Ispire Technology Inc. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30 , 2023 OR ☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 001-41680 Ispire Technology Inc. (Exact name of registrant as specified in its charter) Delaware 93-1869878 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 19700 Magellan Drive Los Angeles , CA 90502 (Address of principal executive offices) (310) 742-9975 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class: Name of Each Exchange on Which Registered: Ticker Symbol Common Stock, par value $0.0001 per share The Nasdaq Stock Market LLC ISPR Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of September 30, 2023, there were 54,268,992 shares of common stock outstanding. ISPIRE TECHNOLOGY INC. TABLE OF CONTENTS Page PART I - FINANCIAL INFORMATION 1 Item 1. Financial Statements. 1 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended September 30, 2022 and 2023 1 Unaudited Condensed Consolidated Balance Sheets as of June 30, 2023 and September 30, 2023 2 Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended September 30, 2022 and 2023 3 Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2022 and 2023 4 Notes to Condensed Consolidated Financial Statements. 5 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 23 Item 4. Controls and Procedures. 23 PART II - OTHER INFORMATION 24 Item 6. Exhibits 24 i FORWARD-LOOKING STATEMENTS This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements. Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our prospectus dated April 3, 2023 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects. OTHER PERTINENT INFORMATION Unless specifically set forth to the contrary, “Company”, “we,” “us,” “our” and similar terms refer to Ispire Technology Inc. and its subsidiaries, unless the context indicates otherwise. ii PART I – FINANCIAL INFORMATION ITEM 1 – Financial Statements ISPIRE TECHNOLOGY INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Three Months Ended September 30, 2022 2023 Revenue $ 26,943,050 $ 42,864,647 Cost of revenue 22,150,947 35,976,355 Gross profit 4,792,103 6,888,292 Operating expenses: Sales and marketing expenses 1,501,156 1,068,663 General and administrative expenses 4,505,815 6,730,902 Total operating expenses 6,006,971 7,799,565 Loss from operations ( 1,214,868 ) ( 911,273 ) Other income (expense): Interest income 510 72,246 Exchange gain (loss), net ( 500,794 ) 3,661 Other income (expenses), net ( 19,201 ) ( 43,204 ) Total other income (expense), net ( 519,485 ) 32,703 Loss before income taxes ( 1,734,353 ) ( 878,570 ) Income taxes - current ( 267,401 ) ( 496,045 ) Net loss $ ( 2,001,754 ) $ ( 1,374,615 ) Other comprehensive (loss) income Foreign currency translation adjustments ( 6,876 ) 44,463 Comprehensive loss ( 2,008,630 ) ( 1,330,152 ) Net loss per share Basic and diluted $ ( 0.04 ) $ ( 0.03 ) Weighted average shares outstanding: Basic and diluted 50,000,000 54,246,212 See notes to unaudited condensed consolidated financial statements. 1 ISPIRE TECHNOLOGY INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS June 30, September 30, 2023 2023 Assets Current assets: Cash and cash equivalents $ 40,300,573 $ 25,686,052 Accounts receivable, net 24,526,262 39,160,751 Inventories, net 7,472,108 5,609,028 Prepaid expenses and other current assets 3,378,617 1,964,822 Held-to-maturity investment 9,133,707 9,192,746 Total current assets 84,811,267 81,613,399 Other assets: Property, plant and equipment, net 1,088,131 1,592,092 Intangible assets - 255,650 Rental deposit 732,334 660,282 Right-of-use assets – operating leases 4,061,617 4,285,182 Total other assets 5,882,082 6,793,206 Total assets $ 90,693,349 $ 88,406,605 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 1,274,391 $ 170,507 Accounts payable – related party 51,698,588 50,504,883 Contract liabilities 988,556 1,290,061 Accrued liabilities and other payables 281,361 273,745 Due to related parties 710,910 - Income tax payable - current 63,853 559,991 Operating lease liabilities – current portion 944,525 1,207,234 Total current liabilities 55,962,184 54,006,421 Other liabilities: Operating lease liabilities – net of current portion 3,356,232 3,387,844 Total liabilities $ 59,318,416 $ 57,394,265 Stockholders’ equity: Common stock, par value $ 0.0001 per share; 140,000,000 shares authorized; 54,222,420 and 54,268,992 shares issued and outstanding as of June 30, 2023 and September 30, 2023 5,422 5,427 Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized, no shares issued at June 30, 2023 and September 30, 2023 - - Equity reserve - 641,943 Additional paid-in capital 25,685,475 26,011,086 Accumulated other comprehensive loss ( 163,768 ) ( 119,305 ) Retained earnings 5,847,804 4,473,189 Total stockholders’ equity 31,374,933 31,012,340 Total liabilities and stockholders’ equity $ 90,693,349 $ 88,406,605 See notes to unaudited condensed consolidated financial statements. 2 ISPIRE TECHNOLOGY INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Ordinary shares Preferred shares Additional Accumulated Other Total Number of Number of Paid-in Equity Retained Comprehensive Shareholders’ Shares Amount Shares Amount Capital Reserve Earnings (Loss)/Income Equity Balance, July 1, 2022 50,000,000 $ 5,000 - $ - $ - $ - $ 11,946,407 $ ( 184,664 ) $ 11,766,743 Net loss - - - - - - ( 2,001,754 ) - ( 2,001,754 ) Foreign currency translation adjustment - - - - - - - ( 6,876 ) ( 6,876 ) Balance, September 30, 2022 50,000,000 $ 5,000 - $ - $ - $ - $ 9,944,653 $ ( 191,540 ) $ 9,758,113 Balance, July 1, 2023 54,222,420 $ 5,422 - $ - $ 25,685,475 $ - $ 5,847,804 $ ( 163,768 ) $ 31,374,933 Net loss - - - - - - ( 1,374,615 ) - ( 1,374,615 ) Stock-based compensation expense - - - - - 641,943 - - 641,943 Issuance of common stock for equity incentive awards 46,572 5 - - 325,611 - - - 325,616 Foreign currency translation adjustment - - - - - - - 44,463 44,463 Balance, September 30, 2023 54,268,992 $ 5,427 - $ - $ 26,011,086 $ 641,943 $ 4,473,189 $ ( 119,305 ) $ 31,012,340 See notes to unaudited condensed consolidated financial statements. 3 ISPIRE TECHNOLOGY INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months ended September 30, 2022 2023 Net loss: $ ( 2,001,754 ) $ ( 1,374,615 ) Adjustments to reconcile net income from operations to net cash provided by operating activities: Depreciation and amortization 6,553 29,161 Depreciation of right-of-use assets 256,655 312,938 Accounts receivable impairment - 225,487 Stock-based compensation expenses - 967,559 Changes in operating assets and liabilities: Accounts receivable, net ( 5,917,620 ) ( 14,710,476 ) Inventories ( 4,780,043 ) 1,863,080 Prepaid expenses and other current assets ( 24,810 ) 1,603,180 Accounts payable 15,442,733 ( 2,449,276 ) Contract liabilities ( 997,912 ) 281,529 Accrued liabilities and other payables ( 13,887 ) ( 124,950 ) Income tax payable 265,925 496,138 Net cash provided by (used in) operating activities $ 2,235,840 $ ( 12,880,245 ) Cash flows from investing activities: Purchase of property, plant and equipment ( 324,747 ) ( 533,122 ) Acquisition of intangible assets - ( 255,650 ) Net cash used in investing activities $ ( 324,747 ) $ ( 788,772 ) Cash flows from financing activities: Advances to related parties ( 105,752 ) ( 703,322 ) Principal portion of lease payment ( 185,600 ) ( 242,182 ) Net cash used in financing activities $ ( 291,352 ) $ ( 945,504 ) Net increase(decrease) in cash and cash equivalents 1,619,741 ( 14,614,521 ) Cash and cash equivalents - beginning of period 74,480,651 40,300,573 Cash and cash equivalents - end of period $ 76,100,392 $ 25,686,052 See notes to unaudited condensed consolidated financial statements. 4 ISPIRE TECHNOLOGY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND PRINCIPAL ACTIVITIES Ispire Technology Inc. (the “Company”) was incorporated under the laws of the State of Delaware on June 13, 2022. Through its subsidiaries, the Company is engaged in the research and development, design, commercialization, sales, marketing and distribution of branded e-cigarettes and cannabis vaping products. Ispire owns a 100 % equity interest in Ispire International Limited, a business company incorporated under the laws of the British Virgin Islands (“BVI”) (“Ispire International”) on July 6, 2022. Prior to July 29, 2022, all of the equity of Aspire North America LLC, a California limited liability company (“Aspire North America”), was owned by Aspire Global Inc. (“Aspire Global”), and all of the equity of Aspire Science and Technology Limited, a Hong Kong corporation (“Aspire Science”), was owned by Aspire Global Holdings Limited (“Aspire Holdings”), a wholly-owned subsidiary of Aspire Global. Aspire Global and the Company are related parties since the same individual is the chief executive officer of both companies, the chief executive officer and his wife are directors of both companies, and own 66.5 % and 5.0 %, respectively, of the equity of both Aspire Global and the Company. At the time of transfer of the equity in Aspire North America and Aspire Science, the Company had the same stockholders as Aspire Global and the Company’s stockholders held the same percentage interest in the Company as they had in Aspire Global. Because the transfer of the equity in Aspire North America and Aspire Science is a transfer between related parties, the historical financial information of the subsidiaries is carried forward as the historical financial information of the Company and the 50,000,000 shares that were issued at or about the time of the Company’s organization are treated as being outstanding on July 1, 2020. On July 29, 2022: ● Aspire Global transferred 100 % of the equity interest in Aspire North America to the Company ● Aspire Holdings transferred 100 % of the equity of Aspire Science to Ispire International. In September 2023, the Company established a wholly-owned subsidiary, Ispire Malaysia Sdn Bhd (“Ispire Malaysia”) under the laws of the Federation of Malaysia, in order to establish manufacturing operations in Southeast Asia. Ispire Malaysia was formed by Tuanfang Liu, the Company’s Chairman and Co-Chief Executive Officer on September 1, 2023 and assigned to the Company on September 22, 2023 at a consideration of 100 Malaysian ringgits. The following table sets forth information concerning the Company and its subsidiaries as of September 30, 2023: Name of Entity Date of Organization Place of Organization % of Ownership Principal Activities Ispire Technology Inc. June 13, 2022 Delaware Parent Company Holding Company Ispire International July 6, 2022 BVI 100% Holding Company Aspire North America February 22, 2020 California 100% Research and Development, Sales and Marketing Aspire Science December 9, 2016 Hong Kong 100% Sales and Marketing Ispire Malaysia September 1, 2023 Malaysia 100% Manufacturing Ispire is a holding company and does not engage in any active operations. Its business is conducted by its two operating subsidiaries, Aspire North America, which is engaged in the development, marketing and sales of cannabis vapor products, which were introduced in mid-2020, and Aspire Science, which is engaged in the development, marketing and sales of tobacco vaping products. In October 2022, the directors and stockholders of the Company approved the 2022 Equity Incentive Plan (the “Plan”) pursuant to which up to 15,000,000 shares of common stock may be issued pursuant to options or restricted stock grants. The Plan will be administered by the Compensation Committee of the Board of Directors. Awards under the Plan may be granted to officers, directors, employees and those consultants who qualify as a consultant or advisor under the instructions to Form S-8. The Compensation Committee has broad discretion in making awards; provided that any options shall be exercisable at the fair market value on the date of grant. Awards have been granted during the three months ended September 2023. See Note 13. 5 Impact of COVID-19 In December 2019, coronavirus disease 2019 (COVID-19) was first reported to have surfaced in Wuhan, China. During 2020, the disease spread to many parts of the world. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in much of the world, most of which are no longer in effect. The World Health Organization ended the global emergency status for COVID-19 on May 5, 2023, and the United States Department of Health and Human Services declared that the public health emergency from COVID-19 expired at the end of the day on May 11, 2023. The extent to which COVID-19 impacts the Company’s operations on an ongoing basis is highly uncertain. Since the Company’s products are presently manufactured in China by a related party, any changes in the outbreak in China and any changes in the Chinese government’s policy may affect the Company’s supplier’s operations which could affect its ability to manufacture and deliver product in a timely manner. Supply Chain Risks One of effects of the COVID-19 has been delays resulting from supply chain issues, which relate to the difficulty that companies have in having their products manufactured, shipped to the country of destination, and delivered from the port of entry to the customer’s location. As the port delays have significantly decreased, the Company does not believe that the supply chain issues that affected its operations are currently affecting the Company. The Company cannot assure you that delays will not affect its business in the future. In 2021, Shenzhen Yi Jia, the Company’s principal supplier of products, suffered a chip shortage resulting in a slowdown in delivery of its products to the Company from April to August 2021. To secure the supply of chips, Shenzhen Yi Jia changed the payment terms to chip suppliers from 30 days after delivery in the past to prepayment, and it engaged two new chip suppliers. Since September 2021, Shenzhen Yi Jia has obtained a supply of chips to meet its production needs and the chip shortage no longer affects its production. In 2022, a slowdown in the delivery of components to Shenzhen Yi Jia resulting from supply chain slowdowns as a result of the effects of mainland China’s COVID policy resulted in an increase in cost of revenue during the three months period ended September 30, 2022. The Company cannot assure you that it will not suffer from a chip shortage or that the effects of China’s COVID policy will not affect Shenzhen Yi Jia’s ability or the ability of its suppliers to delivery products in a timely manner. Market and Economic Conditions In recent years, the United States and other markets have experienced cyclical or episodic downturns, and worldwide economic conditions remain uncertain, including, as a result of the COVID-19 pandemic, supply chain disruptions, the Russian invasion of Ukraine, instability in the U.S. and global banking systems, rising fuel prices, increasing interest rates or foreign exchange rates and increased inflation and the possibility of a recession. A significant downturn in economic conditions may affect the market for the Company’s products and its supplier’s ability to provide products on acceptable terms. The Company cannot predict the timing, strength, or duration of any future economic slowdown or any subsequent recovery generally, or in any industry. If the conditions in the general economy and the markets in which the Company operates worsen from present levels, its business, financial condition, operating results could be adversely affected. 6 E-cigarette regulation Regulation regarding e-cigarette varies across countries, from no regulation to a total ban. The legal status of e-cigarettes is currently pending in many countries. But as e-cigarettes have become more and more popular recently, many countries are considering imposing more stringent law and regulations to regulate this market. Changes in existing law and regulations and the imposition of new laws, regulation in countries and regions that our major customers are located in may adversely affect the Company’s business. The Federal Food, Drug, and Cosmetic Act requires all Electronic Nicotine Delivery Systems (“ENDS”) product manufacturers that market products in the United States to submit Premarket Tobacco Product Applications (“PMTAs”) to the FDA. For ENDS products that were on the U.S. market on August 8, 2016, a PMTA was required to be submitted to the FDA by September 9, 2020; for ENDS products that were not on the U.S. market prior to August 8, 2016, and for which a PMTA was not filed by September 9, 2020, a PMTA a premarket authorization issued in response to a PMTA is required before the subject product may enter the U.S. market. The Company has submitted a PMTA filing for one ENDS product, and, under apparent FDA policies, the agency will not enforce the premarket review requirements for that product pending review of its PMTA. However, even with submission of the PMTA application, the FDA may reject the Company’s application and may prevent the Company’s ENDS products from being sold in U.S., which will adversely affect the Company’s business. Amendments to the Prevent All Cigarette Trafficking (“PACT”) Act, which became law in 2021, extend the PACT Act to include e-cigarette and all vaping products, and place significant burdens on sellers of vaping products in the United States which may make it difficult to operate profitably in the United States. Because of tighter government regulations, the Company has stopped marketing tobacco vaping products in the United States, as the volume of sales from the one tobacco vaping product which the Company may sell in the United States does not justify the marketing and regulatory costs involved. In the United States, cannabis vaping products are governed by state laws, which vary from state to state. Most states do not permit the adult recreational use of cannabis, and no states permit the sale of recreational cannabis products to minors. As a result of the reduced revenue to states resulting from the effects of the COVID 19 pandemic, states may seek to raise revenue by permitting and taxing the use of cannabis products. The Company cannot predict what action states will take or the nature and amount of taxes they may impose. However, to the extent the PACT Act applies to cannabis products that aerosolize liquids, it may be more difficult to sell our products in states that permit the sale of cannabis. However, cannabis and its derivatives containing more than 0.3 % delta-9 tetrahydrocannabinol on a dry weight basis remain Schedule I controlled substances under U.S. federal law, meaning that federal law generally prohibits their manufacture and distribution. United States federal law also deems it unlawful to sell, offer for sale, transport in interstate commerce, import, or export “drug paraphernalia,” which includes “any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance” the possession of which federal law prohibits, including Schedule I “marijuana.” Limited exemptions exist, most notably when state or local law authorizes these items’ manufacture, possession, or distribution. The European Commission issued the Tobacco Products Directive (the “TPD”), which became effective on May 19, 2014 and became applicable in the European Union member states on May 20, 2016. The TPD regulates e-cigarettes on the packaging, labelling and ingredients of the products on the European Union market, the creation of smoke-free environments, tax measures and activities against illegal trade and anti-smoke campaigns. Member states of the European Union are required to ensure that advertisements for any tobacco related product are prohibited, and no promotion shall be made as to those devices with an intention to promote e-cigarettes. For the e-cigarettes released after May 20, 2016, TPD requires e-cigarette manufacturers to submit product sales applications to the regulatory market six months in advance, and ensure their products can meet the TPD requirements before they can be released. The Company has complied with TPD requirement that for all its tobacco products sold in Europe. The sale of cannabis vaping products is illegal in the European Union and the United Kingdom. 7 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The unaudited interim consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s consolidated financial position as of September 30, 2023 and the results of operations for the three months ended September 30, 2022 and 2023. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the financial statements not misleading have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accordingly do not include all of the disclosures normally made in the Company’s annual consolidated financial statements. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended June 30, 2023, included in the Company’s registration statement on Form S-1. The results of operations for the three month periods ended September 30, 2023 are not necessarily indicative of the results of operations that may be expected for any other interim periods or for the year ending June 30, 2024. Use of estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include allowance for doubtful accounts, the useful lives of property and equipment, impairment of long-lived assets, and deferred cost. Actual results could differ from those estimates. Allowance for credit losses The Company adopted Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” during the three months ended September 30, 2023. The Company estimates its allowance for current expected credit losses based on an expected loss model, compared to prior periods which were estimated using an incurred loss model which did not require the consideration of forward-looking economic variables and conditions in the reserve calculation across the portfolio. The impact related to adopting the new standard was not material. The Company estimates its allowances for expected credit losses for accounts receivable by considering past events, including any historical default, current economic conditions and certain forward-looking information, including reasonable and supportable forecasts. As of July 1, 2023, the methodologies that the Company uses to estimate the allowance for expected credit losses for accounts receivable are as follows: The Company reviews all accounts receivable considered at risk semi-annually and performs an analysis based upon current information available about the customers, such as financial statements, news reports, published credit ratings as well as collateral net of repossession cost, prior collection history and current and future expected economic conditions. Using this information, the Company determines the expected cash flow for the accounts and other receivables and calculates an estimate of the potential loss and the probability of loss. For those accounts for which the loss is probable, the Company records a specific allowance. The Company considers forward-looking macroeconomic variables such as gross domestic product when quantifying the impact of economic forecasts on its allowance for credit losses. Macroeconomic variables may vary based on historical experiences, portfolio composition and current environment. The Company also considers the impact of current conditions and economic forecasts relating to client-credit ratings, in addition to performing a qualitative review of credit risk factors across the portfolio. Forward-looking estimates require the use of judgment, particularly in times of economic uncertainty. The Company writes off receivables when all efforts at collection have been exhausted and the receivable is considered uncollectible. Investment The investment represents a certificate of deposit that the Company holds in HSBC bank. The entire balance of the investment presented on the balance sheet as of September 30, 2023 is $ 9,192,746 and it matures on February 8, 2024. Intangible assets Intangible assets refer to capitalized external costs, such as filing fees and associated attorney fees, incurred to obtain issued patents and patent license rights. All patents are internally generated. The Company expenses costs associated with maintaining patents subsequent to their issuance in the period incurred. Capitalized patent costs are amortized on a straight-line basis over estimated useful lives of 15 - 20 years, which are based on the length of the license agreements as the Company expects to receive economic benefits over that time. The Company assesses the potential impairment to capitalized patent costs when events or changes in circumstances indicate that the carrying amount of our patent portfolio may not be recoverable. $ 255,650 of patent fees were capitalized during the three months ended September 30, 2023. 8 Revenue recognition The Company sells its products to customers and recognizes revenue in accordance with the guidance of ASC 606, Revenue from Contracts with Customers. Revenue is recognized when control of goods has transferred to customers. For the majority of the Company’s customer arrangements, control transfers to customers at a point-in-time when goods have been delivered to the pickup location specified by the customer or a forwarder appointed by the customer, as that is generally when legal title, physical possession and risks and rewards of goods transfer to the customer. Revenue is recognized at the transaction price based on the purchase order as adjusted for the anticipated rebates, discounts and other sales incentives. When determining the transaction price, management estimates variable consideration applying the portfolio approach practical expedient under ASC 606. The main sources of variable consideration for the Company are customer rebates, trade promotion funds, and cash discounts. These sales incentives are recorded as a reduction of revenue at the time of the initial sale using the most-likely amount estimation method. The most-likely amount method is based on the single most likely outcome from a range of possible consideration outcomes. The range of possible consideration outcomes is primarily derived from the following inputs: sales terms, historical experience, trend analysis, and projected market conditions in the various markets served. Because the Company serves numerous markets, the sales incentive programs offered vary across businesses, but the most common incentive relates to amounts paid or credited to customers for achieving defined volume levels or growth objectives. Disaggregated Revenue In accordance with ASC 606-10-50-5, the Company has taken into consideration the nature, amount, timing, and uncertainty of revenue and cash flows, and has determined to disaggregate its net sales of tobacco vaping products and cannabis vaping products. The net sales disaggregated by products for the three months period ended September 30, 2022 and 2023 were as follows: Three months ended September 30, 2022 2023 Net sales by products Tobacco vaping products $ 18,947,058 $ 25,531,999 Cannabis vaping products 7,995,992 17,332,648 Total $ 26,943,050 $ 42,864,647 Cost of revenue Cost of revenue for the three months ended September 30, 2022 and 2023 consisted primarily of the cost of purchasing vaping products, which were purchased from a related party. See Note 11. Stock-based compensation The Company measures and recognizes compensation expenses for stock-based payment awards, including stock options, and restricted stock units (“RSUs”) granted to directors, and advisors, based on the grant date fair value of the awards. The Company engages a third party valuer to determine fair value of stock options using the binomial option pricing model. The fair value of RSUs is measured on the grant date based on the closing fair market value of the Company’s common stock. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period, which is generally four years for stock options and three years for RSUs. Stock-based compensation is recognized on a straight-line basis, net of estimated forfeitures, over the period during which services are provided in exchange for the award. Stock-based compensation expense is recorded in the general and administrative expense in the consolidated statements of operations. Recent accounting pronouncements As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company intends to take advantage of the benefits of this extended transition period. The Company had reviewed recent accounting pronouncements and determined that none of the pronouncements not yet effective are expected to have a material impact on the Company’s financial statements. 9 Accounting pronouncements adopted during the three months ended September 30, 2023 In June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses (Topic 326). This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. In July 2019, the FASB delayed the effective date for this ASU for private companies (including emerging growth companies) and will be effective for annual reporting periods beginning after December 15, 2022, with early adoption permitted. As the adoption of this standard on July 1, 2023 was immaterial, the Company did not record a cumulative-effect adjustment to retained earnings on that date. On September 29, 2022, FASB issued ASU 2022-04: Liabilities-Supplier Finance Programs (Topic 405-50): Disclosure of Supplier Finance Program Obligations. This update requires that a buyer in a supplier finance program disclose additional information about the program to allow financial statement users to better understand the effect of the programs on an entity’s working capital, liquidity, and cash flows. This update will be effective for the Company for fiscal years beginning after December 15, 2022, except for the amendment on roll forward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The adoption of this update had no material impact on the Company’s consolidated financial statements. Customer Concentration For the three months ended September 30, 2022 and 2023, the Company’s major customers, who accounted for more than 10 % of the Company’s consolidated revenue, were as follows: Three months ended September 30, 2022 2023 Major Customers Customer A 37 % 35 % Customer B * 16 % * Represented less than 10 % of consolidated revenue. 3. CASH AND CASH EQUIVALENTS Below is a breakdown of the Company’s cash balances in banks as of June 30, 2023 and September 30, 2023, both by geography and by currencies (translated into U.S. dollars): As of June 30, As of September 30, By Geography: 2023 2023 Cash in HK $ 25,841,880 $ 20,570,618 Cash in U.S. 14,458,693 4,682,414 Cash in Malaysia - 433,020 Total $ 40,300,573 $ 25,686,052 By Currency: USD $ 39,835,636 $ 24,965,741 RM - 433,020 HKD 363,416 183,382 EUR 59,702 62,739 GBP 22,143 21,367 RMB 19,676 19,803 Total $ 40,300,573 $ 25,686,052 “HKD” refers to Hong Kong dollars, “GBP” refers to British pounds, “EUR” refers to Euros and “RM” refers to Malaysia ringgit. 4. FAIR VALUE MEASUREMENT As of June 30, 2023 and September 30, 2023, information about inputs into the fair value measurement of the Company’s assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to their initial recognition is as follows: Cash and cash equivalents, accounts receivable, prepaid expenses and other receivables are financial assets with carrying values that approximate fair value due to their short-term nature. Accounts payable, accounts payable – related party, contract liabilities, accrued liabilities and other payables and due to related parties are financial liabilities with carrying values that approximate fair value due to their short-term nature. 10 5. ACCOUNTS RECEIVABLE, NET As of June 30, 2023 and September 30, 2023, accounts receivable consisted of the following: As of June 30, As of September 30, 2023 2023 Accounts receivable – gross $ 26,025,068 $ 40,256,685 Allowance for credit losses ( 1,498,806 ) ( 1,095,934 ) Accounts receivable, net $ 24,526,262 $ 39,160,751 The Company recorded $ 0 and $ 225,487 bad debt expense for the three months ended September 30, 2022 and 2023, respectively. For the three months ended September 30, 2022 and 2023, the Company wrote off accounts receivable against allowance for credit losses of $ 0 and $ 628,359 , respectively. 6. PREPAID EXPENSES AND OTHER CURRENT ASSETS As of June 30, 2023 and September 30, 2023, prepaid expenses and other current assets consisted of the following: As of June 30, As of September 30, 2022 2023 Prepaid inventories $ 3,209,413 $ 1,555,469 Other receivable 127,595 244,928 Prepayment 26,974 98,754 Deposit paid 14,635 65,671 Total $ 3,378,617 $ 1,964,822 Prepayments primarily consist of prepayment for raw materials and consulting services provided by suppliers. 7. PROPERTY, PLANT AND EQUIPMENT, NET As of June 30, 2023 and September 30, 2023, property, plant and equipment consisted of the following: As of June 30, As of September 30, 2022 2023 Leasehold improvement $ 518,854 $ 813,912 Office and other equipment 339,155 563,132 Furniture and fixture 309,990 324,077 1,167,999 1,701,121 Less: accumulated depreciation ( 79,868 ) ( 109,029 ) Total $ 1,088,131 $ 1,592,092 For the three months ended September 30, 2022 and 2023, depreciation expense amounted to $ 6,556 and $ 29,118 , respectively. 11 8. CONTRACT LIABILITIES As of June 30, 2023 and September 30, 2023, the Company had total contract liabilities of $ 988,556 and $ 1,290,061 , respectively. These liabilities are advance deposits received from customers after an order has been placed. As of September 30, 2023, the Company expects all of the contract liabilities to be settled in less than one year. The increase in the balance at September 30, 2023 was due to more orders on hand on that date. 9. LEASES The Company has operating lease arrangements for office premises in Hong Kong , California and Malaysia. These leases typically have terms of two to five years and are expensed on a straight-line basis. Leases with an initial term of 12 months or less are not presented as right-of-use assets on the consolidated balance sheet and are expensed over the lease term. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. The balances for the right-of-use assets where the Company is the lessee are presented as follow: As of June 30, As of September 30, 2023 2023 Right-of-use assets $ 4,061,617 $ 4,285,182 Lease liabilities – current $ 944,525 $ 1,207,234 Lease liabilities – non-current 3,356,232 3,387,844 Total $ 4,300,757 $ 4,595,078 As of September 30, 2023, the maturities of our lease liabilities (excluding short-term leases) are as follows: As of September 30, 2023 2024 1,525,895 2025 1,549,132 2026 1,394,839 2027 806,759 Total future lease payments 5,276,625 Less: imputed interest ( 681,547 ) Total lease liabilities 4,595,078 The Company incurred lease costs, which include the amortization of the right-of-use assets and the payment of short-term leases, of $ 274,951 and $ 278,441 on the Company’s consolidated statements of operations and comprehensive loss for the three months ended September 30, 2022 and 2023, respectively. The Company made payments of $ 239,429 and $ 309,252 under the lease agreements during the three months ended September 30, 2022 and 2023, respectively. The weighted-average remaining lease term related to the Company’s lease liabilities as of June 30, 2023 and September 30, 2023 was 4 years and 3 years, respectively. The discount rate related to the Company’s lease liabilities as of both June 30, 2023 and September 30, 2023 was 8 % and 8 %. The discount rates are generally based on estimates of the Company’s incremental borrowing rate, as the discount rates implicit in the Company’s leases cannot be readily determined. 12 10. ACCRUED LIABILITIES AND OTHER PAYABLES As of June 30, 2023 and September 30, 2023, accrued liabilities and other payables consisted of the following: As of June 30, As of September 30, 2023 2023 Other payables $ 148,197 $ 233,392 Accrued salaries and related benefits 97,314 20,442 Accrued expenses 35,850 17,313 Other tax payable - 2,598 Total $ 281,361 $ 273,745 11. RELATED PARTY TRANSACTIONS a) The table below sets forth the major related parties and their relationships with the Company: Name of related parties and Relationship with the Company -Tuanfang Liu is the Chairman of the Company. -Jiangyan Zhu is the wife of Tuanfang Liu and a director of the Company. -Eigate (Hong Kong) Technology Co., Limited (“Eigate”) is a wholly-owned subsidiary of Aspire Global. -Aspire Global is a company controlled by the Chairman of the Company. -Shenzhen Yi Jia, a Chinese company that is 95% owned by the Company’s chairman and 5% by the chairman’s cousin. b) Tuanfang Liu is also Aspire Global’s co-chief executive officer and a director of both the Company and Aspire Global, and his wife, Jiangyan Zhu, is also a director of both companies. As of September 30, 2023, Mr. Liu and Ms. Zhu beneficially own 66.5 % and 5.0 %, respectively, of the outstanding shares of Aspire Global. As of September 30, 2023, Mr. Liu and Ms. Zhu beneficially own 61.3 % and 4.6 %, respectively, of the outstanding shares of the Company. c) The balances in due to related parties at June 30, 2023 and September 30, 2023 represent amounts due to Shenzhen Yi Jia of $ 710,910 and $0 , respectively. The balances are all non-interest bearing, unsecured, have no due date and are repayable on demand. d) For both three month periods ended September 30, 2022 and 2023, substantially all of the Company’s tobacco and cannabis vaping products were purchased from Shenzhen Yi Jia. As of June 30, 2023 and September 30, 2023, the accounts payable–- related party was $ 51,698,588 and $ 50,504,883 , respectively, which was payable to Shenzhen Yi Jia. For the three months ended September 30, 2022 and 2023, the purchases from Shenzhen Yi Jia were $ 22,304,556 and $ 23,518,413 , respectively. 12. INCOME TAXES For the three months ended September 30, 2022 and 2023 income(loss) before income taxes consists of : Three months ended September 30, 2022 2023 HK $ 1,210,327 $ 3,152,076 U.S. ( 2,944,680 ) ( 3,942,031 ) Malaysia - ( 88,615 ) Total $ ( 1,734,353 ) $ ( 878,570 ) The Company’s effective tax rate for the three months ended September 30, 2022 and 2023 was different from the Hong Kong statutory income tax rate due primarily to the U.S. subsidiary being in a loss position. No tax benefit has been recognized for this current loss and the related carryforward losses of this subsidiary, as a full valuation allowance has been established against the deferred tax asset arising from the losses. As at September 30, 2023, income tax payable of $ 496,045 was from income generated during the three months ended September 30, 2023, and $ 63,946 was from income generated prior to that date. As at June 30, 2023, income tax payable of $ 63,853 was from income generated during the year ended June 30, 2023. All income tax payables arose solely from Hong Kong operation. As at September 30, 2023, there were unrecognized deferred tax assets of $ 4,593,466 , out of which $ 3,822,280 were net operating loss carryforwards that may result in future income tax benefits, resulting from net operating losses of $ 18,201,331 arose from Aspire North America LLC. The amount of the valuation allowance as of September 30, 2023 was $ 4,593,466 , resulting from an addition of $ 93,022 to the valuation allowance of $ 4,500,444 as of June 30, 2023. 13 13. STOCK-BASED COMPENSATION Stock Options On September 4, 2023, the Board, as administrator of the Plan, granted pursuant to the Plan non-qualified stock options to its executive officers, and other employees to purchase an aggregate of 2,455,000 shares of common stock, at exercise price of $ 9.76 per share, being the fair market value on the date of grant. Except for 50,000 options that vested upon grant, the remaining options shall vest over four years with the initial 25 % of the awarded options vesting on the one-year anniversary of September 4, 2023, with the remaining 75 % of the award vesting monthly on a 1/36 th pro-rata basis for the following 36 months thereafter for each employee. The following is a summary of stock option activity transactions as of and for the period ended June 30, 2023 and September 30, 2023: Number of options Weighted average exercise price Weighted average fair value per option Outstanding and exercisable at June 30, 2023 - $ - $ - Granted 2,455,000 $ 9.76 $ 5.53 Exercised - $ - $ - Expired - $ - $ - Outstanding and exercisable at September 30, 2023 2,455,000 $ 9.76 $ 5.53 The aggregate intrinsic value of options exercised for each of the three months ended September 30, 2022 and 2023 was $ 0 . Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the period in excess of the weighted-average exercise price multiplied by the number of options outstanding or exercisable. The total fair value of shares vested for the three months ended September 30 2022 and 2023 was $ 0 and $ 505,979 , respectively, using the binomial option pricing model based on the following assumptions: Three months ended September 30, 2023 Risk-free interest rate 4.197 % Expected life 10 years Expected volatility 50.00 % Expected dividend yield 0 % Details of the options outstanding and exercisable as of September 30, 2023 are as follows: Number of options granted Vesting period Exercise price Exercisable period Weighted remaining contractual life in years In 2023 50,000 Vest in September 2023 $ 9.76 September 4, 2023 to September 4, 2033 9.94 601,250 Vest in September 2024 $ 9.76 September 4, 2024 to September 4, 2033 9.94 601,250 Vest in September 2025 $ 9.76 September 4, 2025 to September 4, 2033 9.94 601,250 Vest in September 2026 $ 9.76 September 4, 2026 to September 4, 2033 9.94 601,250 Vest in September 2027 $ 9.76 September 4, 2027 to September 4, 2033 9.94 A total of 50,000 stock options are exercisable as of September 30, 2023. 14 RSUs RSUs granted to directors and employees vest cumulatively as to one-third of the restricted stock units on each of the first three anniversaries of the date of grant. RSUs granted to consultants vest over the respective service periods. RSUs are accounted for as equity using the fair value method, which requires measurement and recognition of compensation expense for all awards granted to employees, directors and consultants based upon the grant-date fair value. Unvested Shares Weighted average grant date fair value Unvested, June 30, 2023 - $ - Conversion - - Granted 633,807 9.73 Vested ( 4,483 ) 9.37 Canceled and forfeited - - Unvested, September 30, 2023 629,324 $ 9.73 The aggregate grant date fair value for the RSUs during the three months period ended September 30, 2023 was $ 461,580 . A total of $ 967,559 stock-based compensation expenses were recognized in general and administrative expenses in the consolidated statements of operations for three months ended September 30, 2023. As of September 30, 2023, the Company had approximately $ 18,787,853 in unrecognized compensation expenses related to all non-vested options and RSUs that will be recognized over the weighted-average period of 2.3 years. 14. EARNINGS PER SHARE The following table presents a reconciliation of basic net loss per share: Three months ended September 30, 2022 2023 Net loss $ ( 2,001,754 ) $ ( 1,374,615 ) Weighted average basic and diluted ordinary shares outstanding 50,000,000 54,246,212 Net loss per basic and diluted share of common stock $ ( 0.04 ) $ ( 0.03 ) 15. SUBSEQUENT EVENTS On October 9, 2023, the Board, as administrator of the 2022 Equity Incentive plan, granted pursuant to the Plan non-qualified stock options to its employees from Ispire Malaysia to purchase an aggregate of 330,000 shares of common stock, at an exercise price of $ 9.19 per share, being the closing price as of October 6, 2023. These options shall vest over four years with the initial vesting of 25 % of the awarded options vesting on the one-year anniversary date hereof, with the remaining 75 % of the award vesting pro-rata on a monthly basis for the following 36 months thereafter. On November 3, 2023, the Board, as administrator of the 2022 Equity Incentive plan, granted pursuant to the Plan non-qualified stock options to one of its employee to purchase an aggregate of 150,000 shares of common stock, par value $ 0.0001 , and such options shall be exercised for a purchase price equal to the closing price of the Company’s common stock on grant date. A number of 37,500 options shall be granted on November 3, 2023, December 13, 2023, March 13 2024, and June 13, 2024 respectively, totaling 150,000 options. These options shall vest immediately upon grant and shall be exercisable for four years from the date of grant. 15 ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed financial statements and the related notes appearing elsewhere in this report. See “Cautionary Forward-Looking Statements.” Actual results could differ materially from those discussed below. Overview We are engaged in the research and development, design, commercialization, sales, marketing and distribution of branded e-cigarettes and cannabis vaping products. We sell our tobacco vaping products worldwide except for the PRC and Russia. Our tobacco vaping products are marketed under the Aspire brand name and are sold primarily through our distribution network. We currently sell our cannabis vaping hardware only in the United States, and we have recently commenced marketing activities in Canada and Europe, primarily in the European Union. Most of our products are vaping hardware. Vaping refers to the practice of inhaling and exhaling the vapor produced by an electronic vaping device, and includes dabbing, which is the recreational inhalation of extremely concentrated tetrahydrocannabinol, the main psychotropic cannabinoid derived from the marijuana plant. Our cannabis vaping products are marketed under the Ispire brand name, primarily on an ODM basis to other cannabis vapor companies. ODM generally involves the design and customization of the core products to meet each brand’s unique image and needs, and our products are sold by our customers under their own brand names although they may also include our brand name on the products. Regulatory Risks The sale of tobacco and cannabis products is subject to regulations worldwide. Many countries prohibit the sale of any cannabis products, and many countries have regulations relating to tobacco products, with a particular emphasis on underage sales. As a result of regulations in the United States, we are able to sell only one tobacco vaping product line, the Nautilus Prime, in the United States. Our tobacco vaping sales in the United States were approximately $0.4 million and $0.1 million for the three months ended September 30, 2022 and 2023, respectively. Because the volume of sales did not justify the marketing and regulatory costs, we have ceased marketing tobacco vaping products in the United States. If any similar regulations are adopted with respect to cannabis products, our business will be severely impacted since all of our cannabis revenue for the three months ended September 30, 2022 and 2023 was generated from sales in the United States Effects of COVID-19 Pandemic In December 2019, coronavirus disease 2019 (COVID-19) was first reported to have surfaced in Wuhan, China. During 2020, the disease spread to many parts of the world. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in much of the world, most of which are no longer in effect. The World Health Organization ended the global emergency status for COVID-19 on May 5, 2023, and the United States Department of Health and Human Services declared that the public health emergency from COVID-19 expired at the end of the day on May 11, 2023. The extent to which COVID-19 impacts our operations on an ongoing basis is highly uncertain. Since our products are presently manufactured in China by a related party, any changes in the outbreak in China and any changes in the Chinese government’s policy may affect our supplier’s operations which could affect its ability to manufacture and deliver product in a timely manner. 16 Supply Chain Risks One of the effects of the COVID-19 has been delays resulting from supply chain issues, which relate to the difficulty that companies have in having their products manufactured, shipped to the country of destination, and delivered from the port of entry to the customer’s location. As the port delays have significantly decreased, we do not believe that the supply chain issues that affected our operations are currently affecting us. We cannot assure you that delays will not affect our business in the future. In 2021, Shenzhen Yi Jia suffered a chip shortage resulting in a slowdown in delivery of its products to the Company from April to August 2021. To secure the supply of chips, Shenzhen Yi Jia changed the payment terms to chip suppliers from 30 days after delivery in the past to prepayment, and it engaged two new chip suppliers. Since September 2021, Shenzhen Yi Jia has advised us that it obtained a supply of chips to meet its production needs and the chip shortage no longer affects its production. In 2022, a slowdown in the delivery of components to Shenzhen Yi Jia resulting from supply chain slowdowns as a result of the effects of the PRC’s COVID policy resulted in an increase in cost of revenue during the period. We cannot assure you that we will not suffer from a chip shortage or that the effects of COVID or the PRC’s COVID policy will not affect Shenzhen Yi Jia’s ability or the ability of its suppliers to delivery products in a timely manner. Accounts Receivable Our business relies on the collection of accounts receivable from our customers in a timely manner to maintain liquidity and support our ongoing operations. The balance of the allowance for doubtful accounts was $0 and $1.1 million at September 30, 2022 and 2023, respectively. Our failure or inability to collect accounts receivable when due results from a number of factors, including (i) our customer’s failure to pay as a result of adverse economic conditions affecting the customers; (ii) our failure to accurately assess the creditworthiness of our customers; (iii) our failure to implement effective collection efforts; and (iv) disputes over contract terms, product quality or delays in delivery. Although we may implement strategies to mitigate these risks, there can be no assurance that such measures will be entirely effective, and we may continue to incur write-offs of accounts receivable, which may impair our ability to operate profitably. Key Factors that Affect Our Results of Operations We believe the following key factors may affect our financial condition and results of operations: ● The effect of legislation and regulations affecting the tobacco and cannabis vaping products. ● If we elect to market tobacco vaping products in the United States, our ability to obtain regulatory approval to market additional tobacco vaping products in the United States. ● Our ability to develop and market tobacco and cannabis vaping products to meet the changing tastes of users. ● The effects of competition. ● The development of an international market for cannabis vaping products, which is presently primarily limited to certain states in the United States. ● The effect of the outbreak of another pandemic or other disease that results in restrictions imposed by governments which may impact our ability to purchase or assemble products as well as the ability of end users to purchase our products. 17 Results of Operations Three Months Ended September 30, 2022 and 2023 The following table sets forth a summary of our consolidated statements of operations and comprehensive income for the three months ended September 30, 2022 and 2023 (dollars in thousands except per share amounts). Three Months ended September 30, 2022 2023 % of Revenue % of Revenue Revenue $ 26,943 100.0 % $ 42,865 100.0 % Cost of revenue (22,151 ) (82.2 )% (35,976 ) (83.9 )% Gross profit 4,792 17.8 % 6,889 16.1 % Operating expenses (6,007 ) (22.3 )% (7,800 ) (18.2 )% Loss from operations (1,215 ) (4.5 )% (911 ) (2.1 )% Other income(loss), net (519 ) (1.9 )% 33 0.1 % Loss before income taxes (1,734 ) (6.4 )% (878 ) (2.0 )% Income taxes (267 ) (1.0 )% (496 ) (1.2 )% Net loss (2,001 ) (7.4 )% (1,374 ) (3.2 )% Other comprehensive (loss)income (7 ) (0.1 )% 44 0.1 % Comprehensive loss (2,008 ) (7.5 )% (1,330 ) (3.1 )% Net loss per ordinary share (basic and diluted) $ (0.04 ) $ (0.03 ) Weighted ordinary shares outstanding 50,000,000 54,246,212 Revenue The following tables set out the breakdown of our revenue percentage by region based on information provided to us by our distributors. For the Three Months ended September 31, 2022 2023 Europe 56.1 % 46.4 % North America 32.7 % 41.7 % Asia Pacific (excluding PRC) 10.8 % 11.8 % Others 0.4 % 0.1 % Total 100.0 % 100.0 % 18 Our revenue increased by $15,921,597, or 59.1%, from $26,943,050 for the three months ended September 30, 2022, to $42,864,647 for the three months ended September 30, 2023. All sales of cannabis vaping products are from United States, which were included in sales in North America. Sales in North America also include sales of tobacco vaping products in Canada. Sales to regions other than North America are from tobacco vaping products. The increase in revenue is the combined effect of (i) increases in sales of cannabis vaping products of $9.3 million from $8.0 million for the three months ended September 30, 2022 to approximately $17.3 million for the three months ended September 30, 2023, (ii) increases in sales of tobacco vaping products in Europe of $4.7 million from $15.1 million for the three months ended September 30, 2022 to approximately $19.9 million for the three months ended September 30, 2023, (iii) increases in sales of tobacco vaping products in Asia Pacific (excluding PRC) of $2.2 million from $2.9 million for the three months ended September 30, 2022 to approximately $5.1 million for the three months ended September 30, 2023. Cost of Revenue Cost of revenue mainly consists of cost of purchases of vaping products, which we purchased from Shenzhen Yi Jia. Cost of revenue increased by $13,825,408, or 62.4%, from $22,150,947 for the three months ended September 30, 2022 to $35,976,355 for the three months ended September 30, 2023. The increase in cost of revenue reflects the increase in period-to-period unit sales. Gross Profit The following tables show the revenue, cost of revenue and gross profit of our tobacco and cannabis vaping products (dollars in thousands). For the Three Months Ended September 30, 2022 Revenue Cost of revenue Gross profit Gross profit % Tobacco vaping products $ 18,947 $ 15,905 $ 3,042 16.1 % Cannabis vaping products 7,996 6,246 1,750 21.9 % Total $ 26,943 $ 22,151 $ 4,792 17.8 % For the Three Months Ended September 30, 2023 Revenue Cost of revenue Gross profit Gross profit % Tobacco vaping products $ 25,532 $ 21,497 $ 4,035 15.8 % Cannabis vaping products 17,333 14,479 2,854 16.5 % Total $ 42,865 $ 35,976 $ 6,889 16.1 % Gross profit increased by $2,096,189, or 43.7%, from $4,792,103 for the three months ended September 30, 2022 to $6,888,292 for the three months ended September 30, 2023, while our gross margin decreased from 17.8% to 16.1%. The gross margin for tobacco vaping products remained constant. The decrease in gross margin for cannabis vaping products was primarily due to (i) a new model of cannabis vaping product was launched in July 2023, that Aspire North America offered discounts to clear the inventories of the older model that led to a drop in gross margin, and (ii) a change in product mix with more lower margin products being sold during the three months ended September 30, 2023. 19 Operating Expenses Operating expenses increased $1,792,594 or 29.8%, from $6,006,971 for the three months ended September 30, 2022 to $7,799,565 for the three months ended September 30, 2023. Our sales and marketing expenses mainly consist of employees’ salaries and benefits, marketing expense, travel expenses and others. Sales and marketing expenses decreased by $432,493, or 28.8%, from $1,501,156 for the three months ended September 30, 2022 to $1,068,663 for the three months ended September 30, 2023. The decrease in sales and marketing expenses for the three-month periods ended September 30, 2023 was primarily due to a reduction in our marketing campaign and trade shows for our cannabis vaping products. Our general and administrative expenses mainly consist of compensation and benefits, rental expense, professional fees and other administrative expenses. General and administrative expenses increased by $2,225,087, or 49.4%, from $4,505,815 for the three months ended September 30, 2022 to $6,730,902 for the three months ended September 30, 2023. The increase was primarily due to (i) an increase of $0.9 million for payroll expenses as more employees were hired by us for expansion of our cannabis business and building a manufacturing plant in Malaysia, (ii) an increase in professional fees of $0.9 million for expenses incurred being a public company for the three months ended September 30, 2023, (iii) stock-based compensation expense of $1.0 million incurred in the three months ended September 30, 2023 as compensation for management, employees and service providers, offset by a decrease in sample expenses of $0.4 million as less samples were distributed during the three months ended September 30, 2023, a decrease in failed units expenses of $0.4 million as there were no failed units during the three months ended September 30, 2023 and the increase in our expenses is not the result of inflation. Inflation in Hong Kong, where Aspire Science is located, was relatively stable. Other expense(income), net Other income, net includes interest income, interest expense, exchange gain (loss), net and other income (expense). Interest income was $510 for the three months ended September 30, 2022 and $72,246 for the three months ended September 30, 2023. Exchange loss(gain) changes by $504,455, or 100.7%, from net exchange loss of $500,794 for the three months ended September 30, 2022 to net exchange gain of $3,661 for three months ended September 30, 2023. As a result of these factors, other expense(income), net increased by $552,188, from other expense, net of $519,485 for the three months ended September 30, 2022 to other income, net of $32,703 for three months ended September 30, 2023. Income Taxes Income taxes increased by $228,644, or 85.5%, from $267,401 for the three months ended September 30, 2022 to $496,045 for the three months ended September 30, 2023. We had a consolidated net loss for both three month periods ended September 30, 2022 and 2023, which was the combined effect of a profit by Aspire Science and a loss by Aspire North America and Ispire Malaysia. The profit from Aspire Science resulted in a current tax expense. The increase in valuation allowance reflects our view that the taxable income in the future will not be sufficient to utilize the carryforward loss. Net Loss As a result of the foregoing, net loss decreased by $627,139, from net loss of $2,001,754, or $(0.04) per share (basic and diluted) for the three months ended September 30, 2022 to a net loss of $1,374,615, or $(0.03) per share, for the three months ended September 30, 2023. 20 Liquidity and Capital Resources The following table summarizes our changes in working capital from June 30, 2023 to September 30, 2023 (dollars in thousands). June 30, 2023 September 30, 2023 Change % Change Current Assets $ 84,811 $ 81,613 $ (3,198 ) (3.8 )% Current Liabilities 55,962 54,006 (1,956 ) (3.5 )% Working Capital 28,849 27,607 (1,242 ) (4.3 )% The following table sets forth information as to consolidated cash flow information for the three months ended September 30, 2022 and 2023 (dollars in thousands). Three Months Ended September 30, Increase Consolidated cash flow data: 2022 2023 (Decrease) Net cash provided by (used in) operating activities $ 2,236 $ (12,880 ) $ (15,116 ) Net cash used in investing activities (325 ) (789 ) (464 ) Net cash used in financing activities (291 ) (946 ) (655 ) Net increase (decrease) in cash and cash equivalents 1,620 (14,615 ) (16,235 ) Net cash flow provided by operating activities for the three months ended September 30, 2022 of $2.2 million, reflected our net loss of $2.0 million, adjusted primarily as follows: an add-back of depreciation of right-of-use assets of $0.3 million, increase in accounts payable of $15.4 million, offset by an increase in accounts receivable of $5.9 million, an increase in inventories of $4.8 million and a decrease in contract liabilities of $1.0 million. Net cash flow used in operating activities for the three months ended September 30, 2023 of $12.9 million, reflected our net loss of $1.4 million, adjusted primarily as follows: an add-back of depreciation of right-of-use assets of $0.3 million, an add-back of stock-based compensation expenses of $1.0 million, an add-back of accounts receivable impairment of $0.2 million, a decrease in inventories of $1.9 million, a decrease of prepaid expenses and other current assets of $1.6 million, an increase in income tax payable of $0.5 million, offset by an increase in accounts receivable of $14.7 million and a decrease in accounts payable of $2.5 million. Net cash flow used in investing activities for the three months ended September 30, 2022 of $0.3 million reflected primarily purchase of property, plant and equipment of $0.3 million. Net cash flow used in investing activities for the three months ended September 30, 2023 of $0.8 million reflected primarily purchase of property, plant and equipment of $0.5 million and acquisition of intangible assets of $0.3 million. Net cash flow used in financing activities for the three months ended September 30, 2022 of $0.3 million reflected primarily advances to related parties of $0.1 million, and principal portion of lease payment of $0.2 million. Net cash flow used in financing activities for the three months ended September 30, 2023 of $0.9 million reflected primarily advances to related parties of $0.7 million, and principal portion of lease payment of $0.2 million. To date, we have financed our operations primarily through cash flow from operations and working capital loans from our major stockholders, who are our co-chief executive officer and his wife, when necessary. We plan to support our future operations primarily from cash generated from our operations and cash on hand. We believe that our current cash and cash flows provided by operating activities, and the net proceeds from our initial public offering of $18.3 million will be sufficient to meet our working capital needs in the next 12 months. If we experience an adverse operating environment or incur unanticipated capital expenditure requirements, or if we decide to accelerate our growth, then additional financing may be required. We cannot give any assurance that additional financing will not be required or, if required, would be available on favorable terms if at all. Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in dilution to our stockholders which may be substantial. 21 The cash at bank held by our Hong Kong operating subsidiary can be freely transferred within our corporate structure without restriction. If our Hong Kong operating subsidiary were to incur additional debt on its own behalf in the future, the instruments governing the debt may restrict the ability of our operating subsidiaries to transfer cash to our U.S. investors. Contractual Obligations As of June 30 2023 and September 30 2023, we had contract liabilities of $988,556 and $1,290,061, respectively. These liabilities are advance deposits received from customers after an order has been placed. We expect all of the contract liabilities to be settled in less than one year. We have operating lease arrangements for office and factory premises for Hong Kong, California and Malaysia, which are treated as right-of-use assets. These leases typically have terms of two to five years. Leases with an initial term of 12 months or less are not presented as right-of-use assets and are expensed over the lease term. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. The balances for our right-of-use assets where we are the lessee are presented as follow: As of June 30, As of September 30, 2023 2023 Right-of-use assets $ 4,061,617 $ 4,285,182 Lease liabilities – current $ 944,525 $ 1,207,234 Lease liabilities – non-current 3,356,232 3,387,844 Total $ 4,300,757 $ 4,595,078 As of September 30, 2023, the maturities of our lease liabilities (excluding short-term leases) are as follows: As of September 30, 2023 2024 1,525,895 2025 1,549,132 2026 1,394,839 2027 806,759 Total future lease payments 5,276,625 Less: imputed interest (681,547 ) Total lease liabilities 4,595,078 Trend Information Other than as disclosed elsewhere in this registration statement, we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition. Seasonality Seasonality does not materially affect our business or the results of our operations. Off-Balance Sheet Arrangements We do not have off-balance sheet arrangements. As a company with less than $1.235 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We have elected to take advantage of such exemptions. 22 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. ITEM 4. Controls and Procedures Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective, due to the lack of controls needed to enable us to record assets acquired from a controlling stockholder in accordance with GAAP. Our failure to have such controls in place resulted in the need for us to restate our unaudited financial statements for the three and nine months ended March 31, 2023. As a result of the restatement, our net loss for the nine months ended March 31, 2023 decreased from $6,057,776, or $0.12 per share (basic and diluted), to $4,512,513, or $0.09 per share (basic and diluted), and our net loss for the three months ended March 31, 2023 decreased from $3,106,855, or $0.06 per share (basic and diluted) to $2,334,223, or $0.05 pe share (basic and diluted). The decrease in net loss reflects the elimination of amortization of the intangible assets transferred from the controlling stockholder. On the March 31, 2023 balance sheet, (i) intangible assets decreased from $72,714,652 to nil. (ii) capital contribution decreased from $74,259,915 to nil and (iii) stockholders’ equity decreased from $79,953,608 to $7,238,957. Subsequent to June 30, 2023, we have appointed a new chief financial officer and a vice president of finance to address material weaknesses in internal control as evidenced by our restatement of the unaudited interim consolidated financial statements for the period ended March 31, 2023 as part of our program to develop and implement effective internal controls over financial reporting. Changes in Internal Control over Financial Reporting During the three months ended September 30, 2023, we appointed a new chief financial officer and a vice president of finance, as part of our program to develop and implement effective internal controls over financial reporting, and we are continuing to develop and implement internal controls over financial reporting particularly in view of the material weakness described above. Inherent Limitations of Controls Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. Controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings. From time to time, we may be subject to legal proceedings, investigations and claims incidental to the conduct of our business. Other than disclosed above, we are not a party to, nor are we aware of, any legal proceedings, investigations or claims which, in the opinion of our management, are likely to have a material adverse effect on our business, financial condition or results of operations. On March 17, 2021, the FDA sent a letter to Aspire North America requesting that Aspire North America submit documents relating to its marketing practices for Aspire products. Specifically, the FDA requested documents related to youth exposure to Aspire North America’s social media marketing of Aspire as well as Aspire North America’s use of influencers in social media marketing. This request applied to all of Aspire electronic nicotine delivery system (ENDS) products and their components or parts. The FDA requested these documents based on the epidemic of youth ENDS use and based on Aspire North America’s marketing of Aspire products on social media platforms (e.g., Facebook, YouTube, and Instagram). The FDA requested that Aspire North America respond within 60 days but granted a 30-day extension. On June 15, 2021, Aspire North America provided the required information to the FDA. To date, the FDA has not substantively responded or taken any further action in the matter. However, we cannot assure you that the FDA will consider the response adequate and will not initiate regulatory or enforcement action based on an alleged failure to comply with the request or that the FDA will not initiate regulatory or enforcement action on other grounds based on the contents of the documents produced in the response. Either result could materially and adversely affect our business, financial condition, and results of operations. Item 1A. Risk Factors As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. Our current risk factors are set forth in our Form 10-K, filed with the SEC on September 19, 2023. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults upon Senior Securities None. Item 4. Mine and Safety Disclosure Not applicable Item 5. Other Information None. Item 6. Exhibits The following is a complete list of exhibits filed as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K. Exhibit Description 31.1 Certification of Co-Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Co-Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document* 101.SCH Inline XBRL Taxonomy Extension Schema Document* 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document* 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document* 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document* 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document* 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) 24 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 14, 2023 ISPIRE TECHNOLOGY INC. By: /s/ Michael Wang Michael Wang Co-Chief Executive Officer (Principal Executive Officer) By: /s/ Daniel Machock Daniel Machock Chief Financial Officer (Principal Financing and Accounting Officer) 25