Hour Loop(HOUR) - 2024 Q4 - Annual Report

Part I Business Hour Loop is a US e-commerce retailer on Amazon, achieving profitability in FY2024 with $138.3 million revenue Business Overview and Model - Hour Loop is an online retailer primarily operating as a third-party seller on Amazon.com since 2013, with negligible revenue from other platforms like Walmart, eBay, Etsy, or its own website[16] - The company's business model is wholesale, also known as reselling. It involves buying products in bulk directly from brands or manufacturers and selling them on platforms like Amazon, which also handles sales fulfillment (FBA)[17] - The company manages over 100,000 stock-keeping units (SKUs) across categories such as home/garden décor, toys, kitchenware, apparel, and electronics[16] - The company was founded in 2013 by Sam Lai (CEO) and Maggie Yu (SVP). It was incorporated in Washington in 2015 and reincorporated in Delaware in 2021[21][22] Historical Performance and Market Opportunity Historical Financial Performance (2022-2024) | Year | Net Revenue | YoY % | Net Income (Loss) | Net Income (Loss) % | | :--- | :--- | :--- | :--- | :--- | | 2022 | $95,930,091 | 53% | $(1,477,623) | (2)% | | 2023 | $132,124,202 | 38% | $(2,429,694) | (2)% | | 2024 | $138,252,861 | 5% | $657,447 | 0% | - In 2024, U.S. e-commerce sales grew 6.6% to $1.19 trillion, representing 16.07% of total U.S. retail sales, up from 15.45% in 2023[19][37] - Amazon accounts for approximately 40% of all e-commerce in the United States, making it the largest player in the market[20][38] - For both 2024 and 2023, approximately 99% of the company's revenue was generated through the Amazon sales platform[25] Strategy and Competitive Advantages - The company's two main competitive advantages are its experienced operations/sales teams and its proprietary software system that collects and processes large amounts of data to optimize operations and identify product gaps[24] - Pricing strategy is managed by a customized auto-pricing system that analyzes sales trends, inventory, costs, and competition to balance gross margin and revenue. This includes competition-based, promotional, and value-based pricing policies[26][27][33] - Operational advantages include automation through proprietary software, profitability management with KPIs, continuous process optimization, a data-driven approach, and effective employee training programs[41][42][43][44] - Cost advantages are achieved through direct importing, bulk purchasing, efficient processes using proprietary software, and leveraging Amazon's FBA program and other logistics partners to reduce distribution and labor costs[50][51][52][55] Competition and Growth - The key competitor is identified as Amazon Retail (both Vendor Central and the "Sold by Amazon" program), which often sells the same brands at a loss. Other third-party sellers are not considered key competitors due to the vast market size[56][57][58] - The company believes Amazon Retail's weakness lies in its focus on sales over vendor relationships, often not following MAP pricing, and its lack of focus on niche marketplaces, which provides an opportunity for third-party sellers[61][62] - Barriers to entry for new competitors include high capital requirements for inventory and advertising, the need for product differentiation through a large number of SKUs, and the time required to develop a sophisticated management system and vendor relationships[66][67][68] - The company's 2025 growth objective is to continue emphasizing profit maximization over revenue expansion by optimizing procurement, maintaining stringent inventory controls, and selectively sourcing products[73] Corporate Information - As of December 31, 2024, the company had 151 employees, a modest reduction from 2023. It anticipates increasing headcount to approximately 180 in 2025 to support growth[82] - The company's executive officers are Sam Lai (CEO) and Maggie Yu (SVP)[85][86][87] - The company has a line of credit with Taishin International Bank with an outstanding balance of $610,967 as of Dec 31, 2024, maturing in May 2025[76][77][78] - The company has a subordinated loan from its principal stockholders, Mr. Lai and Ms. Yu, with a principal amount of $4,170,418. The loan matures on December 31, 2025, with an annual interest rate of 5.5%[81] Risk Factors The company faces significant risks from Amazon dependence, competition, operational issues, and its "controlled company" status Risks Related to Business and Operations - The company is heavily dependent on its relationship with Amazon, as 99% of its net revenue in 2024 and 2023 was through the Amazon sales platform. Any adverse change in this relationship could significantly impact the business[111] - The online retail business is intensely competitive. Competitors may have greater resources, secure better terms from vendors, and adopt more aggressive pricing[95] - The business depends on maintaining strong product listings, which can be affected by unfavorable customer complaints or negative publicity. A significant portion of performance perception depends on third parties like suppliers and delivery agents[97] - Continued increases in Amazon Marketplace fulfillment (FBA) and storage fees could adversely impact the company's profit margin and results of operations[108] - The company's profits are dependent on reimbursements from Amazon for lost and damaged merchandise. Any change in Amazon's reimbursement policy could adversely impact profitability[113] Risks Related to Finance, Personnel, and Technology - The company's ability to continue as a going concern depends on improved profitability, implementation of its business strategy, and the availability of future funding[134] - The loss of key personnel, particularly CEO Sam Lai and SVP Maggie Yu, or the inability to attract and retain qualified employees, could adversely affect operations[114][155] - Hardware and software systems are vulnerable to damage, theft, or intrusion. System interruptions could prevent the company from efficiently fulfilling orders, and a breach of data security could harm the business and customer standing[118][119][121] - The company is dependent on access to capital for its liquidity needs to fund working capital and indebtedness. Disruption of credit markets could materially affect liquidity[126][127] Risks Related to Governance and Common Stock - CEO Sam Lai and SVP Maggie Yu, who are married, beneficially own approximately 94.9% of the company's voting power, making it a "controlled company." This allows them to significantly influence all matters requiring stockholder approval and limits minority stockholders' influence[156] - As a "controlled company," Hour Loop is exempt from certain Nasdaq corporate governance rules, such as having a majority of independent directors or maintaining separate compensation and nominating committees composed entirely of independent directors[157][339] - As an "emerging growth company," the company is permitted to rely on exemptions from certain disclosure requirements, such as not requiring an auditor report on internal controls, which may make its securities less attractive to some investors[181][185] - The company has never paid dividends on its common stock and has no plans to do so in the future, intending to retain earnings for business operations and expansion[196] Unresolved Staff Comments The company reports that it has no unresolved staff comments - None[198] Cybersecurity The company is developing a cybersecurity risk management program with executive oversight, having identified no material threats - The company is developing and implementing a cybersecurity risk management program to safeguard confidential information and critical systems[200] - The program includes risk assessments, a dedicated security team, employee training, an incident response plan, and vendor management[201] - Executive management, along with an IT service provider, is responsible for managing cybersecurity risks, with oversight provided by the Board of Directors[203][205] - The company has not identified any known cybersecurity threats that have materially affected or are reasonably likely to materially affect its operations, strategy, or financial condition[202] Properties The company operates from a virtual HQ in Redmond, leases a warehouse in China, and has offices in Taiwan - Corporate headquarters is a virtual office located at 8201 164th Ave. NE, 200, Redmond, WA 98052-7615, with a monthly rent of $59[207] - The company leases a warehouse in Dongguan, China, for storage and warehousing, with payments based on usage[208] - The company's subsidiary, Flywheel, had four office leases in Taiwan in 2024 with varying terms and contract amounts[209] Legal Proceedings The company is not currently involved in any material legal proceedings, nor is it aware of any threatened actions - To the knowledge of management, there are no legal proceedings currently pending against the company that would have a material effect on its business[211] Mine Safety Disclosures This item is not applicable to the company - Not applicable[212] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with 35.15 million shares outstanding and an equity incentive plan, but no dividends paid - The company's common stock trades on The Nasdaq Capital Market under the symbol "HOUR"[214] - As of March 27, 2025, there were 35,151,440 shares of common stock outstanding[215] - The company has never paid cash dividends and does not intend to in the foreseeable future, planning to retain earnings for business expansion[216] - The 2021 Equity Incentive Plan had 8,097,909 shares authorized and available for issuance as of March 27, 2025[217] - Throughout 2023 and 2024, the company issued shares of common stock to its executives and directors as part of their compensation packages under their respective agreements[219][224][225] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2024, Hour Loop's net revenues grew to $138.3 million, achieving $0.66 million net income and positive operating cash flow Results of Operations (2024 vs 2023) Consolidated Statement of Operations Data (2024 vs 2023) | | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | | :--- | :--- | :--- | | Total revenues | $138,252,861 | $132,124,202 | | Gross profit | $72,010,708 | $66,517,255 | | Income (loss) from operations | $730,940 | $(3,003,423) | | Net income (loss) | $657,447 | $(2,429,694) | | Total comprehensive income (loss) | $631,803 | $(2,432,291) | - Revenues increased by $6.1 million (4.64%) in 2024, attributed to a 10.23% increase in total orders (from 5.75 million to 6.34 million), which was partially offset by competitive pricing pressure[246] - Cost of goods sold increased slightly to $66.2 million in 2024 from $65.6 million in 2023[247] - Operating expenses increased by 2.53% to $71.3 million, primarily due to higher platform fees and Amazon fees which are proportional to revenue[249] Liquidity and Capital Resources Summary of Cash Flows (2024 vs 2023) | | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $313,140 | $(2,063,375) | | Net cash used in investing activities | $(35,996) | $(14,823) | | Net cash used in financing activities | $(671,000) | $-0- | | Net decrease in cash | $(364,572) | $(2,078,436) | | Cash at end of period | $2,119,581 | $2,484,153 | - The significant improvement in cash from operating activities was driven by the shift from a net loss of $2.4 million in 2023 to a net income of $0.66 million in 2024[257] - Cash used in financing activities in 2024 consisted of payments to related parties[260][512] - The company's primary sources of liquidity are cash from operations and debt financing[253] Contractual Obligations and Commitments - The company fully paid off its $785,000 Bank of America loan in June 2024[264] - The subsidiary Flywheel has a line of credit with Taishin International Bank, with an outstanding balance of $610,967 as of Dec 31, 2024. The maturity date was extended to May 23, 2025, with an interest rate of 3.33%[265][266][267] - The company has a loan from its principal stockholders (Mr. Lai and Ms. Yu) with an original principal of $4,170,418. The maturity date was extended to Dec 31, 2025, and the interest rate is 5.5%[270] - The company has four operating leases for offices in Taiwan with total minimum lease payments of $115,652 due in 2025[271][272] Critical Accounting Policies - Revenue Recognition: Revenue from product sales is recognized at a point in time when control transfers to the customer, typically at the shipment date. The company acts as the principal in its transactions on the Amazon platform[291][292] - Inventory: Inventories are stated at the lower of cost (determined on a first-in-first-out basis) or net realizable value. An allowance is recorded for obsolete and slow-moving inventory, with a full allowance for SKUs not sold for more than one year[278][280] - Concentration of Risk: The company's business is highly reliant on Amazon, which provides its sales platform, logistics, and fulfillment. Approximately 99% of revenue was generated through Amazon in both 2024 and 2023[306][559] - Sales Tax: The company owed $-0- in sales taxes, penalties, and interest as of Dec 31, 2024, a significant reduction from the $288,466 owed as of Dec 31, 2023[302][554] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2024 - Management, including the Certifying Officers, concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[316] - Management assessed the effectiveness of internal control over financial reporting based on the COSO 2013 framework and concluded that it was adequate in material aspects as of December 31, 2024[321] - There were no changes in internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[322] Part III Directors, Executive Officers and Corporate Governance Hour Loop is a "controlled company" with CEO Sam Lai and SVP Maggie Yu holding 94.9% voting power, exempt from certain Nasdaq governance rules - The company's executive officers are Sam Lai (Chairman, CEO, Interim CFO) and Sau Kuen (Maggie) Yu (SVP, Director). The board consists of these two officers and three independent directors: Michael Lenner, Minghui (Alan) Gao, and Hilary (Hui-Chong) Bui[327][329] - The company is a "controlled company" because CEO Sam Lai and SVP Maggie Yu (who are married) together beneficially own ~94.9% of the voting power[339] - As a controlled company, Hour Loop is exempt from and avails itself of exemptions from certain Nasdaq governance requirements, including having a majority-independent board and independent compensation or nominating committees[340][341] - The company has an Audit Committee composed of its three independent directors, with Ms. Bui serving as chair and qualifying as an "audit committee financial expert"[343][347] Executive Compensation Executive compensation for CEO Sam Lai and SVP Maggie Yu included significant bonuses in 2024, alongside an equity incentive plan Compensation Summary and Agreements 2024 and 2023 Named Executive Officer Compensation | Name and Position | Year | Salary ($) | Bonus ($) | All Other Comp. ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Sam Lai | 2024 | 500,000 | 600,000 | 15,546 | 1,115,546 | | CEO & Interim CFO | 2023 | 500,000 | 100,000 | 24,884 | 624,884 | | Maggie Yu | 2024 | 450,000 | 550,000 | 16,991 | 1,016,991 | | Senior Vice President | 2023 | 450,000 | 550,000 | 25,651 | 1,025,651 | - Mr. Lai's 2024 bonus was tied to achieving breakeven or net profit targets, while Ms. Yu's was based on acquiring a certain number of new vendors[376][377][378] - Employment agreements for Mr. Lai and Ms. Yu have three-year terms with automatic one-year renewals and provide for base salaries of $500,000 and $450,000, respectively[368][369][370] - The agreements include provisions for severance payments upon termination without "Cause" or for "Good Reason," as well as a tax "Gross-Up Payment" for any "excess parachute payments" under Section 280G of the Code[385][387] Equity Incentive Plan - The company adopted the 2021 Equity Incentive Plan on June 27, 2021, to grant stock options, RSUs, and other awards to employees, directors, and consultants[416] - As of March 27, 2025, there were 8,097,909 shares authorized and available for issuance under the 2021 Plan[419] - The plan includes an "evergreen" provision that automatically increases the number of available shares each January 1st by the lesser of 3% of outstanding shares or an amount determined by the Board[419] - The plan includes provisions for adjustments in case of capitalization changes, dissolution, or a change in control, and is subject to a clawback policy[434][436][439] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters CEO Sam Lai and SVP Maggie Yu beneficially own 94.9% of the company's common stock, maintaining controlling interest Beneficial Ownership as of March 27, 2025 | Name of Beneficial Owner | Number of Shares Beneficially Owned | Percentage of Outstanding Common Stock | | :--- | :--- | :--- | | Sam Lai | 33,381,462 | 94.9% | | Maggie Yu | 33,381,462 | 94.9% | | All executive officers and directors as a group (5 persons) | 33,439,773 | 95% | - Ownership percentages are based on 35,151,440 shares of common stock outstanding as of March 27, 2025[445] - As of December 31, 2024, there were no outstanding options, warrants, or rights under any equity compensation plans[450] Certain Relationships and Related Transactions, and Director Independence The company engages in related party transactions, including a $3.5 million loan from its controlling stockholders, reviewed by the Audit Committee - The Audit Committee is responsible for reviewing and approving any transaction between the company and a related person[454] - The company has a loan from CEO Sam Lai and SVP Maggie Yu, originally for $4,170,418. The loan was extended to mature on December 31, 2025, with an amended interest rate of 5.5%[459] - As of December 31, 2024, the outstanding principal balance on the loan from Mr. Lai and Ms. Yu was $3,499,418[460] - The company reiterates its status as a "controlled company" due to the ~94.9% combined ownership of Mr. Lai and Ms. Yu, and confirms that three of its five directors are independent[472][475] Principal Accountant Fees and Services HTL International, LLC is the company's auditor, with $168,750 in audit fees for FY2024, all pre-approved by the Audit Committee Accountant Fees (2024 vs 2023) | | HTL (Current Auditor) | TPS (Former Auditor) | | :--- | :--- | :--- | | FY 2024 Audit Fees | $168,750 | $- | | FY 2023 Audit Fees | $150,000 | $190,000 | - HTL International, LLC was appointed as the company's independent registered accounting firm on September 13, 2023[476] - All audit and non-audit services are pre-approved by the company's audit committee[481] Part IV Exhibits and Financial Statement Schedules This section references consolidated financial statements and the Exhibit Index, detailing key corporate and contractual documents - This section lists the financial statements, schedules, and exhibits filed with the annual report[483][485] - Key exhibits include the Certificate of Incorporation, Bylaws, employment agreements with executive officers, director agreements, the 2021 Equity Incentive Plan, and various loan agreements[487][491] Form 10-K Summary This item is not applicable to the company - Not applicable[490] Financial Statements Consolidated Financial Statements Hour Loop returned to profitability in 2024 with $0.66 million net income and positive operating cash flow, increasing equity Consolidated Balance Sheet Highlights (As of Dec 31) | | 2024 | 2023 | | :--- | :--- | :--- | | Total Current Assets | $18,738,654 | $18,013,331 | | Total Assets | $19,966,964 | $19,550,280 | | Total Current Liabilities | $14,807,222 | $10,924,602 | | Total Liabilities | $14,807,222 | $15,097,383 | | Total Stockholders' Equity | $5,159,742 | $4,452,897 | Consolidated Statement of Operations Highlights (For the Year Ended Dec 31) | | 2024 | 2023 | | :--- | :--- | :--- | | Revenues, net | $138,252,861 | $132,124,202 | | Gross Profit | $72,010,708 | $66,517,255 | | Net income (loss) | $657,447 | $(2,429,694) | | Basic and diluted EPS | $0.02 | $(0.07) | Consolidated Statement of Cash Flows Highlights (For the Year Ended Dec 31) | | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $313,140 | $(2,063,375) | | Net cash used in investing activities | $(35,996) | $(14,823) | | Net cash used in financing activities | $(671,000) | $-0- | Notes to Consolidated Financial Statements Notes detail accounting policies, revenue disaggregation, related party debt, and inventory, highlighting Amazon dependence and a $3.5 million stockholder loan - Revenue Disaggregation: For 2024, gross revenue was primarily from America ($144.8M) and International ($4.9M), with net revenue of $138.3M after returns and discounts[599] - Inventory: As of Dec 31, 2024, net inventory was $14.64 million, including an allowance of $560,293 for obsolete and slow-moving items[569] - Related Party Transactions: As of Dec 31, 2024, the company owed $4,192,995 to related parties (Mr. Lai and Ms. Yu), which includes $3,499,418 in stockholder payables and $693,577 in accrued bonuses[596] - Income Taxes: The company recorded an income tax expense of $302,114 in 2024, compared to a tax benefit of $730,760 in 2023. It has deferred tax assets of $1,060,104 as of Dec 31, 2024, primarily from net loss carryforwards[601][603][605]