Hour Loop, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023. The consolidated interim financial statements are unaudited. Hour Loop is a technology-enabled online retailer selling consumer products, predominantly through Amazon.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $22.42 million | $14.80 million | $43.49 million | $27.15 million |
| Gross profit | $11.36 million | $8.36 million | $20.97 million | $14.81 million |
| Gross margin | 50.7% | 56.5% | 48.2% | 54.6% |
| Operating expenses | $12.20 million | $8.76 million | $23.42 million | $15.96 million |
| Operating loss | $846,338 | $399,659 | $2.45 million | $1.15 million |
| Net loss | $769,368 | $313,407 | $2.00 million | $958,295 |
| Operating cash flow | MD&A reports $135,364 used in Q2 2023 and $4.75 million used in Q2 2022 | $3.42 million used | $12.67 million used |
At June 30, 2023, cash was $1.12 million, down from $4.56 million at year-end 2022. Current assets were $16.73 million and current liabilities $9.29 million, implying working capital of $7.44 million and a current ratio of about 1.8. Inventory was $14.42 million, or most of current assets.
Total liabilities were $13.47 million. The balance sheet reports a $643,294 short-term bank loan and $4.17 million due to related parties; the latter loan was extended to December 31, 2024 and bears 5.5% interest. Stockholders’ equity was $4.85 million. The Taishin bank facility, with $643,294 outstanding, was due August 30, 2023.
Changes versus comparable periods
- Q2 net revenue rose 51.5% year over year; six-month revenue rose 60.1%. Management attributes growth mainly to higher order volume: up 78.8% in Q2 and 75.9% for the first half. It also cites competitive pricing and discounts as limiting revenue growth relative to order growth.
- Gross margin declined by about 5.8 percentage points in Q2 and 6.4 points for the first half. Management cites higher product and supply-chain costs.
- Operating expenses increased 39.4% in Q2 and 46.8% for the first half, which management attributes principally to Amazon platform and fulfillment fees rising with sales and fee changes.
- Net losses increased versus the prior-year periods. However, Q2’s $769,368 net loss was lower than the implied Q1 loss of about $1.24 million; management says quarterly losses improved sequentially.
- Inventory declined from $18.80 million at December 31, 2022 to $14.42 million at June 30, 2023. Cash used in operations improved year over year for the first half, but remained negative.
Outlook, risks and unusual items
- Going concern: The filing says operating cash outflow and net loss raise substantial doubt about the company’s ability to continue as a going concern. Management says working capital should support operations for more than twelve months, expects related-party borrowings to be renewed when due, and says majority shareholders are committed to provide additional funding if needed. Planned measures include cost controls and efforts to improve sales and profitability. No quantified revenue or earnings guidance is provided.
- Platform concentration: Approximately 100% of revenue was through or with Amazon. The company identifies Amazon as a key vendor for its sales platform, logistics, fulfillment and collections; sales from its own website and other marketplaces were negligible.
- Sales tax: Accrued sales taxes, interest and penalties were $288,466, including $78,947 of interest and penalties. The company says it has made progress filing historical returns and targets completing filings in all jurisdictions in 2023.
- Inventory and returns: The inventory allowance rose to $1.05 million from $842,263 at year-end. The company records a full allowance for inventory SKUs unsold for more than one year. Returns were 6.77% of gross sales in the first half of 2023 versus 6.36% in the prior-year period.
- Related-party dependence: The $4.17 million related-party loan is owed to the CEO and a senior executive, who are also significant shareholders. The filing describes other stockholder advances as payable on demand, while the formal loan is subordinated and matures in 2024.
- The company reported no material pending litigation, no material commitments, no subsequent events requiring disclosure, and no material changes to internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts to verify
- Reconcile operating cash flow figures: the cash flow statement reports $3.42 million used for the first half, while MD&A elsewhere reports $3.27 million; MD&A also gives a Q2 cash-use figure not separately shown in the presented cash flow statement.
- Confirm the status, repayment or renewal of the $643,294 Taishin facility that matured shortly after quarter-end, and the availability of related-party funding.
- Assess liquidity and inventory quality, including the inventory allowance, cash burn and ability to fund ongoing operations without additional support.
- Monitor Amazon fee changes and concentration, sales trends and margins, and progress resolving historical sales-tax filings and accrued amounts.