Item 1. Business
ITEM 1. Business
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 products worldwide except for the PRC, the United States, and Russia. Our tobacco 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.
All of our products are v aping 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 cannabinoids, typically tetrahydrocannabinol,
the main psychotropic cannabinoid derived from the marijuana plant. Our cannabis 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 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.
Our products use our BDC (bottom dual coil) coil
technology which uses bottom dual coils to provide much higher temperature and an expanded heating that achieves much greater flavor and
vapor production. We believe that the use of our dual-coil technology enhances the flavor performance of e-liquid, and the hidden wick
cotton with special designed wick holes can both extend the tank e-liquid capacity and improve the speed of wicking to increase the coil
life.
Our BVC (bottom vertical coil) coil represents
a significant technological breakthrough for us in coil technology utilizing a vertical heating wire surrounded by cotton. This design
can enable the coil heating to provide uniform temperature from the tank, together with more efficient wicking. This new technology, which
Aspire Global introduced in 2014, enables the coil to last longer while still giving users what we believe is the purest and cleanest
taste from e-liquids. The BVC coils are still very popular for MTL (mouth to lung) vapors today.
Our Cleito tank brings new and innovative technological
advancement to the vaping industry. The Cleito uses a revolutionary new coil design that replaces the standard chimney and, we believe,
delivers maximized airflow. This design frees up even more restriction in the airflow by eliminating the need for a static chimney within
the tank itself, which results in an expanded flavor profile and increased vapor production. Combined with a Clapton kanthal coil for
maximum flavor, the Cleito tank delivers a rush of intense flavor and huge vapor with a broad profile. The simple top-fill design makes
filling very easy and use more convenient and enjoyable.
Our Ispire cannabis vapor products use our patented
DuCore™ (Dual Coil) technology for cannabis vaporizers. This technology enables users to create massive plumes of vape without burning
the cannabis oil. These products incorporate our patented dual coil technology for what we believe is best-in-class airflow and taste,
and our technology for eliminating the leakage of the oil from the unit, which overcomes a major disadvantage with many existing products.
In June 2023, we introduced our proprietary Ispire
ONE TM technology and products. Ispire ONE TM is designed to eliminate capping issues in the manufacturing/co-packing
process; increase consistency and quality of the filled devices; eliminate leaking, spitting, or overheating for cartridges, disposables,
and PODs; and improve consumer safety, as the devices are sealed in a sterilized factory environment to eliminate risk of contamination
during filling process by Ispire’s customers.
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Our products are manufactured and supplied by
Shenzhen Yi Jia, which is 95% owned by our co-chief executive officer and controlling stockholder, Tuanfang Liu. We have taken steps toward
the development of manufacturing operations in California and are exploring Southeast Asia for potential locations for manufacturing operations.
We expect to receive our first fully automated assembly system and related equipment in our California facility in late January 2024.
We anticipate fine-tuning the system and completing the clean room where the system will be housed with initial production expected to
commence before first half of 2024. Initially, our primary manufacturing operations will be assembling from components that we purchase
from other companies. Although we expect that we will commence these assembly operations by first half of 2024, due to the nature of these
activities and the infrastructure required, we may encounter unexpected timing issues or operational challenges which could impact our
ability we cannot assure you that we will be able to meet this timetable or that we will be able to effectively and efficiently conduct
such operations.
We sell the Aspire brand of tobacco vaporizer
technology products in more than 30 countries through our global network of more than 150 distributors. The primary markets for our tobacco
products are Europe and the Asia Pacific region, which does not include the PRC.
The following table sets forth our tobacco revenue
and percentage for tobacco products by region for the years ended June 30, 2022 and 2023 based on information provided to us by our distributors
(dollars in thousands).
Year Ended June 30,
2022
2023
Revenue
%
Revenue
%
Europe
$ 51,886
76.2 %
$ 58,764
77.8 %
Asia Pacific (excluding PRC)
13,213
19.4 %
14,919
19.7 %
North America
2,849
4.2 %
1,565
2.1 %
Others
169
0.2 %
315
0.4 %
Total
68,117
100 %
75,563
100 %
For the years ended June 30, 2022 and 2023, our
revenues from cannabis products was approximately $20.0 million and $40.0 million, respectively, all of which was in the North American
market. All sales of cannabis products to date have been in the United States, although we have recently commenced marketing efforts in
Canada and Europe, primarily the European Union.
Acquisition of Our Business from a Related
Party
We were formed on June 13, 2022. We have two operating
subsidiaries, Aspire North America LLC, a California limited liability company (“Aspire North America”), and Aspire Science
and Technology Limited, a Hong Kong corporation (“Aspire Science”). On July 29, 2022, we acquired 100% of the equity interest
in Aspire North America from Aspire Global Inc. (“Aspire Global”), and our wholly-owned subsidiary Ispire International Limited,
a British Virgin Islands corporation (“Ispire International”), acquired 100% of the equity interest in Aspire Science from
a wholly-owned subsidiary of Aspire Global in connection with a restructure by Aspire Global pursuant to which the equity in Aspire North
America and Aspire Science was transferred to us, and, at the time of the transfer, we had the same stockholders as Aspire Global.
Aspire North America commenced marketing cannabis
vaping products in mid-2020. Aspire Science markets tobacco vaping products worldwide, except for the PRC and Russia. Since Aspire North
America and Aspire Science were acquired from a related party for no consideration, our consolidated financial statements for the years
ended June 30, 2022 and 2023 include the assets and liabilities of these subsidiaries on the balance sheet dates at their historic costs
and the results of their operations and cash flows for the years then ended as if these subsidiaries were owned by us on July 1, 2020.
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Aspire Global is a related party. Tuanfang Liu
is Aspire Global’s chief executive officer and a director of both us and Aspire Global, and his wife, Jiangyan Zhu, is also a director
of both companies. Mr. Liu and Ms. Zhu beneficially 61.3% and 4.6%, respectively, of our outstanding common stock and 66.5% and 5.9% of
Aspire Global’s ordinary shares. Upon our formation we issued 50,000,000 shares of common stock to the stockholders of Aspire
Global in the same proportion as their stockholdings in Aspire Global.
We presently purchase our tobacco vaping and cannabis
vaping hardware from Shenzhen Yi Jia. Pursuant to agreements dated January 27, 2023, between Aspire North America and Shenzhen Yi Jia
and between Aspire Science and Shenzhen Yi Jia, we purchase our cannabis and tobacco vaping products form Shenzhen Yi Jia at market prices,
provided that the price, delivery, warranty and other terms are no less favorable to us that the price, delivery, warranty and other terms
that are provided to any other customer of Shenzhen Yi Jia.
Our intellectual property was developed primarily
by our co-chief executive officer, Tuanfang Liu. Our research and development team is headed by Mr. Liu. Our intellectual property was
owned by Shenzhen Yi Jia, which had patents or patent application in the United States, the PRC, the European Union and elsewhere relating
to various functional and ornamental aspects of our products. These patents cover both the cannabis and tobacco products. Pursuant to
the Intellectual Property Transfer Agreement, Mr. Liu, Aspire Global and Shenzhen Yi Jia transferred to Aspire North America all patent
and other intellectual property rights, including trademarks, Know-how and Know-how Documentation, as defined in the agreement, relating
to the cannabis vaping products, and to transfer to us any new intellectual property developed or acquired by Mr. Liu, Aspire Global and
Shenzhen Yi Jia which relates to cannabis vaping products. The patents, all of which are United States patents and patent applications,
have been transferred to Aspire North America.
Pursuant to the Intellectual Property License
Agreement, Mr. Liu, Aspire Global and Shenzhen Yi Jia granted Aspire Science a perpetual royalty free sole and exclusive right and license
to use and practice all of the Licensed Technology worldwide except for the PRC and Russia. The Licensed Technology includes all patents,
know-how, know-how documentation and trademarks, whether now existing or hereafter developed or acquired by, or for, Mr. Liu, Aspire Global
and/or Shenzhen Yi Jia that relate, directly or indirectly, to the tobacco vaping market. Pursuant to the License Agreement, neither Mr.
Liu, Aspire Global nor Shenzhen Yi Jia has any right to market or sell or grant distributors the right to market or sell tobacco vaping
products in the world other than in the PRC and Russia.
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 the PRC by a related party, any changes in the
outbreak in the PRC and any changes in the PRC government’s policy may affect our supplier’s operations which could affect
its ability to manufacture and deliver product in a timely manner.
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Matters Relating to PRC Laws
The majority of our operations are in United States.
We are mainly engaged in the research and development, design, commercialization, sales, marketing and distribution of branded e-cigarettes
and cannabis vaping products. The sales of our tobacco products are conducted worldwide except for the PRC, the United States, and Russia.
Through our global distributor network of more than 150 distributors, we sell the Aspire brand of tobacco vaporizer technology products
in more than 30 countries and the main markets for such tobacco products are Europe and the Asia Pacific region, which does not include
the PRC. We do not conduct business and we do not have any employees, assets or funds in mainland China. Although most of our cash is
in Hong Kong banks, a significant portion of these funds is to be paid to related parties. See “Certain Relationships and Related
Party Transactions.” Our operations are primarily in the United States. Although Tuanfang Liu, our co-chief executive officer, lives
in mainland China, where Shenzhen Yi Jia is located, the services that he performs for us in his capacity as our co-chief executive officer
are performed primarily in Hong Kong and the United States. In addition to serving as our co-chief executive officer, Mr. Liu is chairman
of Shenzhen Yi Jia, and the services he provides in mainland China are performed in his capacity as chairman of Shenzhen Yi Jia. Our employees
are largely in the United States, with 62 employees based in the United States and where our research and development activities are conducted,
and seven employees in Hong Kong. Our facilities are located primarily in the United States, where we lease more than 41,221 square feet
of office, manufacturing and storage space and where our research and development activities are conducted, as compared with 1,850 square
feet of office space in Hong Kong. We do not have any variable interest entities arrangements or any similar agreements. As of the date
of this annual report, we do not believe we are subject to PRC Laws applicable to those Chinese companies established in mainland China,
based on advice from Han Kun Law Offices.
We have two operating subsidiaries established
in California and Hong Kong. Hong Kong was established as a special administrative region of the PRC in accordance with Article 31 of
the Constitution of the PRC. The Basic Law of the Hong Kong Special Administrative Region of the PRC (the “Basic Law”) was
adopted and promulgated on April 4, 1990 and became effective on July 1, 1997, when the PRC resumed the exercise of sovereignty over Hong
Kong. Pursuant to the Basic Law, Hong Kong is authorized by the National People’s Congress of the PRC to exercise a high degree
of autonomy and enjoy executive, legislative and independent judicial power, and the PRC laws and regulations shall not be applied to
Hong Kong, other than those relating to national defense, foreign affairs, and certain other matters that are not within the scope of
autonomy of Hong Kong. While the National People’s Congress of the PRC has the power to amend the Basic Law, the Basic Law also
expressly provides that no amendment to the Basic Law shall contravene the established basic policies of the PRC regarding Hong Kong.
As a result, as of the date of this annual report, national laws of the PRC that would be applicable to us if we were a Chinese corporation
do not apply to our Hong Kong subsidiary. However, there is no assurance that certain PRC laws and regulations, including existing laws
and regulations and those enacted or promulgated in the future, will not be applicable to our Hong Kong subsidiary due to change in the
current political arrangements between mainland China and Hong Kong or other unforeseeable reasons. The application of such laws and regulations
may have a material adverse impact on us, as relevant PRC authorities may impose fines and penalties upon our Hong Kong subsidiary, delay
or restrict the repatriation of the proceeds from this offering into Hong Kong, and any failure of us to fully comply with such new regulatory
requirements may significantly limit or completely hinder our ability to offer or continue to offer our common stock, cause significant
disruption to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition
and results of operations and cause our common stock to significantly decline in value or in extreme cases, become worthless.
Our Corporate Organization
We are a Delaware corporation, incorporated on
June 13, 2022. Aspire North America, a California limited liability company was formed on February 22, 2020, and 100% of its ownership
was transferred to Aspire Global on September 23, 2020 and was transferred by Aspire Global to Ispire Technology on July 29, 2022. Aspire
Science, a Hong Kong corporation, was formed on December 9, 2016 and 100% of its equity was transferred to us on July 29, 2022. Ispire
International was organized on July 6, 2022. Aspire North America and Aspire Science are our operating companies. If we establish manufacturing
operation in Southeast Asia, we expect to form an entity under local law to conduct such operations.
Our principal executive offices are located at
19700 Magellan Dr, Los Angeles, CA 90502. Our telephone number is 310 742 9975. Our principal website is www.ispiretechnology.com. The
information contained on, or that can be accessed through, our website or any other website or any social media, is not a part of this
annual report.
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The following chart shows our corporate structure.
Our Strategy
We are implementing a multi-prong growth strategy
directed at increasing the sales of our e-cigarette and cannabis vaporizer technology products.
In addition to increasing sales to our existing
customers, we plan to increase sales of our e-cigarette vaporizer technology products by increasing the number of distributors and regions
where our products are sold. We plan to increase sales of our cannabis products by increasing sales to existing customers, increasing
our customer base in the United States and seeking to penetrate the Canadian and European markets as they develop. We closely follow the
legalization of cannabis globally and plan to enter markets when opportunities arise.
Research and development is at the core of our
business. We will continue to innovate via our own research and development efforts. Tuanfang Liu, our co-chief executive officer developed
the patented DuCore TM technology, which is being assigned to us enabling our cannabis vaporizer products to heat cannabis oil,
which, we believe is the first leak-proof patented design, which enables the consumer to get the full flavor experience of the cannabis.
We will continue to expand our technology leadership and invest in vaporizer and similar technology research and development. Our present
products are designed for adult recreational use. Our research and development activities will be oriented to focus on both medical and
recreational usages of cannabis products. We recognize that industry trends can change rapidly. We believe that our products must be at
the forefront of technology if we are going to develop our business. The cannabis vaping business is in its early stages and we will seek
to develop a strong and leading position in this market. This market is currently largely in the United States and we plan to be in the
forefront as other markets develop.
Through our global sales network, we have a strong
understanding of all of the markets in which our products are sold. We will use forum and community groups as a means to increase engagement
and collect feedback for future improvements in product research and development. We will seek to introduce new products to meet customer
needs based on our assessment of the direction of the market.
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We will also pursue mergers and acquisitions and
strategic relationships to increase our technological human resources and technology and product portfolio. We believe that we have a
strong management team adept at integrating such acquisitions and we believe that we are an attractive platform to potential acquirees.
We plan to develop manufacturing capabilities.
However, initially, and for at least a few years, our manufacturing operations will primarily involve the assembly of products from components
manufactured for us in accordance with our specifications. We are currently seeking to identify a location for manufacturing facilities
in Southeast Asia.
We are expanding our OEM and ODM business. OEM
generally means making and selling the products as we design them and putting customers’ logos on the products. For OEM products,
cost is important to the customer. ODM generally involves the design and customize the core products to meet each brand’s unique
image and needs. For ODM, technology, performance and uniqueness are often more important, with cost generally being a secondary consideration.
Historically, for our tobacco products, we have focused on building and growing our own branded business, with OEM and ODM sales accounting
for a minor portion of our revenue. OEM and ODM sales accounted for approximately $0.7 million and $4.5 million, or 1.0% and 6.0%, of
total revenue of tobacco products in the years ended June 30, 2022 and 2023, respectively. As Aspire Global continued to innovate in the
last decade and the Aspire brand has become recognized as a leading innovator in the vaping industry, Aspire Science has been sought after
by other brands for OEM and ODM work. We believe that OEM and ODM for our tobacco products will represent a key growth area for us in
the future. In seeking to introduce new products, we will, at least initially, rely upon our chairman, Tuanfang Liu, who has been largely
responsible for the development of the technology underlying our tobacco and cannabis vaping products.
Sales of our cannabis products to date are largely
sales to cannabis brands on an ODM basis, and we anticipate that our cannabis sales will continue to be primarily ODM sales for the near
future. It is the responsibility of our customers, which are cannabis brands, to manufacture the cannabis oil and load the oil into our
vaping hardware product. We also sell some hardware products to end users, but our sales are primarily to ODM users. None of our products
include cannabis oil or hemp oil.
Our Products
Tobacco Products
We develop and sell both branded and, to a significantly
lesser extent, OEM and ODM tobacco vaping systems and components (cartridges and batteries) to meet the needs of adult users worldwide,
excluding the United States, the PRC and Russia. Such battery-powered systems and components are commonly used in tobacco (e-liquid).
There are generally two types of vaping systems
– open system and closed system.
The term open system generally refers to vaping
devices consisting of tanks, which include heating coils, and mods, which include the battery packs. Open system vaping devices allow
end consumers to refill the tanks with their own liquid by themselves. With open systems, consumers have great flexibility in mixing different
coils, mods, and e-liquid to create a more personalized experience. Our open system vaping devices are sold under our own brands, including
“Nautilus,” and “Zestquest.”
The term closed system generally refers to vaping
devices that consist of cartridges, which include a heating core (sometimes referred to as atomizers) and is filled with e-liquid, and
batteries, which power the cartridges. The closed system vaping devices includes rechargeable closed system vaping devices and disposable
closed system vaping devices. The cartridge can last from a few days to two weeks, depending upon the frequency of use. We market a line
of closed systems. Unlike the open system, the closed system includes the coils and liquid. We believe that the market for closed systems
is increasing rapidly and it is becoming the dominant form of tobacco vaping.
Initially, all of our products were open systems.
The first closed system was introduced in 2018.
Our vaping components include cartridges, lithium
batteries, metal parts such as coils, plastic parts that are molded, circuit boards (printed circuit board assembly) and liquid cartridges
for our products. The cartridges of closed system vaping devices are consumable products that need to be frequently replaced.
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Our products use our BDC (bottom dual coil) coil
technology which uses bottom dual coils to provide double temperature and expand the heating area and achieve double flavor and vapor
production. This technology allows for two separate oil tanks/cartridges to be integrated into one product/design. Each of the cartridges
has its own heating coil that can be regulated separately to generate the desired heating temperatures independent of each other. This
is beneficial to the consumers because one cartridge could be designed for terpenes (which has a very low evaporation temperature, typically
100-120 degree Fahrenheit), and the other can be for cannabis oil (which has a evaporating temperature in the range of 400-430 degree
Fahrenheit). Conventional cartridge design would have the terpenes and cannabis oil mixed together in one cartridge and be heated to a
single temperature that would typically burn the terpenes and yet under-heat the cannabis oil. With the double flavor design, we can optimize
the heating temperature to evaporate both terpenes and cannabis oil without burning them. We believe that the use of our dual-coil technology
enhances the flavor performance of e-liquid, and the hidden wick cotton with special designed wick holes can both extend the tank e-liquid
capacity and improve the speed of wicking to increase the coil life.
The only tobacco vaping product that we may now
sell in the United States under current regulations is the Nautilus Prime product line, which is an open system. When the products on
the market primarily used plastic atomizers, we created Nautilus, with a high-end and attractive appearance. It is the world’s first
tank using a stainless steel top and base hardware, a 5ml Pyrex glass tank, and long stainless steel drip tip, as well as our revolutionary
airflow control system. This unique four-port adjustable airflow system allows the users to adjust the draw, warmth of vapor, and amount
of vapor produced with the lower ring with four settings according to their vaping needs. This BVC coil can provide pure and intense flavor.
We believe that all of these features make the Nautilus a special atomizer and provide the best vaping experience possible at the moment.
The Nautilus Prime system is the only system that we may sell in the United States. The Nautilus Prime is an enhancement of our original
Nautilus product, for which we do not have authorization to sell in the United States. Because of low sales volume for the only product
that we may sell in the United States and the current regulations, in 2020, we ceased marketing tobacco vaping products in the United
States.
Our BVC (bottom vertical coil) coil represents
a big technological breakthrough for us in coil technology with a vertical heating wire surrounded by cotton. This design can enable the
coil heating to provide uniform temperature from the tank, together with more efficient wicking. This new technology, which Aspire Global
introduced in 2014, enables the coil to last longer while still giving users what we believe is the purest and cleanest taste from e-liquids.
The BVC coils are still very popular for MTL (mouth to lung) vapors today.
We believe that our Cleito tank brings new and
innovative technological advancement to the vaping industry. The Cleito uses a revolutionary new coil design that replaces the standard
chimney and, we believe, delivers maximized airflow. This design frees up even more restriction in the airflow by eliminating the need
for a static chimney within the tank itself, which results in an expanded flavor profile and increased vapor production. Combined with
a Clapton kanthal coil for maximum flavor, the Cleito tank delivers a rush of intense flavor and huge vapor with a broad profile. The
simple top-fill design makes filling very easy use more convenient and more enjoyable.
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Cannabis Products
In December 2020, we introduced the Ispire line
of cannabis vaping products. For the years ended June 30, 2022 and 2023, our sales of Ispire products were $20.0 million and $40.0 million,
respectively, all of which was in the United States, although we have commenced marketing efforts in Canada and Europe, primarily in the
European Union. Our Ispire products use our patented Ducore™ (Dual Coil) technology for cannabis vaporizers. Similar to the Nautilus
series, this technology enables users to create massive plumes of vape without burning the cannabis oil. These products incorporate our
patented dual coil technology for what we believe is best-in-class airflow and taste, and our technology for eliminating the leakage of
the oil from the unit, which overcomes a major disadvantage with many existing products. In addition to the base unit, we offer a range
of cartridges, mouthpieces and color options. In our ODM services, we work with the customer to design the product that has the desired
appearance. All the products are made of stainless steel and the fluid housing is Pyrex glass. We are not involved in cannabis or hemp
plant or oil business, and we do not provide or procure cannabis or hemp oil. Our product, which is hardware only, is designed for our
customers to fill the cartridge with their own cannabis or hemp oil. Cannabis oil, unlike nicotine oil or liquids which is generally of
a uniform consistency, is not of a uniform consistency, with the result that if the oil is too viscous, the user will not have good experience
with the product and our customer may reject or return the product. We do not package the oil with our product and either our customer
purchases the oil separately from the product it purchases from us or the end user purchases the oil independently. We have no way to
ensure that the consumer will use a cannabis oil that will work in the product we have manufactured for our customer.
In June 2023, we introduced our proprietary Ispire
ONE TM technology and products. Ispire ONE TM is designed to eliminate capping issues in the manufacturing/co-packing
process; increase consistency and quality of the filled devices; eliminate leaking, spitting, or overheating for cartridges, disposables,
and PODs; and improve consumer safety, as the devices are sealed in a sterilized factory environment to eliminate risk of contamination
during filling process by Ispire’s customers.
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Sales and Distribution
Most of our revenue from tobacco products comes
from sales to our distributors. We are looking to increase our OEM and ODM sales of tobacco products, which accounted for 1.0% and 4.5%
of our tobacco revenue for the years ended June 30, 2022 and 2023, respectively. Most of our revenue from cannabis products is from ODM
sales to other cannabis vaping brands, and we work with the customer to design the product, which is sold under the customer’s brand
name and for some customers, the Ispire brand is also on the product.
Prior to our acquisition, Aspire Global sold tobacco
vaping products in the United States through its distribution network. We decided not to market in the United States as a result of the
effect of changes in regulations in the United States because Aspire North America would currently be able to sell one product line in
the United States and that product line did not generate sufficient revenue to justify the marketing and regulatory expenses.
We believe that we have the ability to evaluate
the market need for vaping products and develop products for both the tobacco and cannabis markets. We believe that we have the state-of-the-art
technology, which enables us to market to other cannabis vaping brands. We believe that we have implemented systems of quality control
that cover the key steps of supply chain management to provide high-quality products to adult smokers in a consistent manner. We strictly
uphold our extensive internal standards for various aspects of our products and conduct thorough quality assurance and control practices
throughout the entire production cycle.
Our cannabis vapor products are sold directly
by us, with most of our sales being to other cannabis vaping brands who purchase the product from us on an ODM basis and sell the products
under their brand name, although our Ispire brand may be included on the product. We work with the customer in the design and appearance
of the product. We also sell Ispire hardware online, but such sales do not generate significant volume. We do not sell cannabis or hemp
oil, either as part of a product or separately.
For our tobacco products, we have a network of
more than 150 distributors, whose territories cover more than 30 countries or regions. Our distributors have non-exclusive agreements
and generally are not restricted from selling competing vapor products. Our largest distributor, whose territory was United Kingdom and
France, is Your-Buyer International Limited, which accounted for revenue of approximately $34.1 million 38.8% of revenue and approximately
$37.4 million, or 32.4% of revenue for the years ended June 30, 2022 and 2023, respectively. No other distributor or customer accounted
for 10% or more of our revenues for either the year ended June 30, 2022 or 2023.
Typically, our distributors sell our products
to wholesalers who in turn sell to retail distributors although distributors may sell products directly to retail outlets. The vast majority
of sales of all classes of smokeless tobacco is sold in stores, primarily grocery stores, convenience stores and tobacco stores, which
generally purchase product from wholesale distributors. Our products are also available from our distributors on the internet, including
both websites and services such as Amazon. These internet distribution channels are operated by our distributors. The distributors are
responsible for complying with the laws of the countries in which they sell our products. We previously sold tobacco vaping products to
a distributor for Russia, and we no longer sell to that distributor.
We assist our distributors in marketing our products
through websites, blogs, search engine optimization (SEO), opt-in and e-mail marketing, social media marketing, influencer, marketing
and digital advertising promotions. Opt-in and email marketing strategies include newsletter sign-ups to receive new product updates and
promotions, giveaway promotional activities to drive conversion, coupons and discounts promotion activities to increase sales.
We may use social media to promote our products
and we market to consumers through our websites and Instagram. We use social media to educate on current and new products and offers as
well as to provide real-time support to customers. Our social media strategies aim to convert and nurture leads, to increase brand awareness.
We also provide distributors with discounts and
other sales incentives. From time to time, based on our sales or marketing strategy for a specific region or product, we will give distributors
discounts. Although our distributors do not have sales quotas, they have sales goals and, from time to time, we may reward distributors
for exceeding their sales targets. These promotions are not part of a standard plan, but developed by us from time to time based on our
sales and marketing program.
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All of our sales of Ispire cannabis products are
made directly by our sales team in California and not through distributors. Our effort in marketing, branding and sales initiatives for
this product since the product introduction in late 2020 has resulted in a significant increase in brand awareness, as reflected in our
sales growth from approximately $20.0 million in the year ended June 30, 2022, the second year in which we had sales of cannabis products,
to approximately $40.0 million in the year ended June 30, 2023. Our sales of Ispire cannabis products to date, which have been primarily
through direct sales of Ispire branded atomizers to other cannabis brands as semi-finished products on an ODM basis. Pursuant to our agreements
with our ODM customers, we design and sell these atomizers pursuant to purchase orders by the customers. Our logo is printed on some of
these products. To a lesser extent we sell heating devices directly to consumers as internet sales.
Source of Supply
We purchase all of our current tobacco and cannabis
vaping products from Shenzhen Yi Jia. The products that we sell are the same products that Aspire Science and Aspire North America sold
prior to the transfer of the equity in these subsidiaries to us. Pursuant to agreements dated January 27, 2023, between Aspire North America
and Shenzhen Yi Jia and between Aspire Science and Shenzhen Yi Jia, we purchase our cannabis and tobacco vaping products form Shenzhen
Yi Jia at market prices, provided that the price, delivery, warranty and other terms are no less favorable to us than the price, delivery,
warranty and other terms that are provided to any other customer of Shenzhen Yi Jia. In addition, the agreement provides that Shenzhen
Yi Jia will be responsible for any warranty expenses.
We have taken steps toward the development of
manufacturing operations in California and are exploring Southeast Asia for potential locations for manufacturing operations. We expect
to receive our first fully automated assembly system and related equipment in our California facility in late January 2024. We anticipate
fine-tuning the system and completing the clean room where the system will be housed with initial production expected to commence before
the end of 2023. Our operations in California will, at least initially, consist of primarily assembling the products from components we
purchase from suppliers. In this connection, we may purchase components from Shenzhen Yi Jia’s present suppliers as well as other
suppliers which we may identify. Quality control will be a crucial part of our manufacturing process. We will need to include quality
control checks and balances throughout our supply chain and manufacturing process. When selecting suppliers, we will have our quality
control and procurement team visit potential suppliers. We will need to conduct annual inspections of the factories and we will also visit
the factory if any quality issues arise. In connection with the establishment of any manufacturing facilities we will have to employ qualified
manufacturing, supervisory and administrative personnel.
Warranties
We will pass on to our customers the warranties
which Shenzhen Yi Jia provides to us, as a customer. These warranties are of an assurance-type and come standard with all of products
we purchase from Shenzhen Yi Jia and cover repair or replacement should product not perform as expected. We offer these warranties for
all major products, including all types of E-vapor kits, atomizers, replacement coils and mods, but no warranty for accessories such as
spare parts or packaging consumables. Shenzhen Yi Jia generally offers 90-day warranty period from date of purchase for products sold
to all regions, but Shenzhen Yi Jia offers six months warranty period from date of purchase for products sold in the United Kingdom and
France. The warranty offers refund or replacement of products for manufacturer defective items, dead on arrival items and items that do
not appear the same as listed on our website, and exclude damaged goods caused by misuse or unauthorized repair. We generally require
our customers to test our hardware with their oils to confirm the hardware performance and approve the hardware designs, in order to minimize
any hardware related discrepancy or performance issues specific to the formulation of their oils. Since we are passing on the warranties
of Shenzhen Yi Jia, we do not provide for estimated expenses related to product warranties. Management actively studies trends of warranty
claims and takes action to improve product quality and minimize warranty costs. We estimate the actual historical warranty claims coupled
with an analysis of unfulfilled claims to record a liability for specific warranty purposes. As of June 30, 2022 and 2023, products returned
for repair or replacement have been immaterial. Accordingly, a warranty liability has not been deemed necessary.
10
Research and Development
We believe that design and attention to detail are
at the heart of our business. Historically, research and development relating to our existing products were conducted primarily by Shenzhen
Yi Jia. We have commenced research and development activities independent of Shenzhen Yi Jia, which has related primarily to cannabis
vaping products. This research and development effort, which is headed by our chairman, Tuanfang Liu, has eleven members, who are based
in Los Angeles. Prior to the transfer of the equity of Aspire North America and Aspire Science to us, the research and development activities
were conducted by Shenzhen Yi Jia. As discussed under “Business – Intellectual Property” we have rights to intellectual
property generated by the research and development efforts of Shenzhen Yi Jia and Mr. Liu.
During the years ended June 30, 2022 and 2023,
research and development effort included the development of the Ispire cannabis vaping system, including patented dual-coil technology,
a closed system for tobacco vaping that is designed to eliminate the problem of oil leaking out of the unit was conducted by Shenzhen
Yi Jia under the leadership of Tuanfang Liu, who is our co-chief executive officer and chief executive officer of Aspire Global. Since
the transfer of Aspire North America and Aspire Science to us in July 2022, we have established our research and development group independent
of Aspire Global and Shenzhen Yi Jia, and the Shenzhen Yi Jia research and development activities relating to both cannabis and tobacco
product are being transitioned to us. We are also entitled to the benefits of Shenzhen Yi Jia’s research and development pursuant
to the Intellectual Property Transfer Agreement and the License Agreement.
Intellectual Property
Shenzhen Yi Jia has patents or patent applications
in the United States, the PRC, the European Union and elsewhere relating to various functional and ornamental aspects of our products.
Pursuant to the Intellectual Property Transfer Agreement, Aspire North America, Aspire Global, Shenzhen Yi Jia and Mr. Liu have transferred
to our subsidiary, Aspire North America, all their intellectual property, including patents, trademarks, brand names, know-how and know-how
documentation that relate directly or indirectly to cannabis and hemp vaping products, and the patents and trademarks, all of which are
United States patents, trademarks and patent and trademark application, have been transferred to Aspire North America. Pursuant to the
License Agreement, Aspire Science has the right to an exclusive (to the exclusion of Shenzhen Yi Jia and Mr. Liu) right and license to
any patents, trademarks and other intellectual property that relates to tobacco vaping products in the territory, which include the world
except for China and Russia.
We believe that the utility patents form the core
intellectual property for our electronic cigarette and vaporizer products. The utility patents primarily relate to atomizer, heating coil,
and battery technologies, which we believe provide enhanced functionality and an improved smoking experience to users of our products.
Our atomizer technology is directed toward enhancing the atomization of e-liquid, including by enabling the user to adjust the airflow
through the atomizer to provide a customized smoking experience. Our heating coil technology is directed towards heating coil designs
and arrangements that deliver heat more efficiently from the heating coil to the e-liquid, thereby producing vapor more effectively. Our
battery technology is directed towards battery assemblies that are replaceable and that are controllable to help facilitate a customized
smoking experience in combination with the atomizer and heating coil technologies.
We believe the design patents cover the visual
aspects of certain of our products and serve to enhance the protection provide by our utility patents. We either own, with respect to
cannabis vaping products, or license on an exclusive basis, with respect to tobacco products, designs patents for the ornamental appearance
of the housing of certain of our electronic cigarettes and cannabis vaping products. Our design patents also extend to the ornamental
appearance of certain electronic cigarette components, including certain aspects of our atomizers and heating coils.
The patents are primarily based on inventions
developed by our chairman, Tuanfang Liu, who has received more than 200 patents in China, the United States, the European Union and other
countries. All of these patents are being or have been assigned, licensed, or otherwise transferred to Shenzhen Yi Jia, which, in turn
is either transferring to Aspire North America, with respect to intellectual property relating to cannabis products, and licensing on
a sole and exclusive basis in the territory, to Aspire Science, with respect to tobacco products. The territory covered by the License
Agreement is the world except for the PRC and Russia. The earliest of patents were filed in 2012. Overall, the patents expire between
2022 and 2037, depending on priority filing date, patent type, and jurisdiction. We intend to work to improve our technology and products
and to seek further patent protection as warranted in connection with any new developments.
We cannot guarantee that our patent rights are
sufficient to protect all aspects of our products or that we will be able to enforce those rights against third parties, as patents can
be challenged, circumvented, or otherwise found to be invalid.
11
Shenzhen Yi Jia has obtained trademark registrations
for Ispire in the countries which we believe are major markets for our products, including the United States, China, the European Union,
and other countries. In addition to the Ispire mark, Shenzhen Yi Jia has also been granted trademark registrations in the United States
and China for certain products and components, including the marks CLEITO, PERSEUS, PLATO, PROTEUS, and ZESTQUEST. Furthermore, Shenzhen
Yi Jia has submitted trademark applications for the mark Ispire in the United States, China, the European Union, and other jurisdictions
we believe are important markets. To the extent any of these trademarks were held by our chairman, Tuanfang Liu or Shenzhen Yi Jia, those
trademarks have been assigned to Aspire North America with respect to cannabis products pursuant to the Intellectual Property Transfer
Agreement and licensed on an exclusive license (to the exclusion of Aspire Global, Shenzhen Yi Jia and Mr. Liu) to Aspire Science pursuant
to the License Agreement.
We cannot assure you that our patent and trademark
rights are sufficient to protect all aspects of our brands or that we will be to enforce those rights to prevent third parties from using
the same or confusingly similar marks, as trademarks can be opposed, cancelled, or otherwise challenged, especially by parties with rights
to similar marks.
Competition
Vaping products for both tobacco and cannabis
compete with tobacco and marijuana cigarettes and a wide range of other tobacco and legal and illegal cannabis products. In each case,
vaping products seek to provide the user with pleasure that the user derives without the disadvantages.
The worldwide market for tobacco vaping products
is highly competitive, with more than 50 companies selling products which compete with our products. In terms of volume of product sold,
by far the largest worldwide producer of tobacco vapor products is Juul Labs, Inc. British American Tobacco Plc is also a major producer
of tobacco vapor products.
We anticipate that the market for vaping products
will evolve, with technological innovation, changing standards and changes in needs and preferences of adult vapor users. Vaping devices
are more than an alternative to traditional cigarettes. Instead, they represent the user’s taste and offer them a new and fun experience,
as they provide large amounts of vapor, different tastes of e-liquid and fashionable design. In light of such trend and to further differentiate
their vaping devices, manufacturers are upgrading their products in terms of technology and design. Many manufacturers are now providing
full-spectrum vaping devices, including closed system vaping devices, open system vaping devices and other kinds of vaping devices, so
as to be more competitive in the market. In the next few years, with the technology becoming more mature, we anticipate that more differentiated
vaping devices will continuously emerge to draw consumers’ attention. Our recent enhancements to our vaping products, such as the
big smoke effect, have increased interest and sales of our products. We believe that our ability to remain profitable and to increase
our market share is dependent upon our ability to anticipate market demand and develop and market products that address these trends.
The market for cannabis vapor products is a developing
market and at present is mainly limited to the United States, although there is a developing market in Canada, and we believe that a market
is developing in Europe. Our ability to be successful in this market is dependent upon our ability to develop vaping systems that attracts
and retains consumer interest and the regulatory environment in the United States. Our cannabis vaping products compete with other forms
of legal and illegal cannabis, marijuana cigarettes, CBD oil and other CBD products, food products and other vaping products.
Seasonality
Seasonality does not materially affect our business
or the results of our operations.
12
Human Capital
We believe our people are central to the foundation
and future of our success. Our culture and commitment to our employees are important factors in attracting, retaining, developing and
progressing qualified employees. As of July 31, 2023, we had a total of 69 employees, of which 29 are operations personnel, 4 are general
management personnel, 25 are in sales and marketing, and 11, including Tuanfang Liu, our co-chief executive officer, are in research
and development relating to cannabis products.
Culture and Engagement
We value and support our people through, among
other initiatives, our talent management, health and safety, employment practices and total reward programs. We are committed to fostering
a culture of inclusion where differences are welcomed, appreciated and celebrated to positively impact our people and business, and where
our people are engaged and encouraged to support the communities in where they live and work.
Talent Management
We are committed to providing our people with
opportunities to learn, grow and be recognized for their achievements. Through our integrated talent management strategy, we strive to
attract, retain, develop and progress a workforce that embraces our culture of inclusion and reflects our diversity efforts. Our talent
programs play a critical role in attracting and progressing a diverse pipeline of talent. We are also committed to investing in our people
by providing learning and networking opportunities and to drive retention, progression and engagement and help them excel in their current
and future roles.
Health and Safety
We are committed to providing safe and healthy
working environments and taking reasonable preventative measures to protect the health and safety of our employees and customers. We drive
environmental, health and safety excellence across the Company and strive for incident-free workplaces – continuously assessing
and developing measures that are in place to help keep our employees, customers and communities safe. In response to the COVID-19 pandemic,
we have implemented significant changes to our business designed to protect the health and well-being of our employees and to support
appropriate physical distancing and other health and safety protocols. These efforts continue to include: enhanced cleaning and sanitation
procedures; domestic and international travel restrictions; return to work and visitor screening protocols; split shifts at facilities
and the postponement or cancellation of attending large events.
Employment Practices and Total Rewards
We are committed to the fair, consistent and equitable
treatment of our employees in relation to working conditions, wages, benefits, policies and procedures. To this end, our policies and
programs are designed to respond to the needs of our employees in a manner that provides a safe, professional, efficient and rewarding
workplace. Our total rewards programs are designed to offer competitive compensation, comprehensive benefits and other programs to support
employees’ growth, both personally and professionally, and the diverse needs and well-being of our employees worldwide. During 2020,
we enhanced certain of our benefits to support the health and well-being of our employees during the COVID-19 pandemic, including family
leave and voluntary leave of absence policies and programs.
From time to time, we hire part-time employees
as need in connection with our manufacturing. We consider our employee relations to be good.
We enter into labor contracts and standard confidentiality
and intellectual property agreements with our key employees. We believe that maintaining good working relationships with our employees
is essential, and we have not experienced any labor disputes except for the matter set forth below. None of our employees are represented
by labor unions.
13
Property
Our headquarters are located at 19700 Magellan
Dr, Los Angeles, CA 90502 and we maintain offices, manufacturing and storage facilities at the same location. We do not own any real property,
and we leased an aggregate of approximately 85,483 square feet of real property. We do not expect to experience difficulties in renewing
any of the leases when they expire. If we require additional space, we expect to be able to obtain additional facilities on commercially
reasonable terms.
The following table sets forth information as to the real property
leased by us:
Location
Square
Feet
Current
Annual
Rent
Expiration
Date
1410 Abbot Kinney Blvd., PH 1, Venice, CA 90291
4,121
$ 276,000
June 30, 2026
19700 Magellan Dr, Los Angeles, CA 90502
37,100 (1)
$ 734,580
July 31, 2027
55 King Yip Street, King Palace Plaza, Floor 31, Suite J, Kwun Tong, Hong Kong
1,850
$ 81,507
July 14, 2025
(1) The number in the table reflects
the square feet of building that we occupy. The leased property also includes land, and the total leased land and building is 79,512
square feet.
Insurance
We consider our insurance coverage to be consistent
with customary industry standards adopted by other companies in the same industry and of similar size although Aspire Science does not
have product liability insurance.
Legal Proceedings
From time to time, we may be subject to legal
or regulatory proceedings, investigations and claims incidental to the conduct of our business.
Other than disclosed below, we are not a party
to, nor are we aware of, any legal or regulatory 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.
14
REGULATIONS
United States
Premarket Tobacco Product Application (“PMTA”)
filings are required for electronic nicotine delivery systems (“ENDS”) products, including devices, components, and/or parts
that deliver aerosolized e-liquid when inhaled. For existing 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. We timely filed our PMTA for our Nautilus Prime open system vaping products,
which are the only products we can presently sell in the United States. For new ENDS products that were not on the U.S. market on August
8, 2016, and not the subject of a pending PMTA filed by September 9, 2020, a premarket authorization is required before introducing the
product to the U.S. market. Selling ENDS products without authorization can result in civil penalties, seizures, injunctions, and even
criminal prosecutions.
The PMTA pathway remains open for us to add further
products, but we (and anyone else) cannot now bring new tobacco products to the U.S. market without actual premarket authorizations. The
PMTA process is expensive, time-consuming, and uncertain.
Under the Family Smoking Prevention and Tobacco
Control Act of 2009 (the “TCA”), a PMTA’s components include:
● Full reports of all information published or known to, or
which should reasonably be known to, the applicant concerning investigations which have been made to show the health risks of such tobacco
product and whether such tobacco product presents less risk than other tobacco products.
● Full statement of the components, ingredients, additives,
and properties, and of the principle or principles of operation.
● Full description of the methods used in, and the facilities
and controls used for, the manufacture, processing, and when relevant, packing and installation.
● An identifying reference to any tobacco product standard,
if applicable.
● Samples of the tobacco product as required.
● Specimens of proposed labeling.
In adopting the Consolidated Appropriations Act,
2021, the COVID-19 relief bill that was signed on December 27, 2020, Congress amended the PACT Act to apply to e-cigarettes and all vaping
products, which includes cannabis vaping products. The legislation amends the PACT Act’s definition of “cigarette” to
include ENDS, which is defined to include “any electronic device that, through an aerosolized solution, delivers nicotine, flavor,
or any other substance to the user inhaling from the device. The term “any other substance” has been interpreted in regulations
to include liquids containing cannabis derivatives as well as nicotine. This amendment prohibits mailing covered products through the
United States Postal Service to consumers (with exceptions for certain business-to-business mailings) and requires reporting to federal
and state agencies. These restrictions make it more difficult for a seller of vaping products to sell the products in the United States.
Briefly, the PACT Act requires any person who
sells, transfers, or ships “cigarettes,” which is defined to include ENDS, which, as noted above, is very broadly defined,
in interstate commerce for profit to, or who advertises or offers cigarettes or smokeless tobacco for such sale, transfer, or shipment
to:
● File a statement setting forth the name, address, phone number,
email address, website address, with the U.S. Attorney General and the tobacco tax administrator of the State where shipment is being
made or in which an advertisement or offer is disseminated;
● On the 10th day of every month, file a memorandum or a copy
of the invoice covering each and every shipment of “cigarettes” during the previous calendar month with the state tobacco
tax administrator and, where there are also local taxes on cigarettes, with local/tribal official
● Comply with (i) certain shipping requirements if using common
carriers other than the Postal Service, such as FedEx or UPS (e.g., label requirements, weight restrictions, 21+ age verification on
delivery, etc.), and (ii) recordkeeping requirements (e.g., detailed invoices covering every delivery sale, organized by the state, the
city or town, and zip code into which the delivery sale is made); (iii) all state, local, tribal, and other laws generally applicable
to sales of cigarettes, including: excise taxes, licensing and tax-stamping requirements; restrictions on sales to minors; and other
payment obligations or legal requirements relating to the sale, distribution, or delivery of cigarettes or smokeless tobacco.
15
Importantly, neither the mail ban nor the other
PACT Act’s “delivery sale” provisions apply to business-to-business deliveries. Under an exception to the mail ban provision
of the PACT Act, covered products may be mailed for business purposes between legally operating businesses that have all applicable State
and Federal Government licenses or permits and are engaged in product manufacturing, distribution, wholesale, export, import, testing,
investigation, or research or for regulatory purposes between any business described above and an agency of the federal government or
a state government. A business must apply for and obtain Postal Service approval of an exception to avail itself of this exception.
Except for the mail ban, the amendment to the
PACT Act took effect on March 28, 2021. The mail ban took effect on October 21, 2021 pursuant to final regulations issued by the Postal
Service. It applies to cannabis and hemp vaping products that aerosolize liquids only. Further, the most commonly used carriers, Federal
Express and UPS, have recently announced that they would cease all deliveries of vapor products in the United States.
The other requirements of the PACT Act applicable
to “delivery sellers” and “delivery sales” do not apply to business-to-business sales, as those terms involve
delivery to “consumers.” The PACT Act defines “consumer” as “any person that purchases cigarettes or smokeless
tobacco” and specifically excludes “any person lawfully operating as a manufacturer, distributor, wholesaler, or retailer
of cigarettes or smokeless tobacco.
Starting on February 6, 2020, the FDA has prioritized
for immediate enforcement against: (i) flavored, cartridge-based ENDS products (other than tobacco- or menthol-flavored ENDS products),
and (ii) any flavored ENDS products (including tobacco and menthol flavors) that are targeted at minors. Several states in the United
States have imposed temporary emergency flavor bans on ENDS products, and a few of these bans have been enjoined by courts while several
have become permanent. Several states and the District of Columbia have also enacted permanent prohibitions on the sale of flavored ENDS
products. Flavor bans are not the same as a total ban on e-cigarettes, and none of the states in the U.S. have imposed a total ban on
e-cigarettes.
Our self-branded vaping systems are not affected
by the flavor bans. The flavor bans are mainly aimed at ENDS products that are sold with pre-filled non-tobacco flavored or non-menthol-flavored
cartridges, and our self-branded products do not contain any pre-filled cartridges.
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. We cannot predict what action states will take
or the nature and amount of taxes they may impose upon cannabis products. However, the shipping restrictions of the USPS under the PACT
Act applied to certain cannabis products, and cannabis products cannot, with certain exceptions, be sent through the USPS. Major overnight
courier services, such as Federal Express, do not ship vaping products that may not be sent using the USPS. We use a combination of advanced
accounting software and PACT Act compliant carriers to remain compliant with the tax and delivery restrictions of the PACT Act.
Under federal law and the laws of certain states
that continue to broadly restrict production and sale of cannabis, vaping devices intended for use in consuming cannabis products may
qualify as prohibited drug paraphernalia. However, the federal Controlled Substances Act includes an exemption for “any person authorized
by local, State, or Federal law to manufacture, possess, or distribute such items.” Several states with legal cannabis programs,
including California, have enacted legislation invoking this exemption to shield state-legal businesses from federal enforcement on paraphernalia
grounds. In addition, a recent court decision from the U.S. Court of International Trade applied this exemption in prohibiting U.S. Customs
and Border Protection from refusing import entry of cannabis paraphernalia components that the importer could legally possess in the state
of importation.
In distributing cannabis vaping devices in the
United States, we rely on this exemption by (i) not selling our own branded cannabis vaping products directly into states that have maintained
complete or near-complete cannabis prohibition, (ii) requiring distributors to whom we sell cannabis vaping products to covenant that
they will not sell our products into these states, and (iii) limiting the sale of our custom made and white label cannabis vaping products
to state-licensed dispensaries and entities, such as licensed cultivators or manufacturers.
To the extent that we conduct manufacturing operations
in California we will be subject to federal and California state laws and regulations applicable to manufacturing operations generally,
including employee health and safety and environmental laws and regulations.
16
Europe
The European Commission issued the Tobacco Products
Directive (the “TPD’’), which has been entered into force on May 19, 2014 and became applicable in the EU Member States
on May 20, 2016. Under the TPD, an e-cigarette is widely defined as a product that can be used for, including all types of vaping devices,
HNB devices and their respective components, the consumption of nicotine-containing vapor via a mouthpiece, or any component of that product.
The TPD regulates e-cigarettes on five main aspects: (i) the information to be provided by the manufacturer and/or distributor, (ii) the
advertising and promotion, (iii) safety issues and warnings, (iv) product presentation, and (v) provisional measures in case of suspected
risk. Member states of the European Union are required to ensure that advertisements for any tobacco related product are prohibited, unless
the advertisement is specifically targeted at professionals specializing in the electronic cigarettes trading. Moreover, no promotion
whatsoever shall be made as to those devices with an intention (direct or indirect) to promote electronic cigarettes.
The sale of cannabis vaping products for recreational
(as contrasted with medical) use is illegal in the European Union, although we believe that a market is developing, particularly in Germany,
where the new coalition government stated clearly that it is introducing the controlled supply of recreational cannabis to adults in licensed
shops.
United Kingdom
The Medicines and Healthcare Products Regulatory
Agency (“MHRA”) is the authority for a notification scheme for e-cigarettes and refill containers in Great Britain and Northern
Ireland and is responsible for implementing the majority of provisions under Part 6 of the Tobacco and related Products Regulations (TRPR)
and the Tobacco Products and Nicotine Inhaling Products (Amendment) (EU Exit) Regulations 2020.
The TRPR introduced rules which ensure:
●
minimum standards for the safety and quality of all e-cigarettes and refill containers (otherwise known as e-liquids)
●
that information is provided to consumers so that they can make informed choices
●
an environment that protects children from starting to use these products.
The requirements:
●
restrict e-cigarette tanks to a capacity of no more than 2ml
●
restrict the maximum volume of nicotine-containing e-liquid for sale in one refill container to 10ml
●
restrict e-liquids to a nicotine strength of no more than 20mg/ml
●
require nicotine-containing products or their packaging to be child-resistant and tamper evident
●
ban certain ingredients including colorant, stimulants and any carcinogenic, mutanegenic or reprotoxic elements
●
include new labelling requirements and warnings in line with the Classification, Labelling & Packaging regulations of the European Union
●
require all e-cigarettes and e-liquids be notified to the MHRA before they can be sold.
17
The Tobacco Products and Nicotine Inhaling Products
(Amendment) (EU Exit) Regulations 2020 explains the changes from a policy perspective:
The 2020 Regulations sets out the requirements
for new products to be notified from January 1, 2021. This will mean that:
●
Producers placing products on the Northern Ireland market will be required to notify using the EU Common Entry Gate (EU-CEG) system for the notification of tobacco and e-cigarette products.
●
Producers placing products on the Great Britain market will be required to notify on the Great Britain domestic system.
●
Notifiers will be required to pay one fee if they notify in relation to placing products on one of the Great Britain or Northern Ireland markets and the same one fee if they notify in relation to placing products on the two markets.
A producer is anyone who manufactures or imports
these products or who re-brands any product as their own.
Part 6 of the Tobacco and Related Products
Regulations 2016 sets out the requirements for e-cigarettes and refill containers.
Producers must submit information about their
products to the MHRA through the MHRA Submission Portal and European Common Entry Gate (EU-CEG) notification portal for UK wide supply.
Under the TRPR, it is the responsibility of the
producer to ensure that their products comply with the TRPR requirements. We check notifications submitted for completeness and verify
TRPR compliance with producers. Where this review has been completed, the compliance status of products is recorded as ‘declared’
to indicate that the notification is complete, and the product has been declared compliant by the producer.
Producers of new e-cigarette and refill container
products must submit a notification to the MHRA six months before they intend to put their product on the market in Great Britain and/or
Northern Ireland. Once the notification has been published on the MHRA website, producers can launch the product in the notified region.
A product which has been substantially modified will count as a new product and must also follow this process. Further information regarding
what qualifies as a substantial modification can be found in the guidance on submission type below.
The TRPR does not include any requirements as
to where testing of e-cigarettes and refill containers has to take place nor has any international testing standards been established.
The notifier will need to be satisfied as to the standards of any testing carried out as they have to submit a declaration that they bear
full responsibility for the quality and safety of the product when placed on the market and used under normal or reasonably foreseeable
conditions.
The sale of cannabis products is illegal in the
United Kingdom.
Southeast Asia
We are currently seeking a potential location
to establish manufacturing operations in Southeast Asia. We intend to form a subsidiary in Southeast Asia, if we are able to identify
a suitable location if we are able to commence manufacturing operations in Southeast Asia, we would have to comply with laws and regulations
relating to manufacturing operations, including regulatory approval for us to establish manufacturing operations, including satisfying
the applicable government authority that we have sufficient capital to cover all of our planned activities. We would also be subject to
wage and hour laws and laws relating to employee health and safety and environmental laws and regulations. We would structure our operations
in a location in Southeast Asia to comply with applicable laws and regulations.
Other requirements for e-cigarettes
Replacement e-cigarette parts that could contain
nicotine only require notification if they have not already been notified as part of a device or e-cigarette kit in the United Kingdom
or European Union (EU). Identical replacement parts that have already been notified as part of another notified e-cigarette product do
not need to be separately re-notified if it is clear on the labelling what notified product the part is for. Any non-identical replacement
part, particularly one that alters the consumer safety profile of a product (for example by changing its refill capacity), would require
a separate notification.
The Conformitè Europëenne (CE) Mark
is defined as the EU’s mandatory conformity marking for regulating the goods sold within the European Economic Area (EEA) since
1985. The CE marking represents a manufacturer’s declaration that products comply with the EU’s New Approach Directives. These
directives not only apply to products within the EU but also for products that are manufactured in or designed to be sold in the EEA.
This makes the CE marking recognizable worldwide even to those unfamiliar with the EEA.
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Regulations Relating to Privacy and Security
We are or may become subject to a variety of laws
and regulations in the United States and abroad regarding privacy, data security, cybersecurity and data protection. These laws and regulations
are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain
and may be conflicting, particularly with respect to foreign laws. In particular, there are numerous United States federal, state, and
local laws and regulations and foreign laws and regulations regarding privacy and the collection, sharing, use, processing, disclosure,
and protection of personal information and other user data. Such laws and regulations often vary in scope, may be subject to differing
interpretations, and may be inconsistent among different jurisdictions. To the extent that we deal with the public and obtain private
information on our computer system, we would be subject to these laws. To the extent that we conduct internet sales, we may be subject
to these laws.
In June 2018, California adopted the California
Consumer Privacy Act (“CCPA”), which became effective in 2020. Under the law, any California consumer has a right to demand
to see all the information a company has saved on the consumer, as well as a full list of all the third parties that data is shared with.
The consumer also has the right to request that we delete the information it has on the consumer. The CCPA broadly defines “protected
data.” The CCPA also has specific requirements for companies subject to the law. The CCPA provides for a private right of action
for unauthorized access, theft or disclosure of personal information in certain situations, with possible damage awards of $100 to $750
per consumer per incident, or actual damages, whichever is greater. The CCPA also permits class action lawsuits. To the extent that we
sell products to consumers through our website or otherwise on the Internet, we may be subject to the CCPA as well as other consumer protection
laws.
The European Union Parliament approved a new data
protection regulation, known as the General Data Protection Regulation (“GDPR”), which came into effect in May 2018. The GDPR
includes operational requirements for companies that receive or process personal data of residents of the European Economic Area. The
GDPR imposes significant penalties for non-compliance. Although we do not conduct any business in the European Economic Area, in the event
that residents of the European Economic Area access our website and input protected information, including information provided in ordering
through our website, we may become subject to provisions of the GDPR.
We are also subject to laws restricting disclosure
of information relating to our employees. We strive to comply with all applicable laws, policies, legal obligations, and industry codes
of conduct relating to privacy, data security, cybersecurity and data protection. However, given that the scope, interpretation, and application
of these laws and regulations are often uncertain and may be conflicting, it is possible that these obligations may be interpreted and
applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure
or perceived failure by us or our third-party service-providers to comply with our privacy or security policies or privacy-related legal
obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information
or other user data, may result in governmental enforcement actions, litigation, or negative publicity, and could have an adverse effect
on our business and operating results. Although we maintain cybersecurity insurance, we cannot assure you that this insurance will cover
or satisfy any claim made against us or adequately cover any defense costs we may incur.
Environmental Laws and Regulations
As our supplier, Shenzhen Yi Jia is responsible
for compliance with Chinese environmental laws and regulations. To the extent that such compliance results in increased manufacturing
costs, we anticipate that our prices will be increased, although we may not know the details of the expense of such compliance.
As a distributor of products made by third parties,
we do not have any material costs in complying with environmental laws and regulations. If we are able to establish manufacturing operations
in California and in Southeast Asia, we will be required to comply with applicable environmental laws and regulations. We cannot estimate
the ongoing costs of such compliance. As we establish manufacturing facilities, we expect that the cost of such compliance will be included
in our capital budget for any facilities we establish.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.