Ispire Technology Inc. 10-Q

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