods to the entire U.S. population and to approximately 85% of the population in Canada within just two business days using multiple service level offerings.
We maintain longstanding and extensive relationships with our 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 our promise to provide our customers with all things tech. We are a trusted partner and the go-to channel for many leading tech product brands and are increasingly establishing relationships with brands in a growing number of other product categories. As of December 31, 2021, we sourced merchandise from at least 3,250 brand partners for our direct sales business and featured the official online stores of various brand partners, including some of the most well-known IT/CE brands, such as AMD, Asus, Facebook Oculus, Intel, Lenovo, Microsoft, MSI, Nvidia, and Samsung.
We strategically employ a dynamic mix of our established direct sales business and a scalable Marketplace model. Built upon our success in direct sales, our Newegg Marketplace has grown in recent years and significantly complements our direct sales business. As the number of sellers and brands on our Marketplace continues to grow, the choices available to customers should also increase, generating a strong momentum for our continued growth. As of December 31, 2021, our Newegg Marketplace connected our customers to over 14,500 third-party sellers from over 47 countries and regions offering approximately 38.1 million SKUs.
For the years ended December 31, 2021 and 2020, we recorded net sales of $2.4 billion and $2.1 billion, respectively. For the same periods, our total GMV was approximately $3.0 billion and $2.7 billion, respectively. We recorded net income of $36.3 million and $30.4 million for the years ended December 31, 2021 and 2020. For the same periods, our adjusted EBITDA was $52.4 million and $39.4 million, respectively. See “— Non-GAAP Financial Measures.”
The Impact of COVID-19
Our online business and warehouse operations have remained active to serve our customers during the COVID-19 outbreak, and we have seen increased demand for our products and services during the outbreak. By contrast, some of our 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 our core business. Both of these industry trends have contributed to increased sales and market share for us. 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 our products and services. Overall, we saw consistent demand for our products in 2021 as COVID-19 ignited the digital transformation of retail as well as consumer comfort with online shopping. However, we are still faced with challenges around supply constraints and increases in product and shipping costs.
As a consequence of the COVID-19 outbreak, we have experienced occasional supply constraints, primarily in the form of delays in shipment of inventory. We have also experienced some increases in the cost of certain products, as well as a drop in promotions by some manufacturers. While we consider such events to be temporary, continued supply chain disruptions could lead to delayed receipt of, or shortages in, inventory and higher costs.
COVID-19 impacted the supply chain of our brand partners and Marketplace sellers, and our ability to timely fulfill orders and deliver such orders to our customers, particularly as a result of mandatory shutdowns in different countries and cities to mitigate the spread of the virus.
Although we 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 our results of future operations. The potential impact of COVID-19 on our operations remains uncertain and potentially wide-spread.
Newegg’s Business Model
GMV is the primary driver of our net sales, as we derive a significant majority of net sales from the GMV transacted on our online platforms, net of cancellations and returns. We define GMV as the total dollar value of products sold on our websites and third-party marketplace platforms, directly to customers and by our Marketplace sellers through Newegg Marketplace, net of returns, discounts, taxes, and cancellations. GMV also includes the services fees charged through our NPS in rendering services for our 3PL, SBN, SLS, staffing and media ad services, as well as the sales made by our Asia subsidiaries. We generate GMV and net sales primarily from the following sources:
|●||Direct sales, where we control inventories sourced from suppliers and directly sell goods to our customers on our platforms or certain other third-party platforms. Our direct sales revenues include net sales generated from sales of products directly by us to customers on our Newegg platforms (including wholesale where we sell inventories in bulk and mostly at a discount), sales through third-party websites of products we source from suppliers, and freight revenues from fees we charge for delivery of goods that we directly sell to customers.|
|●||Newegg Marketplace, where third-party sellers sell products through our Newegg Marketplace, and we recognize commission and service fees from such third-party sellers in our net sales. The published commission rates are based on a percentage of the GMV transacted, exclusive of the shipping fees charged, which commission rates range from 8% to 15%, depending on the product category. We refer to the net sales generated from Newegg Marketplace as Marketplace revenues.|
|●||Newegg Partner Services (“NPS”), where we generate net sales primarily by charging service fees for a range of e-commerce services and solutions rendered to our vendor partners, Marketplace sellers and various types of customers and businesses, including 3PL and other fulfillment and logistics services, advertising services, and online marketing services. We refer to such net sales as services revenues.|
Factors Affecting Newegg’s Results of Operations
Our 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 our customer base and increase their engagement level
We believe the principal factors necessary to maintain and grow our GMV and net sales include the number of visits to our online platforms, our ability to convert those visits to orders, and the level of our customers’ engagement with our platforms.
We monitor the following key operating metrics to evaluate our user traffic, our ability to convert visits into orders, and the size and engagement of our customer base:
the Year Ended
|Key Operating Data:||2021||2020||2019|
|Total visits(1)||305.1 million||382.2 million||262.2 million|
|Number of customers(2)||40.3 million||37.3 million||34.4 million|
|Number of active customers(3)||3.5 million||4.7 million||3.2 million|
|Repeat purchase rate(5)||31.9||%||32.5||%||30.0||%|
|Average Order Value(6)||$||442||$||301||$||310|
|1.||Measured by total traffic across all Newegg platforms, excluding visits of fewer than three seconds, which we assume are visits from search bots from competitors.|
|2.||Calculated by the total number of registered accounts on all Newegg platforms.|
|3.||Active customers as of a given date are calculated by unique customer ID with at least one transaction purchased on our platforms during the relevant 12-month measurement period.|
|4.||Calculated by dividing transactions over the total number of visits across all Newegg platforms, excluding visits of fewer than three seconds.|
|5.||Measured by the percentage of customers who made at least two purchases on Newegg platforms during the relevant 12-month measurement period.|
|6.||Calculated by dividing sales volume by number of transactions during the relevant 12-month measurement period.|
We use conversion rates to measure our ability to convert visits to orders. Our 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 we face, our 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 our customer base.
Newegg’s product mix
We offer a wide range of technology products from a broad mix of brands and sellers. As of December 31, 2021, we offered approximately 38.7 million SKUs across over 1,800 categories. Products are offered on our online platforms across a range of types, brands, and price points. We believe that customers are attracted to our online platforms primarily by the breadth and depth of our product offerings, a critical component of our ability to increase sales and drive long-term profitability. In addition to core technology products, in recent years we have also complemented our product assortment in areas such as apparel and accessories, home furnishings, personal goods and certain other products of IT — adjacent categories.
Our results of operations are affected by our merchandise mix, as products of different categories, brands and price points have a range of margin and profitability profiles. For example, categories where we hold lower market share and we strive to grow at an accelerated rate over market may offer relatively lower margins. Our merchandise mix may shift over time due to the combination of a variety of factors, including consumer demands and preferences, average selling prices, our ability to maintain and expand our supplier relationships, our ability to forecast market trends, and our marketing and promotional efforts. We continuously monitor the GMV and margin mix of our product offerings and we seek 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 our long-term strategy is to continue to grow our Newegg Marketplace, which we believe is an important driver of future profitable growth.
Our Marketplace has grown in recent years with an increasing contribution to our total sales. For the years ended December 31, 2021, 2020, and 2019, our Newegg Marketplace generated GMV of $742.4 million, $663.7 million, and $495.2 million, respectively, and accounted for approximately 24.5%, 24.2% and 25.0%, respectively, of our total GMV. During the same periods, our Newegg Marketplace generated net sales of $63.5 million, $57.6 million, and $45.6 million, respectively, and accounted for 2.7%, 2.7%, and 3.0%, respectively, of our total net sales. There are a few factors that led to the increase in GMV and net sales in our Marketplace business for the year ended December 31, 2021 versus prior years: (i) the growth in the number of China-based sellers that led to a significant increase in GMV; and (ii) launching of the quarterly commission rebate program in Q3 2021 that enticed sellers to increase their product offerings to our platforms.
We believe the Marketplace model provides us with a number of benefits. As compared with direct sales, the use of the Marketplace model contributes to our working capital and cash flow as there is no need to maintain inventory. Additionally, as the number of sellers and brands on our Newegg Marketplace continues to expand, the choices available to customers also should grow, generating strong momentum for our continued growth. We believe that the integration of our direct sales and Marketplace operations have created a virtuous, self-reinforcing cycle.
Our 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 — we recognize revenues from direct sales on a gross basis, while we recognize 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 our 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. We must effectively respond to these changes to remain competitive. We may have difficulty anticipating consumer demand and preferences, and the goods offered on our online platforms may not be accepted by the market or may be rendered obsolete or uneconomical. Our 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 our financial condition and results of operations.
Newegg’s ability to source products from key suppliers on favorable terms
As of December 31, 2021, we offered over 578,500 direct sales SKUs sourced from at least 385 suppliers globally. We maintain extensive, long-standing and mutually beneficial relationships with many of the biggest tech product brands and distributors globally. However, our 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. Our suppliers may not continue to sell their inventory to us on current terms or at all, and, if the terms are changed, we may not be able to establish new supply relationships on similar or better terms.
We compete with other retailers and direct marketers for favorable product allocations and vendor incentive programs from product manufacturers and distributors. Some of our competitors could enter into exclusive or favorable distribution arrangements for certain products with our vendors, which would deny us complete or partial access to those products and marketing and promotional resources. In addition, some vendors whose products are offered on our online platforms also sell their products directly to customers. If we are unable to develop and maintain relationships with suppliers that permit us to obtain sufficient quantities of desirable merchandise on favorable terms, our results of operations could be adversely impacted.
Our 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,” we consider ourselves to be operating within one reportable segment.
Key Components of Results of Operations
Our 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.
Our net sales are reported net of anticipated discounts, returns, allowances, sales tax and credit card chargebacks, which are all estimated from historical experience. We also offer customer promotional programs, which we record as reductions in sales based on anticipated redemption rates estimated from historical experience.
The following table sets forth the components of our net sales in absolute amounts and as percentages of total net sales, for the periods indicated.
|For the Year Ended December 31,|
|(in millions, except for percentages)|
|Direct sales revenues||$||2,243.4||94.4||$||1,974.9||93.4||$||1,476.8||96.3|
Cost of Sales
The largest component of our cost of sales is the purchase price of goods that we directly sell to customers. Cost of sales also includes (i) costs relating to our service revenues, which include personnel expenses and other costs relating to our 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 we earn under vendor incentive programs, or VIPs, such as purchase rebates, marketing development funds that vendors give us 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 our purchases or sales and represent an indirect or effective reduction of the selling price of the suppliers’ products. Therefore, we treat these program payments as reductions to cost of sales.
The following table sets forth the components of our cost of sales, in absolute amounts and as percentages of total net sales, for the periods indicated.
|For the Year Ended December 31,|
|(in millions, except for percentages)|
|Cost of sales||Amount||%||Amount||%||Amount||%|
price of goods sold |
by it directly
related to |
Marketplace & service
and outbound |
write-downs & |
Selling, General and Administrative Expenses
The largest component of our selling, general and administrative expenses (“SG&A expenses”), is salary and other compensation costs, consisting of expenses relating to the employment of our employees, as well as temporary personnel to meet our 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, merchant processing fees, depreciation and amortization, rent expenses, warehouse costs, office expenses, professional fees, and other general corporate costs.
The following table sets forth the components of our SG&A expenses, in absolute amounts and as percentages of net sales, for the periods indicated.
|For the Year Ended December 31,|
|Selling, general and||(in millions, except for percentages)|
|Salary and other compensation costs||126.6||43.3||107.1||42.8||107.2||46.8|
|Merchant processing fees||59.3||20.3||51.5||20.6||37.6||16.4|
|Advertising and marketing||32.8||11.2||29.0||11.6||25.8||11.3|
|Depreciation and amortization||11.1||3.8||9.1||3.6||10.7||4.7|
Results of Operations
The following table summarizes our consolidated results of operations in absolute amounts and as percentages of our 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.
|For the Year Ended December 31,|
|(in millions, except for percentages, net earnings per share, and average number of share)|
|Cost of sales||2,050.2||86.3||1,841.2||87.1||1,369.0||89.2|
|Other operating income||—||—||—||—||28.3||1.8|
|Selling, general and administrative expenses(1)||292.5||12.3||250.2||11.8||229.2||14.9|
|Income (loss) from operations||33.5||1.4||23.5||1.1||(36.0||)||(2.3||)|
|Other income, net||1.8||0.1||5.2||0.2||4.1||0.3|
|Equity income (loss) from equity method investment||(7.4||)||(0.3||)||3.2||0.2||0.3||0.0|
|Gain from sale of equity method investment||—||—||—||—||21.5||1.4|
|Gain from disposal of subsidiary||2.0||0.1||—||—||—||—|
|Change in fair value of warrants liabilities||0.1||0.0||—||—||—||—|
|Income (loss) before provision for income taxes||30.5||1.3||32.3||1.5||(12.4||)||(0.8||)|
|Provision for (benefit from) income taxes||(5.8||)||(0.2||)||1.9||0.1||4.6||0.3|
|Net income (loss)||$||36.3||1.5||$||30.4||1.4||$||(17.0||)||(1.1||)|
|Net earnings (loss) per share, basic||$||0.10||$||0.08||$||(0.05||)|
|Net earnings (loss) per share, diluted||$||0.08||$||0.08||$||(0.05||)|
|Weighted average number of common stock outstanding used in computing per share amounts, basic||366,650,707||—||363,325,542||—||363,325,542||—|
|Weighted average number of common stock outstanding used in computing per share amounts, diluted||432,249,932||—||385,012,550||—||363,325,542||—|
|(1)||Includes share-based compensation expenses of $6.3 million, $1.6 million, and 0.7 million, respectively, in years ended December 31, 2021, 2020, and 2019.|
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Net sales increased by 12.4% for the year ended December 31, 2021 compared to the comparable prior year period from $2,114.9 million in 2020 to $2,376.2 million in 2021, which was mainly due to the increase in GMV from our direct sales and marketplace businesses from $1,968.7 million and $663.7 million for the year ended December 31, 2020, respectively, to $2,195.9 million and $742.4 million for the year ended December 31, 2021, respectively.
Such increase in GMV was primarily due to the optimization of products with high demand, refinement of our product selection, increase in the number of SKUs offered in our platforms, and improvement in relationships with key suppliers that helped them make strategic decisions in their product offerings. Overall, the customer demand for technology products has also remained strong in 2021 as customers tend to find better solutions to help them work, learn, entertain, and stay connected while being at home.
Cost of Sales & Gross profit
For the year ended December 31, 2021, our cost of sales increased by 11.4% compared to the comparable prior year period from $1,841.2 million in 2020 to $2,050.2 million in 2021, generally reflective of the increase in our net sales. During the same period, our gross profit increased by 19.1% from $273.7 million for the year ended December 31, 2020 to $326.0 million for the year ended December 31, 2021.
Our profit margin increased to 13.7% for the year ended December 31, 2021 from 12.9% for the year ended December 31, 2020 primarily due to the significant growth in sales of our private label brand, ABS, that has higher margin, and increased demand for certain products such as video graphic cards, hard disk and solid-state drives, where aggressive promotions are not required to move inventories.
Selling, general and administrative expenses
For the year ended December 31, 2021, SG&A expenses increased to $292.5 million from $250.2 million for the year ended December 31, 2020, which mainly resulted from (i) an increase in salary and other compensation costs by $19.5 million due to an increase in North America headcount to 1,216 as of December 31, 2021 from 1,005 as of the same period in 2020, (ii) an increase in merchant payment fees by $7.8 million which is variable to sales, and (iii) an increase in other expenses by $9.2 million related to professional fees incurred for the recapitalization.
Interest income and expense
Interest income is earned on (i) our loans to affiliates; and (ii) cash invested in money market accounts or certificates of deposit. See “Related Party Transactions” for more information about our loans to affiliates. Interest expense represents the interest we are charged on our borrowings, including term loan, line of credit and capital leases.
Interest income remained consistent at $1.1 million and $1.1 million for the year ended December 31, 2021 and 2020, respectively.
Interest expense remained consistent at $0.6 million and $0.7 million for the year ended December 31, 2021 and 2020, respectively.
Other income, net
For the year ended December 31, 2021 and 2020, we recorded other income, net of $1.8 million and $5.2 million, respectively. For the year ended December 31, 2021, other income, net, primarily consisted of sales tax rebate from Texas of $1.3 million, insurance proceeds of approximately $1.0 million related to the inventory loss in the U.S., property rental income of $1.6 million, sales tax discount income of $0.4 million, and other miscellaneous income of $0.8 million, which was partially offset by foreign exchange loss of $3.3 million. For the year ended December 31, 2020, other income, net, primarily consisted of partnership incentives of $1.5 million, sales tax rebates and discounts of $1.4 million, and insurance proceeds of $0.8 million.
Equity income from equity method investment
For the year ended December 31, 2021, we recorded a loss on equity method investment of $7.4 million on our investment in Mountain Capital. For the year ended December 31, 2020, we recorded a gain on equity method investment of $3.2 million on our investment in Mountain Capital.
Gain from Disposal of Subsidiary
On May 19, 2021, we disposed all of LLIT’s legacy business contemplated by that certain Equity Transfer Agreement dated October 23, 2020, by and among LLIT, our wholly owned subsidiary, Lianluo Connection and Beijing Fenjin. We sold all of our equity interests in Lianluo Connection to Beijing Fenjin immediately following completion of the Merger for a purchase price of RMB 0.
We recognized a $2.0 million gain from disposal of Lianluo Connection for the year ended December 31, 2021.
Change in Fair Value of Warrants Liabilities
Warrants are remeasured at fair value with changes in fair value recorded in earnings in each reporting period. We recorded a gain on the change in fair value of warrant liabilities of $0.1 million due to the increase in stock price as of December 31, 2021, as compared to the stock price as of May 19, 2021. There were no warrant liabilities as of December 31, 2020.
Provision for/(benefit from) income taxes
Our benefit for income taxes was $5.8 million for the year ended December 31, 2021 from a provision of $1.9 million for the year ended December 31, 2020. The decrease in our provision for income taxes was mainly due to the net change of the valuation allowance of $13.9 million, partially offset by $3.2 million provision for income tax for Canada.
For the year ended December 31, 2021, we recorded a net income of $36.3 million in 2021, as compared to a net income of $30.4 million for the same period in 2020. The increase in net income is primarily driven by a growth in our net sales and improvement in our gross margin.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Net sales increased by 37.9% for the year end December 31, 2020 compared to the comparable prior year period from $1,533.9 million in 2019 to $2,114.9 million in 2020, which was mainly due to the increase in GMV from our direct sales platforms from $1,438.2 million in 2019 to $1,968.7 million in 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 year ended December 31, 2020, our cost of sales increased by 34.5% compared to the comparable prior year period from $1,369.0 million in 2019 to $1,841.2 million in 2020, generally reflective of the increase in our net sales. During the same period, our gross profit increased by 66.0% from $164.9 million in 2019 to $273.7 million in 2020.
Our profit margin increased from 10.8% in 2019 to 12.9% in 2020 primarily due to a strategy change where we focused on selling high margin categories. There was also a high demand in sales that turned the inventories much faster. There were no aggressive promotions needed to move aged inventories that impacted the margin rate negatively.
Selling, general and administrative expenses
As of December 31, 2020, SG&A expenses increased from $229.2 million in 2019 to $250.2 million in 2020, which mainly resulted from (i) an increase in credit card charges from $37.6 million in 2019 to $51.5 million in 2020, which is directly related to the increase in net sales in 2020, and (ii) an increase in advertising and marketing expenses from $25.8 million in 2019 to $29.0 million in 2020.
Interest income and expense
For the year ended December 31, 2020, interest income increased from $0.6 million in 2019 to $1.1 million in 2020. This increase was primarily driven by an increase of $0.5 million in interest income on our loan to an affiliate.
Interest expense decreased from $2.9 million in 2019 to $0.7 million in 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 year ended December 31, 2020, we recorded other income, net of $5.2 million, compared to other income, net of $4.1 million in 2019. For the year ended December 31, 2020, other income, net, primarily consisted of partnership incentives of $1.5 million, sales tax rebates and discounts of $1.4 million, and insurance proceeds of $0.8 million. In 2019, our other income mainly consisted of insurance proceeds of approximately $2.0 million primarily related to the fire loss in one of our warehouses in the U.S., property rental income of $1.2 million from one of our idle warehouses in China, and government subsidies of an insignificant amount.
Gain from sale of and equity income from equity method investments
For the year ended December 31, 2020, we recorded a gain on equity method investment of $3.2 million on our investment in Mountain Capital. For the year ended December 31, 2019, we recorded a gain on equity method investment of $0.3 million on our investment in Mountain Capital. For the year ended December 31, 2019, we also recorded a gain of $21.5 million on the sale of the equity method investment in Mountain Capital of $21.8 million. Mountain Capital sold a portion of our investment in One97 to various third-party buyers, which resulted in disposal of all of our investment in One97 in 2019.
Provision for income taxes
Our provision for income taxes decreased from $4.6 million in 2019 to $1.9 million in 2020. The decrease in our provision for income taxes was mainly due to the expense of withholding tax in first half of 2019 associated with the sale of our investment in One97 through Mountain Capital.
For the year ended December 31, 2020, we recorded a net income of $30.4 million in 2020, as compared to a net loss of $17.0 million for the same period in 2019. The increase in net income is primarily driven by a growth in our net sales and improvement in our gross margin.
Non-GAAP Financial Measures
We have included GMV and Adjusted EBITDA, non-GAAP financial measures, in this annual report. We believe that these are key measures used by our management and board of directors to evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of capital.
GMV is the total dollar value of products sold on our websites and third-party marketplace platforms, directly to customers and by our Marketplace sellers through Newegg Marketplace, net of returns, discounts, taxes, and cancellations. GMV also includes the services fees charged through our NPS in rendering services such as 3PL, SBN, SLS, staffing and media ad services, as well as the sales made by our Asia subsidiaries. It helps us 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 our current performance and in assessing our future performance. See “— Newegg’s Business Model.”
GMV, in previous filings, was defined as the total dollar value of products sold on our websites, directly to customers and by our Marketplace sellers through Newegg Marketplace, net of returns, discounts, taxes and cancellations. We are redefining GMV, as of the date of this filing, to include Nutrend and Rosewill sales through third-party marketplace platforms, service and other revenues through NPS, such as 3PL, SBN, SLS, staffing, and media ad services, as well as sales made by our Asia subsidiaries. The change is warranted to ensure that we report GMV to include all revenues of the company across all our revenue streams that will allow the readers to better understand our overall performance. The change in the GMV definition has resulted in an increase in GMV for 2020 and 2019 of $110.7 million and $44.2 million, respectively.
|For the Year Ended December 31,|
|GMV - Marketplace||742.4||663.7||495.2|
Adjusted EBITDA is a financial measure that includes the removal of various one-time, irregular, and non-recurring items from EBITDA. We believe that exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis and excludes items that we do not consider to be indicative of our core operating performance. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our 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 our results as reported under GAAP. Some of these limitations are:
|●||although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;|
|●||Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;|
|●||Adjusted EBITDA does not consider the potentially dilutive impact of stock-based compensation;|
|●||Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and|
|●||Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.|
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, operating profit and our other GAAP results.
The following table reflects the reconciliation of net loss to Adjusted EBITDA for each of the periods indicated.
|For the Year Ended December 31,|
|Net income (loss)||$||36.3||$||30.4||$||(17.0||)|
|Stock-based compensation expenses||6.3||1.6||0.7|
|Interest (income) expense, net||(0.5||)||(0.4||)||2.3|
|Income tax (benefit) provision||(5.8||)||1.9||4.6|
|Depreciation and amortization||10.8||9.1||10.7|
|Equity income (loss) from equity method investment||7.4||(3.2||)||(0.3||)|
|Gain from sale of equity method investment||—||—||(21.5||)|
|Gain from disposal of subsidiary||(2.0||)||—||—|
|Loss (gain) from change in fair value of warrants liabilities||(0.1||)||—||—|
|Gain from sale of real estate property||—||—||(28.8||)|
|B.||Liquidity and Capital Resources|
Cash flows and working capital
We have historically funded our operations through existing working capital, credit facilities, bank loans, return from investing activities, and equity financings. See Notes 8 and 9 to our consolidated financial statements included elsewhere in this annual report for more information about the line of credit and long-term debt that we obtain from financial institutions.
Our 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 fewer. Amounts receivable from payment 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 us from payment processors that are classified as cash and cash equivalents totaled $14.3 million and $17.5 million at December 31, 2021 and December 31, 2020, respectively. We anticipate that our existing cash and funds generated from operations will be sufficient to meet our working capital needs and expected capital expenditures for at least 12 months from the date of the filing of this annual report. Our cash and cash equivalents are primarily denominated in U.S. dollars.
We historically experience higher sales in the fourth quarter due to the holiday season. In anticipation of such higher sales, we typically begin building up our inventory levels in the late third quarter. Such inventory build-up may require us to expend cash faster than we generate by our operations during these periods. Also, as a result of this inventory build-up and faster inventory turnover during the fourth quarter, our accounts payable are typically at their highest levels at year-end, as compared to the first, second and third quarters when sales are lower.
We intend to finance our future working capital requirements and capital expenditures from cash generated from operating activities and funds raised from financing activities, and return from investing activities. Our future capital requirements may, however, vary materially from those now planned or anticipated. Changes in our operating plans, lower than anticipated net sales, increased expenses or other events, including those described in “Risk Factors,” may cause us to seek additional debt or equity financing in the future. If our existing cash is insufficient to meet our requirements, we 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 our failure to raise adequate capital when needed could negatively impact our growth plans and our financial condition and results of operations. Issuance of additional equity securities, including convertible debt securities, would dilute our 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 our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.
Historical Cash Flows
The following table sets forth our selected consolidated cash flow data for the years ended December 31, 2021, 2020, and 2019.
|For the Year Ended December 31,|
|Summary Consolidated Cash Flow Data:||(in millions)|
|Net cash provided by (used in) operating activities||$||(53.3||)||$||84.5||$||(10.1||)|
|Net cash provided by (used in) investing activities||(13.8||)||(5.2||)||84.7|
|Net cash provided by (used in) financing activities||12.7||(1.7||)||(49.7||)|
|Foreign currency effect on cash, cash equivalents and restricted cash||1.0||(0.4||)||(1.1||)|
|Net increase (decrease) in cash and cash equivalents||(53.4||)||77.2||23.8|
|Cash, cash equivalents and restricted cash at beginning of the year||157.7||80.5||56.7|
|Cash, cash equivalents and restricted cash at end of the year||$||104.3||$||157.7||$||80.5|
Net cash used in operating activities was $53.3 million in 2021. Net income was $36.3 million for the period. The adjustments for non-cash expenses are primarily comprised of (i) $10.8 million of depreciation and amortization that was associated with property and equipment; (ii) $8.3 million of provision for obsolete and excess inventory; (iii) $6.3 million of stock-based compensation; (iv) $7.4 million equity loss from equity method investments; and partially offset by $12.7 million from deferred income taxes. The changes in operating assets and liabilities represented $109.1 million cash used in (i) an increase in inventory of $70.8 million; (ii) a decrease in accounts payable of $20.1 million; (iii) a decrease in accrued liabilities and other liabilities of $8.6 million; (iv) a decrease in deferred revenue of $7.4 million; and (v) an increase in prepaid expenses of $2.2 million, partially offset by a decrease in accounts receivable of $0.8 million.
Net cash provided by operating activities was $84.5 million in 2020. Net income was $30.4 million for the period. The adjustments for non-cash expenses are primarily comprised of (i) $9.1 million of depreciation and amortization that was associated with property and equipment; (ii) $7.3 million of bad debt expense, and (iii) $4.2 million of provision for obsolete and excess inventory. The changes in operating assets and liabilities represented a $34.4 million increase in cash provided by (i) an increase in accounts payable of $76.3 million; (ii) an increase in accrued liabilities and other liabilities of $35.1 million; and (iii) an increase in deferred revenue of $21.8 million, partially offset by (i) an increase in accounts receivable of $14.1 million; (ii) an increase in inventory of $76.2 million; and (iii) an increase in prepaid expenses of $7.5 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) $21.5 million of gain on equity method investment. The changes in operating assets and liabilities represented $42.8 million cash provided by (i) a decrease in accounts receivable and inventory of $33.9 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 investing activities was $13.8 million for the year ended December 31, 2021, which was primarily attributable to the payments made to acquire property and equipment.
Net cash used in investing activities was $5.2 million for the year ended December 31, 2020, which was primarily attributable to the payments made to acquire property and equipment of $6.2 million partially offset by the proceeds from insurance of $0.8 million and disposal of fixed assets of $0.1 million.
Net cash provided by investing activities was $84.7 million for the year ended December 31, 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 $7.0 million; and (iii) loans to an affiliate of $15.0 million. See “Related Party Transactions”
Net cash provided by financing activities was $12.7 million for the year ended December 31, 2021, which was mainly due to (i) cash received from common control asset transaction of $11.4 million; and (ii) borrowings under line of credit of $0.8 million.
Net cash used in financing activities was $1.7 million for the year ended December 31, 2020, due to the repayment of our line of credit.
Net cash used in financing activities was $49.7 million for the year ended December 31, 2019, which was mainly due to (i) net repayment under our line of credit of $36.4 million; and (ii) repayment of our long-term debt of $13.3 million.
Our capital expenditures are incurred primarily in connection with purchases of property and equipment and leasehold improvements. Our capital expenditures were $13.8 million, $6.2 million, and $10.3 million for the years ended December 31, 2021, 2020, and 2019, respectively.
We entered into a credit agreement in August 2021 with several financing institutions that provided a revolving credit facility of up to $100 million with a maturity date of August 20, 2024. Prior to August 20, 2023 and subject to certain terms and conditions, the Maximum Revolving Advance Amount, as defined in the credit agreement, could be increased up to $150.0 million. The revolving credit facility includes a letter of credit sublimit of $30.0 million, which can be used to issue standby and trade letters of credit, and a $20.0 million sublimit for swingline loans. In general, advances from this line of credit will be subject to interest at LIBOR plus the Applicable Margin, as defined in the credit agreement, so long as a Daily LIBOR is offered, ascertainable, and not unlawful, or the Alternate Base Rate (to be defined as the highest of the (a) the Base Rate in effect on such day, (b) the sum of the Overnight Bank Funding Rate in effect on such day plus 0.50%, or (c) the daily LIBOR plus 1.0%) plus the Applicable Margin. For LIBOR loans, we 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. In the event of the permanent or indefinite cessation of LIBOR, the Benchmark Replacement will replace LIBOR. If the Benchmark Replacement is Daily Simple SOFR, all interest payments will be payable on a monthly basis. As of December 31, 2021 and December 31, 2020, there was no balance outstanding under this line of credit.
The line of credit is secured by certain of our U.S. subsidiaries and is collateralized by certain of our assets. 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, we will pay on a quarterly basis, an unused commitment fee of 0.15% per annum on the unused amount for the facility. The credit facility contains customary covenants, including covenants that limit or restrict our ability to incur capital expenditures and lease payments, make certain investments and enter into certain related-party transactions. The credit facility also requires us to maintain certain minimum financial ratios and maintain operation banking relationship with the financial institutions. As of December 31, 2021 and December 31, 2020, we were in compliance with all financial covenants related to the line of credit.
|C.||Research and Development, Patents and Licenses, etc.|
See Item 5A under the subheadings, “Technology” and “Intellectual Property.”
Other than as disclosed in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the current fiscal year that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
|E.||Critical Accounting Estimates|
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses, as well as the disclosure of contingent assets and liabilities and other related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of our assets and liabilities that are not readily apparent from other sources. In many instances, we could have reasonably used different accounting estimates. Actual results could differ from those estimates, and we include any revisions to our estimates in our results for the period in which the actual amounts become known.
We believe the critical accounting policies described below affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our historical consolidated financial condition and results of operations:
Incentives Earned from Vendors
We participate in various vendor incentive programs that include, but are not limited to, purchasing-based volume discounts, sales-based volume incentives, marketing development funds, including for certain cooperative advertising, and price protection agreements. Vendor incentives are recognized in the consolidated statements of operations as an offset to marketing and promotional expenses to the extent that they represent reimbursement of advertising costs incurred by us on behalf of the vendors that are specific, incremental, and identifiable. Reimbursements that are in excess of such costs and all other vendor incentive programs are accounted for as a reduction of cost of sales, or if the related product inventory is still on hand at the reporting date, inventory is reduced in the consolidated balance sheets.
The Company is subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. In accordance with ASC Topic 740, the Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities, using tax rates expected to be in effect during the years in which the bases differences are expected to reverse. A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company considers a number of factors in assessing the realization of a deferred tax asset associated with net operating losses and tax credit carryforwards, including the reversal of temporary differences and future taxable income. The Company also considers the uncertainty posed by the current economic environment and the effect of this uncertainty on the various factors that the Company takes into account in evaluating the need for valuation allowance.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the position. The Company measures the recognized tax benefit as the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon the ultimate settlement with a taxing authority. The Company reverses a previously recognized tax benefit if it determines that the tax position no longer meets the more-likely-than-not threshold of being sustained. The Company accrues interest and penalties related to unrecognized tax benefits in income tax expense.
Expense and Valuation of Shares of our Common Stock
The measurement and recognition of compensation expense for all stock-based payment awards made to employees, consultants and directors, including employee stock options and restricted stock, is based on estimated fair value of the awards on the date of grant. The value of awards that are ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in the consolidated statements of operations.
For detailed discussion on stock-based compensation, see Note 14 to the consolidated financial statements.
Recent Accounting Pronouncements
For detailed discussion on recent accounting pronouncements, see Note 3 to the consolidated financial statements of Newegg Commerce, Inc. included elsewhere in this annual report.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Set forth below is information concerning our dir