HOUR LOOP, INC. Special Note Regarding Forward-Looking Statements
All statements other than statements of historical fact included in this annual
report on Form 10-K, including, without limitation, statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Company's financial position, business strategy and
the plans and objectives of management for future operations, are
forward-looking statements. When used in this annual report, words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to us or the Company's management, identify forward-looking
statements. Such forward-looking statements are based on the beliefs of
management, as well as assumptions made by, and information currently available
to, the Company's management. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of certain factors
detailed in our filings with the
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes thereto contained elsewhere in this annual report on Form 10-
37 Overview Our Business
We are an online retailer engaged in e-commerce retailing in the U.S. market. We
have operated as a third-party seller on www.amazon.com since 2013. We have also
sold merchandise on our website at www.hourloop.com since 2013. We expanded our
operations to www.walmart.com in
Business Model
There are three main types of business models on Amazon: wholesale, private label and retail arbitrage. Our business model is wholesale, also known as reselling, which refers to buying products in bulk directly from the brand or manufacturer at a wholesale price and making a profit by selling the product on Amazon. We sell merchandise on Amazon and the sales are fulfilled by Amazon. We pay Amazon fees for allowing us to sell on their platform. Our relationship with Walmart is also similar. We pay Walmart fees for allowing us to sell our merchandise on their platform. As stated above, to date, we have generated only a negligible amount of revenues as a third-party seller on www.walmart.com.
The advantages of selling via a wholesale model:
? Purchase lower unit quantities with wholesale orders than private label
products.
? Selling wholesale is less time intensive and easier to scale than sourcing
products via retail arbitrage.
? More brands will want to work with us because we can provide broader Amazon
presence.
The challenges of selling via a wholesale model:
? Fierce competition on listing for Buy Box on amazon.com (as described below). ? Developing and maintaining relationships with brand manufacturers.
Market Description/Opportunities
Total retail sales increased 18% to
Formation
We were originally incorporated under the laws of the
38 Competitive advantage
Among more than 2 million active third-party sellers on Amazon, we believe we have two main competitive advantages:
? First, we have strong operations and sales teams experienced in listing,
shipment, advertising, reconciliation and sales. By delivering high quality
results and enhancing procedures through the process, our teams are
competitive.
? Second, we believe our proprietary software system gives us an advantage over
our competition. The system is highly customized to our business model; it
collects and processes large amounts of data every day to optimize our
operation and sales. Through advanced software, we can identify product gaps
and keep them in stock all year round.
With respect to our advertising strategy, we advertise those products that we estimate will have greater demand based on our experience. This lets us allocate our advertising budget in a fashion that delivers positive value. We advertise our products on Amazon. We allocate our advertising dollars prudently. This is accomplished by advertising items that deliver the most return for our advertising spending. We monitor the items being advertised by our competitors. On the operations side, we constantly refine our processes based on learnings from historical data. The combination of managing the business operations effectively along with allocating our advertising budget to high value items allows us to grow profitably. In cases where the advertising is fierce, we allocate the spending appropriately. Our strategy for competing with larger competitors is to monitor their pricing and not compete with them when their pricing is low or at a loss. Competitors sell at low prices or at a loss due to a variety of reasons, including, but not limited to, their desire to liquidate inventory or achieve short term increase in revenue. During these times, we avoid matching their prices. This strategy allows us to stay profitable.
Our Financial Position
For the fiscal years ended
Results of Operations
Year Ended
The following table shows a comparison of our 2022 and 2021 income statements.
Year Ended
December 31, 2022 December 31, 2021
Statement of Operations Data
Total revenues $ 95,930,091 $ 62,792,981
Total cost of goods sold (46,942,770 ) (27,984,335 )
Gross profit 48,987,321 34,808,646
Total operating expenses 50,906,679 29,334,497
(Loss) Income from operations (1,919,358 ) 5,474,149
Total other non-operating income (20,428 ) 18,829
Income tax provisions 462,163 (709,205 )
Net (Loss) income (1,477,623 ) 4,783,773
Other comprehensive loss (15,171 ) (4,690 )
Total comprehensive (Loss) income
39 Revenue
We generated
Cost of Goods Sold
Cost of goods sold for the year ended
Operating Expense
Operating expenses for the year ended
Other (expense) Income
Other (expense) income for the year ended
Total Comprehensive (Loss) Income
Total comprehensive (Loss) income for the year ended
Impacts to Results of Operations from COVID-19
The Company's services, operating results and financial performance could be adversely affected by the overall impacts of the pandemic. Management has determined that there is no material uncertainty that casts substantial doubt on the Company's ability to continue as a going concern. It is expected that COVID-19 might have some impact, though it is not anticipated to be significant.
Liquidity and Capital Resources
Cash Flows for the Years Ended
Liquidity is the ability of an enterprise to generate adequate amounts of cash
to meet its needs for cash requirements. We had cash of
Our primary uses of cash have been for inventory, payments to Amazon related to sales and shipping of products, for services provided, payments for marketing and advertising and salaries paid to our employees. We have received funds from the sales of products that we sell online. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:
? An increase in working capital requirements to finance the rapid growth in our
current business,
? An increase in fees paid to Amazon and other partners as our sales grows
? The cost of being a public company;
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? Marketing and advertising expenses for attracting new customers; and
? Capital requirements for the development of additional infrastructure
Since inception, we have generated liquidity from the profitability of our ongoing business and from debt to fund our operations.
The following table shows a summary of our cash flows for the years endedDecember 31, 2022 and 2021. Year EndedDecember 31, 2022 December 31, 2021
Statement of Cash Flows
Net cash (used in) provided by operating activities
$ (339,518 ) $ (16,115 )
Net cash provided by (used in) financing activities $ 5,923,342
$ (10,631 ) $ 2,743
Net (decrease) increase in cash $ (6,029,983 ) $ 5,624,508
Cash - beginning of the period $ 10,592,572 $ 4,968,064
Cash - end of the period $ 4,562,589 $ 10,592,572
For the fiscal year ended
For the fiscal year ended
Net Cash Provided by (Used in) Financing Activities
For the fiscal year ended
Off-balance sheet financing arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
41 COVID-19
In
Contractual Obligations
Except as set forth below, we do not have any long-term capital lease obligations, operating lease obligations or long-term liabilities.
Bank of America Loan
On
Taishin International Bank
On
PPP Loan
On
Under the terms of the PPP loan, up to the entire amount of principal and
accrued interest may be forgiven to the extent PPP loan proceeds are used for
qualifying expenses as described in the CARES Act and applicable implementing
guidance issued by the
42
Conversion of
On
Affiliated Loans
From time to time, the Company receives loans and advances from its stockholders
to fund its operations. As of
December 2020 Loan
On
July 2021 Loan
On
Leases
The Company has three operating leases (Flywheel has three offices lease in
For the Year Ending December 31 , Amount
2023 $ 399,962
2024 68,648
2025 -
2026 and thereafter -
Total minimum lease payments 468,610
Less: effect of discounting (18,449 )
Present value of the future minimum lease payment 450,161 Less: operating lease liabilities-current
(385,216 )
Total operating lease liabilities-non-current
Sales Taxes
We make an assessment of sales tax payable, including any related interest and
penalties, and accrue these estimates on the financial statements. Pursuant to
the Wayfair decision, each state enforces sales tax collection at different
dates. We collect and remit sales tax in accordance with state regulations. We
estimate that as of
43 Critical Accounting Policies
The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased with original maturities of three months or less to be cash and cash equivalents. The carrying amount of cash and cash equivalents approximates fair value.
Inventory and Cost of Goods Sold
Inventories are stated at the lower of cost or net realizable value. Cost is principally determined on a first-in first-out basis. The Company's costs include the amounts it pays manufacturers for product, tariffs and duties associated with transporting product across national borders, and freight costs associated with transporting the product from its manufacturers to its warehouses.
Cost of goods sold is comprised of the book value of inventory sold to customers during the reporting period.
Property and Equipment
Property, plant, and equipment are recorded at cost and depreciated or amortized over the estimated useful life of the asset using the straight-line method.
Fair Value Measurement
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate fair value because of the immediate or short-term maturity of these financial instruments.
Revenue Recognition
The Company accounts for revenue in accordance with
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which provided a five-step model for recognizing revenue from contracts with customers as follows:
? Identify the contract with a customer. ? Identify the performance obligations in the contract. ? Determine the transaction price. ? Allocate the transaction price to the performance obligations in the contract. ? Recognize revenue when or as performance obligations are satisfied.
The Company derives its revenue from the sale of consumer products. The Company sells its products directly to consumers through online retail channels. The Company considers customer order confirmations to be a contract with the customer. Customer confirmations are executed at the time an order is placed through third-party online channels. For all of the Company's sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when the Company's performance obligation is satisfied), which typically occurs at shipment date. As a result, the Company has a present and unconditional right to payment and record the amount due from the customer in accounts receivable.
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The Company evaluated principal versus agent considerations to determine whether
it is appropriate to record platform fees paid to Amazon as an expense or as a
reduction of revenue. Platform fees are recorded as sales and distribution
expenses and are not recorded as a reduction of revenue because the Company owns
and controls all the goods before they are transferred to the customer. The
Company can, at any time, direct Amazon, similarly, other third-party logistics
providers ("Logistics Providers"), to return the Company's inventories to any
location specified by the Company. It is the Company's responsibility to make
any returns made by customers directly to Logistic Providers and the Company
retains the back-end inventory risk. Further, the Company is subject to credit
risk (i.e., credit card chargebacks), establishes prices of its products, can
determine
Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good to the customer and is the unit of account in ASC Topic 606. A contract's transaction price is recognized as revenue when the performance obligation is satisfied. Each of the Company's contracts have a single distinct performance obligation, which is the promise to transfer individual goods. For consumer product sales, the Company has elected to treat shipping and handling as fulfillment activities, and not a separate performance obligation. The Company bills customers for charges for shipping and handling on certain sales and such charges are recorded as part of net revenue.
For each contract, the Company considers the promise to transfer products to be the only identified performance obligation. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at historical cost less allowance for doubtful accounts. On a periodic basis, management evaluates its accounts receivable and determines whether to provide an allowance or if any accounts should be written off based on a past history of write-offs, collections and current credit conditions. A receivable is considered past due if the Company has not received payments based on agreed-upon terms. The Company performs on-going evaluations of its customers and maintains an allowance for bad and doubtful receivables.
Leases
The Company has elected the adoption under ASC Topic 842, Leases, which allows the Company to apply the transition provision at the Company's adoption date instead of at the earliest comparative period presented in the financial statements. The Company elected the optional practical expedient permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment for existing leases upon adoption.
Sales Taxes
The Company makes an assessment of sales tax payable including any related interest and penalties. The Company's accounting policy is to exclude the tax collected and remitted from revenues and cost of revenues. Pursuant to the Wayfair decision, each state enforces sales tax collection at different dates. The Company collects and remits sales tax in accordance with state regulations. In the past, where the Company has not collected these taxes, the Company has made estimates of amounts owed and accrued these on the financial statements. The Company has made significant progress of filing historical sales tax returns and target to complete filings for all jurisdictions in 2023.
Income Taxes
Prior to 2021, the Company, with the stockholders' consent, elected to be taxed
as an "S corporation" under the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), and comparable state income tax law. As an S
corporation, the Company was generally not subject to corporate income taxes,
and the Company's net income or loss is reported on the individual tax return of
the stockholders of the Company. On
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The Company also complied with state tax code, including
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Related Parties
The Company accounts for related party transactions in accordance with ASC Topic 850 (Related Party Disclosures). A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
Earnings per Share
The Company computes basic earnings per common share using the weighted-average number of shares of common stock outstanding during the period. For period in which the Company reports net losses, diluted net loss per share attributable to stockholders is the same as basic net loss per share attributable to stockholders, because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Foreign Currency and Currency Translation
In case of a functional currency other than the
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