NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
NOTE
1 - Nature of Operations and Summary of Significant Accounting Policies
Hour
Loop, Inc. (“Hour Loop” or the “Company”) is a rapidly growing 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”), 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 the each of the two stockholders (Sam Lai and Maggie Yu) continues
to own 50% of the Company’s outstanding shares. 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
consolidated financial statements.
Basis
of Presentation - The unaudited 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 consolidated financial statements include the accounts of Hour Loop and Flywheel. All material inter-company
accounts and transactions were eliminated in consolidation.
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 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.
HOUR
LOOP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
The
relevant exchange rates are listed below:
Schedule of Foreign Currency Exchange Rates
| |
September 30, | | |
December 31, | | |
September 30, | |
| |
2022 | | |
2021 | | |
2021 | |
| |
| | |
| | |
| |
Period NTD: USD exchange rate | |
| 31.700 | | |
| 27.810 | | |
| 27.800 | |
Period Average NTD: USD exchange rate | |
| 31.200 | | |
| 28.114 | | |
| 27.668 | |
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
estimated include, but not limited to, estimates associated with the collectability of accounts receivable and inventory valuation.
COVID-19
Pandemic - In March 2020, the World Health Organization recognized the novel strain of coronavirus (COVID-19) as a pandemic. This
COVID-19 outbreak has severely restricted the level of economic activity around the world. In response to this COVID-19 outbreak, the
governments of many countries, states, cities, and other geographic regions have taken preventative or protective actions, such as imposing
restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes.
The Company’s services, operating results and financial performance could be adversely affected by the overall impacts of the pandemic.
Management has determined that there is no material uncertainty that casts substantial doubt on the Company’s ability to continue
as a going concern. It is expected that COVID-19 might have some impact, though it is not anticipated to be significant.
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.
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 collection period is usually less than 7 days. The Company
performs on-going evaluations of its customers and maintains an allowance for bad and doubtful receivables. As of September 30, 2022
and December 31, 2021, the Company did not deem it necessary to have an allowance for bad debt or doubtful accounts.
Inventory
and Cost of Goods Sold - The Company’s inventory consists almost entirely 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.
HOUR
LOOP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
The
“Cost of revenues” line item in the consolidated statements of operations is principally inventory sold to customers during
the reporting period. The Company had inventory allowance balances of $790,037 and $184,720 as of September 30, 2022 and December 31,
2021, respectively. Full inventory allowance is recorded for the inventory SKU not sold for more than one year.
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 lives is 3 years.
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, long-term liabilities, due to related parties and other current liabilities approximate fair value because of the immediate
or short-term maturity of these financial instruments.
Revenue
Recognition - The Company accounts for revenue in accordance with Financial Accounting Standards Board (“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. 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. Based on these considerations,
the Company is the principal in this arrangement. The rates of sales returns were 6.12% and 5.60% of gross sales for the
periods ended September 30, 2022 and 2021, respectively.
HOUR
LOOP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
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 have 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 $9,685,604 and $6,393,341 for the periods ended of September 30, 2022 and 2021, 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 September 30, 2022 and 2021 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 Internal Revenue Code of 1986, as amended (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 code, including California franchise tax. 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.
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 estimated on the financial
statements. Pursuant to the Wayfair decision, each state enforced sales tax collection at different dates. The company collects and remits
sales tax in accordance with the state regulations. The Company estimates that as of September 30, 2022 and December 31, 2021, it owed
$700,838 and $620,963, respectively, in sales taxes along with penalties and interest.
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.
HOUR
LOOP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
The
Company’s accounts receivables 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 and nine months
ended September 30, 2022 and 2021, the Company had no customer that accounted for 10% or more of total net revenues. In addition, as
of September 30, 2022 and 2021, the Company had no customer that accounted for 10% or more of gross accounts receivable. As of September
30, 2022 and 2021, 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 three and nine months ended September 30, 2022 and 2021, 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 $1,518,345 and $1,215,121 for the nine months ended September 30, 2022 and
2021, 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.
HOUR
LOOP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
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. Other than those discussed below, 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.
In
December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, as part of its Simplification Initiative to
reduce the cost and complexity in accounting for income taxes. This standard removes certain exceptions related to the approach for intra
period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities
for outside basis differences. It also amends other aspects of the guidance to help simplify and promote consistent application of US
GAAP. The amendments in these ASUs are effective for the Company’s fiscal years, and interim periods within those fiscal years
beginning October 1, 2022. The Company does not expect to early adopt this guidance and is in the process of evaluating the impact of
adoption of this guidance on the Company’s consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (ASC 326), Measurement of Credit Losses on Financial
Instruments. The amendments introduce an impairment model that is based on current expected credit losses (“CECL”), rather
than incurred losses, to estimate credit losses on certain types of financial instruments, including loans, held-to-maturity securities
and certain off-balance sheet financial instruments. The CECL should consider historical information, current information, and reasonable
and supportable forecasts, including estimates of prepayments, over the contractual term. An entity must use judgment in determining
the relevant information and estimation methods that are appropriate in its circumstances. Financial instruments with similar risk characteristics
may be grouped together when estimating the CECL. The allowance for credit losses for purchased financial assets with a more-than-insignificant
amount of credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other
financial assets measured at amortized cost basis; however, the initial estimate of expected credit loss would be recognized through
an allowance for credit losses with an offset to the purchase price at acquisition. Only subsequent changes in the allowance for credit
losses are recorded as a credit loss expense for these assets. The ASU also amends the current available-for-sale security impairment
model for debt securities whereby credit losses related to available-for-sale debt securities should be recorded through an allowance
for credit losses. The amendments will be applied through a modified retrospective approach, resulting in a cumulative-effect adjustment
to retained earnings as of the beginning of the first reporting period in which the guidance is effective. On October 18, 2019, FASB
approved an effective date delay applicable to smaller reporting companies and non-public business entities until January 2023. The Company
has elected to delay implementation of the standard until January 2023. The Company is currently evaluating the provisions of the amendment,
however, we do not expect the adoption of ASU 2016-13 to have a material effect on the Company’s consolidated financial statements.
HOUR
LOOP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
NOTE
3 - Cash and Cash Equivalents
Cash
and cash equivalents was comprised of the following as of September 30, 2022 and December 31, 2021:
Schedule of Cash and Cash Equivalents
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Checking account | |
$ | 1,703,393 | | |
$ | 10,591,158 | |
Savings account and cash | |
| 713 | | |
| 1,414 | |
Total | |
$ | 1,704,106 | | |
$ | 10,592,572 | |
NOTE
4 - Inventory
Inventory
was comprised of the following as of September 30, 2022 and December 31, 2021:
Schedule of Inventory
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Inventory | |
$ | 17,616,011 | | |
$ | 5,852,658 | |
Inventory-in-transit | |
| 4,532,412 | | |
| 1,373,926 | |
Allowance | |
| (790,037 | ) | |
| (184,720 | ) |
Total | |
$ | 21,358,386 | | |
$ | 7,041,864 | |
For
the fiscal period September 30, 2022 and December 31, 2021, the Company recorded inventory provision as follows:
Schedule
of Inventory Provision
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Allowance of inventory | |
| | | |
| | |
Beginning balance | |
$ | 184,720 | | |
$ | 431,313 | |
Provision | |
| 667,261 | | |
| 116,359 | |
Write off | |
| (61,944 | ) | |
| (362,952 | ) |
Ending balance | |
$ | 790,037 | | |
$ | 184,720 | |
HOUR
LOOP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
NOTE
5 - Property and Equipment
Property
and equipment was comprised of the following as of September 30, 2022 and December 31, 2021:
Schedule
of Property and Equipment
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Gross property and equipment | |
$ | 278,156 | | |
$ | 16,115 | |
Accumulated depreciation and amortization | |
| (39,753 | ) | |
| (448 | ) |
Total property and equipment, net | |
$ | 238,403 | | |
$ | 15,667 | |
For the nine months ended September 30, 2022 and year
ended December 31, 2021, the Company purchased $268,342 and $-, for property and equipment, respectively.
NOTE
6 - Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets was comprised of the following as of September 30, 2022 and December 31, 2021:
Schedule of Prepaid Expenses and Other Current Assets
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Advance to suppliers | |
$ | 246,729 | | |
$ | 78,875 | |
Prepaid income tax | |
| 202,567 | | |
| - | |
Prepaid expenses-IPO cost | |
| - | | |
| 576,168 | |
Prepaid expenses-other | |
| 175,824 | | |
| 120,899 | |
Lease refundable deposit | |
| 96,385 | | |
| 70,554 | |
Other current assets | |
| 135,038 | | |
| 118,802 | |
Total | |
$ | 856,543 | | |
$ | 965,298 | |
NOTE
7 - Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities were comprised of the following as of September 30, 2022 and December 31, 2021:
Schedule of Accrued Expenses and Other Current Liabilities
| |
| | | |
| | |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Sales tax payable | |
$ | 700,838 | | |
$ | 620,963 | |
Accrued payroll | |
| - | | |
| 476,277 | |
Accrued expenses | |
| 366,538 | | |
| 116,679 | |
Other payables | |
| 62,179 | | |
| 68,242 | |
Total | |
$ | 1,129,555 | | |
$ | 1,282,161 | |
The Company made an assessment of sales tax payable
including any related interest and penalties and accrued these estimates on the financial statements. Among which, $171,716
and $154,960 are related interest
and penalties as of September 30, 2022 and December 31, 2021, respectively. The Company is in the process of filing sale tax returns
with various jurisdictions across different states. The Company will continue to evaluate the status of those filings.
HOUR
LOOP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
NOTE
8 - Short-Term Debt
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 September 30, 2022 and December 31, 2021, 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 September 30, 2022 that 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.
As
of September 30, 2022, the outstanding balance under the Taishin International Bank line of credit was $630,915 and bears interest at
a rate of 2.6% per annum. Also, Flywheel has accrued interest expense of $1,370 as of September 30, 2022 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. As of September 30, 2022 and December
31, 2021, the Company had $4,316,211 and $5,214,794 due to related parties, respectively.
On
December 30, 2020 the Company and the stockholders 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 in full.
Consistent
with Code Section 1362, the retained earnings as of July 27, 2021 were distributed to the S corporation stockholders, while stockholders
and the Company have entered into an agreement for this amount to be loaned to the Company. As a result, on July 27, 2021, the Company
and the stockholders agreed to the terms of the loan of $4,170,418 from stockholders to the Company, and the loan was subordinated. The
annual interest rate is 2% and the repayment date is December 31, 2022. The Company had accrued the interest of $145,793 on September
30, 2022.
NOTE
10 - Leases
As
of January 1, 2019, the Company adopted ASC Topic 842, Leases, 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 Topic 842. The Company had three
operating leases as of September 30, 2022. The leased assets in Flywheel are presented as right-of-use assets.
HOUR
LOOP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
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 September 30, 2022:
Schedule of Operating Leases Cost
| |
Flywheel | | |
Flywheel | | |
Flywheel | |
| |
January 2022 to | | |
June 2022 | | |
August 2022 | |
Initial lease term | |
December 2023 | | |
to May 2024 | | |
to July 2024 | |
| |
| | |
| | |
| |
Initial recognition of right-of-use assets | |
$ | 488,262 | | |
$ | 105,632 | | |
$ | 147,547 | |
Weighted-average remaining lease term at | |
| | | |
| | | |
| | |
September 30, 2022 | |
| 1.3 | | |
| 1.67 | | |
| 1.83 | |
Weighted-average discount rate at | |
| | | |
| | | |
| | |
September 30, 2022 | |
| 8.11 | % | |
| 8.11 | % | |
| 2.50 | % |
Current
lease liabilities as of September 30, 2022 and December 31, 2021 were $372,579 and $-, respectively. Long-term lease liabilities as of
September 30, 2022 and December 31, 2021 were $151,314 and $-, respectively. The right-of-use assets balance as of September 30, 2022
and December 31, 2021, were $518,575 and $30,111, respectively.
Flywheel
entered into three new office leases in Taiwan in 2022. The respective lease terms are January 1, 2022 to December 31, 2023, June 1,
2022 to May 31, 2024, and August 1, 2022 to July 31, 2024, and the total contract amounts are $534,910, $114,016 and $157,973, respectively.
Schedule
of Operating Lease Liabilities
| |
| | |
For the Year Ending | |
| |
September 30, | |
Amount | |
| |
| |
2022 | |
$ | 96,710 | |
2023 | |
| 386,841 | |
2024 | |
| 66,396 | |
2025 | |
| - | |
2026 and thereafter | |
| - | |
Total minimum lease payments | |
| 549,947 | |
Less: effect of discounting | |
| (26,054 | ) |
Present value of the future minimum lease payment | |
| 523,893 | |
Less: current operating lease liabilities | |
| (372,579 | ) |
Total long-term operating lease liabilities | |
$ | 151,314 | |
NOTE
11 - Income Tax
The
components of income taxes provision (benefit) are as follows:
Schedule
of Effective Income Tax Rate Reconciliation
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Federal rate | |
| 21.02 | % | |
| 21.00 | % |
Blended state tax rate | |
| 3.81 | % | |
| 4.05 | % |
Effective tax rate | |
| 24.83 | % | |
| 25.05 | % |
HOUR
LOOP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at
September 30, 2022:
Schedule of Components of Income Tax Provision (Benefit)
| |
Current | | |
Deferred | | |
Total | |
| |
Income Tax | | |
Income Tax | | |
Income Tax | |
Tax Expense Summary | |
Expense | | |
Benefit | | |
Benefit | |
Federal | |
| - | | |
| (225,828 | ) | |
| (225,828 | ) |
State | |
| 130 | | |
| (40,881 | ) | |
| (40,751 | ) |
Total Tax Expense (Benefit) | |
| 130 | | |
| (266,709 | ) | |
| (266,579 | ) |
The
Company files income tax return in the U.S. federal jurisdiction and Washington state jurisdictions. Based on management evaluation,
there is no provision necessary for material uncertain tax position for the Company at September 30, 2022.
Schedule
of Deferred Tax Assets and Liabilities
| |
| | | |
| | |
| |
Deferred Tax | | |
Deferred Tax | |
| |
Assets | | |
Assets | |
Deferred Tax Assets summary | |
September 30, 2022 | | |
December 31, 2021 | |
Federal | |
| 263,965 | | |
| 38,137 | |
State | |
| 48,232 | | |
| 7,351 | |
Total | |
| 312,197 | | |
| 45,488 | |
| |
| | | |
| | |
| |
Deferred Tax | | |
Deferred Tax | |
| |
Assets | | |
Assets | |
Deferred Tax Assets summary | |
September 30, 2022 | | |
December 31, 2021 | |
Right of use lease assets | |
| (780 | ) | |
| (780 | ) |
Inventories allowance | |
| 154,575 | | |
| 46,268 | |
Net loss | |
| 158,402 | | |
| - | |
Total | |
| 312,197 | | |
| 45,488 | |
NOTE
12 - Revenue
Revenue
was comprised of the following for the periods ended September 30, 2022 and 2021:
Schedule
of Revenue
| |
| | | |
| | | |
| | | |
| | |
| |
For the three months ended
September 30, | | |
For the nine months ended
September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | 18,877,019 | | |
$ | 11,114,219 | | |
$ | 48,209,527 | | |
$ | 33,589,074 | |
Sales returns | |
| (1,083,766 | ) | |
| (561,756 | ) | |
| (2,948,393 | ) | |
| (1,879,699 | ) |
Discounts | |
| (237,200 | ) | |
| (127,352 | ) | |
| (550,580 | ) | |
| (318,121 | ) |
Total | |
$ | 17,556,053 | | |
$ | 10,425,111 | | |
$ | 44,710,554 | | |
$ | 31,391,254 | |
HOUR
LOOP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
NOTE
13 - General and Administrative Expenses
General
and administrative expenses were comprised of the following for the periods ended September 30, 2022 and 2021:
Schedule
of General
and Administrative Expenses
| |
| | | |
| | | |
| | | |
| | |
| |
For the three months ended
September 30, | | |
For the nine months ended
September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Payroll | |
$ | 1,047,209 | | |
$ | 580,567 | | |
$ | 3,184,150 | | |
$ | 1,344,489 | |
Legal and professional fees | |
| 113,640 | | |
| 220,697 | | |
| 684,604 | | |
| 449,848 | |
Insurance expense | |
| 173,915 | | |
| 12,214 | | |
| 432,003 | | |
| 74,226 | |
Storage & rental fees | |
| 131,373 | | |
| 23,742 | | |
| 318,032 | | |
| 87,267 | |
Sales taxes | |
| 8,218 | | |
| 1,999 | | |
| 233,660 | | |
| 13,018 | |
Outside services | |
| 60,939 | | |
| 26,551 | | |
| 193,859 | | |
| 125,164 | |
Franchise tax | |
| - | | |
| - | | |
| 49,870 | | |
| - | |
Pension | |
| 59,130 | | |
| 377 | | |
| 132,807 | | |
| 23,761 | |
Office expense | |
| 15,601 | | |
| 7,695 | | |
| 67,785 | | |
| 60,164 | |
Software subscriptions expense | |
| 13,773 | | |
| 4,559 | | |
| 57,945 | | |
| 7,513 | |
Manpower recruitment advertising expense | |
| 8,346 | | |
| 20 | | |
| 47,375 | | |
| 1,275 | |
Meals and entertainment expense | |
| 6,628 | | |
| 7,390 | | |
| 25,622 | | |
| 40,698 | |
Other general and administrative expenses | |
| 101,655 | | |
| 11,182 | | |
| 264,321 | | |
| 132,077 | |
Total | |
$ | 1,740,427 | | |
$ | 896,993 | | |
$ | 5,692,033 | | |
$ | 2,359,500 | |
NOTE
14 - Stockholders’ Equity
Preferred
Stock
As
of September 30, 2022 and December 31, 2021, 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 outstanding as of September 30, 2022 and December 31, 2021. The holders of the preferred
stock in preference, are entitled to receive dividends, if and when declared by the Board of Directors.
Common
Stock
As
of September 30, 2022 and December 31, 2021, the Company had 300,000,000 shares of common stock, $0.0001 par value per share, authorized.
As of September 30, 2022 and December 31, 2021, there were 35,047,828 and 33,300,000 shares of common stock outstanding, respectively.
Stock
Split
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.
Prior
to December 3, 2021, the Company had 440,000,000 shares of common stock, $0.0001 par value per share, authorized.
HOUR
LOOP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the periods ended September 30, 2022 and 2021
(Unaudited)
On
December 3, 2021, the Company effected a reverse stock split, pursuant to which each existing share of common stock was split into 0.75
share of the Company’s common stock. This reverse stock split caused the number of shares of common stock outstanding to decrease
from 44,400,000 to 33,300,000. All per share amounts and number of shares in the consolidated financial statements and related notes
have been retrospectively adjusted to reflect the reverse stock split.
Share
Issuance for Stock Compensation
On
January 3, 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 services to the Company pursuant to the
terms of their Executive Employment Agreements with the Company.
On
January 3, 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 services as directors to the Company pursuant to the
terms of their Director Agreements with the Company.
On
May 19, 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 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 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 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 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 (“EF Hutton”),
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 September 30, 2022 and 2021, 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 September 30, 2022 and 2021, the
Company had no pending legal proceedings. No amounts have been accrued in the financial statements with respect to any such matters.
NOTE
16 - Subsequent Events
The
Company has evaluated subsequent events through November 14, 2022 the date the financial statements were available to be
issued. Except as noted above, no other matters were identified affecting the accompanying unaudited financial statements or related
disclosures.