NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
1 - Nature of Operations and Summary of Significant Accounting Policies
Hour
Loop, Inc. (“Hour Loop” or the “Company”) is a technology-enabled consumer products company that uses machine
learning and data analytics to design, develop, market and sell products. Hour Loop predominantly operates through online retail channels
such as Amazon, Walmart, and Hourloop.com. The Company, as an Internet marketplace seller, sells products in multiple categories, including
home/garden décor, toys, kitchenware, apparels, and electronics. The Company has only one segment, which is online retail (e-commerce).
The
Company was incorporated on January 13, 2015 under the laws of the state of Washington. On April 7, 2021, the Company was converted from
a Washington corporation to a Delaware corporation.
In
2019, Hour Loop formed a wholly owned subsidiary, Flywheel Consulting Ltd. (“Flywheel”) located in Taiwan, to provide business
operating consulting services exclusively to Hour Loop.
Reorganization
- On June 30, 2021, the Company completed a corporate reorganization to convert its status from a S corporation (10,000,000
common shares issued and outstanding) to a C corporation (10,000,000
common shares issued and outstanding) with an effective date of July
27, 2021. The reorganization did not change the ownership of the Company and each of the two stockholders (Sam Lai and Maggie
Yu) continued to own 50%
of the Company’s outstanding shares following the reorganization. The discussion and presentation of the unaudited
consolidated financial statements herein assumes the reorganization had become effective as of the beginning of the first period
presented in the accompanying unaudited condensed consolidated financial statements. Consistent with Section 1362 of the Internal
Revenue Code of 1986, as amended (the “Code”), the retained earnings as of July 27, 2021 were distributed to the S
corporation stockholders. The stockholders and the Company have entered into an agreement for this amount to be loaned to the
Company. The amount of this distribution is $4,170,418
and the annual interest rate is
2%. The loan was due on December
31, 2022. On December 28, 2022, the Company, Mr. Lai and Ms. Yu agreed to extend the term of the loan, with the new maturity
date of December
31, 2024. As amended, the annual interest rate on the loan is 5.5%.
On
September 27, 2021, the Company completed a stock split such that each outstanding stock was sub-divided and converted into 4.44 shares
of common stock. As result of the stock split, the total number of shares outstanding became 44,400,000.
On
December 3, 2021, the Company completed a reverse stock split such that each outstanding stock was sub-divided and converted into 0.75
shares of common stock. As a result of the reverse stock split, the total number of shares outstanding became 33,300,000. These shares
were retrospectively adjusted for prior periods.
Basis
of Presentation - The unaudited condensed consolidated financial statements and accompanying notes of the Company have
been prepared in accordance with the accounting principles generally accepted in the United States of America (“US
GAAP”).
Principles
of Consolidation - The unaudited condensed consolidated financial statements include the accounts of Hour Loop and
Flywheel. All material inter-company accounts and transactions were eliminated in consolidation.
Unaudited Interim Financial Information - We have prepared the accompanying
condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”)
for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting
of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated cash flows, operating results, and
balance sheets for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that
may be expected for 2023 due to seasonal and other factors.
Foreign
Currency and Currency Translation - The assets and liabilities of Flywheel, having a functional currency other than the U.S. dollar,
are translated into U.S. dollars at exchange rates in effect at period-end, with resulting translation gains or losses included within
other comprehensive income or loss. Revenues and expenses are translated into U.S. dollars at average monthly rates of exchange in effect
during each period. All of the Company’s foreign operations use their local currency as their functional currency. Currency gains
or losses resulting from transactions executed in currencies other than the functional currency are included in other income (expense)
in the condensed consolidated statement of operations and other comprehensive income.
The
Company is exposed to foreign currency exchange risk through its foreign subsidiary in Taiwan, which reports its earnings in Taiwan dollars.
The Company translates the foreign assets and liabilities at exchange rates in effect at the consolidated balance sheet date and translates
the revenues and expenses using average rates during the year. The resulting foreign currency translation adjustments are recorded as
a separate component of accumulated other comprehensive income or loss in the accompanying consolidated balance sheet and the consolidated
statements of operations. The Company does not hedge foreign currency translation risk in the net assets and income reported from these
sources.
The
relevant exchange rates are listed below:
Schedule
of Foreign Currency Exchange Rates
| |
March
31, | | |
December
31, | | |
March
31, | |
| |
2023 | | |
2022 | | |
2022 | |
| |
| | |
| | |
| |
Period
NTD: USD exchange rate | |
$ | 30.400 | | |
$ | 30.660 | | |
$ | 28.575 | |
Period
Average NTD: USD exchange rate | |
$ | 30.507 | | |
$ | 30.618 | | |
$ | 28.388 | |
HOUR
LOOP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Going
Concern Consideration
As
of March 31, 2023, the Company had negative cash flow from operating activities of $3,130,034, and net loss of $1,235,244. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. Therefore, the Company may be unable to realize
its assets and discharge its liabilities in the normal course of business.
Most of the borrowings of the Company as of March
31, 2023 were from the related parties, which will not be repayable within the next 12 months and are subject to renewal. Management is
confident that these borrowings can be renewed upon expiration.
In
order to strengthen the Company’s liquidity in the foreseeable future, the Company has taken the following measures:
|
i. |
Taking
various cost control measures to tighten the costs of operations; and |
|
ii. |
Implementing
various strategies to enhance sales and profitability. |
Management
represents that there is sufficient working capital to sustain operations longer than twelve months, and the majority shareholders are committed to provide the additional
funding if needed.
Use
of Estimates - The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Significant estimates, including but not limited to,
estimates associated with the collectability of allowance for accounts receivable, accounts receivable, useful life of property and equipment,
impairment long lived assets, valuation allowance for deferred tax assets and inventory valuation.
Reclassification
- Certain amounts in the consolidated financial
statements for the prior financials have been reclassified to conform to the current interim review presentation. These reclassifications
had no impact on consolidated net earnings, consolidated financial position, or consolidated cash flows.
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. Our cash and cash equivalents are held in the bank and covered by the Federal Deposit Insurance Corporation (“FDIC”),
which are subject to applicable limits. Deposits are insured up to $250,000
per depositor, per FDIC-insured bank, per ownership category.
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 generally does not require any security or collateral to support its receivables. The collection is
primarily through Amazon and the collection period is usually less than 7 days. The Company performs on-going evaluations of its customers
and maintains an allowance for bad debt and doubtful receivables as the Company deems necessary or appropriate.
As of March 31, 2023 and December 31, 2022, the Company
did not deem it necessary to have an allowance for bad debt or doubtful accounts.
HOUR
LOOP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Inventory
and Cost of Goods Sold - The Company’s inventory consists mainly of finished goods. 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, as applicable. The merchandise with terms of FOB shipping
point from vendors was recorded as the inventory-in-transit when inventory left the shipping dock of the vendors but not yet reached
the receiving dock of the Company. Management continually evaluates its estimates and judgments including those related to merchandise
inventory.
The
“Cost of revenues” line item in the unaudited condensed consolidated statements of operations is principally inventory
sold to customers during the reporting period. The Company had inventory allowance balances of $642,145
and $842,263
as of March 31, 2023 and December 31, 2022, respectively. Full inventory allowance is recorded for the inventory SKU not sold for
more than one year.
Rules
for inventory allowance:
Inventories,
consisting of products available for sale, are primarily accounted for using the first-in, first-out method, and are valued at the lower
of cost and net realizable value. This valuation requires us to make judgments based on currently available information about the likely
method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable
values of each disposition category.
Property
and Equipment - Property and equipment are recorded at cost and depreciated or amortized over the estimated useful life of the asset
using the straight-line method. The Company elected to expense any individual property and equipment items under $2,500.
The
majority of the Company’s property and equipment is computers, and the estimated useful life is 3 years.
Leases
- Leases are classified at lease commencement date as either a finance lease or an operating lease. A lease is a finance lease if
it meets any of the following criteria: (a) the lease transfers ownership of the underlying asset to the lessee by the end of the lease
term, (b) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (c)
the lease term is for the major part of the remaining economic life of the underlying asset, (d) the present value of the sum of the
lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds
substantially all of the fair value of the underlying asset or (e) the underlying asset is of such a specialized nature that it is expected
to have no alternative use to the lessor at the end of the lease term. When none of the foregoing criteria is met, the lease shall be
classified as an operating lease.
For
a lessee, a lease is recognized as a right-of-use asset with a corresponding liability at lease commencement date. The lease liability
is calculated at the present value of the lease payments not yet paid by using the lease term and discount rate determined at lease commencement.
The right-of-use asset is calculated as the lease liability, increased by any initial direct costs, and prepaid lease payments, reduced
by any lease incentives received before lease commencement. The right-of-use asset itself is amortized on a straight-line basis unless
another systematic method better reflects how the underlying asset will be used by and benefits the lessee over the lease term.
In February 2016, the Financial Accounting Standards
Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), and has since issued
amendments thereto, related to the accounting for leases (collectively referred to as “ASC 842”). ASC 842 establishes a right-of-use
(“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with
terms longer than 12 months. As of January 1, 2019, the Company adopted ASC 842, 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. Therefore, the
Company recognized and measured leases existing at January 1, 2019 but without retrospective application. In addition, 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. No impact was recorded to the beginning retained earnings for ASC 842. The Company’s
accounting policy is to recognize lease payments as lease expense for short-term leases of less than 12 months.
HOUR
LOOP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, due to related parties and short-term debt approximate fair value because of the immediate or short-term maturity of
these financial instruments.
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes
the inputs to valuation methodologies used to measure fair value:
|
i. |
Level
1 — Valuations based on quoted prices for identical assets and liabilities in active markets. |
|
ii. |
Level
2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets
and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active,
or other inputs that are observable or can be corroborated by observable market data. |
|
iii. |
Level
3 — Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions
made by other market participants. These valuations require significant judgment. |
Revenue
Recognition - The Company accounts for revenue in accordance with FASB Accounting
Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”). The Company
adopted ASC Topic 606 as of January 1, 2019. The standard did not affect the Company’s consolidated financial position, or cash
flows. There were no changes to the timing of revenue recognition as a result of the adoption.
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.
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 as principal 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 Logistics 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 who fulfills the goods to the customer
(Amazon or the Company) and can limit quantities or stop selling the goods at any time. Based on these considerations, the Company is
the principal in this arrangement.
HOUR
LOOP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
customer can return the products within 30 days after the products are delivered and estimated sales returns are calculated based on
the expected returns. The rates of sales returns were 7.25% and 7.26% of gross sales for the periods ended March 31, 2023 and 2022, respectively.
The
Company also offers price discounts. From time to time, the Company offers price discounts on certain selected items to stimulate the
sales of those items. Revenue is measured as the amount of consideration for which the Company expects to be entitled in exchange for
transferring goods. Consistent with this policy, the Company reduces the amount of these discounts from the gross revenue to calculate
the net revenue recorded on the statement of operations.
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 has 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
had shipping and handling costs of $5,037,251 and $2,653,614 for the periods ended March 31, 2023 and 2022, respectively, which were
recorded in selling, advertising and marketing expenses. Accordingly, the Company recognizes revenue for its single performance obligation
related to product sales at the time control of the merchandise passes to the customer, which is generally at the time of shipment. 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. The Company’s revenues for the periods ended March 31, 2023 and 2022 are recognized
at a point in time.
Income
Taxes - Prior to 2021, the Company, with the stockholders’ consent, elected to be taxed as an “S corporation” under
the provisions of 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 July 27, 2021, the Company’s tax status changed to a C corporation.
Per ASC 740-10-45-19, when deferred tax accounts are recognized or derecognized as required by paragraphs 740-10-25-32 and 740-10-40-6
due to a change in tax status, the effect of recognizing or derecognizing the deferred tax liability of asset shall be included in income
from continuing operations.
The Company also complied with state tax codes and regulations, including
with respect to California franchise taxes. Management has evaluated its tax positions and has concluded
that the Company had taken no uncertain tax positions that could require adjustment or disclosure in the financial statements to comply
with provisions set forth in ASC section 740, Income Taxes.
Deferred
tax assets represent amounts available to reduce income taxes payable in future periods. Deferred tax assets are evaluated for future
realization and reduced by a valuation allowance to the extent we believe they will not be realized. We consider many factors when assessing
the likelihood of future realization of our deferred tax assets, including recent cumulative loss experience and expectations of future
earnings, capital gains and investment in such jurisdiction, the carry-forward periods available to us for tax reporting purposes, and
other relevant factors.
Presentation
of Sales Taxes - Governmental authorities impose sales tax on all of the Company’s sales to nonexempt customers. The Company
collects sales tax from customers and remits the entire amount to the governmental authorities. The Company’s accounting policy
is to exclude the tax collected and remitted from revenues and cost of revenues.
The Company makes an assessment of sales tax payable including any related
interest and penalties and accrues these estimates on its financial statements. 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. The Company estimates
that as of March 31, 2023 and December 31, 2022, it owed $288,477
and $288,466, respectively, in sales taxes along with penalties and interest resulting from late filings.
HOUR
LOOP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Concentrations
of Risks - Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash
and accounts receivable. The Company maintains cash with various domestic and foreign financial institutions of high credit quality.
The Company performs periodic evaluations of the relative credit standing of all of the aforementioned institutions.
The
Company’s accounts receivable are derived from sales contracts with a large number of customers. The Company maintains reserves
for potential credit losses on customer accounts when deemed necessary. Significant customers are those which represent more than 10%
of the Company’s total net revenue or gross accounts receivable balance at the balance sheet date. During the three months
ended March 31, 2023 and 2022, the Company had no customer that accounted for 10% or more of total net revenues. In addition, as of March
31, 2023 and 2022, the Company had no customer that accounted for 10% or more of gross accounts receivable. As of March 31, 2023 and
December 31, 2022, all of the Company’s accounts receivable were held by the Company’s sales platform agent, Amazon, which
collects money on the Company’s behalf from its customers. Therefore, the Company’s accounts receivable are comprised of
receivables due from Amazon and the reimbursement from Amazon to the Company usually takes 15 to 20 days.
The
Company’s business is reliant on one key vendor which currently provides the Company with its sales platform, logistics and fulfillment
operations, including certain warehousing for the Company’s net goods, and invoicing and collection of its revenue from the Company’s
end customers. During the periods ended March 31, 2023 and 2022, approximately 100% of the Company’s revenue was through or with
the Amazon sales platform.
Selling
and Marketing – Selling, advertising and marketing costs are expensed as incurred in accordance with ASC 720-35. Among these,
advertising and promotion expenses were $784,266 and $401,499 for the periods ended March 31, 2023 and 2022, respectively.
General
and Administrative - General and administrative expenses are expensed as incurred in accordance with ASC 720-35.
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 FASB 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 the 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. There were no dilutive securities or other items that would affect earnings per share for the periods
ended March 31, 2023 and 2022. Therefore, the diluted earnings per share is the same as basic earnings per share.
HOUR
LOOP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Share issuances for stock compensation - Compensation
cost for all equity-classified stock awards expected to vest is measured at fair value on the date of grant and recognized over the service
period.
Long
lived assets- In accordance with ASC 360-10-35-17, if the carrying amount of an asset or asset group (in use or under development) is
evaluated and found not to be fully recoverable (the carrying amount exceeds the estimated gross, undiscounted cash flows from use and
disposition), then an impairment loss must be recognized. The impairment loss is measured as the excess of the carrying amount over the
asset’s (or asset group’s) fair value. The Company did not record any impairment charges for the periods ended March 31,
2023 and 2022.
NOTE
2 - Recent Accounting Pronouncements
The FASB issues Accounting Standards Updates (each,
an “ASU”) to amend the authoritative literature in the ASC. There have been several ASUs to date that amend the original text
of the ASCs. The Company believes those ASUs issued to date either (i) provide supplemental guidance, (ii) are technical corrections,
(iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.
NOTE
3 - Cash and Cash Equivalents
Cash
and cash equivalents was comprised of the following as of March 31, 2023 and December 31, 2022:
Schedule
of Cash and Cash Equivalents
| |
March
31, | | |
December
31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Checking
account | |
$ | 136,657 | | |
$ | 939,323 | |
Savings
account and cash | |
| 1,138,134 | | |
| 3,623,266 | |
Total | |
$ | 1,274,791 | | |
$ | 4,562,589 | |
NOTE
4 - Inventory
Inventory
was comprised of the following as of March 31, 2023 and December 31, 2022:
Schedule
of Inventory
| |
2023 | | |
2022 | |
| |
March
31, | | |
December
31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Inventory | |
$ | 12,446,263 | | |
$ | 14,911,735 | |
Inventory-in-transit | |
| 1,766,761 | | |
| 4,732,057 | |
Allowance | |
| (642,145 | ) | |
| (842,263 | ) |
Total | |
$ | 13,570,879 | | |
$ | 18,801,529 | |
For
the fiscal periods ended March 31, 2023 and December 31, 2022, the Company recorded inventory provision as follows:
Schedule
of Inventory Provision
| |
March
31, | | |
December
31, | |
| |
2023 | | |
2022 | |
Allowance
of inventory | |
| | | |
| | |
Beginning
balance | |
$ | 842,263 | | |
$ | 184,720 | |
Allowance | |
| - | | |
| 665,356 | |
Inventory allowance reversal | |
| (200,118 | ) | |
| (7,813 | ) |
Ending
balance | |
$ | 642,145 | | |
$ | 842,263 | |
The
allowance of inventory is recorded under cost of goods sold in the income statement.
HOUR
LOOP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 - Property and Equipment
Property
and equipment was comprised of the following as of March 31, 2023 and December 31, 2022:
Schedule
of Property and Equipment
| |
2023 | | |
2022 | |
| |
March
31, | | |
December
31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Property
and equipment | |
$ | 359,990 | | |
$ | 353,574 | |
Accumulated
depreciation and amortization | |
| (114,842 | ) | |
| (79,379 | ) |
Total
property and equipment, net | |
$ | 245,148 | | |
$ | 274,195 | |
For
the periods ended March 31, 2023 and December 31, 2022, the Company purchased $3,379 and $339,518, for fixtures, and equipment, respectively.
For
the periods ended March 31, 2023 and December 31, 2022, the Company had $34,662 and $79,084, for depreciation, respectively.
For
the periods ended March 31, 2023 and December 31, 2022, the Company had no disposal or pledge, respectively.
NOTE
6 - Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets was comprised of the following as of March 31, 2023 and December 31, 2022:
Schedule
of Prepaid Expenses and other Current Assets
| |
2023 | | |
2022 | |
| |
March
31, | | |
December
31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Advance
to suppliers | |
$ | 117,355 | | |
$ | 182,105 | |
Prepaid
expenses-insurance | |
| 124,841 | | |
| - | |
Prepaid
expenses-other | |
| 82,242 | | |
| 55,731 | |
Lease
refundable deposit | |
| 77,931 | | |
| 80,235 | |
Tax
receivable | |
| 419,349 | | |
| 413,895 | |
Other
current assets | |
| 12,130 | | |
| 9,277 | |
Total | |
$ | 833,848 | | |
$ | 741,243 | |
As
of March 31, 2023 and December 31, 2022, there was a tax receivable of $419,349 and $413,895 due to prepaid income taxes, respectively.
NOTE
7 - Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities were comprised of the following as of March 31, 2023 and December 31, 2022:
Schedule
of Accrued Expenses and Other Current Liabilities
| |
March
31, | | |
December
31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Sales
tax payable | |
$ | 288,477 | | |
$ | 288,466 | |
Accrued
payroll | |
| 254,591 | | |
| 295,673 | |
Accrued
bonus | |
| - | | |
| 468,209 | |
Accrued
expenses | |
| 127,068 | | |
| 182,294 | |
Other
payables | |
| 53,987 | | |
| 349,288 | |
Total | |
$ | 724,123 | | |
$ | 1,583,930 | |
HOUR
LOOP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company made an assessment of sales tax payable including any related interest and penalties and accrued those estimates on the financial
statements. Among which, $78,947 and $78,947 are related interest and penalties as of March 31, 2023 and December 31, 2022, respectively.
A
bonus expense is accrued on annual basis, when the Company’s financial or operational performance meets the required performance level.
The Company has $468,209 accrued for bonus as of December 31, 2022.
NOTE
8 - Short-Term Loan
Line
of Credit
On
June 19, 2019, the Company signed a line of credit agreement in the amount of $785,000 with Bank of America. The line of credit matures
on June 18, 2024 and bears interest at a rate of 8.11% per annum.
As
of March 31, 2023 and December 31, 2022, the outstanding balance under the Bank of America line of credit was $-0-
and $-0-,
respectively. Also, the Company had accrued interest expense of $27,996
as of March 31, 2023 that is due on June
18, 2024. Accrued interest expense has been recorded in the accrued expenses on the balance sheet.
On
August 18, 2022, Flywheel signed a line of credit agreement in the amount of $6,940,063 with Taishin International Bank. The line of
credit matures on August 30, 2023 and bears interest at a rate of 3.2% per annum.
As
of March 31, 2023, the outstanding balance under the Taishin International Bank line of credit was $657,895. Also, Flywheel has accrued
interest expense of $1,788 as of March 31, 2023 that has not been paid. Accrued interest expense has been recorded in the accrued expenses
on the balance sheet.
NOTE
9 - Related Party Balances and Transactions
From
time to time, the Company receives loans and advances from its stockholders to fund its operations. Stockholder loans and advances
are non-interest bearing and payable on demand. As of March 31, 2023 and December 31, 2022, the Company had $4,226,996 and
$4,329,460 due
to related parties (Sam Lai, the Company’s Chairman of the Board, Chief Executive Officer and Interim Chief Financial Officer
and a significant stockholder of the Company; and Maggie Yu, the Company’s Senior Vice President, a member of the
Company’s Board of Directors and a significant stockholder of the Company), respectively.
On
December 30, 2020, the Company and its then-sole stockholders (Sam Lai and Maggie Yu) entered into a loan agreement of $1,041,353
and later modified on September 16, 2021, converted it into a interest-bearing (2%)
loan with a repayment date of December 31, 2021. On January 18, 2022, the Company repaid the loan principal in full.
Additionally,
the Company had $4,170,418 in loan from related parties. The loan is memorialized in a Loan Agreement dated October 15, 2021. The annual
interest rate is 2% and the repayment date is December 31, 2022.
On
December 28, 2022, the
Company, Mr. Lai and Ms. Yu agreed to extend the term of the loan for another 2 years, with a revised maturity date of December 31, 2024.
The annual interest rate is 5.5%.
The Company had accrued interest of $56,578 as of March 31, 2023.
For
the periods ended on March 31, 2023 and 2022, the Company had repayments from related parties of $159,042
and $1,024,188,
respectively.
NOTE
10 - Leases
The
Company had four operating leases (Flywheel’s office leases in Taiwan) as of March 31, 2023. The leased assets in Flywheel are
presented as right-of-use assets.
HOUR
LOOP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years
to the operating lease liabilities recorded in the statements of financial position as of March 31, 2023:
Schedule
of Operating Leases Cost
| |
Flywheel | | |
Flywheel | | |
Flywheel | | |
Flywheel | |
| |
January
2022 to | | |
June
2022 | | |
August
2022 | | |
February
2023 | |
Initial
lease term | |
December
2023 | | |
to
May 2024 | | |
to
July 2024 | | |
to
March 2025 | |
| |
| | |
| | |
| | |
| |
Initial
recognition of right-of-use assets | |
$ | 488,262 | | |
$ | 105,632 | | |
$ | 147,547 | | |
$ | 28,652 | |
Weighted-average
remaining lease term at | |
| | | |
| | | |
| | | |
| | |
March
31, 2023 | |
| 0.8 | | |
| 1.17 | | |
| 1.33 | | |
| 1.92 | |
Weighted-average
discount rate at | |
| | | |
| | | |
| | | |
| | |
March
31, 2023 | |
| 8.11 | % | |
| 8.11 | % | |
| 2.50 | % | |
| 3.20 | % |
Operating
lease liabilities-current as of March 31, 2023 and December 31, 2022 were $340,677 and $385,216, respectively. Operating lease liabilities-non-current
as of March 31, 2023 and December 31, 2022 were $46,951 and $64,945, respectively. The right-of-use assets balance as of March 31, 2023
and December 31, 2022, were $394,301 and $450,721, respectively.
As
of March 31, 2023 and 2022, the amortization of the right-of-use asset was $95,635 and $57,186, respectively, and was recorded in the
general and administrative expenses. Additionally, the Company made lease payments of $101,723 and $30,593 as of March 31, 2023 and 2022,
respectively, which were included in the operating cash flows statement.
The
future minimum lease payment schedule for all operating leases as of March 31, 2023, is as disclosed below.
Schedule
of Operating Lease Liabilities
March
31, | |
Amount | |
For
the Year Ending | |
| |
March
31, | |
Amount | |
| |
| |
2023 | |
$ | 313,653 | |
2024 | |
| 84,057 | |
2025 | |
| 2,470 | |
2026 | |
| - | |
2027
and thereafter | |
| - | |
Total
minimum lease payments | |
| 400,180 | |
Less:
effect of discounting | |
| (12,552 | ) |
Present
value of the future minimum lease payment | |
| 387,628 | |
Less:
operating lease liabilities-current | |
| (340,677 | ) |
Total
operating lease liabilities-non-current | |
$ | 46,951 | |
For
the periods ended March 31, 2023 and 2022, the Company had $95,635 and $57,186, for lease expenses, respectively.
NOTE
11 - Income Tax
The
components of income taxes provision (benefit) are as follows:
Schedule
of Effective Income Tax Rate Reconciliation
| |
March
31, | | |
December
31, | |
| |
2023 | | |
2022 | |
Federal
rate | |
| 21.98 | % | |
| 21.00 | % |
Blended
state tax rate | |
| 3.85 | % | |
| 3.83 | % |
Effective
tax rate | |
| 25.83 | % | |
| 24.83 | % |
HOUR
LOOP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Schedule
of Components of Income Tax Provision (Benefit)
| |
Current | | |
Deferred | | |
Total | |
| |
Income
Tax | | |
Income
Tax | | |
Income
Tax | |
Tax
Expense Summary | |
Expense | | |
Benefit | | |
Benefit | |
Federal | |
$ | - | | |
$ | (361,568 | ) | |
$ | (361,568 | ) |
State | |
| - | | |
| (63,388 | ) | |
| (63,388 | ) |
Total
tax expense (benefit) | |
$ | - | | |
$ | (424,956 | ) | |
$ | (424,956 | ) |
The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets at March 31, 2023:
Schedule
of Deferred Tax Assets and Liabilities
| |
|
| | |
|
| |
| |
Deferred
Tax | | |
Deferred
Tax | |
| |
Assets | | |
Assets | |
Deferred
Tax Assets summary | |
March
31, 2023 | | |
December
31, 2022 | |
Federal | |
$ | 826,162 | | |
$ | 464,594 | |
State | |
| 148,115 | | |
| 84,726 | |
Total | |
$ | 974,276 | | |
$ | 549,320 | |
| |
|
| | |
|
| |
| |
Deferred
Tax | | |
Deferred
Tax | |
| |
Assets | | |
Assets | |
Deferred
Tax Assets summary | |
March
31, 2023 | | |
December
31, 2022 | |
Right
of use lease assets | |
$ | (1,723 | ) | |
$ | (139 | ) |
Inventories
allowance | |
| 165,854 | | |
| 209,131 | |
Net
loss carry forward | |
| 810,145 | | |
| 340,328 | |
Total | |
$ | 974,276 | | |
$ | 549,320 | |
The
Company files income tax return in the U.S. federal jurisdiction and Washington state jurisdictions. Based on management’s evaluation,
there is no provision necessary for material uncertain tax position for the Company at March 31, 2023 and December 31, 2022.
As
of March 31, 2023 and December 31, 2022, the Company reported net operating losses of $ and $, respectively. The net operating loss carryforward is not subject to any expiration period under federal regulations, while at the state level,
the expiration period usually ranges from 10 to 20 years, or there may be no expiration period at all.
The Company expects to generate sufficient taxable
income in future periods against which the deferred tax assets can be utilized. Accordingly, a valuation allowance may not be needed.
NOTE
12 - Revenue
Revenue
was comprised of the following for the periods ended March 31, 2023 and 2022:
Schedule
of Revenue
| |
Three
Months Ended | | |
Three
Months Ended | |
| |
March
31, 2023 | | |
March
31, 2022 | |
| |
| | |
| |
Revenue | |
$ | 23,062,094 | | |
$ | 13,496,210 | |
Sales
returns | |
| (1,672,322 | ) | |
| (980,254 | ) |
Discounts | |
| (322,163 | ) | |
| (161,973 | ) |
Total | |
$ | 21,067,609 | | |
$ | 12,353,983 | |
HOUR
LOOP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13 - General and Administrative Expenses
General
and administrative expenses were comprised of the following for the periods ended March 31, 2023 and 2022:
Schedule
of General and Administrative Expenses
| |
Three
Months Ended | | |
Three
Months Ended | |
| |
March
31, 2023 | | |
March
31, 2022 | |
| |
| | |
| |
Payroll | |
$ | 1,077,037 | | |
$ | 842,544 | |
Legal
and professional fees | |
| 105,605 | | |
| 250,797 | |
Insurance
expense | |
| 137,381 | | |
| 142,887 | |
Storage
& rental fees | |
| 113,242 | | |
| 85,266 | |
Sales
taxes | |
| 10,346 | | |
| 81,015 | |
Outside
services | |
| 35,940 | | |
| 70,667 | |
Annual
franchise tax | |
| 50,194 | | |
| 49,870 | |
Pension | |
| 45,143 | | |
| 37,305 | |
Office
expense | |
| 1,783 | | |
| 34,287 | |
Software
subscriptions expense | |
| 41,925 | | |
| 17,843 | |
Manpower
recruitment advertising expense | |
| - | | |
| 16,678 | |
Meals
and entertainment expense | |
| 388 | | |
| 4,542 | |
Other
general and administrative expenses | |
| 94,202 | | |
| 42,263 | |
Total | |
$ | 1,713,186 | | |
$ | 1,675,964 | |
For
the periods ended March 31, 2023 and 2022, the Company had $45,143 and $37,305, respectively, for pension expenses, which is a retirement benefit required
by the Labor Standards Act in Taiwan, which mandates employers to provide retirement benefits to their employees.
NOTE
14 - Stockholders’ Equity
Preferred
Stock
As
of March 31, 2023 and December 31, 2022, the Company had 10,000,000
shares of preferred stock, $0.0001
par value per share, authorized. The Company did not
have any preferred shares issued and outstanding as of March 31, 2023 and December 31, 2022. The holders of the preferred stock in
preference, are entitled to receive dividends, if and when declared by the Board of Directors.
HOUR
LOOP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Common
Stock
As
of March 31, 2023 and December 31, 2022, the Company had 300,000,000
shares of common stock, $0.0001
par value per share, authorized. As of March 31, 2023 and December 31, 2022, there were 35,052,833
and 35,047,828
shares of common stock issued and outstanding, respectively.
Share
Issuances for Stock Compensation
On
February 1, 2022, the Company issued 1,772 shares of Company common stock to each of Sam Lai, our Chief Executive Officer,
and Maggie Yu, our Senior Vice President, with a fair market value of $4.00 per share as compensation for the past services to the Company
pursuant to the terms of their Executive Employment Agreements with the Company.
On
February 1, 2022, the Company issued 1,750, 1,750, and 709 shares of Company common stock to Michael Lenner, Douglas Branch,
and Alan Gao, respectively, with a fair market value of $4.00 per share as compensation for the past services as directors to the Company
pursuant to the terms of their Director Agreements with the Company.
On
May 20, 2022, the Company issued 916 shares of Company common stock to each of Sam Lai, Maggie Yu, Michael Lenner, Douglas
Branch, and Alan Gao, with a fair market value of $3.2745 per share as compensation for the past services as executives or directors
to the Company pursuant to the terms of their respective Executive Employment Agreements or Director Agreements with the Company.
On
June 30, 2022, the Company issued 1,049 shares of Company common stock to each of Sam Lai, Maggie Yu, Michael Lenner, Douglas
Branch, and Alan Gao, with a fair market value of $2.8605 per share as compensation for the past services as executives or directors
to the Company pursuant to the terms of their respective Executive Employment Agreements or Director Agreements with the Company.
On
September 30, 2022, the Company issued 1,050 shares of Company common stock to each of Sam Lai, Maggie Yu, Michael Lenner,
Douglas Branch, and Alan Gao, with a fair market value of $2.8565 per share as compensation for the past services as executives or directors
to the Company pursuant to the terms of their respective Executive Employment Agreements or Director Agreements with the Company.
On
January 4, 2023, the Company issued 1,001 shares of Company common stock to each of Sam Lai, Maggie Yu, Michael Lenner, Douglas
Branch, and Alan Gao, with a fair market value of $2.9985 per share as compensation for the past services as executives or directors
to the Company pursuant to the terms of their respective Executive Employment Agreements or Director Agreements with the Company.
IPO
Proceeds
On
January 11, 2022, we closed our initial public offering (the “IPO”) of 1,725,000
shares of common stock, which included the full exercise of the underwriter’s over-allotment option, at a public offering
price of $4.00
per share, for aggregate gross proceeds of $6,900,000,
prior to deducting underwriting discounts, commissions, and other offering expenses. Our common stock began trading on The Nasdaq
Capital Market on January 7, 2022, under the symbol “HOUR”. EF Hutton, division of Benchmark Investments, LLC, acted as sole book-running manager for the offering. The net proceeds of the offering, after deducting expenses of
$743,640,
were $6,156,360.
Meanwhile, other costs incurred in the IPO totaled $576,168,
the main nature of which was professional fees. As a result, common stock increased by $173,
and additional paid-in capital increased by $5,580,020.
NOTE
15 - Commitments and Contingencies
As
of March 31, 2023 and 2022, the Company had no material or significant commitments outstanding.
From
time-to-time, the Company is subject to various litigation and other claims in the normal course of business. The Company
establishes liabilities in connection with legal actions that management deems to be probable and estimable. As of March 31, 2023
and 2022, the Company had no pending legal proceedings. No amounts have been accrued in the unaudited condensed consolidated
financial statements with respect to any such matters.
NOTE
16 - Subsequent Events
The Company’s management has performed subsequent events procedures
through the date the financial statements were available to be issued. Except as disclosed below, there were no subsequent events requiring
adjustment to or disclosure in the financial statements.
On
April 3, 2023, the Company issued 1,365, 1,365, 1,365, 1,365, 1,365
and 606
shares of Company common stock to each of Sam Lai, Maggie Yu, Michael Lenner, Douglas Branch, Alan Gao and Hillary Bui,
respectively, with a fair market value of $2.1985
per share as compensation for the past services as executives or directors of the Company pursuant to the terms of their respective
Executive Employment Agreements or Director Agreements with the Company.