Newegg Commerce (NEGG) Risk Factors

Since we are regulated by the SEC, our reports and other filings with the SEC are subject to SEC's review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike publicly traded companies whose operations are located primarily in the United States, substantially all of our operations are presently located in China. Since substantially all of our operations and business take place in China, it may be more difficult for the SEC staff to overcome the geographic and cultural obstacles, when they review our disclosures. Such obstacles are not present for similar companies whose operations and business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosures and public announcements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosures in our SEC reports and other filings are not subject to the review of the CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings, and other public announcements with the understanding that no local regulator has done any due diligence on the Company and that none of our SEC reports, other filings, or any of our other public announcements has been reviewed or otherwise been scrutinized by any local regulator.

Delisting from NASDAQ may cause our common shares to become subject to the SEC's "penny stock" rules. The SEC generally defines a penny stock as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. One such exemption is to be listed on NASDAQ. Therefore, if we were to be delisted from NASDAQ, our common shares could become subject to the SEC's "penny stock" rules. These rules require, among other things, that any broker engaging in a purchase or sale of our securities provide its customers with: (i) a risk disclosure document, (ii) disclosure of market quotations, if any, (iii) disclosure of the compensation of the broker and its salespersons in the transaction, and (iv) monthly account statements showing the market values of our securities held in the customer's accounts. A broker would be required to provide the bid and offer quotations and compensation information before effecting the transaction. This information must be contained on the customer's confirmation. Generally, brokers are less willing to effect transactions in penny stocks due to these additional delivery requirements. These requirements may make it more difficult for shareholders to purchase or sell our common shares. Since the broker, not us, prepares this information, we would not be able to assure that such information is accurate, complete or current.

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, after the completion of Merger, 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.

BDO China Shu Lun Pan Certified Public Accountants LLP, or BDO China, is the independent registered public accounting firm that issued the audit report included in this report in connection with our consolidated financial statements as of, and for the years ended, December 31, 2020 and 2019. As auditors of companies that are traded publicly in the U.S., our public accounting firms are registered with the U.S. Public Company Accounting Oversight Board (United States), or the PCAOB. They are required by U.S. laws to be regularly inspected by the PCAOB to assess their compliance with the U.S. laws and professional standards. However, our operations are solely located in the PRC, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities. Our independent registered public accounting firm, like others operating in China (and Hong Kong, to the extent their audit clients have operations in China), is currently not subject to inspection conducted by the PCAOB. Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms' audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct full inspections of auditors operating in China makes it more difficult to evaluate our auditors' audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections. In December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of the SEC's Rules of Practice against five PRC-based accounting firms, alleging that these firms had violated U.S. securities laws and the SEC's rules and regulations thereunder by failing to provide to the SEC the firms' work papers related to their audits of certain PRC-based companies that are publicly traded in the United States. Rule 102(e)(1)(iii) grants to the SEC the authority to deny to any person, temporarily or permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have willfully violated, or willfully aided and abetted the violation of, any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued, sanctioning four of these accounting firms and suspending them from practicing before the SEC for a period of six months. The sanction will not take effect until there is an order of effectiveness issued by the SEC. In February 2014, four of these PRC-based accounting firms filed a petition for review of the initial decision. In February 2015, each of these four accounting firms agreed to a censure and to pay fine to the SEC to settle the dispute with the SEC. The settlement stays the current proceeding for four years, during which time the firms are required to follow detailed procedures to seek to provide the SEC with access to Chinese firms' audit documents via the CSRC. If a firm does not follow the procedures, the SEC would impose penalties such as suspensions, or commence a new, expedited administrative proceeding against the non-compliant firm or it could restart the administrative proceeding against all four firms. The four-year mark occurred on February 6, 2019. On April 21, 2020, the SEC and the PCAOB issued a joint statement highlighting the significant disclosure, financial reporting and other risks associated with emerging market investments, including the PCAOB's continued inability to inspect audit work papers of auditors in the PRC. This statement is the latest in a series of recent proposed actions: - In December 2018 the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by U.S. regulators in their oversight of financial statement audits of U.S.-listed reporting companies with significant operations in the PRC. - In June 2019 a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress that, if passed, would have required the SEC to maintain a list of foreign reporting companies for which the PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges Act, or EQUITABLE Act, would have prescribed increased disclosure requirements for these reporting companies and, beginning in 2025, provided for the delisting from U.S. stock exchanges of reporting companies included on the SEC's list for three consecutive years. - In May 2020 the U.S. Senate approved a bill entitled the "Holding Foreign Companies Accountable Act," which, if also approved by the U.S. House of Representatives, would allow the SEC to delist the stocks of foreign companies listed on US exchanges that are audited by firms not allowed to be inspected by the PCAOB. - In May 2020 Nasdaq requested approval by the SEC of proposals that would impact companies with businesses principally administered in jurisdictions defined as "restrictive markets," which likely would encompass the PRC. These proposals contemplate, among other things, the application of more stringent listing criteria if a listed company's auditor does not demonstrate a PCAOB inspection record (as is the case with our auditor), employee expertise and training, or geographic or other resources sufficient to perform the company's audit satisfactorily. Examples of more stringent criteria that Nasdaq could apply include requiring: (a) higher levels of equity, assets, earnings or liquidity than are otherwise needed; (b) that any public offering to be underwritten on a firm commitment basis (involving more due diligence by the underwriter; and (c) the imposition of lock-up restrictions on directors and officers to allow market mechanisms to determine an appropriate price for shares before the insiders could sell. Alternatively, Nasdaq could deny continued listing to a company. It remains unclear what further actions the SEC, the PCAOB or Nasdaq will take to address these issues and what impact those actions will have on US companies that have significant operations in the PRC and have securities listed on a U.S. stock exchange. Any such actions could materially affect our operations and stock price, including by resulting in our being de-listed from Nasdaq or being required to engage a new audit firm, which would require significant expense and management time. As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China's, on December 18, 2020, the Holding Foreign Companies Accountable Act was signed into law. This act amends the Sarbanes-Oxley Act of 2002 to direct the SEC to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded "over-the-counter" if the auditor of the registrant's financial statements is not subject to PCAOB inspection for three consecutive years after the law becomes effective. As a result, we could be delisted if we are unable to cure the situation to meet the PCAOB inspection requirement in time.

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

Our Class A common shares are traded and listed on the NASDAQ Capital Market under the symbol of "LLIT." On September 11, 2019, we received a notification letter from the NASDAQ Listing Qualifications Staff of NASDAQ notifying us that the minimum bid price per share for our Class A common shares had been below $1.00 for a period of 30 consecutive business days and we therefore no longer met the minimum bid price requirements set forth in NASDAQ Listing Rule 5550(a)(2). We were granted a compliance period of 180 days, or until March 9, 2020 to regain the compliance. On January 2, 2020, we received another notification letter from the NASDAQ Listing Qualifications Staff notifying us that we no longer complied with the minimum of $2.5 million in stockholders' equity for continued listing on the NASDAQ Capital Market under NASDAQ's Listing Rule 5550(b)(1) and that we also did not comply with either of the two alternative standards of Listing Rule 5550(b), the market value standard and the net income standard. We thereafter submitted a plan to regain compliance with NASDAQ's applicable listing standards. On March 10, 2020, in consideration of our three financings during the first quarter of 2020, from which we received gross proceeds of approximately $8.08 million, the NASDAQ Listing Qualifications Staff determined that we complied with the stockholders' equity requirement set forth in Listing Rule 5550(b)(1). On that date, we met all applicable requirements for initial listing on the NASDAQ Capital Market, other than the minimum bid price requirement. The NASDAQ Listing Qualifications Staff recognized our intention of curing the minimum bid price deficiency by effecting a reverse stock split, and granted a second compliance period of 180 days, or until September 8, 2020, to regain compliance. The second compliance period was thereafter extended to November 20, 2020 by NASDAQ per SR-NASDAQ-2020-021. On October 21, 2020, we effectuated a share combination of our common shares at a ratio of one-for-eight in order to increase the per share trading price of our Class A common shares to satisfy the $1.00 minimum bid price requirement. We regained compliance with the minimum bid price rule on November 10, 2020. However, there is no assurance that we will be able to continue to maintain our compliance with the NASDAQ continued listing requirements. If we fail to do so, our Class A common shares may lose their status on NASDAQ Capital Market and they would likely be traded on the over-the-counter markets, 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 be reduced. 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.

Our corporate affairs will be governed by the provisions of our amended and restated memorandum and articles of association, as amended and restated from time to time, and by the provisions of applicable BVI law. The rights of shareholders and the fiduciary responsibilities of our directors and officers under BVI law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law. These rights and responsibilities are to a large extent governed by the British Virgin Island Business Companies Act, 2004 as amended from time to time, or the BVI Act, and the common law of the BVI. The common law of the BVI is derived in part from judicial precedent in the BVI as well as from English common law, which has persuasive, but not binding, authority on a court in the BVI. In addition, BVI law does not make a distinction between public and private companies and some of the protections and safeguards (such as statutory pre-emption rights, save to the extent expressly provided for in the memorandum and articles of association) that investors may expect to find in relation to a public company are not provided for under BVI law. There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, the BVI regulations governing the securities of BVI companies may not be as extensive as those in effect in the United States, and the BVI law and regulations regarding corporate governance matters may not be as protective of 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.

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.

We are incorporated under the laws of the BVI and many of our directors and 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 United States courts.

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 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.

Currently, and after completion of the Merger, Hangzhou Lianluo, Digital Grid and their affiliates are and will continue to control a majority of the voting power of our outstanding common shares. As a result, we will continue to be 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 of directors 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 market price of our common shares is volatile, and this volatility may continue. This may happen because of broad market and industry factors. In addition to market and industry factors, the price and trading volume for the common shares may be highly volatile due to other factors, including the following: - variations in our revenues, operating costs and expenses, earnings, and cash flow;- announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;- announcements about our earnings that are not in line with analysts' expectations;- announcements of new products and services by us or our competitors;- changes in financial estimates by securities analysts;- detrimental adverse publicity about us, our shareholders, affiliates, directors, officers or employees, our product offerings, our business model, or our industry;- announcements of new regulations, rules or policies relevant for our business;- additions or departures of key personnel;- release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and - potential litigation or regulatory investigations. Any of these factors may result in large and sudden changes in the volume and price at which the common shares will trade. In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company's securities. If we were involved in a class action suit, it could divert a significant amount of our management's attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

It is a closing condition to Merger that our common shares continue to list on NASDAQ. The post-merger entity will be required to meet the initial listing standards of NASDAQ, which are generally more stringent than NASDAQ's continued listing standards. We may not be able to meet those initial listing requirements. Even if our common shares are approved for listing on NASDAQ upon completion of the Merger, we cannot assure you that a liquid public market for our common shares will develop. If an active public market for our common shares does not develop, the market price and liquidity of our common shares may be materially and adversely affected.

The Company and Newegg have structured the Merger with the intent that it will qualify as a tax-free "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), specifically as a non-taxable "reverse subsidiary merger" under Section 368(a)(2)(E) of the Code. However, the qualification of the Merger as a tax-free reorganization depends on compliance with numerous technical requirements. The Company and Newegg have not sought and will not seek any ruling from the IRS regarding any matter affecting the Merger or any of the United States federal income tax consequences discussed herein, and have not sought and will not seek any tax opinion from their respective legal counsel regarding the qualification of the Merger as a tax-free "reorganization" within the meaning of Section 368(a) of the Code. Thus, there can be no assurance that the IRS will ultimately conclude that the Merger does meet all of the requirements for qualification as a "reorganization" within the meaning of Section 368(a) of the Code and otherwise as a tax-free transaction, and there can be no assurance that any of the other statements made herein would not be challenged by the IRS and, if so challenged, would be sustained upon review in a court. A successful challenge by the IRS could result in taxable income to Newegg and its stockholders.

Upon completion of the Merger, our board of directors will consist of up to seven directors. Initially, four of the directors shall be appointed by Digital Grid, which, together with its affiliates, will control approximately 60.91% of our total voting power upon completion of the Merger, and three of the directors shall be appointed by Mr. Fred Chang, acting on behalf of current Newegg stockholders other than Digital Grid, who collectively will own approximately 38.16% of our total voting power upon completion of the Merger. See additional disclosures relating to the shares held by Mr. He under "Risk Factors – A majority of Newegg's capital shares are, and upon completion of the merger, a majority of our common shares will be, pledged as collateral to support delinquent indebtedness of our parent company and could be sold to satisfy that indebtedness." The number of directors that Digital Grid and Mr. Chang are entitled to appoint will decrease proportionately with the decrease of the respective voting power of Digital Grid and the other stockholders of Newegg. Any director positions which neither Digital Grid nor Mr. Chang are entitled to appoint shall be appointed by the remaining directors, or by any other means allowed under our amended and restated memorandum and articles of association. Upon completion of the Merger, as a shareholder you will have no right to appoint or elect any director to our board. The amended and restated memorandum and articles of association to be adopted at the special meeting will limit your ability to appoint or elect persons for service on our board of directors and may discourage proxy contests for the election of directors and purchases of substantial blocks of shares by making it more difficult for a potential acquirer to gain control of our board of directors.

Prior to the Merger, Newegg's stockholders have entered into that certain stockholders agreement, dated March 30, 2017. In connection with the Merger, we will assume that agreement and enter into an amended and restated shareholders agreement with Digital Grid, Hangzhou Lianluo, entities affiliated with Mr. Fred Chang and certain other stockholders of Newegg (the Principal Shareholders"). Under the amended and restated shareholders agreement, the Principal Shareholders will have pre-emptive rights to acquire additional shares when the Company issues or sells additional securities in the future, except for the "excluded issuance" as defined in the amended and restated shareholders agreement or common shares offered pursuant to a registration statement filed with the SEC. In addition, the Company and the Principal Shareholders will have rights of first refusal, subject to compliance with applicable laws and NASDAQ's rules, over transfers of our common shares by the Principal Shareholders. If any Principal Shareholder receives a bona fide offer from any person other than its affiliate to acquire any of the Principal Shareholders' common shares, then the Company will have a right of first refusal, but not the obligation, to elect to purchase all (and not less than all) of such shares, at the same price, and on the same terms and conditions offered by the purchaser. In the event the Company does not decide to purchase all such 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 (as defined in the amended and restated shareholders agreement) of such shares on the same terms and conditions offered by the purchaser. In the event that such shares are in exchange for non-cash consideration, then such right of first refusal shall be exercisable based on the fair market value determined in good faith by the board of such non-cash consideration. Such right of first refusal and pre-emptive rights may delay or prevent us from raising funding in the future and may have an adverse impact on the liquidity and market price of our common shares.

Digital Grid (Hong Kong) Technology Co., Limited ("Digital Grid") is the record owner of 38,143,279 shares of Newegg stock that will be converted into 222,821,591 of our common shares upon completion of the Merger. This will represent approximately 60.5% of our outstanding shares, based on our and Newegg's capitalization on the date of this annual report. All of these shares have been pledged by Digital Grid to Bank of China Limited Zhejiang Branch ("BOC"), as collateral to support working capital loans and letters of credit provided by BOC to Hangzhou Lianluo. The loans have been guaranteed jointly and severally by Mr. Zhitao He (the controlling shareholder of Hangzhou Lianluo) and Beijing Digital Grid Technology Co., Ltd., a subsidiary of Hangzhou Lianluo. The total amount owed under these loans is RMB400 million in RMB denominated loans, plus $66.5 million in U.S. dollar loans, plus interest, fees and penalties on such amounts. In May 2020, BOC filed several lawsuits against Hangzhou Lianluo, Digital Grid, Beijing Digital Grid Technology Co., Ltd. and Mr. He in the Hangzhou Intermediate People's Court in China alleging that Hangzhou Lianluo has failed to repay the loans when due and is in breach of the loan agreements. This litigation is ongoing. BOC could sell, or force Digital Grid to sell, some or all of its shares of Newegg and the Company at any time while the BOC loan remains delinquent. Digital Grid could also choose to voluntarily sell some or all of its shares at any time to satisfy the BOC loan. Any such sale or attempted sale could: - Occur at a discount to the public trading price of Company shares and over a short time period;- Result in a change of control of the Company to the buyer of such shares; or - Result in litigation over the ownership and title to those shares. Each of these risks could cause our share price to fall significantly and is described further below. Digital Grid's Newegg stock certificates are physically in the possession of BOC. As a result, BOC could sell those shares at any time. Any such sale could be done quickly and without regard for maximizing the sale price, other than to enable BOC to recover the amount of indebtedness owed to it by Hangzhou Lianluo. In such a case, the sale price would likely be significantly less than the public trading price of our shares, which would likely cause our share price to fall significantly. In addition, any transfer of those shares to a non-affiliate of Digital Grid would be subject to our amended and restated shareholders agreement. The shareholders agreement gives a right of first refusal in favor of Newegg (or, after the Merger, the Company), and a right of second refusal in favor of the current Newegg stockholders (which primarily includes Mr. Fred Chang), to purchase all shares being transferred. Because Digital Grid will control approximately 60.5% of our outstanding shares, we expect that it will be the controlling shareholder of our Company after completion of the Merger. However, any sale of Digital Grid's shares by BOC or otherwise could result in a change of control of the Company. For example, if Newegg repurchased 17,669,000 Newegg shares (or 103,216,997 of Company shares) from Digital Grid under the right of first refusal, then Mr. Fred Chang would become our controlling shareholder. As another example, if Mr. Chang purchased 8,834,481 Newegg shares (or 51,608,385 of Company shares) from Digital Grid under the right of second refusal, then Mr. Chang would become our controlling shareholder. Even if the right of first refusal and second refusal are not exercised, Digital Grid could still sell a controlling interest in the Company, and the buyer would thereafter control the Company. Any such change in control could result in instability to our Company which could cause our share price to fall. In addition, the shareholders agreement may not be recognized or enforceable in China's courts, because the agreement is governed by the laws of Delaware currently and the laws of the British Virgin Islands after the Merger, and China courts generally do not recognize court decisions from those jurisdictions. As a result, BOC or Digital Grid could try to sell some or all of Digital Grid's shares without complying with those agreements. Any such sale could result in significant litigation and uncertainty over the ownership of those shares, which could cause our share price to fall.

As a BVI company listed on the NASDAQ Capital Market, 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 corporate governance practices in the BVI, which is our home country, may differ significantly from the NASDAQ corporate governance listing standards. After the completion of the Merger, we intend to follow some or all BVI corporate governance practices in lieu of the corporate governance requirements of NASDAQ that listed companies must have for as long as we qualify as a foreign private issuer. For instance, we are not required to: - have a majority of the board be independent (although all of the members of the audit committee must be independent under the Exchange Act);- have a compensation committee and a nominating committee to be comprised solely of independent directors; and - hold an annual meeting of shareholders no later than one year after the end of the Company's fiscal year-end. 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.

It is a condition to closing the Merger that our common shares continue to list on NASDAQ. The post-merger entity will be required to meet the initial listing standards of NASDAQ. We may not be able to meet those initial listing requirements. Even if our securities are so listed, we may be unable to maintain the listing of our securities in the future. If we fail to meet the initial listing requirements, neither we nor Newegg would be required to consummate the Merger. In the event that we and Newegg elected to waive this condition, we and our shareholders could face significant material adverse consequences, including: - limited availability of market quotations for our securities;- limited amount of news coverage for the Company; and - decreased ability to issue additional securities or obtain additional financing in the future.

We could encounter larger than anticipated transaction-related costs, may fail to realize some or all of the benefits anticipated from the Merger or be subject to other factors that may adversely affect preliminary estimates of the results of the Merger. Any of these factors could delay the expected accretive effect of the Merger and contribute to a decrease in the price of our common shares. In addition, we are unable to predict the potential effects of the issuance of common shares as the merger consideration on the trading activity and market price of our common shares.

Certain of our director, executive officer and major shareholders have interests in the Merger and Disposition that may be different from, or in addition to, the interests of our unaffiliated shareholders and that may create potential conflicts of interest. Mr. Zhitao He, who controls approximately 80.4% of our total voting power as of the date of this annual report through Hangzhou Lianluo and its affiliate, Hyperfinite Galaxy Holding Limited, also serves on the board of Newegg and beneficially owns approximately 61.3% of all issued and outstanding shares of Newegg. See additional disclosures relating to the shares held by Mr. He under "Risk Factors – A majority of Newegg's capital shares are, and upon completion of the Merger, a majority of our common shares will be, pledged as collateral to support delinquent indebtedness of our parent company and could be sold to satisfy that indebtedness." Ms. Yingmei Yang, our Interim Chief Financial Officer and a director, also serves on the board of Newegg. In addition, because the completion of the Merger is contingent upon the disposition our medical device business, Mr. Zhitao He and Ms. Yingmei Yang may also have interests in the disposition that may be different from, or in addition to, the interests of our unaffiliated shareholders. Hangzhou Lianluo has indicated that one of the reasons it would like to complete the Merger is that it believes it is the best way for Newegg to become publicly listed, which will provide it and other Newegg stockholders better liquidity for their Newegg investment. The beneficial ownership of our major shareholders and directorship of our officer in Newegg may create additional conflicts of interest in respect of the Merger and Disposition.