Ispire Technology Inc. 10-Q

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. All 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. Initial Public Offering In April 2023, we completed the public offering of 3,105,000 shares of common stock at a public offering price of $7.00 per share, which includes 405,000 shares issued upon the exercise by the underwriters of their over-allotment option. Gross proceeds were approximately $21.7 million, less underwriting discounts and non-accountable expense allowance of approximately $1.7 million, and other expenses of approximately $1.5 million, resulting in net proceeds of $18.5 million. US Tiger Securities, Inc. acted as sole book-running manager for the offering, and TFI Securities and Futures Limited and Prime Number Capital, LLC acted as underwriters. 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 $0.9 million for the year ended June 30, 2022. Because the volume of sales did not justify the marketing and regulatory costs, we have ceased marketing tobacco vaping products in the United States and did not have any sales of tobacco vaping products in the United States in the nine months ended March 31, 2023. 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 and nine months ended March 31, 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. 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 a result of the COVID-19 pandemic, during 2021 and early 2022 there were fewer longshoremen unloading ships and fewer truckers to deliver the products to market, which has resulted in significant delays in the delivery of products to markets. Since the port delays have significantly decreased, we do not believe that the supply chain issues that previously affected our operations are currently affecting us. In 2021, Shenzhen Yi Jia suffered a chip shortage resulting in a slowdown in delivery of its products to us from April to August 2021. To secure the supply of chips, Shenzhen Yi Jia changed the payment terms to chip supplier 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 need and a chip shortage no longer affects its production. However, we cannot assure you that we will not suffer from a chip shortage affecting Shenzhen Yi Jia or any other supplier. 16 The delay in shipment and chip shortage had a negative impact on our results of operation in the three months and nine months ended March 31, 2022 and 2023. Although mainland China’s COVID policy changed in early January 2023 from its zero COVID policy, many people were infected following the termination of the zero-COVID policy which affected the supply chain in the three months ended March 31, 2023. We believe delays in supply chain may continue to affect us. In order to mitigate the possible supply chain disruptions and to have more control of our manufacturing operations, we are using a portion of the net proceeds from our initial public offering to take the initial steps toward the development of manufacturing operations in Vietnam and in California. If we can establish our own production facilities, we will have better control of the manufacturing process and shipment of our products to customers, as well as diversifying risks of any production shutdown. However, we do not have any experience in manufacturing operations, and in order to establish manufacturing operations, we will have to hire personnel with experience in setting up and operating manufacturing operations. With respect to operations in Vietnam, we will need to engage personnel who have experience in managing operations in Vietnam. Further, to the extent that our Vietnam or California operations rely on Chinese suppliers for any components, we will be subject to any shortages and delays as a result of any lockdowns pursuant to China’s COVID policies. We cannot assure you that if our suppliers are impacted by China’s COVID policy, we will be able to obtain products or components from suppliers outside of China. We are planning to establish manufacturing facilities in California and Vietnam as part of our efforts to reduce the effects of inflation because of the lower cost structure in Vietnam, and to reduce the potential impact of China’s COVID policy. We are not experienced in operating manufacturing facilities and we will need to hire key employees in Vietnam who understand the applicable laws and regulations, as well as local customs, in order to operate our proposed facilities. We cannot assure you that we will be able to operate efficiently in compliance with all applicable construction, environmental and other laws and regulations affecting the manufacture of our products in Vietnam. While our proposed facilities in California may provide protection from the effect of China COVID policy, it may not reduce the impact of inflation. In addition, our California facilities may be subject to unplanned expenses and delays as a result of compliance with local rules and regulations relating to construction. Thus, we cannot assure you that we will be able to commence manufacturing options in either location in the near future or that we will be able to reduce our costs as a result of operating our own facilities. Until we have established our own facilities, we anticipate that we will continue to rely on Shenzhen Yi Jia for our products. Through March 31, 2023, inflation in PRC has not materially impacted our cost of revenue. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for three months ended March 31, 2022 and 2023 were increases of 1.1% and 1.3%, respectively, and for the nine months ended March 31, 2022 and 2023 were increases of 1.2% and 1.9%, respectively. Although we have not in the past been materially affected by inflation, we can provide no assurance that we will not be affected in the future by higher rates of inflation in PRC. 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 our products and our supplier’s ability to provide products to us on acceptable terms. We 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 we operate worsen from present levels, our business, financial condition, operating results could be adversely affected. For example, in January 2023, the outstanding national debt of the U.S. government reached its statutory limit. The U.S. Department of the Treasury has announced that, since then, it has been using extraordinary measures to prevent the U.S. government’s default on its payment obligations, and to extend the time that the U.S. government has to raise its statutory debt limit or otherwise resolve its funding situation. The failure by Congress to raise the federal debt ceiling could have severe repercussions within the U.S. and to global credit and financial markets. If Congress does not raise the debt ceiling and if the U.S. government defaults on its payment obligations or experiences delays in making payments when due, such payment default or delay by the U.S. government, as well as continued uncertainty surrounding the U.S. debt ceiling or the U.S. Government’s ability to pay debts, could result in a variety of adverse effects for financial markets, market participants and U.S. and global economic conditions. In addition, U.S. debt ceiling and budget deficit concerns have increased the possibility a downgrade in the credit rating of the U.S. government and could result in economic slowdowns or a recession in the United States. Although U.S. lawmakers have passed legislation to raise the federal debt ceiling on multiple occasions, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States as a result of disputes over the debt ceiling. The impact of a potential downgrade to the U.S. government’s sovereign credit rating or its perceived creditworthiness could adversely affect economic conditions, as well as our business, financial condition and operating results. 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. 17 Results of Operations Three Months and Nine Months Ended March 31, 2022 and 2023 The following table sets forth a summary of our consolidated statements of operations and comprehensive income for the three months ended March 31, 2022 and 2023, and nine months ended March 31, 2022 and 2023 (dollars in thousands except per share amounts). Three Months Ended March 31, Nine Months Ended March 31, 2022 2023 2022 2023 $ % of Revenue $ % of Revenue $ % of Revenue $ % of Revenue Revenue $ 19,014 100.0 % $ 24,136 100.0 % $ 66,248 100.0 % $ 82,977 100.0 % Cost of revenue (16,038 ) (84.3 )% (19,616 ) (81.3 )% (55,960 ) (84.5 )% (68,526 ) (82.6 )% Gross profit 2,976 15.7 % 4,520 18.7 % 10,288 15.5 % 14,451 17.4 % Operating expenses (3,872 ) (20.4 )% (7,982 ) (33.1 )% (9,400 ) (14.2 )% (19,591 ) (23.6 )% (Loss)Income from operations (896 ) (4.7 )% (3,462 ) (14.3 )% 888 1.3 % (5,140 ) (6.2 )% Other income, net 64 0.3 % 593 2.5 % 188 0.3 % 152 0.2 % (Loss)Income before income taxes (832 ) (4.4 )% (2,869 ) (11.9 )% 1,076 1.6 % (4,988 ) (6.0 )% Income taxes (159 ) (0.8 )% (238 ) (1.0 )% (788 ) (1.2 )% (1,070 ) (1.3 )% Net (loss)income (991 ) (5.2 )% (3,107 ) (12.9 )% 288 0.4 % (6,058 ) (7.3 )% Other comprehensive loss (71 ) (0.4 )% (158 ) (0.7 )% (81 ) (0.1 )% (15 ) (0.0 )% Comprehensive (loss)income (1,062 ) (5.6 )% (3,265 ) (13.5 )% 207 0.3 % (6,073 ) (7.3 )% Net loss per share (basic and diluted) (0.02 ) (0.06 ) 0.01 (0.12 ) Weighted shares of common stock outstanding 50,000,000 50,000,000 50,000,000 50,000,000 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 March 31, 2022 2023 Europe 47.0 % 52.0 % North America 43.1 % 33.3 % Asia Pacific (excluding PRC) 9.6 % 14.2 % Others 0.3 % 0.5 % Total 100.0 % 100.0 % 18 Our revenue increased by $5,122,148, or 26.9%, from $19,014,149 for the three months ended March 31, 2022, to $24,136,297 for the three months ended March 31, 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 tobacco vaping products in Europe of $3.7 million from $8.9 million for the three months ended March 31, 2022 to approximately $12.6 million for the three months ended March 31, 2023, (ii) increases in sales of tobacco vaping products in Asia Pacific (excluding PRC) of $1.6 million from $1.8 million for the three months ended March 31, 2022 to approximately $3.4 million for the three months ended March 31, 2023. For the Nine Months ended March 31, 2022 2023 Europe 58.7 % 55.4 % North America 27.3 % 30.4 % Asia Pacific (excluding PRC) 13.8 % 13.9 % Others 0.2 % 0.3 % Total 100.0 % 100.0 % Our revenue increased by $16,729,239, or 25.3%, from $66,247,507 for the nine months ended March 31, 2022, to $82,976,746 for the nine months ended March 31, 2023. The increase in revenue is the combined effect of (i) increases in sales of tobacco vaping products in Europe of $7.1 million from $38.9 million for the nine months ended March 31, 2022 to approximately $46.0 million for the nine months ended March 31, 2023 and (ii) increases in sales of cannabis vaping products in the United States of $7.5 million from $15.9 million for the nine months ended March 31, 2022 to $23.4 million for the nine months ended March 31, 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 $3,577,673, or 22.3%, from $16,038,425 for the three months ended March 31, 2022 to $19,616,098 for the three months ended March 31, 2023. The increase in cost of revenue reflects the increase in period-to-period unit sales and the effects of 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 which impacted both nine-month periods. Although mainland China’s COVID policy changed in early January 2023 from its zero COVID policy, many people were infected following the termination of the zero-COVID policy which affected the supply chain in the three months ended March 31, 2023. Cost of revenue increased by $12,565,907, or 22.5%, from $55,959,959 for the nine months ended March 31, 2022 to $68,525,866 for the nine months ended March 31, 2023. The increase in cost of revenue reflects both the increase in period-to-period unit sales and the effects of 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 which impacted both nine-month periods. Gross Profit The following tables show the revenue, cost of revenue and gross profit of our tobacco and cannabis vaping products (dollars in thousands). For the Three Months Ended March 31, 2022 Revenue Cost of revenue Gross profit Gross profit % Tobacco vaping products $ 11,369 $ 9,589 $ 1,780 15.7 % Cannabis vaping products 7,645 6,449 1,196 15.6 % Total $ 19,014 $ 16,038 $ 2,976 15.7 % For the Three Months Ended March 31, 2023 Revenue Cost of revenue Gross profit Gross profit % Tobacco vaping products $ 16,546 $ 13,927 $ 2,619 15.8 % Cannabis vaping products 7,590 5,689 1,901 25.0 % Total $ 24,136 $ 19,616 $ 4,520 18.7 % 19 Gross profit increased by $1,544,475, or 51.9%, from $2,975,724 for the three months ended March 31, 2022 to $4,520,199 for the three months ended March 31, 2023, while our gross margin increased from 15.7% to 18.7%. The gross margin for tobacco vaping products remained constant. The increase in gross margin for cannabis vaping products was primarily due to (i) a change in product mix with more higher margin products being sold during the three months ended March 31, 2023, and (ii) increase in sales volume that led to economies of scale. For the Nine Months Ended March 31, 2022 Revenue Cost of revenue Gross profit Gross profit % Tobacco vaping products $ 50,308 $ 42,336 $ 7,972 15.8 % Cannabis vaping products 15,940 13,624 2,316 14.5 % Total $ 66,248 $ 55,960 $ 10,288 15.5 % For the Nine Months Ended March 31, 2023 Revenue Cost of revenue Gross profit Gross profit % Tobacco vaping products $ 59,555 $ 50,235 $ 9,320 15.6 % Cannabis vaping products 23,422 18,291 5,131 21.9 % Total $ 82,977 $ 68,526 $ 14,451 17.4 % Gross profit increased by $4,163,332, or 40.5%, from $10,287,548 for the nine months ended March 31, 2022 to $14,450,880 for the nine months ended March 31, 2023, while our gross margin increased from 15.5% to 17.4%. The gross margin for tobacco vaping products remains constant. The increase in gross margin for cannabis vaping products was primarily due to (i) a lower margin on cannabis vaping products in the nine months ended March 31, 2022 as a result of greater discounts in price offered as we commenced the cannabis business in late 2021 and our primary focus was on capturing market of cannabis vaping products; (ii) a change in product mix with more higher margin products being sold during the nine months ended March 31, 2023, and (iii) an increase in sales volume that led to economies of scale. Operating Expenses Operating expenses increased $4,110,857, or 106.2%, from $3,871,403 for the three months ended March 31, 2022 to $7,982,260 for the three months ended March 31, 2023. Operating expenses increased $10,191,154, or 108.4%, from $9,399,443 for the nine months ended March 31, 2022 to $19,590,597 for the nine months ended March 31, 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 $376,722, or 28.4%, from $1,325,024 for the three months ended March 31, 2022 to $948,302 for the three months ended March 31, 2023. Sales and marketing expenses decreased by $425,353, or 11.2%, from $3,781,183 for the nine months ended March 31, 2022 to $3,355,830 for the nine months ended March 31, 2023. The decrease in sales and marketing expenses for both the three-month and nine-month periods ended March 31, 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 $4,487,579, or 176.2%, from $2,546,379 for the three months ended March 31, 2022 to $7,033,958 for the three months ended March 31, 2023. The increase was primarily due to (i) an increase of $1.0 million for payroll and contract worker expenses as more employees were hired and contract workers were engaged by us for expansion of our cannabis business and building our proposed manufacturing plant, (ii) bad debt expense as allowance for doubtful accounts of $1.3 million recorded by Aspire North America on accounts under dispute due to delayed shipment, and a direct write-off of doubtful accounts of $0.5 million, (iii) an increase in amortization expense of $0.8 million of intellectual properties transferred to us in September 2022, (iv) an increase in professional fees of $0.5 million incurred for initial public offering purpose and (v) an increase in rental and warehouse expenses of $0.4 million incurred by us in connection with the development of our proposed manufacturing facility in Los Angeles. The increase in our expenses is not the result of inflation. Inflation in Hong Kong, where Aspire Science is located, was relatively stable. General and administrative expenses increased by $10,616,507, or 189.0%, from $5,618,260 for the nine months ended March 31, 2022 to $16,234,767 for the nine months ended March 31, 2023. The increase was primarily due to (i) an increase of $3.0 million for payroll and contract worker expenses as more employees were hired and contract workers were engaged by us for expansion of our cannabis business and building our proposed manufacturing plant, (ii) bad debt expense as allowance for doubtful accounts of $1.3 million recorded by Aspire North America on accounts under dispute due to delayed shipment, and a direct written off of doubtful accounts of $0.9 million, (iii) an increase in amortization expense of $1.5 million of intellectual properties transferred to us in September 2022, (iv) an increase in rental and warehouse expenses of $1.1 million incurred by us in connection with our plan to establish a manufacturing facility in Los Angeles, and (v) an increase in professional fees of $0.9 million incurred for initial public offering purpose. The increase in our expenses in both the three-month and nine-month periods is not the result of inflation. Inflation in Hong Kong, was relatively stable. The increase in expenses for our United States business results from the growth of our business. The cannabis vapor business commenced in late calendar 2021, and the increase in expenses resulted from our growth relating to this increase in business. However, inflationary pressures may affect our operations in the future. As a result of our public offering, we anticipate that our general and administrative expenses will significantly increase as a result of our being a public corporation, including additional legal, audit and insurance expenses as well as expenses in maintaining our disclosure controls and internal control over financial reporting. Professional fees relating to our initial public offering were included in general and administrative expenses during the three and nine months ended March 31, 2023 since the offering had not been completed by March 31, 2023. The offering was completed in April 2023, and the financial statements for the year ending June 30, 2023 will treat these professional fees of $0.9 million as a reduction of the proceeds of the offering and, accordingly, will be charged to additional paid-in capital. 20 Other income, net Other income, net includes interest income, interest expense, exchange gain (loss), net and other income (expense). Interest income was $1,016 for the three months ended March 31, 2022 and $978 for the three months ended March 31, 2023. Interest income was $2,083 for the nine months ended March 31, 2022 and $77,789 for the nine months ended March 31, 2023. Exchange gain, net increased by $592,340, or 865.7%, from net exchange gain of $68,420 for the three months ended March 31, 2022 to net exchange gain of $660,760 for three months ended March 31, 2023. The increase in exchange gain was from Aspire Science, primarily resulting from the change in the exchange rate of the Hong Kong Dollar to the U.S. dollar from 7.7862 for the three months ended March 31, 2022 to 7.8388 for the three months ended March 31, 2022. Exchange gain, net increased by $46,276, or 33.8%, from net exchange gain of $136,902 for the nine months ended March 31, 2022 to net exchange gain of $183,178 for nine months ended March 31, 2023. As a result of these factors, other income increased by $529,321, from other income of $63,877 for the three months ended March 31, 2022 to other income of $593,198 for three months ended March 31, 2023. Other income decreased by $36,427, from other income of $188,367 for the nine months ended March 31, 2022 to other income of $151,940 for nine months ended March 31, 2023. Income Taxes Income taxes increased by $79,237, or 49.9%, from $158,755 for the three months ended March 31, 2022 to $237,992 for the three months ended March 31, 2023. Income taxes increased by $281,651 or 35.7%, from $788,348 for the nine months ended March 31, 2022 to $1,069,999 for the nine months ended March 31, 2023. We had a consolidated net loss for both three months and nine months ended March 31, 2022 and 2023, which was the combined effect of a profit by Aspire Science and a loss by Aspire North America. 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 increased by $2,116,298, from net loss of $990,557, or $(0.02) per share (basic and diluted) for the three months ended March 31, 2022 to a net loss of $3,106,855, or $(0.06) per share, for the three months ended March 31, 2023. The results of our operations changed from net income of $288,124, or $0.01 per share (basic and diluted) for the nine months ended March 31, 2022 to a net loss of $6,057,776, or $(0.12) per share, for the nine months ended March 31, 2023. Liquidity and Capital Resources The following table summarizes our changes in working capital from June 30, 2022 to March 31, 2023 (dollars in thousands). June 30, 2022 March31, 2023 Change % Change Current Assets $ 99,449 $ 63,581 $ (35,868 ) (36.1 )% Current Liabilities 88,968 58,402 (30,566 ) (34.4 )% Working Capital 10,481 5,179 (5,302 ) (50.6 )% The following table sets forth information as to consolidated cash flow information for the nine months ended March 31, 2022 and 2023 (dollars in thousands). Nine Months Ended March 30, Increase Consolidated cash flow data: 2022 2023 (Decrease) Net cash (used in) provided by operating activities $ (24,003 ) $ 2,252 $ 26,255 Net cash used in investing activities (121 ) (10,100 ) (9,979 ) Net cash used in financing activities (776 ) (42,597 ) (41,821 ) Net decrease in cash and cash equivalents and restricted cash (24,900 ) (50,445 ) (25,545 ) 21 Net cash flow used in operating activities for the nine months ended March 31, 2022 of $24.0 million, reflected our income of $0.3 million, adjusted primarily by a decrease in accounts payable of $13.3 million, an increase in inventories of $6.9 million and an increase in account receivable of $5.3 million. Net cash flow provided by operating activities for the nine months ended March 31, 2023 of $2.2 million, reflected our net loss of $6.1 million, adjusted primarily as follows: an account receivable impairment of $2.2 million, a depreciation and amortization expense of $1.6 million, and an increase in accounts payable of $13.7 million offset by an increase in accounts receivable of $9.3 million. Net cash flow used in investing activities for the nine months ended March 31, 2022 of $0.1 million reflected primarily the purchase of property, plant and equipment of $0.1 million. Net cash flow used in investing activities for the nine months ended March 31, 2023 of $10.1 million reflected primarily purchase of short term investments of $9.6 million. Net cash flow used in financing activities for the nine months ended March 31, 2022 of $0.7 million reflected primarily advances from related parties of $1.7 million, offset by payment to related parties of $1.8 million and payment made for dividends of $0.4 million. Net cash flow used in financing activities for the nine months ended March 31, 2023 of $42.6 million reflected primarily $40.5 million of repayment to related parties, $3.4 million of payments made for dividend, offset by payment to related parties of $1.9 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 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 $18.5 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. 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 2022 and March 31 2023, we had contract liabilities of $1,672,051 and $742,247, 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 premises for Hong Kong and California 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 March 31, 2022 2023 Right-of-use assets $ 295,804 $ 4,359,274 Lease liabilities - current $ 347,541 $ 917,310 Lease liabilities – non-current - 3,608,580 Total $ 347,541 $ 4,525,890 22 As of March 31, 2023, the maturities of our lease liabilities (excluding short-term leases) are as follows: As of March 31, 2022 2024 1,243,979 2025 1,328,088 2026 1,372,447 2027 1,071,992 2028 322,704 Total future lease payments 5,339,210 Less: imputed interest (813,320 ) Total lease liabilities 4,525,890 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. 23 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.