Item 1. Business
ITEM 1. Business
Overview
We are engaged
in the research and development, design, commercialization, sales, marketing and distribution of branded e-cigarettes and cannabis vaping
products. We sell our e-cigarette products worldwide except for the People’s Republic of China (the “PRC”), the United
States, and Russia.
We currently
sell our cannabis vaping hardware in the United States, Europe, Canada, and South Africa. Vaping refers to the practice of inhaling and
exhaling the vapor produced by an electronic vaping device, and includes dabbing, which is the recreational inhalation of extremely concentrated
cannabinoids, typically tetrahydrocannabinol, the main psychotropic cannabinoid derived from the marijuana plant. The market for cannabis/CBD
vaping continues to grow and is expected to reach $20.5 billion in 2031 according to Transparency Market Research. Our management anticipates
that the increasing demand of legal cannabis products in the United States will coincide with higher levels of social acceptability for
these products among adult consumers. As a result, we expect to see increasing demand for our cannabis vaping products in coming years.
Our cannabis
products are marketed under the Ispire brand name, primarily on an original design manufacturer (“ODM”) basis to consumer-facing
cannabis vapor companies and third-party co-packers. ODM generally involves the design and customization of core products to meet each
brand’s unique image and needs, and our products are sold by our customers under their own brand names although they may also include
our brand name on the products.
Some of our products use our
BDC (bottom dual coil) coil technology which uses bottom dual coils to provide much higher temperature and an expanded heating which we
believe achieves much greater flavor and vapor production than other available technologies. We believe that the use of our dual-coil
technology enhances the flavor performance of e-liquid, and the hidden wick cotton with special designed wick holes can both extend the
tank e-liquid capacity and improve the speed of wicking to increase the coil life.
We believe
that our BVC (bottom vertical coil) coil represents a significant technological breakthrough for us in coil technology utilizing a vertical
heating wire surrounded by cotton. This design can enable the coil heating to provide uniform temperature from the tank, together with
more efficient wicking. This technology, which was originally introduced by Aspire Global in 2014, enables the coil to last longer while
still giving users what we believe is the purest and cleanest taste from e-liquids.
We believe
that our Cleito tank brings new and innovative technological advancement to the vaping industry. The Cleito uses a revolutionary coil
design that replaces the standard chimney and, we believe, delivers maximized airflow. This design frees up even more restriction in
the airflow by eliminating the need for a static chimney within the tank itself, which results in an expanded flavor profile and increased
vapor production. Combined with a Clapton kanthal coil for maximum flavor, the Cleito tank delivers a rush of intense flavor and huge
vapor with a broad profile. The simple top-fill design makes filling the device very easy and more convenient and enjoyable to use.
Our Ispire
cannabis vapor products use our patented DuCore™ (Dual Coil) technology for cannabis vaporizers. This technology enables users to
create massive plumes of vape without burning the cannabis oil. These products incorporate our patented dual coil technology for what
we believe is best-in-class airflow and taste, and our technology for eliminating the leakage of the oil from the unit, which overcomes
a major disadvantage with many existing products.
In June
2023, we introduced our proprietary Ispire ONE™ technology and products. Ispire ONE™ is designed to eliminate capping issues
in the manufacturing/co-packing process; increase consistency and quality of the filled devices; eliminate leaking, spitting, or overheating
for cartridges, disposables, and PODs; and improve consumer safety, as the devices are sealed in a sterilized factory environment to eliminate
risk of contamination during filling process by Ispire’s customers. In addition, Ispire ONE™ offers a more streamlined approach
to cartridge filling versus conventional methods improving productivity and lowing production costs per unit.
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A majority
of our products are manufactured and supplied by Shenzhen Yi Jia, which is 95% owned by our co-chief executive officer and controlling
stockholder, Tuanfang Liu. We have taken steps toward the establishment and operation of our own manufacturing facilities. On February
5, 2024, we commenced manufacturing on two of the six lines in our approximately 31,000 square foot manufacturing facility in Malaysia.
This facility is operational, with its current manufacturing operations focused on the assembly of components that we purchase from other
companies. Our Malaysian facility has received several ISO certifications, including ISO9001, ISO14001, ISO13485, and a GMP certification.
Because we have only recently commenced Malaysian assembly operations, we may encounter unexpected timing issues or operational and regulatory
challenges which could impact our ability to be fully operational on our expected time schedule. Accordingly, we cannot assure you that
we will be able to effectively and efficiently operate our facilities, or profitably or efficiently manage variations in manufacturing
costs, capacity and demand planning issues, workforce and labor pricing, and local labor laws. Any one of these items could negatively
impact the costs of production and thus our gross margins.
We sell
the Aspire brand of tobacco vaporizer technology products in more than 30 countries through our global network of more than 150 distributors.
The primary markets for our e-cigarette products are Europe and the Asia Pacific region, which does not include the PRC.
The following table sets out the breakdown of
our revenue and percentage by region for the years ended June 30, 2023 and 2024 based on information provided to us by our distributors
(dollars in thousands) and from the company’s sales.
Year Ended June 30,
2023
2024
Revenue
%
Revenue
%
Europe
$ 58,764
50.8 %
$ 65,260
43.0 %
North America (the U.S. and Canada)
41,608
36.0 %
63,080
41.5 %
Asia Pacific (excluding PRC)
14,919
12.9 %
17,589
11.6 %
Others
315
0.3 %
5,980
3.9 %
Total
115,606
100 %
151,909
100 %
Acquisition of Our Business from a Related
Party
We were formed on June 13, 2022. We have two operating
subsidiaries, Aspire North America LLC, a California limited liability company (“Aspire North America”), and Aspire Science
and Technology Limited, a Hong Kong corporation (“Aspire Science”). On July 29, 2022, we acquired 100% of the equity interest
in Aspire North America from Aspire Global Inc. (“Aspire Global”), and our wholly-owned subsidiary Ispire International Limited,
a British Virgin Islands corporation (“Ispire International”), acquired 100% of the equity interest in Aspire Science from
a wholly-owned subsidiary of Aspire Global in connection with a restructure by Aspire Global pursuant to which the equity in Aspire North
America and Aspire Science was transferred to us, and, at the time of the transfer, we had the same stockholders as Aspire Global.
Aspire North America commenced marketing cannabis vaping products in
mid-2020. Aspire Science markets nicotine vaping products worldwide, except for the PRC and Russia.
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Aspire Global is a related party. Tuanfang Liu
is Aspire Global’s chief executive officer and a director of both us and Aspire Global, and his wife, Jiangyan Zhu, is also a director
of both companies. Mr. Liu and Ms. Zhu beneficially own 58.7% and 4.4%, respectively, of our outstanding common stock, par value $0.0001
per share (the “Common Stock”) and 66.5% and 5.9% of Aspire Global’s ordinary shares. Upon our formation we issued 50,000,000
shares of Common Stock to the stockholders of Aspire Global in the same proportion as their stockholdings in Aspire Global.
We presently purchase the majority of our e-cigarette
and cannabis vaping hardware from Shenzhen Yi Jia. Pursuant to agreements dated January 27, 2023, between Aspire North America and Shenzhen
Yi Jia and between Aspire Science and Shenzhen Yi Jia, we purchase our cannabis and tobacco vaping products form Shenzhen Yi Jia at market
prices, provided that the price, delivery, warranty and other terms are no less favorable to us than the price, delivery, warranty and
other terms that are provided to any other customer of Shenzhen Yi Jia.
Our intellectual property was developed primarily
by our co-chief executive officer, Tuanfang Liu. Our research and development team is headed by Mr. Liu. Our intellectual property was
owned by Shenzhen Yi Jia, which had patents or patent application in the United States, the PRC, the European Union and elsewhere relating
to various functional and ornamental aspects of our products. These patents cover both the cannabis and tobacco products. Pursuant to
the Intellectual Property Transfer Agreement, Mr. Liu, Aspire Global and Shenzhen Yi Jia transferred to Aspire North America all patent
and other intellectual property rights, including trademarks, Know-how and Know-how Documentation, as defined in the agreement, relating
to the cannabis vaping products, and to transfer to us any new intellectual property developed or acquired by Mr. Liu, Aspire Global and
Shenzhen Yi Jia which relates to cannabis vaping products. The patents have been transferred to Aspire North America for nil consideration.
Pursuant to the Intellectual Property License
Agreement (the “License Agreement”), Mr. Liu, Aspire Global and Shenzhen Yi Jia granted Aspire Science a perpetual, royalty-free
sole license to use Licensed Technology worldwide, except for the PRC and Russia. This license is for exclusive use of the Licensed Technology,
so no other parties may use or practice this intellectual property . The Licensed Technology includes all patents, know-how, know-how
documentation and trademarks, whether now existing or hereafter developed or acquired by, or for, Mr. Liu, Aspire Global and/or Shenzhen
Yi Jia that relate, directly or indirectly, to the e-cigarette market. Pursuant to the License Agreement, neither Mr. Liu, Aspire Global
nor Shenzhen Yi Jia has any right to market or sell or grant distributors the right to market or sell tobacco vaping products in the world
other than in the PRC and Russia.
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Matters Relating to PRC Laws
The majority of our operations are in United States.
We do not conduct business and we do not have any employees, assets or funds in mainland China. Although most of our cash is in Hong Kong
banks, a significant portion of these funds is to be paid to related parties. See “Certain Relationships and Related Party Transactions.”
Our operations are primarily in the United States. Although Tuanfang Liu, our co-chief executive officer, lives in mainland China, where
Shenzhen Yi Jia is located, the services that he performs for us in his capacity as our co-chief executive officer are performed primarily
in Hong Kong and the United States. In addition to serving as our co-chief executive officer, Mr. Liu is chairman of Shenzhen Yi Jia,
and the services he provides in mainland China are performed in his capacity as chairman of Shenzhen Yi Jia. Our employees are largely
in the United States, with 67 employees based in the United States and where our research and development activities are conducted, 37
in Malaysia, and 10 employees in Hong Kong. Our facilities are located primarily in the United States, where we lease more than 41,221
square feet of office, manufacturing and storage space and where our research and development activities are conducted, as compared with
1,850 square feet of office space in Hong Kong. We are also leasing approximately 31,000 square feet for our manufacturing facility in
Malaysia. We do not have any variable interest entities arrangements or any similar agreements in mainland China. As of the date of this
Annual Report, we do not believe we are subject to PRC Laws applicable to those Chinese companies established in mainland China, based
on advice from Han Kun Law Offices.
We have two operating subsidiaries established in California and Hong
Kong. Hong Kong was established as a special administrative region of the PRC in accordance with Article 31 of the Constitution of the
PRC. The Basic Law of the Hong Kong Special Administrative Region of the PRC (the “Basic Law”) was adopted and promulgated
on April 4, 1990 and became effective on July 1, 1997, when the PRC resumed the exercise of sovereignty over Hong Kong. Pursuant to the
Basic Law, Hong Kong is authorized by the National People’s Congress of the PRC to exercise a high degree of autonomy and enjoy
executive, legislative and independent judicial power, and the PRC laws and regulations shall not be applied to Hong Kong, other than
those relating to national defense, foreign affairs, and certain other matters that are not within the scope of autonomy of Hong Kong.
While the National People’s Congress of the PRC has the power to amend the Basic Law, the Basic Law also expressly provides that
no amendment to the Basic Law shall contravene the established basic policies of the PRC regarding Hong Kong. As a result, as of the date
of this Annual Report, national laws of the PRC that would be applicable to us if we were a Chinese corporation do not apply to our Hong
Kong subsidiary. However, there is no assurance that certain PRC laws and regulations, including existing laws and regulations and those
enacted or promulgated in the future, will not be applicable to our Hong Kong subsidiary due to change in the current political arrangements
between mainland China and Hong Kong or other unforeseeable reasons. The application of such laws and regulations may have a material
adverse impact on us, as relevant PRC authorities may impose fines and penalties upon our Hong Kong subsidiary, delay or restrict the
repatriation of the proceeds from this offering into Hong Kong, and any failure of us to fully comply with such new regulatory requirements
may significantly limit or completely hinder our ability to offer or continue to offer our Common Stock, cause significant disruption
to our business operations, and severely damage our reputation, which would materially and adversely affect our financial condition and
results of operations and cause our Common Stock to significantly decline in value or in extreme cases, become worthless.
Our Corporate Organization
We are a Delaware corporation, incorporated on
June 13, 2022. Aspire North America, LLC, a California limited liability company, was formed on February 22, 2020, and 100% of its ownership
was transferred to Aspire Global on September 23, 2020, and was transferred by Aspire Global to Ispire Technology on July 29, 2022. Aspire
Science, a Hong Kong corporation, was formed on December 9, 2016, as a subsidiary of Aspire Global, and 100% of its equity was transferred
to our subsidiary, Ispire International, on July 29, 2022. Ispire International was organized on July 6, 2022. Ispire Malaysia Sdn Bhd
was formed by on our behalf by Tuanfang Liu, our Chairman and Co-Chief Executive Officer, under the laws of the Federation of Malaysia
on August 2, 2023, and assigned to us on September 22, 2023. Aspire North America and Aspire Science are our operating companies.
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The following chart shows our corporate structure.
Our Strategy
We are implementing a multi-prong growth strategy
directed at increasing the sales of our e-cigarette and cannabis vaporizer technology products.
In addition to increasing sales to our existing
customers, we plan to increase sales of our e-cigarette vaporizer technology products by increasing the number of distributors and regions
where our products are sold. We plan to increase sales of our cannabis products by increasing sales to existing customers, increasing
our customer base in the United States and seeking to penetrate the Canadian and European markets as they develop. We closely follow the
legalization of cannabis globally and plan to enter markets when opportunities arise.
Research and development is at the core of our
business. We will continue to innovate via our own research and development efforts. Tuanfang Liu, our co-chief executive officer, developed
the patented DuCore TM technology, which is being assigned to us enabling our cannabis vaporizer products to heat cannabis oil,
which, we believe is the first leak-proof patented design, which enables the consumer to get the full flavor experience of the cannabis.
We will continue to expand our technology leadership and invest in vaporizer and similar technology research and development. Our present
products are designed for adult use. Our research and development activities will be oriented to focus on both medical and recreational
usages of cannabis products. We recognize that industry trends can change rapidly. We believe that our products must be at the forefront
of technology if we are going to develop our business. The cannabis vaping business is in its early stages and we will seek to develop
a strong and leading position in this market. Currently, this market is largely in the United States and we plan to be at the forefront
as other markets develop.
Through our global sales network, we have a strong
understanding of all of the markets in which our products are sold. We will use online forum and community groups as a means to increase
engagement and collect feedback for future improvements in product research and development. We will seek to introduce new products to
meet customer needs based on our assessment of the direction of the market.
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We will also pursue mergers and acquisitions and
strategic relationships to increase our technological human resources and technology and product portfolio. We believe that we have a
strong management team adept at integrating such acquisitions and that we are an attractive platform to potential acquirees.
We plan to develop further manufacturing capabilities.
However, currently, and for the foreseeable near term, our manufacturing operations will primarily involve the assembly of products from
components manufactured for us in accordance with our specifications.
We are expanding our cannabis and e-cigarette
Original Equipment Manufacturer (“OEM”) and Original Design Manufacturer (“ODM”) business. OEM generally means
making and selling the products as we design them and putting customers’ logos on the products. For OEM products, cost is important
to the customer. ODM generally involves the design and customization of the core products to meet each brand’s unique image and
needs. For ODM products, our customers often consider technology, performance and uniqueness more important than cost, which is often
a secondary consideration. Historically, for our e-cigarette products, we have focused on building and growing our own branded business,
with OEM and ODM sales accounting for a minor portion of our revenue. OEM and ODM sales accounted for approximately $4.5 million and $22.1
million, or 6.0% and 25.9%, of total revenue of e-cigarette products in the years ended June 30, 2023 and 2024, respectively. As Aspire
Global continued to innovate in the last decade and the Aspire brand has become recognized as a leading innovator in the vaping industry,
Aspire Science has been sought after by other brands for OEM and ODM work. We believe that OEM and ODM for our e-cigarette products will
represent a key growth area for us in the future. In seeking to introduce new products, we will, at least initially, rely upon our chairman,
Tuanfang Liu, who has been largely responsible for the development of the technology underlying our e-cigarette and cannabis vaping products.
Sales of our cannabis products to date are largely
sales to cannabis brands on an ODM basis, and, while some hardware products are sold to end users, we anticipate that our cannabis product
sales will continue to be primarily ODM sales for the near future. It is the responsibility of our customers, which are cannabis brands,
to manufacture the cannabis oil and load the oil into our vaping hardware product. None of our products include cannabis oil or hemp oil.
Our Products
E-Cigarette Products
We develop and sell both branded and, to a significantly
lesser extent, OEM and ODM nicotine vaping systems and components (cartridges and batteries) to meet the needs of adult users worldwide,
excluding the United States, the PRC and Russia.
There are generally two types of vaping systems
– open systems and closed systems.
Initially, all of our products were “open
system” vaping devices. The term “open system” generally refers to vaping devices consisting of tanks, which include
heating coils, and battery mods, which include the battery packs. Open system vaping devices allow end consumers to refill the tanks with
their own liquid by themselves. With open systems, consumers have great flexibility in mixing different coils, mods, and e-liquid to create
a more personalized experience. Our open system vaping devices are sold under our own brands, including “Nautilus,” and “Zestquest.”
In 2018, we introduced our first “closed
system” vaping device. The term “closed system” generally refers to vaping devices that consist of cartridges, which
include a heating core (sometimes referred to as atomizers) and is filled with e-liquid, and batteries, which power the cartridges. The
closed system vaping devices include rechargeable and disposable vaping devices. A cartridge for a closed-system vaping device typically
can last from a few days to approximately two weeks, depending upon the frequency of use. We market a line of closed systems through our
licensed brands under the brand names BRKFST and Hidden Hills Club. We believe that the market for closed system vaping devices is increasing
rapidly and is becoming the dominant form of tobacco vaping.
Our vaping components include cartridges, lithium
batteries, metal parts such as coils, plastic parts that are molded, circuit boards (printed circuit board assembly) and liquid cartridges
for our products. The cartridges of closed system vaping devices are consumable products that need to be frequently replaced.
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Some
of our products use our BDC (bottom dual coil) coil technology which uses bottom dual coils to provide expanded heating area and achieve
double flavor and vapor production. This technology allows for two separate oil tanks/cartridges to be integrated into one product/design.
Each of the cartridges has its own heating coil that can be regulated separately to generate the desired heating temperatures independently
of the other. This is beneficial to the consumers because one cartridge could be designed for terpenes (which has a very low evaporation
temperature, typically 100-120 degrees Fahrenheit), and the other can be for cannabis oil (which has an evaporating temperature in the
range of 400-430 degrees Fahrenheit). Conventional cartridge design would have the terpenes and cannabis oil mixed together in one cartridge
and be heated to a single temperature that would typically burn the terpenes and yet under-heat the cannabis oil. With the double flavor
design, we can optimize the heating temperature to evaporate both terpenes and cannabis oil without burning them. We believe that the
use of our dual-coil technology enhances the flavor performance of e-liquid, and the hidden wick cotton with specially designed wick
holes can both expand the tank e-liquid capacity and improve the speed of wicking to increase the coil life.
Our BVC (bottom vertical coil) coil represents
a major technological breakthrough for us in coil technology with a vertical heating wire surrounded by cotton. This design can enable
the coil heating to provide uniform temperature to the tank, together with more efficient wicking. This technology, which Aspire Global
introduced in 2014, enables the coil to last longer while still giving users what we believe is the purest and cleanest taste from e-liquids.
The BVC coils are still very popular for MTL (mouth to lung) vapors today.
We believe that our Cleito tank brings new and innovative technological
advancement to the vaping industry. The Cleito uses a revolutionary new coil design that replaces the standard chimney and, we believe,
delivers maximized airflow. This design frees up even more restriction in the airflow by eliminating the need for a static chimney within
the tank itself, which results in an expanded flavor profile and increased vapor production. Combined with a Clapton kanthal coil for
maximum flavor, the Cleito tank delivers a rush of intense flavor and huge vapor with a broad flavor profile. We believe the simple top-fill
design makes filling the device more convenient and more enjoyable when compared to other designs.
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Cannabis Products
In
December 2020, we introduced the Ispire line of cannabis vaping products. Our Ispire products use our patented Ducore™ (Dual Coil)
technology for cannabis vaporizers. Similar to the Nautilus series, this technology enables users to create extremely large plumes of
vape without burning the cannabis oil. These products incorporate our patented dual coil technology for what we believe is best-in-class
airflow and taste, as well as our technology for eliminating the leakage of the oil from the unit, which overcomes a major disadvantage
with many existing products. In addition to the base unit, we offer a range of cartridge, mouthpiece and color options. In our ODM services,
we work with the customer to design a product that has the desired appearance. All the products are made of stainless steel and the fluid
housing is Pyrex glass. We are not involved in cannabis or hemp plant or oil business, and we do not provide or procure cannabis or hemp
oil. Our product, which is hardware only, is designed for our customers to fill the cartridge with their own cannabis or hemp oil. Cannabis
oil, unlike nicotine oil or liquids which are generally of a uniform consistency, is not of a uniform consistency. If the oil is too
viscous, the user will not have good experience with the product and our customer may reject or return the product. We do not package
the oil with our product. Our ODM customers purchase the oil separately from the product they purchase from us or the end user of our
product purchases the oil independently. We have no way to ensure that any consumer will use a cannabis oil that will work in a product
we have manufactured for our customers.
In June 2023, we introduced our proprietary Ispire
ONE TM technology and associated products. Ispire ONE TM is designed to eliminate capping issues in the manufacturing/co-packing
process, increase consistency and quality of filled devices, eliminate leaking, spitting, or overheating for cartridges, disposables,
and PODs, and improve consumer safety., The devices are sealed in a sterilized factory environment to eliminate risk of contamination
during the filling process by our customers.
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Sales and Distribution
Most of our revenue from our e-cigarette products
comes from sales to our distributors. We are looking to increase our OEM and ODM sales of e-cigarette products, which accounted for 4.5%
and 25.9% of our e-cigarette revenue for the years ended June 30, 2023 and 2024, respectively. We have secured a major e-cigarette OEM
contract in May of 2024 and believe that this contract will yield significant revenue increases from the OEM and ODM business in our 2025
fiscal year. Most of our revenue from cannabis products is from ODM sales to other cannabis vaping brands, and we work with the customer
to design the product, which is sold under the customer’s brand name. For some customers, the Ispire brand is also on the product.
Prior
to our acquisition, Aspire Global sold e-cigarette vaping products in the United States through its distribution network. We decided
not to market in the United States as a result of changes in regulations in the United States. Aspire North America would currently only
be able to sell one product line in the United States and that product line does not generate sufficient revenue to justify the marketing
and regulatory expenses at this time. However, we have submitted a new premarket tobacco product application (“PMTA”) for
a disposable e-cigarette with several flavors, and are hopeful that, with the incorporation of age-gating technology from our IKE Tech
LLC joint venture, we will be able to sell this product into the U.S. market, if approved. We also plan to file PMTAs for a pod-based
e-cigarette system with a variety of flavors, which includes point-of-use age-gating technology, in the next 6 to 12 months.
We believe that we have the ability to evaluate
the market need for vaping products and develop products for both the e-cigarette and cannabis markets. We believe that we have the state-of-the-art
technology, which enables us to market to other cannabis vaping brands. We believe that we have implemented systems of quality control
that cover the key steps of supply chain management to provide high-quality products to adult smokers in a consistent manner. We strictly
uphold our extensive internal standards for various aspects of our products and conduct thorough quality assurance and control practices
throughout the entire production cycle.
Our cannabis vapor products are sold directly
by us, with most of our sales being to other cannabis vaping brands who purchase the product from us on an ODM basis and sell the products
under their brand name, although our Ispire brand may be included on the product. We work with the customer in the design and appearance
of the product. We do not sell cannabis or hemp oil, either as part of a product or separately.
For
our e-cigarette products, we have a network of more than 150 distributors, whose territories cover more than 30 countries or regions.
Our distributors have non-exclusive agreements and generally are not restricted from selling competing vapor products. Our largest distributor,
whose territory was the United Kingdom and France, is Your-Buyer International Limited, which accounted for revenue of approximately
$37.4 million, or 32.4% of revenue and approximately $45.6 million, or 30.0% of revenue for the years ended June 30, 2023 and 2024, respectively.
No other distributor or customer accounted for 10% or more of our revenues for either the year ended June 30, 2023 or 2024.
Typically, our distributors sell our products
to wholesalers who in turn sell to retail distributors, although distributors may sell products directly to retail outlets. The vast majority
of sales of all classes of e-cigarettes are sold in stores, primarily grocery stores, convenience stores and tobacco stores, which generally
purchase product from wholesale distributors. Our products are also available from our distributors on the internet, including both websites
and services such as Amazon. These internet distribution channels are operated by our distributors. The distributors are responsible for
complying with the laws of the countries in which they sell our products. We previously sold tobacco vaping products to a distributor
for Russia; however, we no longer sell to that distributor.
We assist our distributors in marketing our products
through websites, blogs, search engine optimization (SEO), opt-in and e-mail marketing, social media marketing, influencer, marketing
and digital advertising promotions. Opt-in and email marketing strategies include newsletter sign-ups to receive new product updates and
promotions, giveaway promotional activities to drive conversion, coupons and discount promotion activities to increase sales to adult
consumers in compliance with local laws and regulations.
We may use social media to promote our products
and we market to adult consumers through our websites and Instagram. We use social media to educate on current and new products and offers
as well as to provide real-time support to customers. Our social media strategies aim to convert and nurture leads, to increase brand
awareness among adult consumers.
We also provide distributors with discounts and
other sales incentives. From time to time, based on our sales or marketing strategy for a specific region or product, we will give distributors
discounts. Although our distributors do not have sales quotas, they have sales goals and, from time to time, we may reward distributors
for exceeding their sales targets. These promotions are not part of a standard plan, but developed by us from time to time based on our
sales and marketing program.
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Our
sales of Ispire cannabis products to date, which have been primarily through direct sales of Ispire branded atomizers to other cannabis
brands as semi-finished products on an ODM basis. Pursuant to our agreements with our ODM customers, we design and sell these atomizers
pursuant to purchase orders by the customers. To a lesser extent we sell heating devices directly to consumers as internet sales.
Source of Supply
We purchase a majority of our current e-cigarette
and cannabis vaping products from Shenzhen Yi Jia. The products that we sell are the same products that Aspire Science and Aspire North
America sold prior to the transfer of the equity in these subsidiaries to us. Pursuant to agreements dated January 27, 2023, between Aspire
North America and Shenzhen Yi Jia and between Aspire Science and Shenzhen Yi Jia, we purchase our cannabis and e-cigarette vaping products
form Shenzhen Yi Jia at market prices, provided that the price, delivery, warranty and other terms are no less favorable to us than the
price, delivery, warranty and other terms that are provided to any other customer of Shenzhen Yi Jia. In addition, the agreement provides
that Shenzhen Yi Jia will be responsible for any warranty expenses.
In February of 2024, we began operations at our
Company-owned manufacturing facility in Malaysia. We are currently operating with 6 production lines at the Malaysia factory. We plan
to continue expanding our production capabilities in Malaysia as a way to diversify our source of supply.
In connection with the Malaysian operations, we
may purchase components from Shenzhen Yi Jia’s present suppliers as well as other suppliers which we may identify. Quality control
will be a crucial part of our manufacturing process. We will need to include quality control checks and balances throughout our supply
chain and manufacturing process. When selecting suppliers, we will have our quality control and procurement team visit potential suppliers.
We will need to conduct annual inspections of the factories and we will also visit the factory if any quality issues arise. In connection
with the establishment of any manufacturing facilities we will have to employ qualified manufacturing, supervisory and administrative
personnel.
Warranties
We will pass on to our customers the warranties
which Shenzhen Yi Jia provides to us as a customer. These warranties are of an assurance-type, come standard with all of products we purchase
from Shenzhen Yi Jia, and cover repair or replacement should product not perform as expected. We offer these warranties for all major
products, including all types of E-vapor kits, atomizers, replacement coils and mods, but no warranty for accessories such as spare parts
or packaging consumables. Shenzhen Yi Jia generally offers 90-day warranty period from date of purchase for products sold to all regions,
but Shenzhen Yi Jia offers six months warranty period from date of purchase for products sold in the United Kingdom and France. The warranty
offers the refund or replacement of products for manufacturer defective items, dead on arrival items and items that do not appear the
same as listed on our website, and exclude damaged goods caused by misuse or unauthorized repair. We generally require our customers to
test our hardware with their oils to confirm the hardware performance and approve the hardware designs, in order to minimize any hardware
related discrepancy or performance issues specific to the formulation of their oils. Since we are passing on the warranties of Shenzhen
Yi Jia, we do not provide for estimated expenses related to product warranties. Management actively studies trends of warranty claims
and takes action to improve product quality and minimize warranty costs. We estimate the actual historical warranty claims coupled with
an analysis of unfulfilled claims to record a liability for specific warranty purposes. As of June 30, 2023 and 2024, products returned
for repair or replacement have been immaterial. Accordingly, a warranty liability has not been deemed necessary.
Research and Development
We believe that design and attention to detail
are at the heart of our business. Historically, research and development relating to our existing products were conducted primarily by
Shenzhen Yi Jia. We have commenced research and development activities independent of Shenzhen Yi Jia, which has related primarily to
cannabis vaping products. This research and development effort, which is headed by our chairman, Tuanfang Liu, has eleven members, who
are primarily based in Los Angeles. Prior to the transfer of the equity of Aspire North America and Aspire Science to us, the research
and development activities were conducted by Shenzhen Yi Jia. As discussed under “Business – Intellectual Property”
we have rights to intellectual property generated by the research and development efforts of Shenzhen Yi Jia and Mr. Liu.
10
During
the years ended June 30, 2023 and 2024, research and development efforts included the development of the Ispire cannabis vaping system,
patented dual-coil technology, self-sealing technology and a closed system for e-cigarette vaping that is designed to eliminate the problem
of oil leaking out of the unit. These research and development efforts were conducted by Shenzhen Yi Jia under the leadership of Tuanfang
Liu, our co-chief executive officer and the chief executive officer of Aspire Global. Since the transfer of Aspire North America and
Aspire Science to us in July 2022, we have established our research and development group independent of Aspire Global and Shenzhen Yi
Jia, and the Shenzhen Yi Jia research and development activities relating to both cannabis and e-cigarette product have transitioned
to us. We are also entitled to the benefits of Shenzhen Yi Jia’s research and development pursuant to the Intellectual Property
Transfer Agreement and the License Agreement.
IKE Tech LLC Joint Venture
As
reported in our Form 8-K on April 11, 2024, Aspire North America LLC entered into a capital contribution, subscription, and joint venture
agreement with Chemular Inc, Touch Point Worldwide, Inc. d/b/a/ Berify, and Ike Tech LLC, a Delaware limited liability company (the “Joint
Venture”) pursuant to which the Parties agreed to participate in the Joint Venture. The business of the Joint Venture is developing,
licensing, owning, and operating an industry-standard age-verification solution for vapor (e-cigarette) devices. The Joint Venture plans
to submit PMTA applications seeking FDA marketing orders for cutting-edge technologies across the U.S. e-cigarette market, including,
without limitation, (a) next-generation e-cigarette hardware with a user-friendly point-of-use age-verification and geo fencing capability
that eliminates usability of vapor hardware in certain designated areas such as schools and sensitive areas, (b) e-cigarettes with end-to-end
range of dynamic features such as authentication, direct to consumer engagements and exclusive offerings built on the foundations of
blockchain technology, and (c) a real-time biometric identity platform for user access controls, designed to create added security and
reliability to deter counterfeiting in connection with vapor devices. As of the date of this Annual Report, Aspire North America LLC
owns 40% of the Joint Venture.
Intellectual Property
Shenzhen Yi Jia has patents or patent applications
in the United States, the PRC, the European Union and elsewhere relating to various functional and ornamental aspects of our products.
Pursuant to the Intellectual Property Transfer Agreement, Aspire Global, Shenzhen Yi Jia and Mr. Liu have transferred to our subsidiary,
Aspire North America, all their intellectual property, including patents, trademarks, brand names, know-how and know-how documentation
that relate directly or indirectly to cannabis and hemp vaping products, and the patents and trademarks, trademarks and patent and trademark
application, have been transferred to Aspire North America. Pursuant to the License Agreement, Aspire Science has the right to an exclusive
(to the exclusion of Shenzhen Yi Jia and Mr. Liu) right and license to any patents, trademarks and other intellectual property that relates
to tobacco vaping products in the territory, which include the world except for China and Russia.
We believe that the utility patents form the core
intellectual property for our cigarette-cigarette and vaporizer products. The utility patents primarily relate to atomizer, heating coil,
and battery technologies, which we believe provide enhanced functionality and an improved smoking experience to users of our products.
Our atomizer technology is directed toward enhancing the atomization of e-liquid, including by enabling the user to adjust the airflow
through the atomizer to provide a customized smoking experience. Our heating coil technology is directed towards heating coil designs
and arrangements that deliver heat more efficiently from the heating coil to the e-liquid, thereby producing vapor more effectively. Our
battery technology is directed towards battery assemblies that are replaceable and that are controllable to help facilitate a customized
smoking experience in combination with the atomizer and heating coil technologies.
We believe the design patents cover the visual
aspects of certain of our products and serve to enhance the protection provide by our utility patents. We either own, with respect to
cannabis vaping products, or license on an exclusive basis, with respect to tobacco products, designs patents for the ornamental appearance
of the housing of certain of our electronic cigarettes and cannabis vaping products. Our design patents also extend to the ornamental
appearance of certain e-cigarette components, including certain aspects of our atomizers and heating coils.
The patents are primarily based on inventions developed by our chairman,
Tuanfang Liu, who has received more than 200 patents in China, the United States, the European Union and other countries. All of these
patents have been assigned, licensed, or otherwise transferred to Shenzhen Yi Jia, which, has transferred to Aspire North America, with
respect to intellectual property relating to cannabis products, and licensing on a sole and exclusive basis globally other than the PRC
and Russia, to Aspire Science, with respect to e-cigarette products. The earliest patents were filed in 2012 and began expiring in 2022,
with the last patents set to expire in 2037, depending on priority filing date, patent type, and jurisdiction. We intend to work to improve
our technology and products and to seek further patent protection as warranted in connection with any new developments.
We cannot guarantee that our patent rights are
sufficient to protect all aspects of our products or that we will be able to enforce those rights against third parties, as patents can
be challenged, circumvented, or otherwise found to be invalid.
11
Shenzhen Yi Jia has obtained trademark registrations
for Ispire in the countries which we believe are major markets for our products, including the United States, China, the European Union,
and other countries. In addition to the Ispire mark, Shenzhen Yi Jia has also been granted trademark registrations in the United States
and China for certain products and components, including the marks CLEITO, PERSEUS, PLATO, PROTEUS, and ZESTQUEST. Furthermore, Shenzhen
Yi Jia has submitted trademark applications for the mark Ispire in the United States, China, the European Union, and other jurisdictions
we believe are important markets. To the extent any of these trademarks were held by our chairman, Tuanfang Liu or Shenzhen Yi Jia, the
trademarks related to cannabis products have been assigned to Aspire North America pursuant to the Intellectual Property Transfer Agreement,
and all other trademarks have been licensed on an exclusive license (to the exclusion of Aspire Global, Shenzhen Yi Jia and Mr. Liu) to
Aspire Science pursuant to the License Agreement.
We cannot assure you that our patent and trademark
rights are sufficient to protect all aspects of our brands or that we will be to enforce those rights to prevent third parties from using
the same or confusingly similar marks, as trademarks can be opposed, cancelled, or otherwise challenged, especially by parties with rights
to similar marks.
Competition
Vaping products for both e-cigarette and cannabis
compete with tobacco and marijuana cigarettes and a wide range of other tobacco, nicotine and legal and illegal cannabis products. In
each case, vaping products seek to provide the user with pleasure that the user derives from consuming nicotine or cannabis without the
disadvantages of other mediums.
The worldwide market for e-cigarette products
is highly competitive, with more than 50 companies selling products which compete with our products. In terms of volume of product sold,
by far the largest worldwide producer of tobacco vapor products is Juul Labs, Inc. British American Tobacco Plc is also a major producer
of tobacco vapor products.
We anticipate that the market for vaping
products will evolve, with technological innovation, changing standards and changes in needs and preferences of adult vapor users. Vaping
devices are more than a reduced-risk alternative to traditional cigarettes. Instead, they represent the user’s taste and offer
them a new and fun experience, as they provide large amounts of vapor, different tastes of e-liquid and fashionable design. In light
of such trend and to further differentiate their vaping devices, manufacturers are upgrading their products in terms of technology and
design. Many manufacturers are now providing full-spectrum vaping devices, including closed system vaping devices, open system vaping
devices and other kinds of vaping devices, so as to be more competitive in the market. In the next few years, with the technology becoming
more mature, we anticipate that more differentiated vaping devices will continuously emerge to draw adult consumers’ attention.
Our recent enhancements to our vaping products, such as the big smoke effect, have increased interest and sales of our products. We believe
that our ability to remain profitable and to increase our market share is dependent upon our ability to anticipate market demand and
develop and market products that address these trends.
The market for cannabis vapor products is a developing
market and at present is mainly limited to the United States, although there is a developing market in Canada, and we believe that a market
is developing in Europe. Our ability to be successful in these markets is dependent upon our ability to develop vaping systems that attracts
and retains consumer interest and the regulatory environment in the United States. Our cannabis vaping products compete with other forms
of legal and illegal cannabis, marijuana cigarettes, CBD oil and other CBD products, food products and other vaping products.
Seasonality
Seasonality does not materially affect our business
or the results of our operations.
12
Human Capital
We believe our people are central to the foundation
and future of our success. Our culture and commitment to our employees are important factors in attracting, retaining, developing and
progressing qualified employees. As of September 24, 2024, we had a total of 98 employees, of which 40 are operations personnel, 24 are
general management personnel, 19 are in sales and marketing, and 15, including Tuanfang Liu, our co-chief executive officer, are in research
and development relating to our products.
Culture and Engagement
We value and support our people through, among
other initiatives, our talent management, health and safety, employment practices and total reward programs. We are committed to fostering
a culture of inclusion where differences are welcomed, appreciated and celebrated to positively impact our people and business, and where
our people are engaged and encouraged to support the communities in where they live and work.
Talent Management
We are committed to providing our people with
opportunities to learn, grow and be recognized for their achievements. Through our integrated talent management strategy, we strive to
attract, retain, develop and progress a workforce that embraces our culture of inclusion and reflects our diversity efforts. Our talent
programs play a critical role in attracting and progressing a diverse pipeline of talent. We are also committed to investing in our people
by providing learning and networking opportunities and to drive retention, progression and engagement and help them excel in their current
and future roles.
Health and Safety
We are committed to providing safe and healthy
working environments and taking reasonable preventative measures to protect the health and safety of our employees and customers. We drive
environmental, health and safety excellence across the Company and strive for incident-free workplaces – continuously assessing
and developing measures that are in place to help keep our employees, customers and communities safe. In response to the COVID-19 pandemic,
we have implemented significant changes to our business designed to protect the health and well-being of our employees and to support
appropriate physical distancing and other health and safety protocols. These efforts continue to include: enhanced cleaning and sanitation
procedures; domestic and international travel restrictions; return to work and visitor screening protocols; split shifts at facilities
and the postponement or cancellation of attending large events.
13
Employment Practices and Total Rewards
We are committed to the fair, consistent and equitable
treatment of our employees in relation to working conditions, wages, benefits, policies and procedures. To this end, our policies and
programs are designed to respond to the needs of our employees in a manner that provides a safe, professional, efficient and rewarding
workplace. Our total rewards programs are designed to offer competitive compensation, comprehensive benefits and other programs to support
employees’ growth, both personally and professionally, and the diverse needs and well-being of our employees worldwide. During 2020,
we enhanced certain of our benefits to support the health and well-being of our employees during the COVID-19 pandemic, including family
leave and voluntary leave of absence policies and programs.
From time to time, we hire part-time employees
as need in connection with our manufacturing. We consider our employee relations to be good.
We enter into labor contracts and standard confidentiality
and intellectual property agreements with our key employees. We believe that maintaining good working relationships with our employees
is essential, and we have not experienced any labor disputes except for the matter set forth below. None of our employees are represented
by labor unions.
Insurance
We consider our insurance coverage to be consistent
with customary industry standards adopted by other companies in the same industry and of similar size although Aspire Science does not
have product liability insurance.
Legal Proceedings
From time to time, we may be subject to legal
or regulatory proceedings, investigations and claims incidental to the conduct of our business.
We
are not a party to, nor are we aware of, any legal or regulatory proceedings, investigations or claims which, in the opinion of our management,
are likely to have a material adverse effect on our business, financial condition or results of operations.
14
REGULATION
United States
Premarket Tobacco Product Application (“PMTA”)
filings are required for electronic nicotine delivery systems (“ENDS”) products, including devices, components, and/or parts
that deliver aerosolized e-liquid when inhaled. For existing ENDS products that were on the U.S. market on August 8, 2016, a PMTA was
required to be submitted to the FDA by September 9, 2020. We timely filed our PMTA for our Nautilus Prime open system vaping products,
which are the only products we can presently sell in the United States. For new ENDS products that were not on the U.S. market on August
8, 2016, and not the subject of a pending PMTA filed by September 9, 2020, a premarket authorization is required before introducing the
product to the U.S. market. Selling ENDS products without authorization can result in civil penalties, seizures, injunctions, and even
criminal prosecutions.
The PMTA pathway remains open for us to add further
products, but now neither we, nor anyone else, can bring new tobacco products to the U.S. market without actual premarket authorizations.
The PMTA process is expensive, time-consuming, and uncertain.
Under the Family Smoking Prevention and Tobacco
Control Act of 2009 (the “TCA”), a PMTA’s components include:
●
Full reports of all information published or known to, or which should reasonably be known to, the applicant concerning investigations which have been made to show the health risks of such tobacco product and whether such tobacco product presents less risk than other tobacco products.
●
Full statement of the components, ingredients, additives, and properties, and of the principle or principles of operation.
●
Full description of the methods used in, and the facilities and controls used for, the manufacture, processing, and when relevant, packing and installation.
●
An identifying reference to any tobacco product standard, if applicable.
●
Samples of the tobacco product as required.
●
Specimens of proposed labeling.
In adopting the Consolidated Appropriations Act,
2021, the COVID-19 relief bill that was signed on December 27, 2020, Congress amended the PACT Act to apply to e-cigarettes and all vaping
products, which includes cannabis vaping products. The legislation amends the PACT Act’s definition of “cigarette” to
include ENDS, which is defined to include “any electronic device that, through an aerosolized solution, delivers nicotine, flavor,
or any other substance to the user inhaling from the device. The term “any other substance” has been interpreted in regulations
to include liquids containing cannabis derivatives as well as nicotine. This amendment prohibits mailing covered products through the
United States Postal Service to consumers (with exceptions for certain business-to-business mailings) and requires reporting to federal
and state agencies. These restrictions make it more difficult for a seller of vaping products to sell the products in the United States.
Briefly, the PACT Act requires any person who
sells, transfers, or ships “cigarettes,” which is defined to include ENDS, which, as noted above, is very broadly defined,
in interstate commerce for profit to, or who advertises or offers cigarettes or smokeless tobacco for such sale, transfer, or shipment
to:
●
File a statement setting forth the name, address, phone number, email address, website address, with the U.S. Attorney General and the tobacco tax administrator of the State where shipment is being made or in which an advertisement or offer is disseminated;
●
On the 10th day of every month, file a memorandum or a copy of the invoice covering each and every shipment of “cigarettes” during the previous calendar month with the state tobacco tax administrator and, where there are also local taxes on cigarettes, with local/tribal official
●
Comply with (i) certain shipping requirements if using common carriers other than the Postal Service, such as FedEx or UPS (e.g., label requirements, weight restrictions, 21+ age verification on delivery, etc.), and (ii) recordkeeping requirements (e.g., detailed invoices covering every delivery sale, organized by the state, the city or town, and zip code into which the delivery sale is made); (iii) all state, local, tribal, and other laws generally applicable to sales of cigarettes, including: excise taxes, licensing and tax-stamping requirements; restrictions on sales to minors; and other payment obligations or legal requirements relating to the sale, distribution, or delivery of cigarettes or smokeless tobacco.
15
Importantly, neither the mail ban nor the other
PACT Act’s “delivery sale” provisions apply to business-to-business deliveries. Under an exception to the mail ban provision
of the PACT Act, covered products may be mailed for business purposes between legally operating businesses that have all applicable State
and Federal Government licenses or permits and are engaged in product manufacturing, distribution, wholesale, export, import, testing,
investigation, or research or for regulatory purposes between any business described above and an agency of the federal government or
a state government. A business must apply for and obtain Postal Service approval of an exception to avail itself of this exception.
Except for the mail ban, the amendment
to the PACT Act took effect on March 28, 2021. The mail ban took effect on October 21, 2021, pursuant to final regulations issued by
the Postal Service. It applies to cannabis and hemp vaping products that aerosolize liquids only. Further, the most commonly used carriers,
Federal Express and UPS, have recently announced that they would cease all deliveries of vapor products in the United States.
The other requirements of the PACT Act applicable
to “delivery sellers” and “delivery sales” do not apply to business-to-business sales, as those terms involve
delivery to “consumers.” The PACT Act defines “consumer” as “any person that purchases cigarettes or smokeless
tobacco” and specifically excludes “any person lawfully operating as a manufacturer, distributor, wholesaler, or retailer
of cigarettes or smokeless tobacco.
Starting on February 6, 2020, the FDA prioritized
enforcement against: (i) flavored, cartridge-based ENDS products (other than tobacco- or menthol-flavored ENDS products), and (ii) any
flavored ENDS products (including tobacco and menthol flavors) that are targeted at minors. Several states in the United States have imposed
temporary emergency flavor bans on ENDS products, and a few of these bans have been enjoined by courts while several have become permanent.
Several states and the District of Columbia have also enacted permanent prohibitions on the sale of flavored ENDS products. Flavor bans
are not the same as a total ban on e-cigarettes, and none of the states in the U.S. have imposed a total ban on e-cigarettes.
Our self-branded vaping systems are not affected
by the flavor bans. The flavor bans are mainly aimed at ENDS products that are sold with pre-filled non-tobacco flavored or non-menthol-flavored
cartridges, and our self-branded products do not contain any pre-filled cartridges.
Moreover,
we believe that the technology being developed by our IKE Tech LLC Joint Venture may allow for the approval of ENDS products with characterizing
flavors other than tobacco or menthol. This is because the point-of-use age-gating technology could prevent youth usage of vapor devices
by biometrically preventing youth from powering-on the device itself. Accordingly, we have submitted a disposable ENDS device PMTA in
September of 2024 with several characterizing flavors. Our plan is to amend or resubmit this PMTA when we receive approval of the IKE
Tech LLC age-gating technology from the FDA.
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. We cannot predict what action states will take or the nature and amount of taxes they may
impose upon cannabis products. However, the shipping restrictions of the USPS under the PACT Act applied to certain cannabis products,
and cannabis products cannot, with certain exceptions, be sent through the USPS. Major overnight courier services, such as Federal Express,
do not ship vaping products that may not be sent using the USPS. We use a combination of advanced accounting software and PACT Act compliant
carriers to remain compliant with the tax and delivery restrictions of the PACT Act.
Under federal law and the laws of certain states
that continue to broadly restrict production and sale of cannabis, vaping devices intended for use in consuming cannabis products may
qualify as prohibited drug paraphernalia. However, the federal Controlled Substances Act includes an exemption for “any person authorized
by local, State, or Federal law to manufacture, possess, or distribute such items.” Several states with legal cannabis programs,
including California, have enacted legislation invoking this exemption to shield state-legal businesses from federal enforcement on paraphernalia
grounds. In addition, a recent court decision from the U.S. Court of International Trade applied this exemption in prohibiting U.S. Customs
and Border Protection from refusing import entry of cannabis paraphernalia components that the importer could legally possess in the state
of importation.
In distributing cannabis vaping devices in the
United States, we rely on this exemption by (i) not selling our own branded cannabis vaping products directly into states that have maintained
complete or near-complete cannabis prohibition, (ii) requiring distributors to whom we sell cannabis vaping products to covenant that
they will not sell our products into these states, and (iii) limiting the sale of our custom made and white label cannabis vaping products
to state-licensed dispensaries and entities, such as licensed cultivators or manufacturers.
To the extent that we conduct manufacturing operations
in California we will be subject to federal and California state laws and regulations applicable to manufacturing operations generally,
including employee health and safety and environmental laws and regulations.
16
Europe
The European Commission issued the Tobacco Products
Directive (the “TPD’’), which entered into force on May 19, 2014, and became applicable in the EU Member States on May
20, 2016. Under the TPD, an e-cigarette is widely defined as a product that can be used for, including all types of vaping devices, HNB
devices and their respective components, the consumption of nicotine-containing vapor via a mouthpiece, or any component of that product.
The TPD regulates e-cigarettes on five main aspects: (i) the information to be provided by the manufacturer and/or distributor, (ii) the
advertising and promotion, (iii) safety issues and warnings, (iv) product presentation, and (v) provisional measures in case of suspected
risk. Member states of the European Union are required to ensure that advertisements for any tobacco related product are prohibited, unless
the advertisement is specifically targeted at professionals specializing in the electronic cigarettes trading. Moreover, no promotion
whatsoever shall be made as to those devices with an intention (direct or indirect) to promote electronic cigarettes.
The sale of cannabis vaping products for recreational
(as contrasted with medical) use is illegal in most of the European Union, although we believe that a market is developing, particularly
in Germany, where the new coalition government stated clearly that it is introducing the controlled supply of recreational cannabis to
adults in licensed shops.
United Kingdom
The Medicines and Healthcare Products Regulatory
Agency (“MHRA”) is the authority for a regulatory scheme for e-cigarettes and refill containers in Great Britain and Northern
Ireland and is responsible for implementing the majority of provisions under Part 6 of the Tobacco and related Products Regulations (“TRPR”)
and the Tobacco Products and Nicotine Inhaling Products (Amendment) (EU Exit) Regulations 2020.
The TRPR introduced rules which ensure:
●
minimum standards for the safety and quality of all e-cigarettes and refill containers (otherwise known as e-liquids)
●
that information is provided to consumers so that they can make informed choices
●
an environment that protects children from starting to use these products.
The requirements:
●
restrict e-cigarette tanks to a capacity of no more than 2ml
●
restrict the maximum volume of nicotine-containing e-liquid for sale in one refill container to 10ml
●
restrict e-liquids to a nicotine strength of no more than 20mg/ml
●
require nicotine-containing products or their packaging to be child-resistant and tamper evident
●
ban certain ingredients including colorant, stimulants and any carcinogenic, mutanegenic or reprotoxic elements
●
include new labelling requirements and warnings in line with the Classification, Labelling & Packaging regulations of the European Union
●
require all e-cigarettes and e-liquids be notified to the MHRA before they can be sold.
17
The Tobacco Products and Nicotine Inhaling Products
(Amendment) (EU Exit) Regulations 2020 (the “2020 Regulations”) explains the changes from a policy perspective:
The 2020 Regulations set out the requirements
for new products to be notified from January 1, 2021. This will mean that:
●
Producers placing products on the Northern Ireland market will be required to notify using the EU Common Entry Gate (EU-CEG) system for the notification of tobacco and e-cigarette products.
●
Producers placing products on the Great Britain market will be required to notify on the Great Britain domestic system.
●
Notifiers will be required to pay one fee if they notify in relation to placing products on one of the Great Britain or Northern Ireland markets and the same one fee if they notify in relation to placing products on the two markets.
A producer is anyone who manufactures or imports
these products or who re-brands any product as their own.
Part 6 of the Tobacco and Related Products
Regulations 2016 sets out the requirements for e-cigarettes and refill containers.
Producers must submit information about their
products to the MHRA through the MHRA Submission Portal and European Common Entry Gate (EU-CEG) notification portal for UK wide supply.
Under the TRPR, it is the responsibility of the
producer to ensure that their products comply with the TRPR requirements. We check notifications submitted for completeness and verify
TRPR compliance with producers. Where this review has been completed, the compliance status of products is recorded as ‘declared’
to indicate that the notification is complete, and the product has been declared compliant by the producer.
Producers of new e-cigarette and refill container
products must submit a notification to the MHRA six months before they intend to put their product on the market in Great Britain and/or
Northern Ireland. Once the notification has been published on the MHRA website, producers can launch the product in the notified region.
A product which has been substantially modified will count as a new product and must also follow this process. Further information regarding
what qualifies as a substantial modification can be found in the guidance on submission type below.
The TRPR does not include any requirements as
to where testing of e-cigarettes and refill containers has to take place nor has any international testing standards been established.
The notifier will need to be satisfied as to the standards of any testing carried out as they have to submit a declaration that they bear
full responsibility for the quality and safety of the product when placed on the market and used under normal or reasonably foreseeable
conditions.
Disposable (closed-system) e-cigarette products
will be banned in the United Kingdom on April 1, 2025. Our primary sales in the UK are currently open-system, non-disposable products.
The sale of cannabis products is currently illegal
in the United Kingdom.
Malaysia
We are operating a manufacturing facility in Malaysia.
As such, we must comply with laws and regulations relating to manufacturing operations, including regulatory approval, as applicable,
including satisfying the applicable government authority that we have sufficient capital to cover all of our planned activities. We are
also subject to wage and hour laws and laws relating to employee health and safety and environmental laws and regulations. We have structured
our operations to comply with applicable laws and regulations in Malaysia.
Other requirements for e-cigarettes
Replacement e-cigarette parts that could contain
nicotine only require notification if they have not already been notified as part of a device or e-cigarette kit in the United Kingdom
or European Union (EU). Identical replacement parts that have already been notified as part of another notified e-cigarette product do
not need to be separately re-notified if it is clear on the labelling what notified product the part is for. Any non-identical replacement
part, particularly one that alters the consumer safety profile of a product (for example by changing its refill capacity), would require
a separate notification.
The Conformitè Europëenne (“CE”)
Mark is defined as the EU’s mandatory conformity marking for regulating the goods sold within the European Economic Area (“EEA”)
since 1985. The CE marking represents a manufacturer’s declaration that products comply with the EU’s New Approach Directives.
These directives not only apply to products within the EU but also for products that are manufactured in or designed to be sold in the
EEA. This makes the CE marking recognizable worldwide even to those unfamiliar with the EEA.
18
Regulations Relating to Privacy and Security
We are or may become subject to a variety of laws
and regulations in the United States and abroad regarding privacy, data security, cybersecurity and data protection. These laws and regulations
are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain
and may be conflicting, particularly with respect to foreign laws. In particular, there are numerous United States federal, state, and
local laws and regulations and foreign laws and regulations regarding privacy and the collection, sharing, use, processing, disclosure,
and protection of personal information and other user data. Such laws and regulations often vary in scope, may be subject to differing
interpretations, and may be inconsistent among different jurisdictions. To the extent that we deal with the public and obtain private
information on our computer system, we would be subject to these laws. To the extent that we conduct internet sales, we may be subject
to these laws.
In June 2018, California adopted the California
Consumer Privacy Act (“CCPA”), which became effective in 2020. Under the law, any California consumer has a right to demand
to see all the information a company has saved on the consumer, as well as a full list of all the third parties that data is shared with.
The consumer also has the right to request that we delete the information it has on the consumer. The CCPA broadly defines “protected
data.” The CCPA also has specific requirements for companies subject to the law. The CCPA provides for a private right of action
for unauthorized access, theft or disclosure of personal information in certain situations, with possible damage awards of $100 to $750
per consumer per incident, or actual damages, whichever is greater. The CCPA also permits class action lawsuits. To the extent that we
sell products to adult consumers through our website or otherwise on the Internet, we may be subject to the CCPA as well as other consumer
protection laws.
The European Union Parliament approved a new data
protection regulation, known as the General Data Protection Regulation (“GDPR”), which came into effect in May 2018. The GDPR
includes operational requirements for companies that receive or process personal data of residents of the European Economic Area. The
GDPR imposes significant penalties for non-compliance. Although we do not conduct any business in the European Economic Area, in the event
that residents of the European Economic Area access our website and input protected information, including information provided in ordering
through our website, we may become subject to provisions of the GDPR.
We are also subject to laws restricting disclosure
of information relating to our employees. We strive to comply with all applicable laws, policies, legal obligations, and industry codes
of conduct relating to privacy, data security, cybersecurity and data protection. However, given that the scope, interpretation, and application
of these laws and regulations are often uncertain and may be conflicting, it is possible that these obligations may be interpreted and
applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure
or perceived failure by us or our third-party service-providers to comply with our privacy or security policies or privacy-related legal
obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information
or other user data, may result in governmental enforcement actions, litigation, or negative publicity, and could have an adverse effect
on our business and operating results. Although we maintain cybersecurity insurance, we cannot assure you that this insurance will cover
or satisfy any claim made against us or adequately cover any defense costs we may incur.
Environmental Laws and Regulations
As our supplier, Shenzhen Yi Jia is responsible
for compliance with Chinese environmental laws and regulations. To the extent that such compliance results in increased manufacturing
costs, we anticipate that our prices will be increased, although we may not know the details of the expense of such compliance.
As a distributor of products made by third parties,
we do not have any material costs in complying with environmental laws and regulations. If we are able to establish manufacturing operations
in California, and as part of our current manufacturing Malaysia, we will be required to comply with applicable environmental laws and
regulations. We cannot estimate the ongoing costs of such compliance. As we establish manufacturing facilities, we expect that the cost
of such compliance will be included in our capital budget for any facilities we establish.
Available Information
As a public company, we are required to file our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A and other information
(including any amendments) with the Securities and Exchange Commission (the “SEC”). The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. You
can find our SEC filings at the SEC’s website at www.sec.gov.
Our Internet address is www.ispiretechnology.com.
Information contained on our website is not part of this Annual Report. Our SEC filings (including any amendments) will be made available
free of charge on www.ispiretechnology.com, as soon as reasonably practicable after we electronically file such material with, or furnish
it to, the SEC.
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