Newegg Commerce, Inc. annual report, Q4 FY2020

Business context and reporting period

This is Lianluo Smart Limited’s annual report on Form 20-F for the fiscal year ended December 31, 2020, filed March 31, 2021—not a Newegg Commerce, Inc. quarterly filing. Lianluo was a small China-focused medical-device and sleep-apnea diagnostics business; the proposed Newegg merger was pending at the reporting date. The filing does not provide Newegg’s standalone financial results.

Key financial metrics

Gross margins are calculated from reported revenue and gross loss. The $3.5 million restricted-cash balance was held in escrow for specified securities-related claims and a potential merger termination fee; it was not freely available operating cash. The company reported no income-tax expense or benefit.

Changes versus the prior year

• Revenue declined 6%. OSAS diagnostic-service revenue fell by about $140,000, largely due to fewer patient users during COVID-19 disruptions; product sales rose about $110,000. Product revenue was $323,325 and OSAS service revenue was $35,211.
• Operating loss narrowed 22% and net loss narrowed about 27%, aided by lower selling costs, lower depreciation and reduced administrative costs. Selling expenses fell 89% to $91,820, reflecting staff reductions and the Beijing Dehaier divestiture.
• Cash from operations deteriorated to a $2.34 million outflow from a $1.67 million outflow. Financing activities provided $7.66 million, including $7.19 million net proceeds from share issuance and related-party borrowing.
• Year-end cash and cash equivalents increased, but a substantial part of total cash, cash equivalents and restricted cash of $5.32 million was escrowed. Inventory declined to $88,603 net from $1.09 million; the company recorded a $58,930 inventory write-down.

Outlook, transactions, risks and unusual items

• Liquidity and going concern: The company reported a $3.24 million net loss and $2.34 million operating cash outflow, and said continued operation depends on future profits and/or financing. Management believed available cash and expected operating cash flows would cover the next 12 months, considering cost reductions and financing. This is a management expectation, not a guarantee.
• Newegg transaction: The October 2020 merger agreement contemplated issuing 5.8417 Lianluo shares per eligible Newegg share; estimated consideration was about $1.19 billion using the October 23, 2020 share price. Closing required approvals, Nasdaq listing conditions and a concurrent public offering expected to raise about $30 million or the amount needed for initial listing requirements. The filing describes the transaction as pending.
• Planned medical-business disposition: After the merger, Beijing Fenjin was to acquire Lianluo Connection for RMB0, with a commitment to contribute RMB87.784 million to its registered capital by September 2023. Lianluo also agreed to convert $11.26 million of debt owed by Lianluo Connection into its additional paid-in capital immediately before disposition.
• Funding after year-end: In late January 2021, investors exercised 1,255,000 warrants, generating $6.8 million in cash; 118,750 warrants remained outstanding. This subsequent financing was not included in December 31, 2020 cash.
• Business concentration: Two customers accounted for approximately 91% of 2020 revenue (84% and 7%); one supplier accounted for 100% of purchases. The company had six full-time employees at year-end and incurred no R&D expense in 2020.
• Governance and controls: Management concluded internal control over financial reporting and disclosure controls were ineffective because of insufficient qualified accounting staff and inadequate review capacity. Management planned training; the auditor did not provide an internal-control attestation.
• Other risks and items: COVID-19 disrupted services and operations; the filing also highlights China regulatory, foreign-exchange and audit-inspection risks, product-liability exposure without product-liability insurance, related-party dependence, and merger execution, dilution and listing risks. A $245,326 loss was recorded on the Beijing Dehaier disposal; 2020 also included a $129,036 non-cash warrant-liability fair-value loss and a $130,435 unrealized gain on marketable securities.
• Prior-year comparison caveat: The October 2020 one-for-eight share combination is reflected retroactively in reported share and per-share data. A separate 2018 intangible-asset impairment of $3.28 million did not recur in 2019 or 2020.

Investor verification priorities

1. Confirm the filing issuer and scope: this 20-F reports Lianluo Smart’s FY2020 medical business, not Newegg Commerce’s standalone operating results or Q4 results.
2. Verify the merger, medical-business disposition and associated financing’s eventual closing status, final terms, share issuance and dilution, and Nasdaq listing outcome.
3. Reconcile unrestricted cash with the $3.5 million escrow, its permitted uses and release conditions, and the reported liquidity runway.
4. Assess collection and settlement of related-party balances, including $1.78 million of related-party borrowings and unpaid employee termination settlements disclosed in the filing.
5. Review customer and supplier concentration, the inventory write-down, the control material weakness and remediation progress, and the going-concern assessment.