Ispire Technology Inc 10-Q for FY2024 Q1
Ispire Technology Inc. (ISPR)
About this 10-Q
Ispire Technology Inc filed this 10-Q on November 14, 2023, covering the quarter ended September 30, 2023 (FY2024 Q1).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $42.86M
- up 59.1% from $26.94M a year earlier
- Net loss
- $1.37M
- compared with a net loss of $2M a year earlier
- Diluted EPS
- -$0.03
- compared with -$0.04 a year earlier
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)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class: | Name of Each Exchange on Which Registered: | Ticker Symbol | ||
| 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. Yes ☐
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 September 30, 2023, 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 the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our prospectus dated April 3, 2023 in “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 September 30, | ||||||||
| 2022 | 2023 | |||||||
| 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 | ||||||||
| Exchange gain (loss), net | ( | ) | ||||||
| Other income (expenses), net | ( | ) | ( | ) | ||||
| Total other income (expense), net | ( | ) | ||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income taxes - current | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Other comprehensive (loss) income | ||||||||
| 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, | September 30, | |||||||
| 2023 | 2023 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Held-to-maturity investment | ||||||||
| Total current assets | ||||||||
| Other assets: | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets | ||||||||
| Rental deposit | ||||||||
| Right-of-use assets – operating leases | ||||||||
| 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 related parties | ||||||||
| Income tax payable - current | ||||||||
| Operating lease liabilities – current portion | ||||||||
| Total current liabilities | ||||||||
| Other liabilities: | ||||||||
| Operating lease liabilities – net of current portion | ||||||||
| Total liabilities | $ | $ | ||||||
| Stockholders’ equity: | ||||||||
| Common stock, par value $ | ||||||||
| Preferred stock, par value $ | ||||||||
| Equity reserve | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| 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
| Ordinary shares | Preferred shares | Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||||||
| Number of | Number of | Paid-in | Equity | Retained | Comprehensive | Shareholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Reserve | Earnings | (Loss)/Income | Equity | ||||||||||||||||||||||||||||
| Balance, July 1, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Balance, July 1, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for equity incentive awards | - | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
3
ISPIRE TECHNOLOGY INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three Months ended September 30, | ||||||||
| 2022 | 2023 | |||||||
| Net loss: | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income from operations to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Depreciation of right-of-use assets | ||||||||
| Accounts receivable impairment | ||||||||
| Stock-based compensation expenses | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Contract liabilities | ( | ) | ||||||
| Accrued liabilities and other payables | ( | ) | ( | ) | ||||
| 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 | - | ( | ) | |||||
| Net cash used in investing activities | $ | ( | ) | $ | ( | ) | ||
| Cash flows from financing activities: | ||||||||
| Advances to related parties | ( | ) | ( | ) | ||||
| Principal portion of lease payment | ( | ) | ( | ) | ||||
| Net cash used in financing activities | $ | ( | ) | $ | ( | ) | ||
| Net increase(decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents - beginning of period | ||||||||
| Cash and cash equivalents - end of period | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
4
ISPIRE TECHNOLOGY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Ispire Technology Inc. (the “Company”) 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, the chief executive officer and his wife are directors of
both companies, and own
On July 29, 2022:
| ● | Aspire Global transferred |
| ● | Aspire Holdings transferred |
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 |
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 development, marketing and sales of tobacco vaping products.
In October 2022, the directors and stockholders
of the Company approved the 2022 Equity Incentive Plan (the “Plan”) pursuant to which up to
5
Impact of COVID-19
In December 2019, coronavirus disease 2019 (COVID-19) was first reported to have surfaced in Wuhan, China. During 2020, the disease spread to many parts of the world. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in much of the world, most of which are no longer in effect. The World Health Organization ended the global emergency status for COVID-19 on May 5, 2023, and the United States Department of Health and Human Services declared that the public health emergency from COVID-19 expired at the end of the day on May 11, 2023.
The extent to which COVID-19 impacts the Company’s operations on an ongoing basis is highly uncertain. Since the Company’s products are presently manufactured in China by a related party, any changes in the outbreak in China and any changes in the Chinese government’s policy may affect the Company’s supplier’s operations which could affect its ability to manufacture and deliver product in a timely manner.
Supply Chain Risks
One of effects of the COVID-19 has been delays resulting from supply chain issues, which relate to the difficulty that companies have in having their products manufactured, shipped to the country of destination, and delivered from the port of entry to the customer’s location. As the port delays have significantly decreased, the Company does not believe that the supply chain issues that affected its operations are currently affecting the Company. The Company cannot assure you that delays will not affect its business in the future.
In 2021, Shenzhen Yi Jia, the Company’s principal supplier of products, suffered a chip shortage resulting in a slowdown in delivery of its products to the Company from April to August 2021. To secure the supply of chips, Shenzhen Yi Jia changed the payment terms to chip suppliers from 30 days after delivery in the past to prepayment, and it engaged two new chip suppliers. Since September 2021, Shenzhen Yi Jia has obtained a supply of chips to meet its production needs and the chip shortage no longer affects its production. In 2022, a slowdown in the delivery of components to Shenzhen Yi Jia resulting from supply chain slowdowns as a result of the effects of mainland China’s COVID policy resulted in an increase in cost of revenue during the three months period ended September 30, 2022. The Company cannot assure you that it will not suffer from a chip shortage or that the effects of China’s COVID policy will not affect Shenzhen Yi Jia’s ability or the ability of its suppliers to delivery products in a timely manner.
Market and Economic Conditions
In recent years, the United States and other markets have experienced cyclical or episodic downturns, and worldwide economic conditions remain uncertain, including, as a result of the COVID-19 pandemic, supply chain disruptions, the Russian invasion of Ukraine, instability in the U.S. and global banking systems, rising fuel prices, increasing interest rates or foreign exchange rates and increased inflation and the possibility of a recession. A significant downturn in economic conditions may affect the market for the Company’s products and its supplier’s ability to provide products on acceptable terms.
The Company cannot predict the timing, strength, or duration of any future economic slowdown or any subsequent recovery generally, or in any industry. If the conditions in the general economy and the markets in which the Company operates worsen from present levels, its business, financial condition, operating results could be adversely affected.
6
E-cigarette regulation
Regulation regarding e-cigarette 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, regulation 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 August 8, 2016, a PMTA was required to be submitted to the FDA by 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 by September 9, 2020, a PMTA a premarket authorization issued in response to a PMTA 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-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 that 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 unaudited 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 September 30, 2023 and the results of operations for the three months ended September 30, 2022 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 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 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 registration statement on Form S-1.
The results of operations for the three month periods ended September 30, 2023 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 doubtful accounts, the useful lives of property and equipment, impairment of long-lived assets, and deferred cost. 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” during the three months ended September 30, 2023. 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.
The Company estimates its allowances for expected credit losses for accounts receivable by considering past events, including any historical default, current economic conditions and certain forward-looking information, including reasonable and supportable forecasts. As of July 1, 2023, the methodologies that the Company uses to estimate the allowance for expected credit losses for accounts receivable are as follows:
The Company reviews all accounts receivable considered at risk semi-annually and performs an analysis based upon current information available about the customers, such as financial statements, news reports, published credit ratings as well as collateral net of repossession cost, prior collection history and current and future expected economic conditions. Using this information, the Company determines the expected cash flow for the accounts and other receivables and calculates an estimate of the potential loss and the probability of loss. For those accounts for which the loss is probable, the Company records a specific allowance.
The Company considers forward-looking macroeconomic variables such as gross domestic product when quantifying the impact of economic forecasts on its allowance for credit losses. Macroeconomic variables may vary based on historical experiences, portfolio composition and current environment. The Company also considers the impact of current conditions and economic forecasts relating to client-credit ratings, in addition to performing a qualitative review of credit risk factors across the portfolio. Forward-looking estimates require the use of judgment, particularly in times of economic uncertainty. The Company writes off receivables when all efforts at collection have been exhausted and the receivable is considered uncollectible.
Investment
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 September 30, 2023 is $
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
8
Revenue recognition
The Company sells its products to customers and recognizes revenue in accordance with the guidance of ASC 606, Revenue from Contracts with Customers. 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 customer rebates, 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, historical experience, trend analysis, and projected market conditions in the various markets served. Because the Company serves numerous markets, the sales incentive programs offered vary across businesses, but the most common incentive relates to amounts paid or credited to customers for achieving defined volume levels or growth objectives.
Disaggregated Revenue
In accordance with ASC 606-10-50-5, 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 September 30, | ||||||||
| 2022 | 2023 | |||||||
| Net sales by products | ||||||||
| Tobacco vaping products | $ | $ | ||||||
| Cannabis vaping products | ||||||||
| Total | $ | $ | ||||||
Cost of revenue
Cost of revenue for the three months ended September 30, 2022 and 2023 consisted primarily of the cost of purchasing vaping products, which were purchased from a related party. See Note 11.
Stock-based compensation
The Company measures and recognizes compensation expenses for stock-based payment awards, including stock options, and restricted stock units (“RSUs”) granted to directors, and advisors, 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 fair market value 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, net of estimated forfeitures, 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.
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.
The Company had reviewed recent accounting pronouncements and determined that none of the pronouncements not yet effective are expected to have a material impact on the Company’s financial statements.
9
Accounting pronouncements adopted during the three months ended September 30, 2023
In June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses (Topic 326). This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. In July 2019, the FASB delayed the effective date for this ASU for private companies (including emerging growth companies) and will be effective for annual reporting periods beginning after December 15, 2022, with early adoption permitted. As the adoption of this standard on July 1, 2023 was immaterial, the Company did not record a cumulative-effect adjustment to retained earnings on that date.
On September 29, 2022, FASB issued ASU 2022-04: Liabilities-Supplier Finance Programs (Topic 405-50): Disclosure of Supplier Finance Program Obligations. This update requires that a buyer in a supplier finance program disclose additional information about the program to allow financial statement users to better understand the effect of the programs on an entity’s working capital, liquidity, and cash flows. This update will be effective for the Company for fiscal years beginning after December 15, 2022, except for the amendment on roll forward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The adoption of this update had no material impact on the Company’s consolidated financial statements.
Customer Concentration
For the three months ended September 30, 2022 and 2023, the Company’s
major customers, who accounted for more than
| Three months ended September 30, | ||||||||
| 2022 | 2023 | |||||||
| Major Customers | ||||||||
| Customer A | % | % | ||||||
| Customer B | % | |||||||
| * |
3. CASH AND CASH EQUIVALENTS
| As of June 30, | As of September 30, | |||||||
| By Geography: | 2023 | 2023 | ||||||
| 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 and “RM” refers to Malaysia ringgit.
4. FAIR VALUE MEASUREMENT
As of June 30, 2023 and September 30, 2023, information about inputs into the fair value measurement of the Company’s assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to their initial recognition is as follows:
Cash and cash equivalents, accounts receivable, prepaid expenses and other receivables are financial assets with carrying values that approximate fair value due to their short-term nature. Accounts payable, accounts payable – related party, contract liabilities, accrued liabilities and other payables and due to related parties are financial liabilities with carrying values that approximate fair value due to their short-term nature.
10
5. ACCOUNTS RECEIVABLE, NET
| As of June 30, | As of September 30, | |||||||
| 2023 | 2023 | |||||||
| Accounts receivable – gross | $ | $ | ||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
The Company recorded $
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
| As of June 30, | As of September 30, | |||||||
| 2022 | 2023 | |||||||
| Prepaid inventories | $ | $ | ||||||
| Other receivable | ||||||||
| Prepayment | ||||||||
| Deposit paid | ||||||||
| Total | $ | $ | ||||||
Prepayments primarily consist of prepayment for raw materials and consulting services provided by suppliers.
7. PROPERTY, PLANT AND EQUIPMENT, NET
| As of June 30, | As of September 30, | |||||||
| 2022 | 2023 | |||||||
| Leasehold improvement | $ | $ | ||||||
| Office and other equipment | ||||||||
| Furniture and fixture | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
For the three months ended September 30,
2022 and 2023, depreciation expense amounted to $
11
8. CONTRACT LIABILITIES
As of June 30, 2023 and September 30, 2023, the
Company had total contract liabilities of $
9. 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 September 30, | |||||||
| 2023 | 2023 | |||||||
| Right-of-use assets | $ | $ | ||||||
| Lease liabilities – current | $ | $ | ||||||
| Lease liabilities – non-current | ||||||||
| Total | $ | $ | ||||||
| As of September 30, 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total future lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Total lease liabilities | ||||
The Company incurred lease costs, which include
the amortization of the right-of-use assets and 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 September 30, 2023 was
The discount rate related to the Company’s
lease liabilities as of both June 30, 2023 and September 30, 2023 was
12
10. ACCRUED LIABILITIES AND OTHER PAYABLES
| As of June 30, | As of September 30, | |||||||
| 2023 | 2023 | |||||||
| Other payables | $ | $ | ||||||
| Accrued salaries and related benefits | ||||||||
| Accrued expenses | ||||||||
| Other tax payable | ||||||||
| Total | $ | $ | ||||||
11. RELATED PARTY TRANSACTIONS
| a) |
| Name of related parties and Relationship with the Company |
| b) | Tuanfang Liu is also Aspire Global’s co-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
September 30, 2023, Mr. Liu and Ms. Zhu beneficially own |
| c) | The balances in due to related parties at June 30, 2023 and
September 30, 2023 represent amounts due to Shenzhen Yi Jia of $ |
| d) | For both three month periods ended September 30, 2022 and
2023, substantially all of the Company’s tobacco and cannabis vaping products were purchased from Shenzhen Yi Jia. As of June 30,
2023 and September 30, 2023, the accounts payable–- related party was $ |
12. INCOME TAXES
| Three months ended September 30, | ||||||||
| 2022 | 2023 | |||||||
| HK | $ | $ | ||||||
| U.S. | ( | ) | ( | ) | ||||
| Malaysia | ( | ) | ||||||
| Total | $ | ( | ) | $ | ( | ) | ||
The Company’s effective tax rate for the three months ended September 30, 2022 and 2023 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 September 30, 2023, income tax payable of $
As at September 30, 2023, there were unrecognized deferred tax assets
of $
13
13. STOCK-BASED COMPENSATION
Stock Options
On September 4, 2023, the Board, as administrator
of the Plan, granted pursuant to the Plan non-qualified stock options to its executive officers, and other employees to purchase an aggregate
of
| Number of options | Weighted average exercise price | Weighted average fair value per option | ||||||||||
| Outstanding and exercisable at June 30, 2023 | $ | $ | ||||||||||
| Granted | $ | $ | ||||||||||
| Exercised | $ | $ | - | |||||||||
| Expired | $ | $ | - | |||||||||
| Outstanding and exercisable at September 30, 2023 | $ | $ | ||||||||||
The aggregate intrinsic value of options exercised
for each of the three months ended September 30, 2022 and 2023 was $
| Three months ended September 30, 2023 | ||
| Risk-free interest rate | ||
| Expected life | ||
| Expected volatility | ||
| Expected dividend yield |
|
Number of options granted |
Vesting period |
Exercise price |
Exercisable period |
Weighted remaining contractual life in years | |||||
| In 2023 | |||||||||
| $ | |||||||||
| $ | |||||||||
| $ | |||||||||
| $ | |||||||||
| $ |
A total of
14
RSUs
RSUs granted to directors and employees vest cumulatively
as to one-third of the restricted stock units on each of the first three anniversaries of the date of grant. RSUs granted to consultants
vest over the respective service periods.
| Unvested Shares | Weighted average grant date fair value | |||||||
| Unvested, June 30, 2023 | $ | |||||||
| Conversion | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Canceled and forfeited | ||||||||
| Unvested, September 30, 2023 | $ | |||||||
The aggregate grant date fair value for the RSUs
during the three months period ended September 30, 2023 was $
A total of $
14. EARNINGS PER SHARE
| Three months ended September 30, | ||||||||
| 2022 | 2023 | |||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| $ | ( | ) | $ | ( | ) | |||
15. SUBSEQUENT EVENTS
On October 9, 2023, the Board, as administrator
of the 2022 Equity Incentive plan, granted pursuant to the Plan non-qualified stock options to its employees from Ispire Malaysia to purchase
an aggregate of
On November 3, 2023, the Board, as administrator
of the 2022 Equity Incentive plan, granted pursuant to the Plan non-qualified stock options to one of its employee to purchase an aggregate
of
15
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 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 PRC and Russia. Our tobacco vaping products are marketed under the Aspire brand name and are sold primarily through our distribution network. 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 $0.4 million and $0.1 million for the three months ended September 30, 2022 and 2023, 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 will be severely impacted since all of our cannabis revenue for the three months ended September 30, 2022 and 2023 was generated from sales in the United States
Effects of COVID-19 Pandemic
In December 2019, coronavirus disease 2019 (COVID-19) was first reported to have surfaced in Wuhan, China. During 2020, the disease spread to many parts of the world. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in much of the world, most of which are no longer in effect. The World Health Organization ended the global emergency status for COVID-19 on May 5, 2023, and the United States Department of Health and Human Services declared that the public health emergency from COVID-19 expired at the end of the day on May 11, 2023.
The extent to which COVID-19 impacts our operations on an ongoing basis is highly uncertain. Since our products are presently manufactured in China by a related party, any changes in the outbreak in China and any changes in the Chinese government’s policy may affect our supplier’s operations which could affect its ability to manufacture and deliver product in a timely manner.
16
Supply Chain Risks
One of the effects of the COVID-19 has been delays resulting from supply chain issues, which relate to the difficulty that companies have in having their products manufactured, shipped to the country of destination, and delivered from the port of entry to the customer’s location. As the port delays have significantly decreased, we do not believe that the supply chain issues that affected our operations are currently affecting us. We cannot assure you that delays will not affect our business in the future.
In 2021, Shenzhen Yi Jia suffered a chip shortage resulting in a slowdown in delivery of its products to the Company from April to August 2021. To secure the supply of chips, Shenzhen Yi Jia changed the payment terms to chip suppliers from 30 days after delivery in the past to prepayment, and it engaged two new chip suppliers. Since September 2021, Shenzhen Yi Jia has advised us that it obtained a supply of chips to meet its production needs and the chip shortage no longer affects its production. In 2022, a slowdown in the delivery of components to Shenzhen Yi Jia resulting from supply chain slowdowns as a result of the effects of the PRC’s COVID policy resulted in an increase in cost of revenue during the period. We cannot assure you that we will not suffer from a chip shortage or that the effects of COVID or the PRC’s COVID policy will not affect Shenzhen Yi Jia’s ability or the ability of its suppliers to delivery products in a timely manner.
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 doubtful accounts was $0 and $1.1 million at September 30, 2022 and 2023, 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 accurately assess the creditworthiness of our customers; (iii) our failure to implement effective collection efforts; and (iv) 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. |
17
Results of Operations
Three Months Ended September 30, 2022 and 2023
The following table sets forth a summary of our consolidated statements of operations and comprehensive income for the three months ended September 30, 2022 and 2023 (dollars in thousands except per share amounts).
| Three Months ended September 30, | ||||||||||||||||
| 2022 | 2023 | |||||||||||||||
| % of Revenue | % of Revenue | |||||||||||||||
| Revenue | $ | 26,943 | 100.0 | % | $ | 42,865 | 100.0 | % | ||||||||
| Cost of revenue | (22,151 | ) | (82.2 | )% | (35,976 | ) | (83.9 | )% | ||||||||
| Gross profit | 4,792 | 17.8 | % | 6,889 | 16.1 | % | ||||||||||
| Operating expenses | (6,007 | ) | (22.3 | )% | (7,800 | ) | (18.2 | )% | ||||||||
| Loss from operations | (1,215 | ) | (4.5 | )% | (911 | ) | (2.1 | )% | ||||||||
| Other income(loss), net | (519 | ) | (1.9 | )% | 33 | 0.1 | % | |||||||||
| Loss before income taxes | (1,734 | ) | (6.4 | )% | (878 | ) | (2.0 | )% | ||||||||
| Income taxes | (267 | ) | (1.0 | )% | (496 | ) | (1.2 | )% | ||||||||
| Net loss | (2,001 | ) | (7.4 | )% | (1,374 | ) | (3.2 | )% | ||||||||
| Other comprehensive (loss)income | (7 | ) | (0.1 | )% | 44 | 0.1 | % | |||||||||
| Comprehensive loss | (2,008 | ) | (7.5 | )% | (1,330 | ) | (3.1 | )% | ||||||||
| Net loss per ordinary share (basic and diluted) | $ | (0.04 | ) | $ | (0.03 | ) | ||||||||||
| Weighted ordinary shares outstanding | 50,000,000 | 54,246,212 | ||||||||||||||
Revenue
The following tables set out the breakdown of our revenue percentage by region based on information provided to us by our distributors.
| For the Three Months ended September 31, | ||||||||
| 2022 | 2023 | |||||||
| Europe | 56.1 | % | 46.4 | % | ||||
| North America | 32.7 | % | 41.7 | % | ||||
| Asia Pacific (excluding PRC) | 10.8 | % | 11.8 | % | ||||
| Others | 0.4 | % | 0.1 | % | ||||
| Total | 100.0 | % | 100.0 | % | ||||
18
Our revenue increased by $15,921,597, or 59.1%, from $26,943,050 for the three months ended September 30, 2022, to $42,864,647 for the three months ended September 30, 2023. All sales of cannabis vaping products are from 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 from tobacco vaping products. The increase in revenue is the combined effect of (i) increases in sales of cannabis vaping products of $9.3 million from $8.0 million for the three months ended September 30, 2022 to approximately $17.3 million for the three months ended September 30, 2023, (ii) increases in sales of tobacco vaping products in Europe of $4.7 million from $15.1 million for the three months ended September 30, 2022 to approximately $19.9 million for the three months ended September 30, 2023, (iii) increases in sales of tobacco vaping products in Asia Pacific (excluding PRC) of $2.2 million from $2.9 million for the three months ended September 30, 2022 to approximately $5.1 million for the three months ended September 30, 2023.
Cost of Revenue
Cost of revenue mainly consists of cost of purchases of vaping products, which we purchased from Shenzhen Yi Jia. Cost of revenue increased by $13,825,408, or 62.4%, from $22,150,947 for the three months ended September 30, 2022 to $35,976,355 for the three months ended September 30, 2023. 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 September 30, 2022 |
||||||||||||||||
| Revenue | Cost of revenue |
Gross profit | Gross profit % |
|||||||||||||
| Tobacco vaping products | $ | 18,947 | $ | 15,905 | $ | 3,042 | 16.1 | % | ||||||||
| Cannabis vaping products | 7,996 | 6,246 | 1,750 | 21.9 | % | |||||||||||
| Total | $ | 26,943 | $ | 22,151 | $ | 4,792 | 17.8 | % | ||||||||
| For the Three Months Ended September 30, 2023 |
||||||||||||||||
| Revenue | Cost of revenue |
Gross profit | Gross profit % |
|||||||||||||
| Tobacco vaping products | $ | 25,532 | $ | 21,497 | $ | 4,035 | 15.8 | % | ||||||||
| Cannabis vaping products | 17,333 | 14,479 | 2,854 | 16.5 | % | |||||||||||
| Total | $ | 42,865 | $ | 35,976 | $ | 6,889 | 16.1 | % | ||||||||
Gross profit increased by $2,096,189, or 43.7%, from $4,792,103 for the three months ended September 30, 2022 to $6,888,292 for the three months ended September 30, 2023, while our gross margin decreased from 17.8% to 16.1%. The gross margin for tobacco vaping products remained constant. The decrease in gross margin for cannabis vaping products was primarily due to (i) a new model of cannabis vaping product was launched in July 2023, that Aspire North America offered discounts to clear the inventories of the older model that led to a drop in gross margin, and (ii) a change in product mix with more lower margin products being sold during the three months ended September 30, 2023.
19
Operating Expenses
Operating expenses increased $1,792,594 or 29.8%, from $6,006,971 for the three months ended September 30, 2022 to $7,799,565 for the three months ended September 30, 2023.
Our sales and marketing expenses mainly consist of employees’ salaries and benefits, marketing expense, travel expenses and others.
Sales and marketing expenses decreased by $432,493, or 28.8%, from $1,501,156 for the three months ended September 30, 2022 to $1,068,663 for the three months ended September 30, 2023. The decrease in sales and marketing expenses for the three-month periods ended September 30, 2023 was primarily due to a reduction in our marketing campaign and trade shows for our cannabis vaping products.
Our general and administrative expenses mainly consist of compensation and benefits, rental expense, professional fees and other administrative expenses. General and administrative expenses increased by $2,225,087, or 49.4%, from $4,505,815 for the three months ended September 30, 2022 to $6,730,902 for the three months ended September 30, 2023. The increase was primarily due to (i) an increase of $0.9 million for payroll expenses as more employees were hired by us for expansion of our cannabis business and building a manufacturing plant in Malaysia, (ii) an increase in professional fees of $0.9 million for expenses incurred being a public company for the three months ended September 30, 2023, (iii) stock-based compensation expense of $1.0 million incurred in the three months ended September 30, 2023 as compensation for management, employees and service providers, offset by a decrease in sample expenses of $0.4 million as less samples were distributed during the three months ended September 30, 2023, a decrease in failed units expenses of $0.4 million as there were no failed units during the three months ended September 30, 2023 and the increase in our expenses is not the result of inflation. Inflation in Hong Kong, where Aspire Science is located, was relatively stable.
Other expense(income), net
Other income, net includes interest income, interest expense, exchange gain (loss), net and other income (expense).
Interest income was $510 for the three months ended September 30, 2022 and $72,246 for the three months ended September 30, 2023.
Exchange loss(gain) changes by $504,455, or 100.7%, from net exchange loss of $500,794 for the three months ended September 30, 2022 to net exchange gain of $3,661 for three months ended September 30, 2023.
As a result of these factors, other expense(income), net increased by $552,188, from other expense, net of $519,485 for the three months ended September 30, 2022 to other income, net of $32,703 for three months ended September 30, 2023.
Income Taxes
Income taxes increased by $228,644, or 85.5%, from $267,401 for the three months ended September 30, 2022 to $496,045 for the three months ended September 30, 2023. We had a consolidated net loss for both three month periods ended September 30, 2022 and 2023, 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. 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 decreased by $627,139, from net loss of $2,001,754, or $(0.04) per share (basic and diluted) for the three months ended September 30, 2022 to a net loss of $1,374,615, or $(0.03) per share, for the three months ended September 30, 2023.
20
Liquidity and Capital Resources
The following table summarizes our changes in working capital from June 30, 2023 to September 30, 2023 (dollars in thousands).
| June 30, 2023 | September 30, 2023 | Change | % Change | |||||||||||||
| Current Assets | $ | 84,811 | $ | 81,613 | $ | (3,198 | ) | (3.8 | )% | |||||||
| Current Liabilities | 55,962 | 54,006 | (1,956 | ) | (3.5 | )% | ||||||||||
| Working Capital | 28,849 | 27,607 | (1,242 | ) | (4.3 | )% | ||||||||||
The following table sets forth information as to consolidated cash flow information for the three months ended September 30, 2022 and 2023 (dollars in thousands).
| Three Months Ended September 30, | Increase | |||||||||||
| Consolidated cash flow data: | 2022 | 2023 | (Decrease) | |||||||||
| Net cash provided by (used in) operating activities | $ | 2,236 | $ | (12,880 | ) | $ | (15,116 | ) | ||||
| Net cash used in investing activities | (325 | ) | (789 | ) | (464 | ) | ||||||
| Net cash used in financing activities | (291 | ) | (946 | ) | (655 | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | 1,620 | (14,615 | ) | (16,235 | ) | |||||||
Net cash flow provided by operating activities for the three months ended September 30, 2022 of $2.2 million, reflected our net loss of $2.0 million, adjusted primarily as follows: an add-back of depreciation of right-of-use assets of $0.3 million, increase in accounts payable of $15.4 million, offset by an increase in accounts receivable of $5.9 million, an increase in inventories of $4.8 million and a decrease in contract liabilities of $1.0 million.
Net cash flow used in operating activities for the three months ended September 30, 2023 of $12.9 million, reflected our net loss of $1.4 million, adjusted primarily as follows: an add-back of depreciation of right-of-use assets of $0.3 million, an add-back of stock-based compensation expenses of $1.0 million, an add-back of accounts receivable impairment of $0.2 million, a decrease in inventories of $1.9 million, a decrease of prepaid expenses and other current assets of $1.6 million, an increase in income tax payable of $0.5 million, offset by an increase in accounts receivable of $14.7 million and a decrease in accounts payable of $2.5 million.
Net cash flow used in investing activities for the three months ended September 30, 2022 of $0.3 million reflected primarily purchase of property, plant and equipment of $0.3 million.
Net cash flow used in investing activities for the three months ended September 30, 2023 of $0.8 million reflected primarily purchase of property, plant and equipment of $0.5 million and acquisition of intangible assets of $0.3 million.
Net cash flow used in financing activities for the three months ended September 30, 2022 of $0.3 million reflected primarily advances to related parties of $0.1 million, and principal portion of lease payment of $0.2 million.
Net cash flow used in financing activities for the three months ended September 30, 2023 of $0.9 million reflected primarily advances to related parties of $0.7 million, and principal portion of lease payment of $0.2 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 cash flows provided by operating activities, and the net proceeds from our initial public offering of $18.3 million 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.
21
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 September 30 2023, we had contract liabilities of $988,556 and $1,290,061, 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 where we are the lessee are presented as follow:
| As of June 30, | As of September 30, | |||||||
| 2023 | 2023 | |||||||
| Right-of-use assets | $ | 4,061,617 | $ | 4,285,182 | ||||
| Lease liabilities – current | $ | 944,525 | $ | 1,207,234 | ||||
| Lease liabilities – non-current | 3,356,232 | 3,387,844 | ||||||
| Total | $ | 4,300,757 | $ | 4,595,078 | ||||
As of September 30, 2023, the maturities of our lease liabilities (excluding short-term leases) are as follows:
| As of September 30, 2023 | ||||
| 2024 | 1,525,895 | |||
| 2025 | 1,549,132 | |||
| 2026 | 1,394,839 | |||
| 2027 | 806,759 | |||
| Total future lease payments | 5,276,625 | |||
| Less: imputed interest | (681,547 | ) | ||
| Total lease liabilities | 4,595,078 | |||
Trend Information
Other than as disclosed elsewhere in this registration statement, 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 continuing 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.
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.
22
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.
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 the lack of controls needed to enable us to record assets acquired from a controlling stockholder in accordance with GAAP. 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, our net loss for the nine months ended March 31, 2023 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), and our net loss for the three months ended March 31, 2023 decreased from $3,106,855, or $0.06 per share (basic and diluted) to $2,334,223, or $0.05 pe share (basic and diluted). The decrease in net loss reflects the elimination of amortization of the intangible assets transferred from the controlling stockholder. On the March 31, 2023 balance sheet, (i) intangible assets decreased from $72,714,652 to nil. (ii) capital contribution decreased from $74,259,915 to nil and (iii) stockholders’ equity decreased from $79,953,608 to $7,238,957.
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 September 30, 2023, we appointed a new chief financial officer and a vice president of finance, as part of our program to develop and implement effective internal controls over financial reporting, and we are continuing 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 error 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.
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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 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. However, we cannot assure you that the FDA will consider the response adequate and will not initiate regulatory or enforcement action based on an alleged failure to comply with the request or that the FDA will not initiate regulatory or enforcement action on other grounds based on the contents of the documents produced in the response. Either result could materially and adversely affect our business, financial condition, and results of operations.
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 Form 10-K, filed with the SEC on September 19, 2023.
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
None.
Item 6. Exhibits
The following is a complete list of exhibits filed as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.
| Exhibit | Description | |
| 31.1 | Certification of Co-Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Co-Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | Inline XBRL Instance Document* | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document* | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document* | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document* | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
24
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: November 14, 2023 | 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) | ||
25
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Wang, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Ispire Technology Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| November 14, 2023 | /s/ Michael Wang | |
| Name: | Michael Wang | |
| Title: | Co-Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel Machock, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Ispire Technology Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| November 14, 2023 | /s/ Daniel Machock | |
| Name: | Daniel Machock | |
| Title: | Chief Financial Officer | |
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Ispire Technology Inc. (the “Company’s Quarterly Report”) on Form 10-Q for the period ended September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Michael Wang, as Co-Chief Executive Officer and principal executive officer and Daniel Machock, as Chief Financial Officer and principal financial officer of the Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of the undersigned’s knowledge and belief, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and | |
| 2. | Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. |
| /s/ Michael Wang | |
| Michael Wang | |
| Co-Chief Executive Officer and Principal Executive Officer |
| Dated: November 14, 2023 |
| /s/ Daniel Machock | |
| Daniel Machock | |
| Chief Financial Officer and Principal Financial Officer |
Dated: November 14, 2023