UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from ________ to _________
Commission file number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | ||
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class: | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
| The |
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| ☒ | Smaller reporting company | |||||
| Emerging growth company |
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of May 10, 2024, there
were
ISPIRE TECHNOLOGY INC.
TABLE OF CONTENTS
i
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under Part I, Item 1A, “Risk Factors” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended June 30, 2023, as well as the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, “Company,” “we,” “us,” “our” and similar terms refer to Ispire Technology Inc. and its subsidiaries, unless the context indicates otherwise.
ii
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
ISPIRE TECHNOLOGY INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND
COMPREHENSIVE LOSS
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| 2023 | 2024 | 2023 | 2024 | |||||||||||||
| (Restated) | ||||||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total Operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income, net | ||||||||||||||||
| Exchange gain (loss), net | ( | ) | ( | ) | ||||||||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Total Other income (expense), net | ( | ) | ||||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income taxes - current | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive loss | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Weighted average shares outstanding: | ||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
1
ISPIRE TECHNOLOGY INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2023 | March 31, 2024 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Investment - other | ||||||||
| Total current assets | ||||||||
| Other assets: | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Rental deposit | ||||||||
| Right-of-use assets – operating leases | ||||||||
| Long term investment | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable – related party | ||||||||
| Contract liabilities | ||||||||
| Accrued liabilities and other payables | ||||||||
| Due to a related party | ||||||||
| Income tax payable | ||||||||
| Operating lease liabilities – current portion | ||||||||
| Total current liabilities | ||||||||
| Other liabilities: | ||||||||
| Operating lease liabilities – net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, par value $ | ||||||||
| Preferred stock, par value $ | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings (accumulated deficit) | ( | ) | ||||||
| Accumulated other comprehensive (loss) income | ( | ) | ||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
2
ISPIRE TECHNOLOGY INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2024
| Common stock | Preferred stock | Additional | Retained Earnings/ |
Accumulated Other |
Total | |||||||||||||||||||||||||||
| Number | Number | Paid-in | (Accumulated | Comprehensive | Shareholders’ | |||||||||||||||||||||||||||
| of Shares | Amount | of Shares | Amount | Capital | deficit) | (Loss)/Income | Equity | |||||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
| Net loss | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
| Net loss | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||
| Issuance of common stock for a secondary offering | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||||||
3
ISPIRE TECHNOLOGY INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2023 AND 2024
| Common stock | Preferred stock | Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||
| Number | Number | Paid-in | Retained | Comprehensive | Shareholders’ | |||||||||||||||||||||||||||
| of Shares | Amount | of Shares | Amount | Capital | Earnings | (Loss)/Income | Equity | |||||||||||||||||||||||||
| Balance, July 1, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Balance, July 1, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||
| Issuance of common stock for equity incentive awards | ||||||||||||||||||||||||||||||||
| Issuance of common stock for a secondary offering | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
4
ISPIRE TECHNOLOGY INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine Months ended March 31, | ||||||||
| 2023 | 2024 | |||||||
| (Restated) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Credit loss expenses | ||||||||
| Stock-based compensation expenses | ||||||||
| Inventory impairment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable and accounts payable – related party | ||||||||
| Contract liabilities | ( | ) | ||||||
| Accrued liabilities and other payables | ||||||||
| Operating lease liabilities | ( | ) | ||||||
| Income tax payable | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property, plant and equipment | ( | ) | ( | ) | ||||
| Acquisition of intangible assets | ( | ) | ||||||
| Purchase of short term investment | ( | ) | ||||||
| Maturity of short term investment | ||||||||
| Acquisition of long term investment | ( | ) | ||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Payment made for dividends | ( | ) | ||||||
| Advances from related parties | ||||||||
| Repayments of advances from a related party | ( | ) | ( | ) | ||||
| Proceeds from a secondary offering | ||||||||
| Costs of a secondary offering | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| Supplemental non-cash investing and financing activities | ||||||||
| Leased assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
| Unpaid long term investment in accrued liabilities and other payables | $ | $ | ||||||
| Supplemental disclosures | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
5
ISPIRE TECHNOLOGY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
MARCH 31, 2023
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Ispire Technology Inc. (the “Company” or “Ispire”) was incorporated under the laws of the State of Delaware on June 13, 2022. Through its subsidiaries, the Company is engaged in the research and development, design, commercialization, sales, marketing and distribution of branded e-cigarettes and cannabis vaping products.
Ispire owns a
Prior to July 29, 2022, all of the equity of Aspire North America LLC, a California limited liability company (“Aspire North America”), was owned by Aspire Global Inc. (“Aspire Global”), and all of the equity of Aspire Science and Technology Limited, a Hong Kong corporation (“Aspire Science”), was owned by Aspire Global Holdings Limited (“Aspire Holdings”), a wholly-owned subsidiary of Aspire Global.
Aspire Global and the Company
are related parties since the same individual is the chief executive officer of both companies. As of March 31, 2024, the chief executive
officer and his wife, being directors of both companies, owned
In September 2023, the Company
established a wholly-owned subsidiary, Ispire Malaysia Sdn Bhd (“Ispire Malaysia”) under the laws of the Federation of Malaysia,
in order to establish manufacturing operations in Southeast Asia. Ispire Malaysia was formed by Tuanfang Liu, the Company’s Chairman
and Co-Chief Executive Officer on September 1, 2023, and assigned to the Company on September 22, 2023, at a consideration of
| Name of Entity | Date of Organization | Place of Organization | % of Ownership | Principal Activities | ||||||
| Ispire Technology Inc. | ||||||||||
| Ispire International | ||||||||||
| Aspire North America | ||||||||||
| Aspire Science | ||||||||||
| Ispire Malaysia | Sales and Marketing | |||||||||
Ispire is a holding company and does not engage in any active operations. Its business is conducted by its two operating subsidiaries, Aspire North America, which is engaged in the development, marketing and sales of cannabis vapor products, which were introduced in mid-2020, and Aspire Science, which is engaged in the marketing and sales of tobacco vaping products, and the products are mainly sold in Europe and Asia Pacific (excluding People’s the Republic of China (“PRC”)).
6
Restatement of Unaudited Condensed Consolidated Financial Statements for the nine months ended March 31, 2023
In preparing the unaudited
condensed consolidated statement of cash flows, the Company identified an error related to the presenting of operating leases. The Company
determined that cash payments arising from operating leases were incorrectly classified under financing activities instead of operating
activities. As a result of the restatement, the Company’s principal portion of lease payment of $
In preparing the
unaudited condensed consolidated statement of operations and comprehensive loss, the Company identified an additional error related
to the reclassification of shipping and handling costs. The Company determined that the shipping and handling costs, which should be
classified under cost of revenue, were classified under selling expenses for the nine months ended March 31, 2023. As a result of
the restatement, the Company’s shipping and handling costs of $
Risk and Uncertainties
E-cigarette regulation
Regulation regarding e-cigarettes varies across countries, from no regulation to a total ban. The legal status of e-cigarettes is currently pending in many countries. But as e-cigarettes have become more and more popular recently, many countries are considering imposing more stringent law and regulations to regulate this market. Changes in existing law and regulations and the imposition of new laws and regulations in countries and regions that our major customers are located in may adversely affect the Company’s business.
The Federal Food, Drug, and Cosmetic Act requires all Electronic Nicotine Delivery Systems (“ENDS”) product manufacturers that market products in the United States to submit Premarket Tobacco Product Applications (“PMTAs”) to the Food and Drug Administration (“FDA”). For ENDS products that were on the U.S. market on or before August 8, 2016, a PMTA was required to be submitted to the FDA before September 9, 2020; for ENDS products that were not on the U.S. market prior to August 8, 2016, and for which a PMTA was not filed before September 9, 2020, a PMTA premarket authorization issued by FDA is required before the subject product may enter the U.S. market. The Company has submitted a PMTA filing for one ENDS product, and, under apparent FDA policies, FDA will not enforce the premarket review requirements for that product pending review of its PMTA. However, even with submission of the PMTA application, the FDA may reject the Company’s application and may prevent the Company’s ENDS products from being sold in U.S., which will adversely affect the Company’s business.
Amendments to the Prevent All Cigarette Trafficking (“PACT”) Act, which became law in 2021, extend the PACT Act to include e-cigarette and all vaping products, and place significant burdens on sellers of vaping products in the United States which may make it difficult to operate profitably in the United States. Because of tighter government regulations, the Company has stopped marketing tobacco vaping products in the United States, as the volume of sales from the one tobacco vaping product which the Company may sell in the United States does not justify the marketing and regulatory costs involved.
In the United States, cannabis vaping products are governed by state laws, which vary from state to state. Most states do not permit the adult recreational use of cannabis, and no states permit the sale of recreational cannabis products to minors. As a result of the reduced revenue to states resulting from the effects of the COVID 19 pandemic, states may seek to raise revenue by permitting and taxing the use of cannabis products. The Company cannot predict what action states will take or the nature and amount of taxes they may impose. However, to the extent the PACT Act applies to cannabis products that aerosolize liquids, it may be more difficult to sell our products in states that permit the sale of cannabis.
However, cannabis and its
derivatives containing more than
The European Commission issued the Tobacco Products Directive (the “TPD”), which became effective on May 19, 2014, and became applicable in the European Union member states on May 20, 2016. The TPD regulates e-cigarettes on the packaging, labelling and ingredients of the products on the European Union market, the creation of smoke-free environments, tax measures and activities against illegal trade and anti-smoke campaigns. Member states of the European Union are required to ensure that advertisements for any tobacco related product are prohibited, and no promotion shall be made as to those devices with an intention to promote e-cigarettes. For the e-cigarettes released after May 20, 2016, TPD requires e-cigarette manufacturers to submit product sales applications to the regulatory market six months in advance, and ensure their products can meet the TPD requirements before they can be released. The Company has complied with TPD requirement for all its tobacco products sold in Europe.
The sale of cannabis vaping products is illegal in the European Union and the United Kingdom.
7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited condensed interim consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s consolidated financial position as of March 31, 2024, and the results of operations for the three- and nine-month periods ended March 31, 2024 and 2023. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the financial statements not misleading have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accordingly do not include all of the disclosures normally made in the Company’s annual consolidated financial statements. Accordingly, these unaudited condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended June 30, 2023, included in the Company’s Annual Report on Form 10-K. The accompanying condensed consolidated balance sheet as of June 30, 2023 has been derived from the Company’s audited consolidated financial statements included in such Annual Report.
The results of operations for the three- and nine-month periods ended March 31, 2024 are not necessarily indicative of the results of operations that may be expected for any other interim periods or for the year ending June 30, 2024.
Use of estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the Company 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 revenue and expenses during the reporting period. Significant estimates include allowance for credit losses, inventory reserve, deferred tax asset reserve, the useful lives of property, plant and equipment, incremental borrowing rate for operating leases and fair value of certain share based payment awards. Actual results could differ from those estimates.
Allowance for credit losses
The Company adopted Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” on July 1, 2023, under the modified retrospective method of adoption. The Company estimates its allowance for current expected credit losses based on an expected loss model, compared to prior periods which were estimated using an incurred loss model which did not require the consideration of forward-looking economic variables and conditions in the reserve calculation across the portfolio. The impact related to adopting the new standard was not material.
Based on the current expected credit loss model, the Company consider many factors, including age of balance, past events, any historical default, current information available about the customers, current economic conditions and certain forward-looking information, including reasonable and supportable forecasts.
Concentration of credit risk
Financial
instruments that potentially subject the Company to a concentration of credit risk consist of cash, accounts receivable and investment
- other. The Company maintains its cash in financial institutions. To the extent that such deposits exceed the maximum insurance levels,
they are uninsured. On June 30, 2023, amounts due from two customers totaled approximately
Inventories
Inventories mainly consist of finished goods purchased from suppliers. Inventories are stated at the lower of cost or net realizable value. The cost of an inventory item is determined using the weighted average method.
When management determines
that certain inventories may not be saleable, or there is an indicator that certain inventory costs may exceed expected market value,
the Company will record the difference between the cost and the net realizable value as a write down of inventories. The net realizable
value is determined based on the estimated selling price, in the ordinary course of business, less estimated costs necessary to make the
sale. The Company records an allowance for slow moving and potentially obsolete inventory based upon recent sales history, the quantity
of inventory on-hand, and an estimate of expected sellable life of the inventory. The Company periodically reviews inventory to identify
slow moving inventories and compares the forecast sales with the quantities and expected sellable life of inventory. Any inventories identified
during this process are reserved for at rates based upon management’s judgment and historical rates. The quantity thresholds and
reserve rates are based on management’s judgment and knowledge of current and projected demand. The reserve estimates may, therefore,
be revised if there are changes in the overall market for the Company’s products or market changes that in management’s judgment,
impact its ability to sell potentially obsolete inventory. For the three months ended March 31, 2023 and 2024, the Company recorded inventory
reserve of $
8
Property, plant and equipment, net
Property, plant and equipment are stated at cost less accumulated depreciation and depreciated on a straight-line basis over the estimated useful lives of the assets from the time the assets are placed in service. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.
| Estimated Useful Life | ||
| Office and other equipment | ||
| Furniture & fixtures | ||
| Leasehold improvements | Shorter of the term of the lease or the estimated useful life of the assets |
Long term investment
Long term investment consist of equity investments in a privately held company that the Company does not have control or significant influence over it. These equity investments do not have readily determinable fair values and are primarily accounted for under the measurement alternative. Under the measurement alternative, the carrying value is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer
Leases
The Company determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, the term of such lease is assessed based on the date on which the underlying asset is made available for the Company’s use by the lessor. The Company’s assessment of the lease term reflects any rent-free periods. The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the consolidated statements of operations over the lease term.
For leases with a term exceeding 12 months, an operating lease liability is recorded on the Company’s consolidated balance sheet at lease commencement reflecting the present value of its fixed minimum payment obligations over the lease term. A corresponding operating lease right-of-use asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received. For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are typically not readily determinable. The Company’s incremental borrowing rate reflects the rate it would pay to borrow on a secured basis and incorporates the term and economic environment of the associated lease.
For the Company’s operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term. For leases with a term of 12 months or less, any fixed lease payments are recognized on a straight-line basis over the lease term and are not recognized on the Company’s consolidated balance sheet as an accounting policy election. Leases qualifying for the short-term lease exception were insignificant.
Investment - other
The investment represents
a certificate of deposit that the Company holds in HSBC bank. The entire balance of the investment presented on the balance sheet as of
June 30, 2023 was $
Intangible assets
Intangible assets refer to
capitalized external costs, such as filing fees and associated attorney fees, incurred to obtain issued patents and patent license rights.
All patents are internally generated. The Company expenses costs associated with maintaining patents subsequent to their issuance in the
period incurred. Capitalized patent costs are amortized on a straight-line basis over estimated useful lives of
Revenue recognition
The Company sells its vaping products to customers and recognizes revenue in accordance with the guidance of ASC 606, Revenue from Contracts with Customers. Many customers are distributors that resell the Company’s products in various geographic regions. The performance obligations are for the Company to transfer the title and control of the goods to a customer for a determined price. Each order is considered a separate contract with single performance obligation. Revenue is recognized when control of goods has transferred to customers. For the majority of the Company’s customer arrangements, control transfers to customers at a point-in-time when goods have been delivered to the pickup location specified by the customer or a forwarder appointed by the customer, as that is generally when legal title, physical possession and risks and rewards of goods transfer to the customer.
9
Revenue is recognized at the transaction price based on the purchase order as adjusted for the anticipated rebates, discounts and other sales incentives. When determining the transaction price, management estimates variable consideration applying the portfolio approach practical expedient under ASC 606. The main sources of variable consideration for the Company are trade promotion funds, and cash discounts. These sales incentives are recorded as a reduction of revenue at the time of the initial sale using the most-likely amount estimation method. The most-likely amount method is based on the single most likely outcome from a range of possible consideration outcomes. The range of possible consideration outcomes is primarily derived from the following inputs: sales terms and historical experience.
The Company offers different
payment terms to different customers. For tobacco vaping products, the general payment term is a deposit of
Disaggregated Revenue
The Company has taken into
consideration the nature, amount, timing, and uncertainty of revenue and cash flows, and has determined to disaggregate its net sales
of tobacco vaping products and cannabis vaping products.
| Three months ended March 31, | Nine months ended March 31, | |||||||||||||||
| Net sales by product | 2023 | 2024 | 2023 | 2024 | ||||||||||||
| Tobacco vaping products | $ | $ | $ | $ | ||||||||||||
| Cannabis vaping products | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Cost of revenue
Cost of revenue for the three and nine months ended March 31, 2023 and 2024, consisted primarily of the cost of purchasing vaping products, which were mostly purchased from a related party. See Note 11.
Shipping and handling costs
Shipping and handling costs for the three months
ended March 31, 2023 and 2024 are $
Research and development expenses
Research and development expenses
for the three months ended March 31, 2023 and 2024 were $
Stock-based compensation
The Company measures and recognizes compensation expenses for stock-based payment awards, including stock options, restricted stock granted to directors and advisors, and restricted stock units (“RSUs”) granted to employees, based on the grant date fair value of the awards. The Company engages a third-party valuer to determine fair value of stock options using the binomial option pricing model. The fair value of RSUs is measured on the grant date based on the closing market price of the Company’s common stock. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period, which is generally four years for stock options and three years for RSUs. Stock-based compensation is recognized on a straight-line basis over the period during which services are provided in exchange for the award. Stock-based compensation expense is recorded in the general and administrative expense in the consolidated statements of operations. The Company recognizes forfeitures of stock-based payment awards upon occurrence.
Income taxes
The Company accounts for income taxes under ASC 740, Income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
10
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The provisions of ASC 740-10 prescribe a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. The Company classifies the interest and penalties, if any, as a component of income tax expense. For three and nine months ended March 31, 2023 and 2024, the Company did not incur any interest or penalties related to an uncertain tax position. The Company does not believe that there were any uncertain tax positions as of June 30, 2023, and March 31, 2024.
Earnings per share
The Company computes earnings
per share (“EPS”) in accordance with ASC 260, Earnings per Share. ASC 260 requires companies with complex capital structures
to present basic and diluted EPS. Basic EPS is measured as net loss divided by the weighted average common shares outstanding for the
period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (for example,
convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date,
if later. Stock options, warrants and unvested restricted stock units, altogether
| Three months ended March 31, | Nine months ended March 31, | |||||||||||||||
| 2023 | 2024 | 2023 | 2024 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Segment reporting
The Company uses the management approach to determine operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker (“CODM”) for making decisions, allocating resources, and assessing performance. The Company’s CODM has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing the performance of the Company.
The Company’s CODM reviews the consolidated financial results when making decisions about allocating resources and assessing the performance of the Company as a whole and has determined that the Company has only one reportable segment. Notwithstanding that the Company has customers located around the world and the Company’s Hong Kong subsidiary serves as one of the sales and marketing centers, the Company’s long-lived assets and management are located substantially in the U.S. and management operates its business as a single segment.
11
Recent accounting pronouncements
As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company intends to take advantage of the benefits of this extended transition period.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures. The new guidance requires enhanced disclosures about significant segment expenses. The Company is required to adopt this guidance for its annual reporting in fiscal year 2025 and for interim period reporting beginning the first quarter of fiscal year 2026 on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on our segment disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures. ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The guidance is effective for annual periods beginning after December 15, 2024 on a prospective basis. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.
Customer and Supplier Concentration
(a) Customers
| Three months ended March 31, | Nine months ended March 31, | |||||||||||||||
| 2023 | 2024 | 2023 | 2024 | |||||||||||||
| Major Customers | ||||||||||||||||
| Customer A | % | % | % | % | ||||||||||||
| Customer B | % | |||||||||||||||
| * |
(b) Suppliers
| Three months ended March 31, | Nine months ended March 31, | |||||||||||||||
| 2023 | 2024 | 2023 | 2024 | |||||||||||||
| Major Suppliers | ||||||||||||||||
| Supplier A | % | % | % | % | ||||||||||||
| (1) |
3. MISAPPLICATION OF FUNCTIONAL CURRENCY
Before October 2023, Aspire
Science had been using HKD as its functional currency and translated to USD for consolidation and reporting purposes. During the review
of financial statements for the three and six months ended December 31, 2022 and 2023, the Company revisited and determined that the functional
currency for Aspire Science should be USD in accordance with Accounting Standards Codification (“ASC”) 830, Foreign Currency
Matters. The Company evaluated the materiality of the error from qualitative and quantitative perspectives in accordance with ASC 250-10-20,
and Staff Accounting Bulletin (“SAB”) 99.
12
4. CASH
| As of June 30, | As of March 31, | |||||||
| By Geography: | 2023 | 2024 | ||||||
| Cash in HK | $ | $ | ||||||
| Cash in U.S. | ||||||||
| Cash in Malaysia | ||||||||
| Total | $ | $ | ||||||
| By Currency: | ||||||||
| USD | $ | $ | ||||||
| RM | ||||||||
| HKD | ||||||||
| EUR | ||||||||
| GBP | ||||||||
| RMB | ||||||||
| Total | $ | $ | ||||||
“HKD” refers to Hong Kong dollars, “GBP” refers to British pounds, “EUR” refers to Euros, “RM” refers to Malaysia ringgit, and “RMB” refers to Renminbi.
5. FAIR VALUE MEASUREMENT
As of June 30, 2023, and March 31, 2024, the Company’s assets and liabilities were not measured at fair value on a recurring basis. The carrying value of certain of the Company’s financial instruments, including cash, accounts receivable, prepaid expenses and other receivables, accounts payable, accounts payable - related party, contract liabilities, accrued liabilities and other payables and due to related parties, approximates their fair value because of their short-term maturity.
6. ACCOUNTS RECEIVABLE, NET
| As of June 30, | As of March 31, | |||||||
| 2023 | 2024 | |||||||
| Accounts receivable – gross | $ | $ | ||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
The Company recorded
$
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
| As of June 30, | As of March 31, | |||||||
| 2023 | 2024 | |||||||
| Prepayment for inventory purchases | $ | $ | ||||||
| Other receivable | ||||||||
| Prepayments | ||||||||
| Prepaid provisional profit tax – Hong Kong | ||||||||
| Total | $ | $ | ||||||
Prepayments primarily consist of prepayment for production testers and jigs for Ispire Malaysia, and prepayments for marketing services.
13
8. PROPERTY, PLANT AND EQUIPMENT, NET
| As of June 30, |
As of March 31, |
|||||||
| 2023 | 2024 | |||||||
| Leasehold improvements | $ | $ | ||||||
| Office and other equipment | ||||||||
| Furniture and fixtures | ||||||||
| Construction-in-progress | ||||||||
| Less: accumulated depreciation | ( |
) | ( |
) | ||||
| Total | $ | $ | ||||||
For the three months ended
March 31, 2023 and 2024, depreciation expense amounted to $
Included in construction-in-progress are prepayment for production and office renovations for Ispire Malaysia.
9. LONG TERM INVESTMENT
On February 13, 2024, the
Company invested $
10. CONTRACT LIABILITIES
As of June 30, 2023, and March
31, 2024, the Company had total contract liabilities of $
11. LEASES
The Company has operating
lease arrangements for office premises in Hong Kong, California and Malaysia. These leases typically have terms of
Leases with an initial term of 12 months or less are not presented as right-of-use assets on the consolidated balance sheet and are expensed over the lease term. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date.
| As of June 30, | As of March 31, | |||||||
| 2023 | 2024 | |||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Operating lease liabilities – current | $ | $ | ||||||
| Operating lease liabilities – non-current | ||||||||
| Total | $ | $ | ||||||
| As of March 31, 2023 | ||||
| April 1, 2024 to March 31, 2025 | $ | |||
| April 1, 2025 to March 31, 2026 | ||||
| April 1, 2026 to March 31, 2027 | ||||
| April 1, 2027 to March 31, 2028 | ||||
| Total future lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Total lease liabilities | $ | |||
14
The Company incurred lease
costs, which include the payment of short-term leases, of $
The Company made payments
of $
The weighted-average remaining
lease term related to the Company’s lease liabilities as of June 30, 2023 and March 31, 2024 was
The discount rate related
to the Company’s lease liabilities as of both June 30, 2023 and March 31, 2024 was
12. ACCRUED LIABILITIES AND OTHER PAYABLES
| As of June 30, | As of March 31, | |||||||
| 2023 | 2023 | |||||||
| Other payables | $ | $ | ||||||
| Accrued salaries and related benefits | ||||||||
| Accrued expenses | ||||||||
| Long term investment payable | ||||||||
| Reserve for product returns | ||||||||
| Other tax payable | ||||||||
| Total | $ | $ | ||||||
13. RELATED PARTY TRANSACTIONS
| a) |
| Name of related parties and Relationship with the Company |
| b) | Tuanfang Liu is also Aspire Global’s chief executive officer and a director of both the Company and Aspire Global, and his wife, Jiangyan Zhu, is also a director of both companies. As of March 31, 2024, Mr. Liu and Ms. Zhu beneficially own |
| c) | The balances due to related parties at June 30, 2023 and March 31, 2024 represent amounts due to Shenzhen Yi Jia of $ |
| d) | For both three- and nine-month periods ended March 31, 2023 and 2024, the majority of the Company’s tobacco and cannabis vaping products were purchased from Shenzhen Yi Jia. As of June 30, 2023 and March 31, 2024, the accounts payable - related party was $ |
15
14. INCOME TAXES
| Three months ended March 31, | Nine months ended March 31, | |||||||||||||||
| 2023 | 2024 | 2023 | 2024 | |||||||||||||
| HK | $ | $ | $ | $ | ||||||||||||
| U.S. | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Malaysia | ( | ) | ( | ) | ||||||||||||
| Total | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Income taxes recorded for the three and nine months ended March 31, 2023 and 2024, were estimated using the discrete method. Income taxes are based on the Company’s financial results through the end of the period, as well as the related change in the valuation allowance on deferred tax assets. The Company is unable to estimate the annual effective tax rate with sufficient precision for purposes of the effective tax rate method, which requires the Company to consider a projection of full-year income and the expected change in the valuation allowance. The estimated annual effective tax rate method was not reliable due to its sensitivity to small changes to forecasted annual pre-tax earnings and the effect of the valuation allowance, which create results with significant variations in the customary relationship between income tax expense and pre-tax income for the interim periods. As a result, the Company determined that using the discrete method is more appropriate than using the annual effective tax rate method.
The Company’s effective tax rate for the three and nine months ended March 31, 2023 and 2024, was different from the Hong Kong statutory income tax rate due primarily to the U.S. subsidiary being in a loss position. No tax benefit has been recognized for this current loss and the related carryforward losses of this subsidiary, as a full valuation allowance has been established against the deferred tax asset arising from the losses.
As at June 30, 2023, income
tax payable of $
As at March 31, 2024, there
were unrecognized deferred tax assets of $
16
15. WARRANTS
On April 3, 2023, the Company
issued representative of the underwriters
16. STOCK-BASED COMPENSATION
In October 2022, the directors
and stockholders of the Company approved the 2022 Equity Incentive Plan (the “Plan”) pursuant to which up to
Restricted stocks
During the nine months ended
March 31, 2024,
During the nine months ended
March 31, 2024,
Stock Options
| Number of options | Weighted average exercise price | Weighted average fair value per option | ||||||||||
| Outstanding at June 30, 2023 | $ | $ | ||||||||||
| Granted | $ | $ | ||||||||||
| Exercised | $ | $ | ||||||||||
| Expired | $ | $ | ||||||||||
| Forfeiture | $ | $ | ||||||||||
| Outstanding at March 31, 2024 | $ | $ | ||||||||||
The aggregate intrinsic value
of options outstanding with an exercise price less than the closing price of the Company’s common stock as of March 31, 2024
was $
Total expense of options vested
for the three months ended March 31, 2023 and 2024, was $
| Nine months ended March 31, 2023 | ||||
| Risk-free interest rate | ||||
| Time to expiry | ||||
| Expected volatility | ||||
| Expected dividend yield | ||||
17
RSUs
RSUs granted to employees
vest cumulatively as to one-third of the restricted stock units on each of the first three anniversaries of the date of grant based on
continues service. Each vested RSU entitles holder to receive one share of common stock upon exercise.
| Shares | Weighted average grant date fair value | |||||||
| Unvested, June 30, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Canceled and forfeited | ( | ) | ||||||
| Unvested, March 31, 2024 | $ | |||||||
Total expense for the RSUs
during the three and nine months ended March 31, 2024 was $
| Three months ended March 31, | Nine months ended March 31, | |||||||||||||||
| 2023 | 2024 | 2023 | 2024 | |||||||||||||
| General and administrative expenses | $ | $ | $ | $ | ||||||||||||
| Sales and marketing expenses | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
17. STOCKHOLDERS’ EQUITY
On March 22, 2024, pursuant to a securities purchase
agreement with certain purchasers, the Company sold, in a secondary offering, an aggregate of
18. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its business, which cover a wide range of matters. Liabilities for contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
If the assessment of a contingency indicates that it is probable that a material loss is incurred and the amount of the liability can be estimated, then the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, is disclosed.
18
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
On December 11, 2023, the
Company entered into a licensing agreement with BRKFST, LLC (“BRKFST”) for the licensing of marks owned by BRKFST. For
a minimum of
As of March 31, 2024, the
Company recorded an unpaid $
19. SUBSEQUENT EVENTS
On April 5, 2024 (the “Closing Date”),
Aspire North America (together with Ispire, the “Companies”) entered into a capital contribution, subscription, and joint
venture agreement (the “JV Agreement”) with Chemular Inc., a Michigan corporation, Berify, and Ike Tech LLC, a Delaware limited
liability company (the “Joint Venture”, and together with Chemular, Berify, and the Companies, each a “Party”
and collectively, the “Parties”) pursuant to which the Parties agreed to participate in the Joint Venture. Pursuant to the
JV Agreement, the business of the Joint Venture will be licensing, owning, operating and developing an industry-standard age-verification
solution for vapor (e-cigarette) devices in the U.S. market as well as the related planned submission of PMTA applications that seek FDA
marketing orders for cutting-edge technologies across the U.S. e-cigarette market. On the Closing Date, the Companies (i) contributed
$
19
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this report. See “Cautionary Forward-Looking Statements.” Actual results could differ materially from those discussed below.
Overview
We are engaged in the research and development, design, commercialization, sales, marketing and distribution of branded e-cigarettes and cannabis vaping products. We sell our tobacco vaping products worldwide except for the People’s Republic of China (the “PRC”) and Russia. Our tobacco vaping products are marketed under the Aspire brand name and are sold primarily through our distribution network and we have plans to launch various third-party branded lines of tobacco vaping products in the future. We currently sell our cannabis vaping hardware only in the United States, and we have recently commenced marketing activities in Canada and Europe, primarily in the European Union. Most of our products are vaping hardware. Vaping refers to the practice of inhaling and exhaling the vapor produced by an electronic vaping device, and includes dabbing, which is the recreational inhalation of extremely concentrated tetrahydrocannabinol, the main psychotropic cannabinoid derived from the marijuana plant. Our cannabis vaping products are marketed under the Ispire brand name, primarily on an ODM basis to other cannabis vapor companies. ODM generally involves the design and customization of the core products to meet each brand’s unique image and needs, and our products are sold by our customers under their own brand names although they may also include our brand name on the products.
Regulatory Risks
The sale of tobacco and cannabis products is subject to regulations worldwide. Many countries prohibit the sale of any cannabis products, and many countries have regulations relating to tobacco products, with a particular emphasis on underage sales. As a result of regulations in the United States, we are able to sell only one tobacco vaping product line, the Nautilus Prime, in the United States. Our tobacco vaping sales in the United States were approximately $0.1 million and $88,000 for the three months ended March 31, 2023 and 2024, respectively. Our tobacco vaping sales in the United States were approximately $0.6 million and $0.2 million for the nine months ended March 31, 2023 and 2024, respectively. Because the volume of sales did not justify the marketing and regulatory costs, we have ceased marketing tobacco vaping products in the United States. If any similar regulations are adopted with respect to cannabis products, our business may be severely impacted since nearly all of our cannabis revenue for the three and nine months ended March 31, 2023 and 2024, was generated from sales in the United States.
20
E-cigarette regulation
Regulation regarding e-cigarettes varies across countries, from no regulation to a total ban. The legal status of e-cigarettes is currently pending in many countries. As e-cigarettes have become more and more popular recently, many countries are considering imposing more stringent law and regulations to regulate this market. Changes in existing law and regulations and the imposition of new laws or regulations in countries and regions that our major customers are located in may adversely affect the Company’s business.
The Federal Food, Drug, and Cosmetic Act requires all Electronic Nicotine Delivery Systems (“ENDS”) product manufacturers that market products in the United States to submit Premarket Tobacco Product Applications (“PMTAs”) to the FDA. For ENDS products that were on the U.S. market on or before August 8, 2016, a PMTA was required to be submitted to the FDA before September 9, 2020; for ENDS products that were not on the U.S. market prior to August 8, 2016, and for which a PMTA was not filed before September 9, 2020, a PMTA premarket authorization issued by FDA is required before the subject product may enter the U.S. market. The Company has submitted a PMTA filing for one ENDS product, and, under apparent FDA policies, the agency will not enforce the premarket review requirements for that product pending review of its PMTA. However, even with submission of the PMTA application, the FDA may reject the Company’s application and may prevent the Company’s ENDS products from being sold in U.S., which will adversely affect the Company’s business.
Amendments to the Prevent All Cigarette Trafficking (“PACT”) Act, which became law in 2021, extend the PACT Act to include e-cigarettes and all vaping products, and place significant burdens on sellers of vaping products in the United States which may make it difficult to operate profitably in the United States. Because of tighter government regulations, the Company has stopped marketing tobacco vaping products in the United States, as the volume of sales from the one tobacco vaping product which the Company may sell in the United States does not justify the marketing and regulatory costs involved.
In the United States, cannabis vaping products are governed by state laws, which vary from state to state. Most states do not permit the adult recreational use of cannabis, and no states permit the sale of recreational cannabis products to minors. As a result of the reduced revenue to states resulting from the effects of the COVID 19 pandemic and lingering inflationary effects, states may seek to raise revenue by permitting and taxing the use of cannabis products. Further, states may be more willing to permit recreational cannabis use given the DEA’s intention to reschedule cannabis as a Schedule III controlled substance allowing for medicinal use. The Company cannot predict what action states will take or the nature and amount of taxes they may impose. However, to the extent the PACT Act applies to cannabis products that aerosolize liquids, it may be more difficult to sell our products in states that permit the sale of cannabis.
However, cannabis and its derivatives containing more than 0.3% delta-9 tetrahydrocannabinol on a dry weight basis remain Schedule I controlled substances under U.S. federal law, meaning that federal law generally prohibits their manufacture and distribution. United States federal law also deems it unlawful to sell, offer for sale, transport in interstate commerce, import, or export “drug paraphernalia,” which includes “any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance” the possession of which federal law prohibits, including Schedule I “marijuana.” Limited exemptions exist, most notably when state or local law authorizes these items’ manufacture, possession, or distribution.
21
The European Commission issued the Tobacco Products Directive (the “TPD”), which became effective on May 19, 2014, and became applicable in the European Union member states on May 20, 2016. The TPD regulates e-cigarettes on the packaging, labelling and ingredients of the products on the European Union market, the creation of smoke-free environments, tax measures and activities against illegal trade and anti-smoke campaigns. Member states of the European Union are required to ensure that advertisements for any tobacco related product are prohibited, and no promotion shall be made as to those devices with an intention to promote e-cigarettes. For the e-cigarettes released after May 20, 2016, TPD requires e-cigarette manufacturers to submit product sales applications to the regulatory market six months in advance, and ensure their products can meet the TPD requirements before they can be released. The Company has complied with TPD requirement for all its tobacco products sold in Europe.
The sale of cannabis vaping products is illegal in the European Union and the United Kingdom.
Accounts Receivable
Our business relies on the collection of accounts receivable from our customers in a timely manner to maintain liquidity and support our ongoing operations. The balance of the allowance for credit losses was $1.5 million and $4.0 million at June 30, 2023 and March 31, 2024, respectively. Our failure or inability to collect accounts receivable when due results from a number of factors, including (i) our customer’s failure to pay as a result of adverse economic conditions affecting the customers; (ii) our failure to implement effective collection efforts; and (iii) disputes over contract terms, product quality or delays in delivery. Although we may implement strategies to mitigate these risks, there can be no assurance that such measures will be entirely effective, and we may continue to incur write-offs of accounts receivable, which may impair our ability to operate profitably.
Key Factors that Affect Our Results of Operations
We believe the following key factors may affect our financial condition and results of operations:
| ● | The effect of legislation and regulations affecting the tobacco and cannabis vaping products. | |
| ● | If we elect to market tobacco vaping products in the United States, our ability to obtain regulatory approval to market additional tobacco vaping products in the United States. | |
| ● | Our ability to develop and market tobacco and cannabis vaping products to meet the changing tastes of users. | |
| ● | The effects of competition. | |
| ● | The development of an international market for cannabis vaping products, which is presently primarily limited to certain states in the United States. | |
| ● | The effect of the outbreak of another pandemic or other disease that results in restrictions imposed by governments which may impact our ability to purchase or assemble products as well as the ability of end users to purchase our products. |
22
Results of Operations
Three Months and Nine Months Ended March 31, 2023 and 2024
The following table sets forth a summary of our unaudited condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2023 and 2024, and nine months ended March 31, 2023 and 2024 (dollars in thousands except share amounts).
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||||||
| 2023 | 2024 | 2023 | 2024 | |||||||||||||||||||||||||||||
| $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | $ | % of Revenue | |||||||||||||||||||||||||
| Revenue | $ | 24,136 | 100.0 | % | $ | 30,015 | 100.0 | % | $ | 82,977 | 100.0 | % | $ | 114,565 | 100.0 | % | ||||||||||||||||
| Cost of revenue | (19,616 | ) | (81.3 | )% | (23,893 | ) | (79.6 | )% | (68,699 | ) | (82.8 | )% | (95,345 | ) | (83.2 | )% | ||||||||||||||||
| Gross profit | 4,520 | 18.7 | % | 6,122 | 20.4 | % | 14,278 | 17.2 | % | 19,220 | 16.8 | % | ||||||||||||||||||||
| Operating expenses | (7,209 | ) | (29.9 | )% | (11,802 | ) | (39.3 | )% | (17,872 | ) | (21.5 | )% | (29,762 | ) | (26.0 | )% | ||||||||||||||||
| Loss from operations | (2,689 | ) | (11.1 | )% | (5,680 | ) | (18.9 | )% | (3,594 | ) | (4.3 | )% | (10,542 | ) | (9.2 | )% | ||||||||||||||||
| Other income (loss), net | 593 | 2.5 | % | (14 | ) | (0.0 | )% | 152 | 0.2 | % | 299 | 0.3 | % | |||||||||||||||||||
| Loss before income taxes | (2,096 | ) | (8.7 | )% | (5,694 | ) | (19.0 | )% | (3,442 | ) | (4.1 | )% | (10,243 | ) | (8.9 | )% | ||||||||||||||||
| Income taxes | (238 | ) | (1.0 | )% | (255 | ) | (0.8 | )% | (1,070 | ) | (1.3 | )% | (1,104 | ) | (1.0 | )% | ||||||||||||||||
| Net loss | (2,334 | ) | (9.7 | )% | (5,949 | ) | (19.8 | )% | (4,512 | ) | (5.4 | )% | (11,347 | ) | (9.9 | )% | ||||||||||||||||
| Other comprehensive (loss) income | (158 | ) | 0.7 | % | 11 | 0.0 | % | (15 | ) | (0.0 | )% | 170 | 0.1 | % | ||||||||||||||||||
| Comprehensive loss | (2,492 | ) | (10.3 | )% | (5,938 | ) | (19.8 | )% | (4,527 | ) | (5.5 | )% | (11,177 | ) | (9.8 | )% | ||||||||||||||||
| Net loss per share Basic and diluted | (0.05 | ) | (0.11 | ) | (0.09 | ) | (0.21 | ) | ||||||||||||||||||||||||
| Weighted shares of common stock outstanding Basic and diluted | 50,000,000 | 54,347,729 | 50,000,000 | 54,287,624 | ||||||||||||||||||||||||||||
Revenue
The following tables set out the breakdown of our revenue percentage by region based on information provided to us by our distributors on where the distributors are reselling to.
| For the Three Months ended March 31, | ||||||||
| 2023 | 2024 | |||||||
| Europe | 52.0 | % | 45.4 | % | ||||
| North America (the U.S. and Canada) | 33.3 | % | 41.2 | % | ||||
| Asia Pacific (excluding PRC) | 14.2 | % | 12.6 | % | ||||
| Others | 0.5 | % | 0.8 | % | ||||
| Total | 100.0 | % | 100.0 | % | ||||
23
Our revenue increased by $5,878,738, or 24.4%, from $24,136,297 for the three months ended March 31, 2023, to $30,015,035 for the three months ended March 31, 2024. Nearly all cannabis vaping products are sold in United States, which were included in sales in North America. Sales in North America also include sales of tobacco vaping products in Canada. Sales to regions other than North America are mostly tobacco vaping products. The increase in revenue is the combined effect of (i) increases in sales of cannabis vaping products of $4.3 million from $7.6 million for the three months ended March 31, 2023 to approximately $11.9 million for the three months ended March 31, 2024, and (ii) increases in sales of tobacco vaping products in Europe of $1.0 million from $12.6 million for the three months ended March 31, 2023 to approximately $13.6 million for the three months ended March 31, 2024.
For the Nine Months ended March 31, | ||||||||
| 2023 | 2024 | |||||||
| Europe | 55.4 | % | 42.9 | % | ||||
| North America (the U.S. and Canada) | 30.4 | % | 43.8 | % | ||||
| Asia Pacific (excluding PRC) | 13.9 | % | 13.0 | % | ||||
| Others | 0.3 | % | 0.3 | % | ||||
| Total | 100.0 | % | 100.0 | % | ||||
Our revenue increased by $31,588,498, or 38.1%, from $82,976,746 for the nine months ended March 31, 2023, to $114,565,244 for the nine months ended March 31, 2024. Nearly all cannabis vaping products are sold in United States, which were included in sales in North America. Sales in North America also include sales of tobacco vaping products in Canada. Sales to regions other than North America are mostly tobacco vaping products. The increase in revenue is the combined effect of (i) increases in sales of cannabis vaping products of $25.4 million from $23.4 million for the nine months ended March 31, 2023 to approximately $48.8 million for the nine months ended March 31, 2024, (ii) increases in sales of tobacco vaping products in Asia Pacific (excluding PRC) of $3.3 million from $11.5 million for the nine months ended March 31, 2023 to approximately $14.8 million for the nine months ended March 31, 2024, (iii) increases in sales of tobacco vaping products in Europe of $3.2 million from $46.0 million for the nine months ended March 31, 2023 to approximately $49.1 million for the nine months ended March 31, 2024.
Cost of Revenue
Cost of revenue mainly consists of cost of purchases of vaping products, which we mainly purchased from Shenzhen Yi Jia. Cost of revenue increased by $4,276,985, or 21.8%, from $19,616,098 for the three months ended March 31, 2023, to $23,893,083 for the three months ended March 31, 2024. The increase in cost of revenue reflects the increase in period-to-period unit sales.
Cost of revenue increased by $26,646,300, or 38.8%, from $68,699,245 for the nine months ended March 31, 2023, to $95,345,545 for the nine months ended March 31, 2024. The increase in cost of revenue reflects the increase in period-to-period unit sales.
Gross Profit
The following tables show the revenue, cost of revenue and gross profit of our tobacco and cannabis vaping products (dollars in thousands).
| For the Three Months Ended March 31, 2023 | ||||||||||||||||
| Revenue | Cost of revenue | Gross profit | Gross profit % | |||||||||||||
| Tobacco vaping products | $ | 16,546 | $ | 13,927 | $ | 2,619 | 15.8 | % | ||||||||
| Cannabis vaping products | 7,590 | 5,689 | 1,901 | 25.0 | % | |||||||||||
| Total | $ | 24,136 | $ | 19,616 | $ | 4,520 | 18.7 | % | ||||||||
| For the Three Months Ended March 31, 2024 | ||||||||||||||||
| Revenue | Cost of revenue | Gross profit | Gross profit % | |||||||||||||
| Tobacco vaping products | $ | 18,083 | $ | 15,231 | $ | 2,852 | 15.8 | % | ||||||||
| Cannabis vaping products | 11,932 | 8,663 | 3,269 | 27.4 | % | |||||||||||
| Total | $ | 30,015 | $ | 23,894 | $ | 6,121 | 20.4 | % | ||||||||
Gross profit increased by $1,601,754, or 35.4%, from $4,520,199 for the three months ended March 31, 2023 to $6,121,953 for the three months ended March 31, 2024, and our gross profit percentage slightly increased from 18.7% to 20.4%. The gross profit percentage for tobacco vaping products remained relatively constant. The increase in gross profit percentage for cannabis vaping products was primarily because we have been implementing a more detailed selection process on accepting more sales orders with higher profit margin during the three months ended March 31, 2024.
24
| For the Nine Months Ended March 31, 2023 | ||||||||||||||||
| Revenue | Cost of revenue | Gross profit | Gross profit % | |||||||||||||
| Tobacco vaping products | $ | 59,555 | $ | 50,408 | $ | 9,147 | 15.4 | % | ||||||||
| Cannabis vaping products | 23,422 | 18,291 | 5,131 | 21.9 | % | |||||||||||
| Total | $ | 82,977 | $ | 68,699 | $ | 14,278 | 17.2 | % | ||||||||
| For the Nine Months Ended March 31, 2024 | ||||||||||||||||
| Revenue | Cost of revenue | Gross profit | Gross profit % | |||||||||||||
| Tobacco vaping products | $ | 65,749 | $ | 55,481 | $ | 10,268 | 15.6 | % | ||||||||
| Cannabis vaping products | 48,816 | 39,864 | 8,952 | 18.3 | % | |||||||||||
| Total | $ | 114,565 | $ | 95,345 | $ | 19,220 | 16.8 | % | ||||||||
Gross profit increased by $4,942,198, or 34.6%, from $14,277,501 for the nine months ended March 31, 2023 to $19,219,699 for the nine months ended March 31, 2024, while our gross profit percentage decreased from 17.2% to 16.6%. The gross profit percentage for tobacco vaping products remained constant. The decrease in gross profit percentage for cannabis vaping products was the combined effect of larger customers that negotiated lower prices resulting in lower margins in the second half year of 2023, and implementing a more detailed selection process on accepting more sales orders with higher profit margin during the three months ended March 31, 2024.
Operating Expenses
Operating expenses increased $4,592,248 or 63.7%, from $7,209,628 for the three months ended March 31, 2023 to $11,801,876 for the three months ended March 31, 2024. Operating expenses increased $11,889,575 or 66.5%, from $17,871,956 for the nine months ended March 31, 2023, to $29,761,531 for the nine months ended March 31, 2024.
Our sales and marketing expenses mainly consist of employees’ salaries and benefits, marketing expenses, travel expenses, stock-based compensation expenses and others.
Sales and marketing expenses increased by $806,458, or 85.0%, from $948,302 for the three months ended March 31, 2023, to $1,754,760 for the three months ended March 31, 2024. The increase in sales and marketing expenses was primarily due to an increase in our marketing campaign and trade shows for our cannabis vaping products. Sales and marketing expenses increased by $991,935, or 31.2%, from $3,182,451 for the nine months ended March 31, 2023, to $4,174,386 for the nine months ended March 31, 2024. The increase in sales and marketing expenses was primarily due to increase in headcount and payroll expense for Aspire Science and an increase in our marketing campaign and trade shows for our cannabis vaping products.
Our general and administrative expenses mainly consist of compensation and benefits, stock-based compensation expenses, rental expenses, professional fees and other administrative expenses. General and administrative expenses increased by $3,785,790, or 60.5%, from $6,261,326 for the three months ended March 31, 2023, to $10,047,116 for the three months ended March 31, 2024. The increase was primarily due to (i) stock-based compensation expense of $1.8 million incurred in the three months ended March 31, 2024, as compensation for management, employees and service providers, (ii) an increase in professional fees of $1.0 million for expenses incurred being a public company for the three months ended March 31, 2024, and (iii) an increase of $0.8 million for payroll expenses as more employees were hired by us for expansion of our cannabis business and building a manufacturing plant in Malaysia.
25
General and administrative expenses increased by $10,897,641, or 74.2%, from $14,689,504 for the nine months ended March 31, 2023, to $25,587,145 for the nine months ended March 31, 2024. The increase was primarily due to (i) stock-based compensation expense of $4.7 million incurred in the nine months ended March 31, 2024, as compensation for management, employees and service providers, (ii) an increase in credit loss expenses of $1.0 million, (iii) an increase of $2.3 million for payroll expenses as more employees were hired by us for expansion of our cannabis business and building a manufacturing plant in Malaysia and (iv) an increase in professional fees of $2.0 million for expenses incurred being a public company for the nine months ended March 31, 2024.
Other expense (income), net
Other income, net includes interest income, interest expense, exchange gain (loss), net and other income (expense).
Interest income was $391 for the three months ended March 31, 2023, and $27,296 for the three months ended March 31, 2024. Interest income was $77,202 for the nine months ended March 31, 2023, and $298,161 for the nine months ended March 31, 2024.
Exchange loss (gain) changes by $714,664, or 108.2%, from net exchange gain of $660,760 for the three months ended March 31, 2023, to net exchange loss of $53,904 for three months ended March 31, 2024. Exchange loss (gain) changes by $202,565, or 110.6%, from net exchange gain of $183,178 for the nine months ended March 31, 2023, to net exchange loss of $19,387 for nine months ended March 31, 2024.
As a result of these factors, other expense (income), net decreased by $607,541, from other income, net of $593,198 for the three months ended March 31, 2023, to other income, net of $14,343 for three months ended March 31, 2024. Other expense (income), net increased by $146,912, from other income, net of $151,940 for the nine months ended March 31, 2023, to other income, net of $298,852 for nine months ended March 31, 2024.
Income Taxes
Income taxes increased by $17,493, or 7.4%, from $237,992 for the three months ended March 31, 2023, to $255,485 for the three months ended March 31, 2024. Income taxes increased by $33,711, or 3.2%, from $1,069,999 for the nine months ended March 31, 2023, to $1,103,710 for the nine months ended March 31, 2024. We had a consolidated net loss for both three- and nine-month periods ended March 31, 2023 and 2024, which was the combined effect of a profit by Aspire Science and a loss by Aspire North America and Ispire Malaysia. The profit from Aspire Science resulted in a current tax expense in Hong Kong. The increase in valuation allowance reflects our view that the taxable income in the future will not be sufficient to utilize the carryforward loss.
Net Loss
As a result of the foregoing, net loss increased by $3,615,528, from net loss of $2,334,223, or $(0.05) per share (basic and diluted) for the three months ended March 31, 2023, to a net loss of $5,949,751, or $(0.11) per share, for the three months ended March 31, 2024. Net loss increased by $6,834,177, from net loss of $4,512,513, or $(0.09) per share (basic and diluted) for the nine months ended March 31, 2023, to a net loss of $11,346,690, or $(0.21) per share, for the nine months ended March 31, 2024.
Liquidity and Capital Resources
The following table summarizes our changes in working capital from June 30, 2023, to March 31, 2024 (dollars in thousands).
| June 30, 2023 | March 31, 2024 | Change | % Change | |||||||||||||
| Current Assets | $ | 84,811 | $ | 98,653 | $ | 13,842 | 16.3 | % | ||||||||
| Current Liabilities | 55,962 | 69,743 | 13,781 | 24.6 | % | |||||||||||
| Working Capital | 28,849 | 28,910 | 61 | 2.1 | % | |||||||||||
26
The following table sets forth information as to consolidated cash flow information for the nine months ended March 31, 2023 and 2024 (dollars in thousands).
| Nine Months Ended March 31, | Increase | |||||||||||
| Consolidated cash flow data: | 2023 | 2024 | (Decrease) | |||||||||
| Net cash provided by (used in) operating activities | $ | 1,617 | $ | (16,878 | ) | $ | (18,495 | ) | ||||
| Net cash (used in) provided by investing activities | (10,099 | ) | 5,949 | 16,048 | ||||||||
| Net cash (used in) provided by financing activities | (41,963 | ) | 10,083 | 52,046 | ||||||||
| Net decrease in cash | $ | (50,445 | ) | $ | (846 | ) | $ | 49,599 | ||||
Net cash flow provided by operating activities for the nine months ended March 31, 2023 of $1.6 million, reflected our net loss of $4.5 million, adjusted primarily as follows: an add back of credit loss expenses of $2.2 million, an increase in accounts payable of $13.7 million, offset by an increase in accounts receivable of $9.3 million, and an decrease in income tax payable of $0.5 million.
Net cash flow used in operating activities for the nine months ended March 31, 2024, of $16.9 million, reflected our net loss of $11.3 million, adjusted primarily as follows: an increase in accounts payable of $11.9 million, add-back of stock-based compensation expenses of $4.7 million, an add-back of credit loss expenses of $3.3 million, a decrease in prepaid expenses and other current assets of $1.7 million, an increase in accrued liabilities and other payables of $1.2 million, offset by an increase in accounts receivable of $26.6 million and increase in inventories of $2.5 million.
Net cash flow used in investing activities for the nine months ended March 31, 2023, of $10.1 million reflected primarily the purchase of short-term investment of $9.6 million, and purchase of property, plant and equipment of $0.5 million.
Net cash flow provided by investing activities for the nine months ended March 31, 2024, of $5.9 million reflected primarily the maturity of short-term investment of $9.1 million, offset by purchase of property, plant and equipment of $1.2 million, purchase of non-marketable securities of $1.0 million and acquisition of intangible assets of $1.0 million.
Net cash flow used in financing activities for the nine months ended March 31, 2023, of $42.0 million reflected primarily repayment of advances from related parties of $40.5 million, payment made for dividend of $3.4 million, offset by advances from related parties of $1.9 million.
Net cash flow provided by financing activities for the nine months ended March 31, 2024, of $10.1 million reflected primarily proceeds from a secondary offering of $12.3 million, offset by payments from a secondary offering of $1.5 million and repayments of advances from related parties of $0.7 million.
To date, we have financed our operations primarily through cash flow from operations and working capital loans from our major stockholders, who are our co-chief executive officer and his wife, when necessary. We plan to support our future operations primarily from cash generated from our operations and cash on hand. We believe that our current cash and working capital will be sufficient to meet our working capital needs in the next 12 months. If we experience an adverse operating environment or incur unanticipated capital expenditure requirements, or if we decide to accelerate our growth, then additional financing may be required. We cannot give any assurance that additional financing will not be required or, if required, would be available on favorable terms if at all. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in dilution to our stockholders which may be substantial.
The cash at bank held by our Hong Kong operating subsidiary can be freely transferred within our corporate structure without restriction. If our Hong Kong operating subsidiary were to incur additional debt on its own behalf in the future, the instruments governing the debt may restrict the ability of our operating subsidiaries to transfer cash to our U.S. investors.
27
Contractual Obligations
As of June 30, 2023, and March 31,2024, we had contract liabilities of $988,556 and $1,327,371, respectively. These liabilities are advance deposits received from customers after an order has been placed. We expect all of the contract liabilities to be settled in less than one year.
We have operating lease arrangements for office and factory premises for Hong Kong, California and Malaysia, which are treated as right-of-use assets. These leases typically have terms of two to five years. Leases with an initial term of 12 months or less are not presented as right-of-use assets and are expensed over the lease term. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date.
The balances for our right-of-use assets and lease liabilities where we are the lessee are presented as follow:
| As of June 30, | As of March 31, | |||||||
| 2023 | 2024 | |||||||
| Operating lease right-of-use assets | $ | 4,061,617 | $ | 3,636,104 | ||||
| Operating lease liabilities – current | $ | 944,525 | $ | 1,275,923 | ||||
| Operating lease liabilities – non-current | 3,356,232 | 2,730,574 | ||||||
| Total | $ | 4,300,757 | $ | 4,006,497 | ||||
As of March 31, 2024, the maturities of our lease liabilities (excluding short-term leases) are as follows:
| As of March 31, 2023 | ||||
| April 1, 2024 to March 31, 2025 | $ | 1,546,607 | ||
| April 1, 2025 to March 31, 2026 | 1,529,974 | |||
| April 1, 2026 to March 31, 2027 | 1,117,724 | |||
| April 1, 2027 to March 31, 2028 | 322,704 | |||
| Total future lease payments | 4,517,009 | |||
| Less: imputed interest | (510,512 | ) | ||
| Total lease liabilities | $ | 4,006,497 | ||
As of March 31, 2024, we recorded an unpaid $1 million consideration in accrued liabilities and other payables on the consolidated balance sheet for a committed investment of $1 million into Touch Point Worldwide, Inc. d/b/a/ Berify’s preferred equity for 909,091 shares. We completed the investment on April 5, 2024.
Trend Information
Other than as disclosed elsewhere in this Form 10-Q, we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material effect on our net revenues, income from operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.
Seasonality
Seasonality does not materially affect our business or the results of our operations.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements.
28
Critical Accounting Policies and Estimates
Allowance for credit losses
We adopted Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” in July 2023. We estimate the allowance for current expected credit losses based on an expected loss model, compared to prior periods which were estimated using an incurred loss model which did not require the consideration of forward-looking economic variables and conditions in the reserve calculation across the portfolio. The impact related to adopting the new standard was not material.
Based on the current expected credit loss model, we consider many factors, including age of balance, past events, any historical default, current information available about the customers, current economic conditions, and certain forward-looking information, including reasonable and supportable forecasts.
Inventory reserves
We record an allowance for slow moving and potentially obsolete inventory based upon recent sales history, the quantity of inventory on-hand, and an estimate of expected sellable life of the inventory. We periodically review inventory to identify slow moving inventories and compare the forecast sales with the quantities and expected sellable life of inventory. Any inventory identified during this process is reserved for at rates based upon our management’s judgment, historical rates, and industry practices. The quantity thresholds and reserve rates are subjective and are based on management’s judgment and knowledge of current and projected industry demand. The reserve estimates may, therefore, be revised if there are changes in the overall market for our products or market changes that, in our management’s judgment, impact its ability to sell potentially obsolete inventory. For the three months ended March 31, 2023 and 2024, we recorded inventory reserve of $0 and $38,133, respectively. For the nine months ended March 31, 2023 and 2024, we recorded inventory reserve of $0 and $168,585, respectively.
Emerging Growth Company
As a company with less than $1.235 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We have elected to take advantage of such exemptions. We could lose Emerging Growth Company status if we become a “Large Accelerated Filer.” This would occur if we had a public float of $700 million or more, as of the last business day of our most recently completed second fiscal quarter.
Cybersecurity
Cyberattacks are a growing geopolitical risk, becoming larger, more frequent, more intricate and more relentless. They are a significant threat to individual organizations and national security. We rely on accounting, financial, and operational management information systems to conduct our operations. Any disruption in these systems could adversely affect our ability to conduct our business. Furthermore, as part of our normal business activities, we collect and store common confidential information about customers, employees, vendors, and suppliers. This information is entitled to protection under a number of regulatory regimes. Any failure to maintain the security of the data, including the penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also result in deterioration in customers’ confidence in us and other competitive disadvantages, and thus could have a material adverse impact on our financial condition and results of operations. While we devote resources to security measures to protect our systems and data, these measures cannot provide absolute security and the insurance coverage we maintain may be inadequate to cover claims, costs, and liabilities relating to cybersecurity incidents.
ITEM 3: Quantitative and Qualitative Disclosure About Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
29
ITEM 4: Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective, due to (1) the lack of controls needed to enable us to record assets acquired from a controlling stockholder in accordance with GAAP, (2) the lack of controls needed to enable us to evaluate significant estimates, including (i) the sufficiency of inventory reserve for slow-moving inventories and (ii) the credit loss history and use it to evaluate the sufficiency of credit loss reserve for accounts receivable under the Topic 326, and (3) the lack of written control policies.
Our failure to have such controls in place resulted in the need for us to restate our unaudited financial statements for the three and nine months ended March 31, 2023. As a result of the restatement, as of March 31, 2023, the restated intangible asset balance should be $0, instead of $74,259,915. For the three months ended March 31, 2023, the net loss decreased from $3,106,855, or $0.06 per share (basic and diluted), to the net loss of $2,334,223, or $0.05 per share (basic and diluted). For the nine months ended March 31, 2023, the net loss decreased from $6,057,776, or $0.12 per share (basic and diluted), to $4,512,513, or $0.09 per share (basic and diluted). Additionally, in preparing the unaudited condensed consolidated statement of cash flows, we identified an additional error related to the presenting of operating leases. We determined that cash payments arising from operating leases were incorrectly classified under financing activities instead of operating activities. As a result of the restatement, our principal portion of lease payment of $114,879 in unaudited condensed consolidated statements of cash flows for the nine months ended March 31, 2023, was reclassified to operating activities. We also omitted to present the noncash activities in relation to leased assets obtained in exchange for operating lease liabilities. During the review of unaudited condensed consolidated financial statements for the three and nine months ended March 31, 2023 and 2024, we have added disclosure of $4,882,220 of leased assets obtained in exchange for operating lease liabilities in the unaudited condensed consolidated statements of cash flows for the nine months ended March 31, 2023.
Subsequent to June 30, 2023, we have appointed a new chief financial officer and a vice president of finance to address material weaknesses in internal control as evidenced by our restatement of the unaudited interim consolidated financial statements for the period ended March 31, 2023, as part of our program to develop and implement effective internal controls over financial reporting.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2024, we have continued to develop and implement internal controls over financial reporting particularly in view of the material weakness described above.
Inherent Limitations of Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. Controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
30
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be subject to legal proceedings, investigations and claims incidental to the conduct of our business.
Other than disclosed above, we are not a party to, nor are we aware of, any legal proceedings, investigations or claims which, in the opinion of our management, are likely to have a material adverse effect on our business, financial condition or results of operations.
On March 17, 2021, the Food and Drug Administration (“FDA”) sent a letter to Aspire North America requesting that Aspire North America submit documents relating to its marketing practices for Aspire products. Specifically, the FDA requested documents related to youth exposure to Aspire North America’s social media marketing of Aspire as well as Aspire North America’s use of influencers in social media marketing. This request applied to all of Aspire electronic nicotine delivery system (ENDS) products and their components or parts. The FDA requested these documents based on the epidemic of youth ENDS use and based on Aspire North America’s marketing of Aspire products on social media platforms (e.g., Facebook, YouTube, and Instagram). The FDA requested that Aspire North America respond within 60 days but granted a 30-day extension. On June 15, 2021, Aspire North America provided the required information to the FDA.
To date, the FDA has not substantively responded or taken any further action in the matter. The Company is uncertain as to whether this remains an active inquiry by FDA, though we believe that the duration of time which has passed since the inquiry tends to suggest that the matter is no longer active within FDA.
However, if the matter remains active there is a possibility that FDA may not consider the Company’s response adequate and/or may initiate regulatory or enforcement action based on an alleged failure to comply with the request or FDA may initiate regulatory or enforcement action on other grounds based on the contents of the documents produced in the response.
Given the lack of sales of the Company’s e-cigarette products in the U.S. for the prior 3-year period, the Company believes it is unlikely that a material monetary penalty could, or would, be levied against the Company in the event of a finding of fault in an aforementioned regulatory proceeding. A finding of fault in a regulatory proceeding, may, however materially impact the Company’s reputation in the e-cigarette industry.
On April 12, 2024, we received a demand letter (the “Demand”) from a current employee alleging a variety of workplace issues and other claims. We believe that these claims have no merit, and we plan to vigorously defend against the Demand. We cannot predict the outcome of the Demand, and it is possible that additional demand letters or lawsuits may be received.
Item 1A. Risk Factors
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. Our current risk factors are set forth in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, filed with the SEC on September 19, 2023 and our Registration Statement on Form S-1 (File No. 333-276804), as amended, filed with the SEC on February 1, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine and Safety Disclosure
Not applicable
Item 5. Other Information
No director or Section 16 officer
31
Item 6. Exhibits
The following is a complete list of exhibits filed or furnished, as applicable, as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.
| * | Filed herewith. |
| ** | Furnished herewith. |
| # | Certain portions of this exhibit (indicated by “[*]”) have been omitted pursuant to Item 601(b)(10(iv) of Regulation S-K. The Company agrees to furnish supplementally an unredacted copy of the exhibit to the Securities and Exchange Commission upon its request. |
32
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: May 14, 2024 | ISPIRE TECHNOLOGY INC. | |
| By: | /s/ Michael Wang | |
| Michael Wang | ||
| Co-Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ Daniel Machock | |
| Daniel Machock | ||
| Chief Financial Officer | ||
| (Principal Financing and Accounting Officer) | ||
33