Hour Loop(HOUR) - 2021 Q4 - Annual Report

Part I Business Hour Loop, Inc. is an online retailer primarily on Amazon, leveraging a wholesale model and proprietary software - The company operates a wholesale (reselling) model, with Amazon accounting for virtually all revenue in 2020 and 2021[16][17][24] - Key competitive advantages include a strong operations team and a proprietary, highly customized software system for optimizing operations, sales, and inventory management[22] Historical Revenue and Net Income (2019-2021) | Year | Revenue | Year-over-Year % | Net Income | Net Income % | Year-over-Year % | | :--- | :--- | :--- | :--- | :--- | :--- | | 2019 | $26,564,693 | 9% | $-423,073 | -2% | -165% | | 2020 | $38,655,264 | 46% | $3,820,698 | 10% | NA | | 2021 | $62,792,981 | 62% | $4,779,083 | 8% | 25% | - The company employs a multi-faceted pricing strategy using a proprietary auto-pricing system, including competition-based, promotional, and value-based pricing to maximize margins[25][26][30] Growth Objectives (2021-2024) | Metric | 2021 Plan | 2022 Plan | 2023 Plan | 2024 Plan | | :--- | :--- | :--- | :--- | :--- | | Suppliers | 300 | 650 | 1,200 | 2,000 | | Business Managers | 50 | 200 | 350 | 600 | | Active SKUs | 60,000 | 130,000 | 200,000 | 300,000 | | Total Employees | 120 | 250 | 500 | 900 | - On January 11, 2022, the company closed its initial public offering (IPO) of 1,725,000 shares at $4.00 per share, raising gross proceeds of $6.9 million[88] Risk Factors The company faces intense competition, Amazon dependence, supply chain risks, internal control weaknesses, and governance issues - The company is heavily dependent on Amazon, with 100% of net revenue in 2021 and 2020 generated through the Amazon sales platform, posing a significant risk to operations and financial results[111] - The online retail business is intensely competitive, with competitors potentially having greater resources, better vendor terms, and more aggressive pricing, which could reduce the company's sales and profits[96][97] - The CEO, Sam Lai, and his wife, SVP Maggie Yu, beneficially own 95.1% of the company's voting power, making it a "controlled company" and influencing corporate affairs while exempting it from certain Nasdaq governance requirements[153][154] - The company's current accounting and inventory tracking systems are not fully operationalized for item-level cost tracking and period-end closing, relying on manual procedures that could impair accurate and timely financial statements[162][163] - The company faces potential liabilities for uncollected sales taxes, estimating it owed $620,963 as of December 31, 2021, and is negotiating with states for compliance[158] - The COVID-19 pandemic has negatively impacted the business through supply chain disruptions, sourcing limitations, and fulfillment limits imposed by Amazon, which could continue to affect operations[150] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[191] Properties The company operates with a virtual headquarters and leases warehouse and office spaces in China and Taiwan - The company utilizes a virtual office for its headquarters in Redmond, WA, and leases warehouse and office space in China and Taiwan[192] Legal Proceedings The company is not currently involved in any material legal proceedings affecting its business or financial position - There are no material legal proceedings pending against the company[193] Mine Safety Disclosures This section is not applicable to the company - Not applicable[194] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on Nasdaq, 35 million shares outstanding; earnings retained for business expansion, no dividends - The company's common stock began trading on The Nasdaq Capital Market on January 7, 2022, under the symbol "HOUR"[88][197] - As of March 29, 2022, there were 35,032,753 shares of common stock outstanding[198] - The company has never paid cash dividends and does not plan to in the foreseeable future, intending to retain earnings for business growth[199] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 62.4% to $62.8 million in 2021, with net income increasing to $4.8 million, reflecting strong growth and liquidity Results of Operations Comparison of Operations (FY 2021 vs. FY 2020) | Statement of Operations Data | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Total revenues | $62,792,981 | $38,655,264 | | Gross profit | $34,808,646 | $22,169,494 | | Income from operations | $5,474,149 | $3,840,569 | | Net income | $4,783,773 | $3,825,389 | | Total Comprehensive Income | $4,779,083 | $3,820,698 | - Revenue increased by $24.1 million (62.4%) in 2021, attributed to continued growth in the operating model and a favorable e-commerce environment, with total orders increasing by 67% from 1,364,557 in 2020 to 2,289,467 in 2021[221] - Cost of Goods Sold increased from $16.5 million in 2020 to $28.0 million in 2021, in line with the higher volume of items sold[222] - Operating Expenses increased by $11.0 million, from $18.3 million in 2020 to $29.3 million in 2021, primarily due to higher Amazon platform fees proportional to revenue, increased employee compensation, and IPO-related costs[223] Liquidity and Capital Resources Summary of Cash Flows (FY 2021 vs. FY 2020) | Cash Flow Data | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $7,764,057 | $3,824,729 | | Net cash used in investing activities | $(16,115) | $0 | | Net cash provided by (used in) financing activities | $(2,126,177) | $299,261 | | Net increase in cash | $5,624,508 | $4,129,101 | | Cash - end of the period | $10,592,572 | $4,968,064 | - Cash from operating activities more than doubled to $7.8 million in 2021, driven by higher net income[234] - Cash used in financing activities in 2021 was primarily due to a $6.3 million distribution to stockholders, partially offset by $4.2 million in long-term debt from related parties[236] Contractual Obligations and Other Events - The company converted from an S corporation to a C corporation on June 30, 2021, resulting in a distribution of $4,170,418 in retained earnings to stockholders, who then loaned this amount back to the company[245][250] - A Paycheck Protection Program (PPP) loan of $27,012 received in 2020 was fully forgiven on May 6, 2021[243][244] - As of December 31, 2021, the company had an outstanding loan of approximately $4.17 million from its CEO and SVP, bearing 2% interest and due on December 31, 2022[250] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2021, due to material internal control weaknesses - Management concluded that disclosure controls and procedures were not effective as of December 31, 2021[279] - Material weaknesses identified include: * Lack of segregation of duties in the accounting team * The same person can authorize and make payments * Credit card expenses lack prior authorization * Limited banking access for independent verification by team members[288] Part III Directors, Executive Officers and Corporate Governance Led by founders, the company is a Nasdaq controlled company due to ownership, with a five-member board and Audit Committee - The company is led by its founders, Sam Lai (CEO) and Maggie Yu (SVP), who are married[293][294][305] - The company is a "controlled company" under Nasdaq rules because CEO Sam Lai and SVP Maggie Yu collectively own 95.1% of the voting power, exempting it from certain corporate governance requirements like having a majority of independent directors[154][308] - The Board of Directors has five members, three of whom (Douglas Branch, Michael Lenner, Minghui (Alan) Gao) are determined to be independent[312] - An Audit Committee has been established, consisting of the three independent directors[315] Executive Compensation Executive compensation for 2021 included significant salaries and bonuses, with performance-based incentives and an equity plan 2021 Summary Compensation | Name and Position | Year | Salary ($) | Bonus ($) | All Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Sam Lai (CEO) | 2021 | $350,000 | $300,000 | $3,237 | $653,237 | | Maggie Yu (SVP) | 2021 | $318,461 | $500,000 | $3,237 | $821,698 | | Rahul Ratan (Former CFO) | 2021 | $107,692 | $10,000 | $0 | $117,692 | - Employment agreements for the CEO and SVP include annual base salaries ($500k for CEO, $450k for SVP), guaranteed bonuses, and performance-based bonuses tied to net profit growth and vendor acquisition targets[337][338][341] - The company adopted the 2021 Equity Incentive Plan, authorizing 4,995,000 shares for issuance, allowing for grants of stock options, RSUs, and other awards to officers, directors, and employees[376][378] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters CEO Sam Lai and SVP Maggie Yu collectively own 95.1% of common stock, giving them controlling interest Security Ownership of Principal Shareholders and Management (as of March 29, 2022) | Name of Beneficial Owner | Shares Beneficially Owned | Percentage of Outstanding Common Stock | | :--- | :--- | :--- | | Sam Lai | 33,303,544 | 95.1% | | Maggie Yu | 33,303,544 | 95.1% | | All executive officers and directors as a group (6 persons) | 33,307,753 | 95.1% | - Sam Lai and Maggie Yu are husband and wife and are deemed to beneficially own each other's shares, resulting in a combined controlling stake of 95.1%[405] Certain Relationships and Related Transactions, and Director Independence Significant related party transactions, primarily loans from controlling shareholders, impact director independence - On July 27, 2021, after converting to a C-Corp, the company distributed $4,170,418 in retained earnings to Sam Lai and Maggie Yu, who then loaned the same amount back to the company at 2% interest, due December 31, 2022[411][416] - A $1,041,353 loan from Sam Lai and Maggie Yu made in December 2020 was amended in 2021 to bear 2% interest and was paid in full on February 8, 2022[412][413][415] Principal Accountant Fees and Services TPS Thayer, LLC is the independent auditor, with audit and audit-related fees detailed for 2021 and 2020 Accountant Fees (2021 vs. 2020) | Fee Type | 2021 | 2020 | | :--- | :--- | :--- | | Audit Fees | $110,000 | $186,000 | | Audit Related Fees | $120,000 | $117,000 | | Total | $230,000 | $303,000 | Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the annual report, including financial statements and corporate documents - This section lists all exhibits filed with the Form 10-K, including the Certificate of Incorporation, Bylaws, employment agreements, the 2021 Equity Incentive Plan, and various loan agreements[437] Financial Statements Audited consolidated financial statements for 2021 and 2020 show increased assets and liabilities, with equity impacted by C-Corp conversion Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Total Assets | $18,816,991 | $9,847,134 | | Cash and cash equivalents | $10,592,572 | $4,968,064 | | Inventory, net | $7,041,864 | $4,361,889 | | Total Liabilities | $16,162,546 | $5,672,154 | | Accounts payable | $9,539,258 | $3,204,256 | | Due to related parties | $5,214,794 | $1,041,353 | | Total Stockholders' Equity | $2,654,445 | $4,174,980 | - The company's tax status changed from an S corporation to a C corporation effective July 27, 2021, requiring provisions for income taxes going forward[463][488] - Subsequent to year-end, on January 11, 2022, the company closed its IPO, raising net proceeds of $6,156,360[532]