Ispire Technology (ISPR) 10-Q2024 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

OR

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission file number: 001-41680

Ispire Technology Inc.

(Exact name of registrant as specified in its charter)

(310) 742-9975

(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:

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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.

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 56,400,636 shares of common stock outstanding.

ISPIRE TECHNOLOGY INC.

TABLE OF CONTENTS

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.

PART I - FINANCIAL INFORMATION

ITEM 1 - Financial Statements

ISPIRE TECHNOLOGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS

See notes to unaudited condensed consolidated financial statements.

ISPIRE TECHNOLOGY INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to unaudited condensed consolidated financial statements.

ISPIRE TECHNOLOGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2024

ISPIRE TECHNOLOGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED MARCH 31, 2023 AND 2024

See notes to unaudited condensed consolidated financial statements.

ISPIRE TECHNOLOGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to unaudited condensed consolidated financial statements.

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 100% equity interest in Ispire International Limited, a business company incorporated under the laws of the British Virgin Islands (“BVI”) (“Ispire International”) on July 6, 2022.

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 66.5% and 5.0% of the equity of Aspire Global, respectively. As of March 31, 2024, they owned 59.0% and 4.4% of the equity of the Company, respectively. On July 29, 2022, Aspire Global transferred 100% of the equity interest in Aspire North America to the Company. On the same day, Aspire Holdings transferred 100% of the equity of Aspire Science to Ispire International. At the time of transfer of the equity in Aspire North America and Aspire Science, the Company had the same stockholders as Aspire Global, and the Company’s stockholders held the same percentage interest in the Company as they had in Aspire Global. Because the transfer of the equity in Aspire North America and Aspire Science is a transfer between related parties, the historical financial information of the subsidiaries is carried forward as the historical financial information of the Company and the 50,000,000 shares that were issued at or about the time of the Company’s organization are treated as being outstanding on July 1, 2020.

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 100 Malaysian ringgits.

The following table sets forth information concerning the Company and its subsidiaries as of March 31, 2024:

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”)).

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 $634,776 in unaudited condensed consolidated statements of cash flows for the nine months ended March 31, 2023 was reclassified to operating activities. The Company also omitted to present the noncash activities in relation to leased assets obtained in exchange for operating lease liabilities. In addition, the Company has added disclosure of $4,882,220 of leased assets obtained in exchange for operating lease liabilities in the unaudited condensed consolidated statement of cash flows for the nine months ended March 31, 2023.

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 $173,379 were reclassified from selling expenses to cost of revenue.

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 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.

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. 

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 11% and 11% respectively, of accounts receivable. On March 31, 2024, accounts receivable from two customers totaled approximately 11% and 10%.

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 $0 and $38,133, respectively. For the nine months ended March 31, 2023 and 2024, the Company recorded inventory reserve of $0 and $168,585, respectively.

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.

When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income/loss in the year of disposition. Estimated useful lives are as follows:

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 $9,133,707 and it matured on February 8, 2024.

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 15 - 20 years, which are based on the length of the license agreements as the Company expects to receive economic benefits over that time. The Company assesses the potential impairment to capitalized patent costs when events or changes in circumstances indicate that the carrying amount of our patent portfolio may not be recoverable. $247,702 and $979,295 of patent fees were capitalized during the three and nine months ended March 31, 2024. The amortization of the intangible assets was $0 and $9,755 for the three months ended March 31, 2023 and 2024 respectively. The amortization of the intangible assets was $0 and $11,262 for the nine months ended March 31, 2023 and 2024 respectively. The amortization expenses were included in the general and administrative expenses.

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.

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 30% of sales amount upon placing order, and the payment of the remaining 70% to be made before shipment. For cannabis vaping products, a tailored payment term is designed for each customer, based on the business relationship, order size and other considerations. All contract liabilities at the beginning of the period were recognized as revenues in the reporting period. The Company offers a thirty-day warranty. The warranty is an assurance-type warranty, and it offers replacement of products in case the products sold do not function as expected. In certain sales contracts, a right of return is offered. With a right of return, a customer is given the right to return the products if they are not satisfied with the product, and a credit would be given. The Company has a very low rate of return in history and a return reserve is accrued based on historical return rate and the management’s judgement. The Company has minimal incremental costs of obtaining a contract and are expensed when incurred. Sales taxes, which are sales and use or other similar taxes collected from the customer and remitted to the applicable taxing authority by the Company in accordance with applicable law, are excluded from revenue.

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. The net sales disaggregated by products for the three- and nine-month periods ended March 31, 2023 and 2024, were as follows:

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 $58,313 and $54,521, respectively. Shipping and handling costs for the nine months ended March 31, 2023 and 2024 are $231,691 and $221,273, respectively. They are included in the cost of revenue.

Research and development expenses   

Research and development expenses for the three months ended March 31, 2023 and 2024 were $42,449 and $163,764, respectively. Research and development expenses for the nine months ended March 31, 2023 and 2024 were $112,527 and $793,103, respectively. Such expenses were included in the general and administrative expenses.

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.

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 3,563,002 potentially dilutive shares, could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would have been antidilutive for the three and nine months ended March 31, 2023 and 2024.

The following table presents a reconciliation of basic net loss per share:

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.

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

For the three and nine months ended March 31, 2023 and 2024, the Company’s major customers, who accounted for more than 10% of the Company’s consolidated revenue, were as follows: 

(b) Suppliers

For the three and nine months ended March 31, 2023 and 2024, the Company’s suppliers, who accounted for more than 10% of the Company’s total purchases, were as follows:

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. As HKD is pegged to USD in a narrow range of US$1:HK$7.75 -7.85, after evaluation the management concluded that the misstatement resulted from the change of functional currency to all reporting periods prior to October 1, 2023, and correction of the error during the three months ended December 31, 2023 was immaterial given consideration of both quantitative and qualitative factors in assessing an item’s materiality. The functional currency of Aspire Science would be USD from October 2023.

4. CASH

Below is a breakdown of the Company’s cash balances in banks as of June 30, 2023, and March 31, 2024, both by geography and by currencies (translated into U.S. dollars):

“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, 2023, and March 31, 2024, accounts receivable consisted of the following:

The Company recorded $1,301,180, and $1,192,488 credit loss expenses for the three months ended March 31, 2023 and 2024, respectively. The Company recorded $2,226,090 and $3,318,772 credit loss expenses for the nine months ended March 31, 2023 and 2024, respectively. For the three months ended March 31, 2023 and 2024, the Company wrote off accounts receivable against allowance for credit losses of $526,085 and $65,801, respectively. For the nine months ended March 31, 2023 and 2024, the Company wrote off accounts receivable against allowance for credit losses of $526,085 and $771,961, respectively.

7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

As of June 30, 2023, and March 31, 2024, prepaid expenses and other current assets consisted of the following:

Prepayments primarily consist of prepayment for production testers and jigs for Ispire Malaysia, and prepayments for marketing services.

8. PROPERTY, PLANT AND EQUIPMENT, NET

As of June 30, 2023, and March 31, 2024, property, plant and equipment consisted of the following:

For the three months ended March 31, 2023 and 2024, depreciation expense amounted to $7,394, and $56,842, respectively. For the nine months ended March 31, 2023 and 2024, depreciation expense amounted to $20,887 and $127,387, respectively.

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 $1,000,000 into a preferred equity investment in Touch Point Worldwide, Inc. d/b/a/ Berify, a Delaware corporation (“Berify”). The Company purchased 909,091 shares of Berify Series Seed Preferred equity for $1 million, yielding a 2.3% ownership in Berify, and the Company also committed to invest an additional of $1 million into Berify’s preferred equity for 909,091 shares. As of March 31, 2024, the Company recorded the unpaid $1 million consideration in accrued liabilities and other payables on the consolidated balance sheet. On April 5, 2024, the Company completed its investment into Berify, giving the Company a total of 1,818,182 shares equal to a 4.5% interest in Berify for $2 million. The Series Seed Preferred equity comes with a variety of protective rights for Series Seed Preferred shareholders. The investment is accounted for by the cost method.

10. CONTRACT LIABILITIES

As of June 30, 2023, and March 31, 2024, the Company had total contract liabilities of $988,556 and $1,327,371, respectively. These liabilities are advance deposits received from customers after an order has been placed. As of March 31, 2024, the Company expects all of the contract liabilities to be settled in less than one year. The increase in the balance at March 31, 2024 was due to more orders on hand on that date.

11. LEASES

The Company has operating lease arrangements for office premises in Hong Kong, California and Malaysia. 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 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.

The balances for the right-of-use assets and lease liabilities where the Company is the lessee are presented as follow:

As of March 31, 2024, the maturities of our lease liabilities (excluding short-term leases) are as follows: 

The Company incurred lease costs, which include the payment of short-term leases, of $275,126 and $413,911 on the Company’s unaudited condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2023 and 2024, respectively. The Company incurred lease costs, which include the payment of short-term leases, of $1,033,862 and $1,148,902 on the Company’s unaudited condensed consolidated statements of operations and comprehensive loss for the nine months ended March 31, 2023 and 2024, respectively.

The Company made payments of $300,593 and $378,560 under the lease agreements during the three months ended March 31, 2023 and 2024, respectively. The Company made payments of $840,623 and $1,089,246 under the lease agreements during the nine months ended March 31, 2023 and 2024, respectively.

The weighted-average remaining lease term related to the Company’s lease liabilities as of June 30, 2023 and March 31, 2024 was 4 years and 3 years, respectively.

The discount rate related to the Company’s lease liabilities as of both June 30, 2023 and March 31, 2024 was 8%. The discount rates are generally based on estimates of the Company’s incremental borrowing rate, as the discount rates implicit in the Company’s leases cannot be readily determined.

12. ACCRUED LIABILITIES AND OTHER PAYABLES

As of June 30, 2023 and March 31, 2024, accrued liabilities and other payables consisted of the following: 

13. RELATED PARTY TRANSACTIONS 

14. INCOME TAXES 

For the three and nine months ended March 31, 2023 and 2024 income (loss) before income taxes by major taxing jurisdiction consists of:

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 $63,853 was from income generated during the year ended June 30, 2023. As at March 31, 2024, there was no income tax payable as the tax position was prepaid provisional tax from Hong Kong operation of $184,609. All income tax payables or prepaid amounts arose solely from Hong Kong operation.

As at March 31, 2024, there were unrecognized deferred tax assets of $7,442,831, out of which $5,855,858 were net operating loss carryforwards in the U.S. that may result in future income tax benefits, resulting from net operating losses of $27,885,039 from Aspire North America LLC. The amount of the valuation allowance as of March 31, 2024 was $7,442,831, resulting from an addition of $2,942,387 to the valuation allowance of $4,500,444 as of June 30, 2023.

15. WARRANTS 

On April 3, 2023, the Company issued representative of the underwriters 62,100 warrants. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $8.75, during the period commencing April 3, 2023, and expiring on April 3, 2028. None of the warrants have been exercised yet. As of March 31, 2024, there are 62,100 warrants outstanding, with a remaining life of approximately 49 months and aggregate intrinsic value of $0.

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 15,000,000 shares of common stock may be issued pursuant to options, restricted stock or RSUs grants. The Plan is administered by the Compensation Committee of the Board of Directors. Awards under the Plan may be granted to officers, directors, employees and those consultants who qualify as a consultant or advisor under the instructions to the Company’s Form S-8 (File No. 333-273458) filed with U.S. Securities and Exchange Commission on July 26, 2023. The Compensation Committee has broad discretion in making awards, provided that any options shall be exercisable at the fair market value on the date of grant.

Restricted stocks

During the nine months ended March 31, 2024, 56,976 shares of common stock were issued to the Company’s board of directors and consultants in settlement of restricted stock granted under the Plan. Restricted stocks granted to directors and consultants are vested over three to six months and fully vested as of March 31, 2024. There are no unrecognized compensation expenses related to unvested restricted stocks as of March 31, 2024.

During the nine months ended March 31, 2024, 3,072,500 stock options and 637,235 RSUs were granted to the Company’s employees under the Plan. See below for details.

Stock Options

The following is a summary of stock option activity transactions as of and for the period ended June 30, 2023 and 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 $0. The aggregate intrinsic value of options exercisable with an exercise price less than the closing price of the Company’s common stock as of March 31, 2024 was $0. Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the period in excess of the weighted-average exercise price multiplied by the number of options outstanding or exercisable.

Total expense of options vested for the three months ended March 31, 2023 and 2024, was $0 and $1,078,235, respectively. Total expense of options vested for the nine months ended March 31, 2023 and 2024, was $0 and $2,785,328, respectively. The options granted during the nine months ended March 31, 2024 were valued using the binomial option pricing model based on the following range of assumptions:

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. RSUs are accounted for as equity using the fair value method, which requires measurement and recognition of compensation expense for all awards granted to employees, directors and consultants based upon the grant-date fair value.

Total expense for the RSUs during the three and nine months ended March 31, 2024 was $722,709 and $1,341,179.

The following table summarizes the allocation of stock-based compensation in the accompanying consolidated statements of operations and comprehensive loss:

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 2,050,000 shares of common stock, with par value $0.0001 per share, at a public offering price of $6.00 per share. This offering generated proceeds of $12,300,000, offset by offering cost of $1,514,094, which contributed an increase of share capital of $205 and additional paid in capital of $10,785,701.

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.

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 3 years (and maximum of 9 years), the license agreement permits the Company to manufacture, market, sell, and distribute vape products bearing BRKFST’s marks. The license agreement calls for the Company to pay BRKFST royalties (equal to a mutually agreed upon percentage of net profits) on the sale of products bearing said marks, which said royalties may become material if the sales of said products are successful.  Further, the license agreement requires (i) joint marketing efforts of the Company and BRKFST and (ii) that a mutually agreed upon percentage of net profits be used to fund the marketing of the licensed products. There were no sales with BRKFST’s marks during the three and nine months ended March 31, 2024.

As of March 31, 2024, the Company 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 Berify’s preferred equity for 909,091 shares. See Note 9.

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 $1 million to the Joint Venture in cash for operating expenses, and (ii) entered into a binding commitment to make an additional capital contribution to the Joint Venture in the aggregate amount of up to $9 million. Additionally, as disclosed in the Company’s Current Report on Form 8-K filed with the SEC on April 11, 2024, in a private placement concurrent with the closing of the JV Agreement the Company issued a warrant to purchase 111,111 shares of its Common Stock to Berify (the “Warrant”). The Warrant has an exercise price of $9.00 per share, is exercisable immediately, and will expire five years from the date of issuance, or April 5, 2029.

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.

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.

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:

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).

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.

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.

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).

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.

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.

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).

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).

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.

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 March 31, 2024, the maturities of our lease liabilities (excluding short-term leases) are as follows:

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.