Newegg(US:NEGG)2025-04-28 20:01PART I Item 3. Key Information The company's principal risks include macroeconomic pressures, intense competition, and significant issues related to controlling shareholder stock pledges Risk Factors The company faces risks from macroeconomic conditions, e-commerce competition, operational vulnerabilities, and controlling shareholders' pledged, delinquent debt - Global macroeconomic conditions materially affect demand for the company's IT/CE products, which are often discretionary purchases2627 - The company faces intense competition from online and traditional retailers like Amazon and Best Buy, who may have greater resources and more favorable supplier terms293132 - A majority of the company's common shares are pledged as collateral by its two largest shareholders to support delinquent indebtedness, creating a risk of forced sales that could depress the stock price129134135 - As of December 31, 2024, Mr. Zhitao He and Mr. Fred Chang collectively control approximately 88.2% of the voting power, classifying Newegg as a "controlled company"25140141 - Previously identified and remediated material weaknesses in internal control over financial reporting present a risk of recurrence666768 Item 4. Information on the Company The company operates a technology-focused e-commerce ecosystem with B2C and B2B models supported by direct sales and a third-party marketplace History and Development of the Company Newegg is a leading North American e-commerce company that served 2.1 million buyers in 2024 and recently executed a twenty-for-one share combination - The company is a leading technology-focused e-commerce company in North America, serving 2.1 million buyers in 2024180 - On April 7, 2025, the company effected a twenty-for-one share combination, with all share and per-share amounts retroactively adjusted181183 Business Overview The business combines a direct sales model (72.3% of 2024 GMV) and a marketplace model, supported by proprietary technology and a robust logistics network Key Operating Metrics (as of Dec 31, 2024) | Metric | Value | | :--- | :--- | | Active Customers | 2.1 million | | SKUs Offered | Over 4 million | | Brands Represented | Over 27,000 | | Marketplace Sellers | Over 5,200 | | Countries/Regions Served | 20 | GMV by Business Operation (FY 2024 vs FY 2023) | Business Operation | 2024 GMV (millions) | 2023 GMV (millions) | | :--- | :--- | :--- | | B2C | $1,200 | $1,400 | | B2B | $248.1 | $325.6 | - Direct sales constitute the majority of the business, generating approximately 72.3% of total GMV for the year ended December 31, 2024203 - The Newegg Marketplace connects customers to over 5,200 third-party sellers, with commission rates ranging from 8% to 15%204205 - The company's ten largest suppliers accounted for approximately 68% of merchandise purchased in 2024, with the top three accounting for 33%82 - Logistics and fulfillment are key capabilities, with an average delivery accuracy rate over 99.7% and a 98.0% one-business day fulfillment rate in the U.S. and Canada220 Property, Plants and Equipment The company owns its corporate headquarters and leases over 1.1 million square feet of fulfillment and warehouse space in North America Principal Leased Facilities (as of Dec 31, 2024) | Description of Use | Approx. Square Footage | Geographic Location | | :--- | :--- | :--- | | Corporate office facilities | 44,440 | North America | | Fulfillment and warehouse operations | 1,138,493 | North America | | Subleased warehouse facilities | 650,133 | North America | - The company's corporate headquarters in Diamond Bar, California was purchased in June 2023256309 Item 5. Operating and Financial Review and Prospects Fiscal year 2024 net sales decreased 17.5% to $1.24 billion, while a net loss of $43.3 million marked an improvement from the prior year Operating Results Net sales fell 17.5% to $1.24 billion in 2024, with a narrowed net loss of $43.3 million due to significant SG&A expense reductions Consolidated Results of Operations (in millions) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net Sales | $1,235.6 | $1,497.0 | $1,720.3 | | Gross Profit | $131.5 | $167.6 | $216.7 | | Loss from Operations | $(51.5) | $(71.0) | $(49.5) | | Net Loss | $(43.3) | $(59.0) | $(57.4) | | Net Loss per Share | $(2.25) | $(3.12) | $(3.08) | - Net sales decreased by 17.5% in FY2024, driven by a decline in GMV from $1.81 billion to $1.53 billion amid soft consumer demand287288302 - Gross margin decreased to 10.6% in 2024 from 11.2% in 2023, attributed to aggressive competitive promotions290 - SG&A expenses decreased significantly to $183.0 million in 2024 from $238.6 million in 2023, mainly due to lower compensation and rent costs291 Liquidity and Capital Resources The company ended 2024 with $96.3 million in cash and believes existing capital is sufficient for operations over the next 12 months Summary Consolidated Cash Flow Data (in millions) | Cash Flow Activity | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $(0.8) | $(3.8) | $20.5 | | Net cash from investing activities | $2.4 | $(14.3) | $(3.8) | | Net cash from financing activities | $(6.1) | $1.6 | $1.5 | | Cash at end of year | $99.7 | $106.5 | $123.5 | - Cash and cash equivalents decreased to $96.3 million at the end of 2024 from $102.5 million at the end of 2023558 - Capital expenditures were $3.6 million in 2024, a significant decrease from $30.3 million in 2023322 - In August 2024, the company amended its revolving credit facility, extending the maturity to August 2026 and adjusting the maximum revolving amount323634 Critical Accounting Estimates Financial statements rely on critical estimates for vendor incentives, income taxes, and the valuation of stock-based compensation - Vendor incentives are a critical estimate, accounted for as a reduction of cost of sales or marketing expenses327 - Income tax accounting requires significant judgment, particularly in assessing the realizability of deferred tax assets328329 - The valuation of stock-based compensation is based on the estimated fair value of awards at the grant date331 Item 6. Directors, Senior Management and Employees The company's leadership, compensation, board practices, and employee base are detailed, noting a workforce reduction to 762 employees in 2024 Directors and Senior Management The company's leadership includes Chairman Zhitao He and CEO Anthony Chow, with a board of seven directors, four of whom are independent Key Management & Board Members | Name | Position(s) | | :--- | :--- | | Zhitao He | Chairman and Director | | Fred Faching Chang | Vice Chairman and Director | | Anthony Chow | Chief Executive Officer | | Christina Ching | Interim Chief Financial Officer and Chief Accounting Officer | Compensation Aggregate cash compensation in 2024 was $0.9 million for directors and $2.6 million for executive officers, supplemented by equity incentive plans 2024 Aggregate Cash Compensation | Group | Amount (approx.) | | :--- | :--- | | Directors | $0.9 million | | Executive Officers | $2.6 million | | CEO (Anthony Chow) | $1.6 million | - The company has two main equity incentive plans: the 2005 Incentive Award Plan and the 2021 Equity Incentive Plan352353354 Board Practices The board has three committees, with director appointments controlled by the two principal shareholders based on their respective voting power - The Board has three committees: Audit, Compensation, and Nominating and Corporate Governance378 - Director nomination rights are held by the two largest shareholders, Digital Grid and the Minority Representative (Fred Chang), proportionate to their voting power362363 - In 2020, the company's majority owner and Chairman Zhitao He received an administrative punishment from the CSRC for information disclosure violations370371 Employees The company employed 762 full-time employees as of December 31, 2024, a decrease from 932 in the prior year due to workforce optimization Employee Headcount (Full-Time) | Date | Total Employees | | :--- | :--- | | Dec 31, 2024 | 762 | | Dec 31, 2023 | 932 | Employees by Geography (as of Dec 31, 2024) | Location | Count | Percentage | | :--- | :--- | :--- | | U.S. | 494 | ~65% | | China | 229 | ~30% | | Taiwan | 23 | ~3% | | Canada | 16 | ~2% | | Total | 762 | 100% | Item 7. Major Shareholders and Related Party Transactions Ownership is concentrated with Zhitao He (58.8%) and Fred Chang (32.0%), and a significant $15.0 million loan to a related party remains outstanding Beneficial Ownership (as of March 31, 2025) | Shareholder | Percentage of Common Shares Beneficially Owned | | :--- | :--- | | Zhitao He | 58.8% | | Fred Chang | 32.0% | | All Directors and Executive Officers as a Group | 89.8% | - The company has a $15.0 million loan receivable from its majority shareholder's parent company, Digital Grid, originating in 2019676 Item 8. Financial Information This section refers to the detailed financial statements in Item 18 and notes the company does not plan to pay dividends in the foreseeable future - The company's consolidated financial statements are provided under Item 18395 - The company has not paid any cash dividends to date and does not anticipate paying any in the foreseeable future397 Item 10. Additional Information As a BVI-incorporated company, governance is subject to BVI law, granting significant control rights to principal shareholders over board appointments and major actions - The company is incorporated in the British Virgin Islands, and its governance is dictated by its Memorandum and Articles of Association and the BVI Companies Act405411 - Principal shareholders have the right to appoint a specified number of directors based on their voting power percentage414415416 - Certain major corporate actions require the approval of a board majority that includes a director appointed by the Minority Representative418420425 - The company is treated as a U.S. corporation for all U.S. federal tax purposes470 Item 11. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate and foreign currency fluctuations, which are not currently hedged with derivative instruments - The main market risks are interest rate risk on floating-rate debt and foreign currency risk from international sales and purchases506 - As of December 31, 2024, the company had no outstanding long-term borrowings507 - The company does not currently use derivative financial instruments to hedge interest rate or foreign currency risks508509 PART II Item 15. Controls and Procedures Management concluded that both disclosure controls and internal control over financial reporting were effective as of December 31, 2024 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2024517518 - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2024522 Item 16. Corporate Governance and Other Disclosures This section covers governance topics, including accountant fees, a share repurchase program, and cybersecurity risk management processes Principal Accountant Fees (BDO USA) | Year | Audit Fees (in thousands) | | :--- | :--- | | 2024 | $1,124 | | 2023 | $1,365 | - In November 2023, the Board approved a share repurchase program of up to $10 million, with approximately $6.5 million remaining available as of year-end 2024532533 - The company has implemented processes to manage cybersecurity risks, led by the Chief Information Security Officer and overseen by the Audit Committee541542 - As a foreign private issuer, the company is permitted to follow certain home country practices and is exempt from some Nasdaq corporate governance requirements536 PART III Item 18. Financial Statements This section contains the audited consolidated financial statements, which received an unqualified opinion from the auditor, BDO USA, P.C - The independent auditor, BDO USA, P.C., issued an unqualified opinion on the consolidated financial statements548 - The auditor identified the measurement of vendor incentive receivables as a critical audit matter due to the complexity and estimation required552553554 Consolidated Balance Sheet Highlights (as of Dec 31, in thousands) | Account | 2024 | 2023 | | :--- | :--- | :--- | | Total Assets | $407,321 | $499,047 | | Cash and cash equivalents | $96,255 | $102,512 | | Inventories, net | $98,537 | $136,164 | | Total Liabilities | $301,229 | $369,655 | | Accounts payable | $148,279 | $206,588 | | Total Stockholders' Equity | $106,092 | $129,392 | - All common share and per-share amounts have been retroactively adjusted to reflect the twenty-for-one share combination effective April 7, 2025572574