Hour Loop, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial statements are unaudited. Hour Loop is an online consumer-products wholesaler, selling mainly through Amazon; it reports one e-commerce segment.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $29.15 million | $17.56 million | $72.64 million | $44.71 million |
| Gross profit | $15.33 million | $9.56 million | $36.31 million | $24.37 million |
| Operating income (loss) | $17,987 | $36,712 | ($2.43 million) | ($1.11 million) |
| Net income (loss) | ($15,056) | $150,205 | ($2.02 million) | ($808,090) |
- Revenue grew 66.1% in Q3 and 62.5% for the nine-month period. Management attributed growth primarily to higher order volume: up 80.3% in Q3 and 77.7% year to date. Competitive pricing and discounts moderated revenue growth relative to order growth.
- Gross margin declined to approximately 52.6% in Q3 from 54.4%, and to 50.0% for the nine months from 54.5%. Management cited higher product, supply-chain, and Amazon fulfillment/platform costs. Operating expenses rose 60.9% in Q3 and 52.1% year to date, principally due to Amazon fees.
- Operating cash outflow was $3.79 million for the nine months, improved from $14.53 million in the comparable 2022 period, but cash still fell $4.00 million from year-end 2022 to $562,612.
- At September 30, current assets were $26.18 million and current liabilities $18.60 million; inventory was $23.73 million and accounts payable $16.91 million. Current assets exceeded current liabilities by $7.58 million, but cash was limited relative to these balances.
- Debt and related-party financing included a $620,732 Taishin bank loan, extended to August 30, 2024 at 3.2%, and $4.17 million owed to related parties. The related-party loan bears 5.5% interest and matures December 31, 2024; accrued interest was $171,578. Total liabilities were $22.78 million.
- The nine-month tax benefit was $508,390, primarily deferred, and deferred tax assets totaled $1.06 million.
Changes, outlook, and risks
- Despite strong sales growth, the company moved from Q3 2022 net income to a small Q3 2023 net loss; the nine-month net loss widened year over year. The nine-month operating loss also increased.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing a $2.02 million nine-month net loss and $3.79 million operating cash outflow. Management said related-party borrowings are not expected to be repaid within 12 months and are subject to renewal, asserted working capital should support operations for more than 12 months, and said majority shareholders are committed to provide funding if needed. These statements do not eliminate the disclosed uncertainty.
- Management cited cost controls and sales and profitability initiatives, and said quarterly losses had improved from Q1 and Q2. No quantified revenue or earnings guidance was provided.
- Amazon concentration is a major operating risk: the filing says approximately 100% of revenue in the periods presented flowed through or was associated with Amazon, despite expansion to other marketplaces. The business also faces competition for Amazon listings, pricing pressure, and dependence on vendor relationships.
- Inventory increased from $18.80 million at year-end 2022; the inventory allowance was $972,582. Estimated customer returns were 6.45% of gross sales, versus 6.12% in 2022. The company also reported $288,482 in estimated sales-tax liabilities, including interest and penalties, and was working on historical filings.
- The filing reports no pending material legal proceedings, no material commitments, and no material changes in internal control over financial reporting. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Conflicting figures in the filing: The financial statements report Q3 net loss of $15,056 and nine-month net loss of $2,019,668, while the MD&A “Financial Position” text gives $65,792 and $2,070,404, respectively. That MD&A text also reports a $3,788,650 operating cash outflow, versus $3,788,238 in the cash-flow statement, and an accumulated deficit of $893,332, versus $842,596 on the balance sheet. Confirm the correct figures with the company or subsequent filings.
- Confirm available liquidity and the status, renewal terms, and repayment expectations for the related-party loan and other borrowings, given the going-concern disclosure.
- Monitor cash conversion, inventory levels and valuation, accounts payable, and whether gross margins recover as sales scale.
- Assess Amazon dependence, fulfillment-fee changes, and progress in generating meaningful revenue through other sales channels.
- Track resolution of historical sales-tax filings and any additional liabilities, interest, or penalties.