Item 2. Management’s Discussion and Analysis
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our
financial condition and results of operations should be read together with our unaudited condensed financial statements and the related
notes appearing elsewhere in this report. See “Cautionary Forward-Looking Statements.” Actual results could differ materially
from those discussed below.
Overview
We are committed to delivering superior products
that challenge industry norms, with the goal of delivering an unmatched customer and adult consumer experience. In achieving this, risk
reduction is central to our mission, and we aim to improve the lives of our consumers through cutting-edge research and development. Our
technology platforms look to reduce youth access to vaping products, which in turn, will facilitate our ability to provide adult consumers
with the products they desire.
We are engaged in the research and development,
design, commercialization, sales, marketing and distribution of branded and non-branded vaping hardware products in both the nicotine
and cannabis spaces. Vaping refers to the practice of inhaling and exhaling the vapor produced by an electronic vaping device. These products
are sold into the global nicotine markets in the form of e-cigarettes and global cannabis markets in the form of cartridges filled with
oils by our customers.
We sell our e-cigarette (or nicotine) products
globally, in markets where we are legally permitted to do so. To date, our nicotine products are marketed under the “Aspire”
brand name and are sold primarily through our expansive distribution network. However, we are currently preparing to expand our international
presence via the launch of nicotine products under the Ispire platform. These products will be launched under licensing arrangements with
the owner(s) of selected partner brand(s). One such license arrangement has already launched, and more are anticipated to occur in the
future.
We currently sell our cannabis vaping hardware
in the United States, Canada, South Africa, and Germany. However, we are continuing to develop our sales network across Europe, South
America, and other regions in preparation for legalization in these markets. Our cannabis products are sold under the Ispire brand name,
primarily on an ODM basis to other cannabis vapor companies including multi and single-state operators, brand owners and co-packers. ODM
generally involves the design and customization of the core products to meet each brand’s unique image and needs. Our hardware products
are sold by our customers under their own brand names. We do not “touch the cannabis plant” in the production and sale of
our hardware products and thus are not subject to the specific cannabis-related regulatory and taxation provisions of the industry (e.g.,
IRS Code Section 280E).
Since our initial public offering in April 2023,
we have completed three fundraising rounds. The first was executed as part of our initial public offering, from which we raised approximately
$18.3 million after underwriting and other offering expenses.
In June 2023, we raised net proceeds of approximately
$7.4 million, after placement agent and offering expenses, from the private placement of our common stock to three investors.
In March 2024, we raised net proceeds of approximately
$10.6 million, after placement agent fees and offering expenses, through a public offering of our common stock priced at $6.00 per share.
We used the net proceeds from this offering in connection with the establishment and operation of our manufacturing facility in Malaysia,
the funding of our joint venture with Touch Point Worldwide Inc. d/b/a/ Berify and Chemular Inc. and for working capital and general corporate
purposes, including research and development.
18
Regulatory Risks
The sale of nicotine and cannabis products is
subject to regulations worldwide. Many countries prohibit the sale of any cannabis products, and many countries have regulations relating
to nicotine products, with a particular emphasis on underage sales. We work closely with our various global distribution partners to help
ensure our nicotine products comply with local regulations (e.g., packaging, ingredient disclosure, health warnings, etc.). Changes in
the regulatory environment can be enacted swiftly and may lead to our products becoming non-compliant in one or more international markets.
This regulatory scenario may severely disrupt our business in these markets while we resolve the deficiencies (if possible) with the current
product offering.
E-cigarette regulation
Regulation regarding e-cigarettes varies across
countries, from limited regulation to a total ban. The legal status of e-cigarettes is currently pending in many countries. 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 or regulations in countries and regions that our major
customers are in may adversely affect our business.
In many markets e-cigarettes and other nicotine
products are subject to an excise tax. The amount of excise tax on our products is a key determining factor in our pricing and the value
proposition to our adult consumer target market. The structure (i.e., ad valorem vs. specific) and tax burden can vary significantly from
market to market. According to a 2023 study by Dauchy E, Fuss C. Global Taxation of Electronic Nicotine and Non-Nicotine Delivery Systems ,
the tax burden on nicotine vape products in Norway is 81.2% while the tax burden on the same products in Paraguay is 2.9%. The tax burden
and resulting retail sales price is a key factor in determining how competitive our products are compared to illicit vaping products.
The greater the price gap between legal and illicit vaping products the greater the incentive for adult consumers to buy illicit products.
These illicit vaping products are not subject to the same quality standards as our products and undermine the efforts of legal operators
seeking to help adult consumers switch from combustible tobacco products to vaping alternatives.
United States E-Cigarette Market
In the United States, 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 or before August 8, 2016, a PMTA was required to be submitted to the FDA before 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 before September 9, 2020, a PMTA premarket authorization
issued by FDA is required before the subject product may enter the U.S. market. We have 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 our application and may prevent our ENDS products from
being sold in U.S., which will adversely affect our business.
As a result of ENDS regulation noted above, we can sell only one tobacco
vaping product line, the Nautilus Prime, in the U.S.. Our tobacco vaping sales related to this line in the U.S. were approximately $0.2
million and $0.6 million for the twelve months ended June 30, 2024, and 2023, respectively. Additionally, amendments to the Prevent All
Cigarette Trafficking (“PACT”) Act, which became law in 2021, extend the PACT Act to include e-cigarettes 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 these tighter government regulations, we have stopped marketing tobacco vaping products in the United States,
as the volume of sales from the one tobacco vaping product which we may sell in the United States does not justify the marketing and regulatory
costs involved.
On September 6, 2024, we submitted a PMTA application
for a disposable ENDS product with 4 flavors. This is an important milestone for us, as it signals our re-entry into the US ENDS market.
It is our intention to amend or resubmit this application in the coming months, once we have finalized the age-gating technology solution
with our IKE Tech LLC joint venture. We have further plans to submit additional PMTA applications for pod-based ENDS systems, which will
include age-gating technology, in the future as well.
19
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. Further, States may be more willing to permit recreational cannabis use in
the future given the DEA’s intention to reschedule cannabis as a Schedule III controlled substance allowing for medicinal use. We
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.
European Market
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. We have complied with TPD requirements for all our tobacco products sold in Europe.
The sale of cannabis vaping products is illegal in the European Union,
save for Germany, and the United Kingdom.
Tariffs
On April 2, 2025 U.S. President Donald Trump instituted
a tariff of 24% on all goods from Malaysia and a 54% tariff on all goods from China through an executive order. On April 9, 2025, President
Trump paused the implementation of the April 2 executive order for 90 days, with respect to all countries but China, instead instituting
a blanket 10% tariff for all non-China imports to the U.S.
As of May 5, 2025 tariffs on most Chinese made
products entering the U.S. are 145% and may continue to increase, or decrease, over the near term.
We purchase the majority of our nicotine and cannabis
vaping products from Shenzhen Yi Jia, located in Shenzhen, China, which constitutes a significant part of our cost of revenue. The increase
of tariff rates could affect our operating results and gross profit margins. However, we are currently able to manufacture a wide range
of cannabis hardware in Malaysia and import into the U.S. at a substantial discount compared with production in, and importation from,
China. We believe that the tariff differential between China and Malaysia serves as a short- and long-term competitive advantage for our
U.S. cannabis hardware business. While we cannot be certain that this tariff differential will last, many customers have approached us,
seeking to diversify their production supply chains out of China and into Malaysia. To the extent we continue to procure vapor devices
from China for sale in the U.S., tariff costs will continue to be passed to our customers.
20
Accounts Receivable
Our business relies on the collection of accounts
receivable from our customers in a timely manner to maintain liquidity and support our ongoing operations. The balance of the allowance
for credit losses was $14.6 million and $5.9 million at March 31, 2025 and June 30, 2024, respectively. Receivables are written off after
exhaustive collection efforts occur and the receivable is deemed uncollectible. The increase is due to write offs after collection efforts,
and then general rise in receivables balance and estimate losses.
Our failure or inability to collect accounts receivable
when due results from a number of factors, including (i) our customer’s failure to pay as a result of adverse economic conditions
affecting the customer’s cash flow; (ii) our failure to implement effective collection efforts; and (iii) disputes over contract
terms, product quality or delays in delivery. Although we may implement strategies to mitigate these risks, there can be no assurance
that such measures will be entirely effective, and we may continue to incur write-offs of accounts receivable, which may impair our ability
to operate profitably.
Key Factors that Affect Our Results of Operations
We believe the following key factors may affect
our financial condition and results of operations:
●
The effect of legislation and regulations affecting tobacco and cannabis vaping products.
●
If we elect to market tobacco vaping products in the United States, our ability to obtain regulatory approval to market additional tobacco vaping products in the United States and the significant cost of seeking such approval.
●
Our ability to develop and market tobacco and cannabis vaping products to meet the changing tastes of adult consumers.
●
The effects of competition.
●
The development of an international market for cannabis vaping products, which is presently primarily limited to certain states in the United States.
●
Changes or uncertainty in tariffs, economic sanctions, and other trade barriers.
Results of Operations
Three and Nine Months Ended March 31, 2025 and 2024
The following table sets forth a summary of our
consolidated statements of operations and comprehensive income for the three and nine months ended March 31, 2025 and 2024 (dollars in
thousands except per share amounts).
Three Months Ended
March 31,
Nine Months Ended
March 31,
2025
2024
2025
2024
$
% of
Revenue
$
% of
Revenue
$
% of
Revenue
$
% of
Revenue
Revenue
$ 26,191
100.0 %
$ 30,015
100.0 %
$ 107,357
100.0 %
$ 114,565
100.0 %
Cost of revenue
(21,415 )
(81.8 )%
(23,893 )
(79.6 )%
(87,184 )
(81.2 )%
(95,346 )
(83.2 )%
Gross profit
4,776
18.2 %
6,122
20.4 %
20,173
18.8 %
19,219
16.8 %
Operating expenses
(15,361 )
(58.7 )%
(11,777 )
(39.2 )%
(43,381 )
(40.4 )%
(29,673 )
(25.9 )%
loss from operations
(10,585 )
(0.4 )%
(5,655 )
(18.8 )%
(23,208 )
(21.6 )%
(10,454 )
(9.1 )%
Other income (expense), net
(94 )
(0.4 )%
(15 )
(0.0 )%
(148 )
(0.1 )%
299
0.3 %
Loss before income taxes
(10,679 )
(40.8 )%
(5,670 )
(18.9 )%
(23,356 )
(21.8 )%
(10,155 )
(8.9 )%
Income taxes
(177 )
(0.7 )%
(255 )
(0.8 )%
(1,094 )
(1.0 )%
(1,104 )
(1.0 )%
Net loss
(10,856 )
(41.5 )%
(5,925 )
(19.7 )%
(24,450 )
(22.8 )%
(11,259 )
(9.8 )%
Other comprehensive income
(3 )
0.1 %
11
0.1 %
(84 )
(0.1 )%
170
0.1 %
Comprehensive loss
(10,859 )
(41.5 )%
(5,914 )
(19.7 )%
(24,534 )
(22.9 )%
(11,089 )
(9.7 )%
Net loss per share Basic and diluted
(0.19 )
(0.11 )
(0.43 )
(0.21 )
Weighted shares of common stock outstanding Basic and diluted
57,003,488
54,347,729
56,752,454
54,287,624
21
Revenue
The following tables set out the breakdown of our revenue percentage
by region based on information provided to us by our distributors.
Three months ended
March 31,
Nine months ended
March 31,
2025
2024
2025
2024
Europe
$ 13,235,728
$ 13,628,653
$ 59,174,779
$ 49,144,807
North America (the U.S. and Canada)
8,788,476
12,361,240
29,441,624
50,191,212
Asia Pacific (excluding PRC)
2,965,023
3,771,105
10,453,766
14,831,769
Africa
117,975
117,695
5,840,041
261,113
South America
1,083,523
136,343
2,446,688
136,343
Total
$ 26,190,725
$ 30,015,036
$ 107,356,898
$ 114,565,244
Our revenue decreased by $3,824,311, or 12.7%,
from $30,015,036 for the three months ended March 31, 2024, to $26,190,725 for the three months ended March 31, 2025. The decrease in
revenue is the combined effect of (i) , increases in sales in South America, of $0.9 million from $0.1 million for the three months ended
March 31, 2024, to $1.0 million for the three months ended March 31, 2025 offset by (ii) decreases in sales of vaping products in North
America of $3.6 million from $12.4 million for the three months ended March 31, 2024 to approximately $8.8 million for the three months
ended March 31, 2025, and (iii) decreases in sales to Asia Pacific regions of $0.8 million from $3.8 million for the three months ended
March 31, 2024 to approximately $3.0 million for the three months ended March 31, 2025.
Our revenue decreased by $7,208,346, or 6.3%,
from $114,565,244 for the nine months ended March 31, 2024, to $107,356,898 for the nine months ended March 31, 2025. The decrease in
revenue is the combined effect of (i) decreases in sales of vaping products in North America of $20.7 million from $50.2 million for the
nine months ended March 31, 2024 to approximately $29.5 million for the nine months ended March 31, 2025, and (ii) decreases in sales
to Asia Pacific regions of $4.4 million from $14.8 million for the nine months ended March 31, 2024 to approximately $10.4 million for
the nine months ended March 31, 2025, offset by (iii) increases in product sales in Europe of $10.0 million from $49.1 million for the
nine months ended March 31, 2024, to $59.1 million for the nine months ended March 31, 2025, increases in sales in Africa, mainly South
Africa, of $5.5 million from $0.3 million for the nine months ended March 31, 2024, to $5.8 million for the nine months ended March 31,
2025 and increases in sales in South America of $2.3 million from $0.1 for the nine months ended March 31, 2024, to $2.4 million for the
nine months ended March 31, 2025.
Cost of Revenue
Cost of revenue mainly consists of cost of purchases
of vaping products, of which the majority of the purchase are from Shenzhen Yi Jia. Cost of revenue decreased by $2,478,263, or 10.4%,
from $23,893,083 for the three months ended March 31, 2024, to $21,414,820 for the three months ended March 31, 2025. The decrease in
cost of revenue is in line with decease in revenue. Cost of revenue decreased by $8,161,501, or 8.6%, from $95,345,545 for the nine months
ended March 31, 2024, to $87,184,044 for the nine months ended March 31, 2025.
The decrease in cost of revenue is in line with
decrease in revenue and more higher-margin products being sold.
22
Gross Profit
The following tables show the revenue, cost of
revenue and gross profit of our products (dollars in thousands).
Three Months Ended March 31, 2025
Revenue
Cost of
revenue
Gross
profit
Gross
profit %
$ 26,190
$ 21,415
$ 4,775
18.2 %
Three Months Ended March 31, 2024
Revenue
Cost of
revenue
Gross
profit
Gross
profit %
$ 30,015
$ 23,893
$ 6,122
20.4 %
Nine Months Ended March 31, 2025
Revenue
Cost of
revenue
Gross
profit
Gross
profit %
$ 107,357
$ 87,184
$ 20,173
18.8 %
Nine Months Ended March 31, 2024
Revenue
Cost of
revenue
Gross
profit
Gross
profit %
$ 114,565
$ 95,345
$ 19,220
16.8 %
Gross profit decreased by $1,346,048, or 22.0%,
from $6,121,953 for the three months ended March 31, 2024, to $4,775,905 for the three months ended March 31, 2025, while our gross margin
decreased from 20.4% to 18.2%. The decrease in gross margin was primarily due to changes in product mix with less higher-margin products
being sold during the three months ended March 31, 2025.
Gross profit increased by $953,155, or 5.0%, from
$19,219,699 for the nine months ended March 31, 2024, to $20,172,854 for the nine months ended March 31, 2025, while our gross margin
increased from 16.8% to 18.8%. The increase in gross margin was primarily due to changes in product mix with more higher-margin products
being sold during the nine months ended March 31, 2025.
Operating Expenses
Operating expenses increased $3,584,098 or 23.3%,
from $11,777,248 for the three months ended March 31, 2024 to $15,361,346 for the three months ended March 31, 2025. Operating expenses
increased $13,707,756 or 46.2%, from $29,673,463 for the nine months ended March 31, 2024 to $43,381,219 for the nine months ended March
31, 2025.
Our sales and marketing expenses mainly consist
of employees’ salaries and benefits, marketing expense, travel expenses and others. Sales and marketing expenses decreased by $98,233,
or 5.6%, from $1,754,760 for the three months ended March 31, 2024 to $1,656,527 for the three months ended March 31, 2025. The slight
decrease in sales and marketing expenses was primarily due to the net effect of (i) a decrease in our marketing activities, marketing
campaign and trade shows of $0.4 million, offset by (ii) increased in headcount and payroll expense for Aspire Science of $0.1 million,
and (iii) increase of $0.2 million in other miscellaneous selling expenses.
Sales and marketing expenses increased by $2,536,052,
or 60.8%, from $4,174,386 for the nine months ended March 31, 2024 to $6,710,438 for the nine months ended March 31, 2025. The increase
in sales and marketing expenses was primarily due to an increase in (i) our marketing activities, marketing campaign and trade shows of
$0.9 million, (ii) stock-based compensation expense related to selling personnel of $1.2 million for the nine months ended March 31, 2025
and (iii) headcount and payroll expense for Aspire Science of $0.2 million.
23
Our general and administrative expenses mainly consist of employees’
salaries and benefits, rental expense, professional fees, stock-based payment expenses, credit loss expense and other administrative expenses.
General and administrative expenses increased by $3,682,331, or 26.9%, from $10,022,488 for the three months ended March 31, 2024 to $13,704,819
for the three months ended March 31, 2025. The increase was primarily due to (i) increase in credit loss expense as an allowance for credit
losses of $4.9 million from accounts resulted from management’s assessment on Company’s account receivables balances, offset
by (ii) an decrease in professional fees of $0.6 million and (iii) decrease of $0.4 million for payroll expenses.
General and administrative expenses increased
by $11,171,704, or 43.8%, from $25,499,077 for the nine months ended March 31, 2024 to $36,670,781 for the nine months ended March 31,
2025. The increase was primarily due to (i) increase in credit loss expense as an allowance for credit losses of $10.1 million from accounts
resulted from management’s assessment on Company’s account receivables balances, (ii) increase of $0.8 million for payroll
expenses and (iii) an increase in professional fees of $0.3 million incurred for cannabis business.
Other expense (income), net
Other income, net includes interest income, interest
expense, exchange gain (loss), net and other income (expense).
Interest expense (income) changed by $59,462,
or 217.8%, from interest income of $27,296 for the three months ended March 31, 2024 to interest expense of $32,166 for the three months
ended March 31, 2025. Interest income decreased by $295,023, or 98.9%, from $298,161 for the nine months ended March 31, 2024 to $3,138
for the nine months ended March 31, 2025. The decrease is largely due to prior year certificate of deposit concluding.
Other expense (income) mainly consists of interest
expense, loss on equity method investment, credits from company credit card and other miscellaneous expenses. Other expense (income) decreased
by $98,504, or 803.1%, from net income of $12,265 for the three months ended March 31, 2024 to net expense of $86,239 for the three months
ended March 31, 2025. Other expense (income) decreased by $67,984, or 338.6%, from net income of $20,078 for the nine months ended March
31, 2024 to net expense of $47,906 for the nine months ended March 31, 2025. The decrease is largely due to the loss on equity method
investment.
Exchange loss (gain) changes by $78,245, or 145.2%,
from net exchange loss of $53,904 for the three months ended March 31, 2024 to net exchange gain of $24,341 for three months ended March
31, 2025. Exchange loss (gain) changes by $83,860 or 432.6%, from net exchange loss of $19,387 for the nine months ended March 31, 2024
to net exchange loss of $103,247 for nine months ended March 31, 2025.
As a result of these factors, other expense, net
decreased by $79,721, from other expense, net of $14,343 for the three months ended March 31, 2024 to other expense, net of $94,064 for
three months ended March 31, 2025. Other expense (income), net decreased by $446,867, from other income, net of $298,852 for the nine
months ended March 31, 2024 to other expense, net of $148,015 for nine months ended March 31, 2025. The decrease is largely due to the
loss on equity method investment.
Income Taxes
Income taxes decreased by $78,495, or 44.3%, from
$255,485 for the three months ended March 31, 2024 to $176,990 for the three months ended March 31, 2025. Income taxes decreased by $9,936,
or 0.9%, from $1,103,710 for the nine months ended March 31, 2024 to $1,093,774 for the nine months ended March 31, 2025. We had a consolidated
net loss for both three and nine month periods ended March 31, 2025 and 2024, which was the combined effect of a profit by Aspire Science
and a loss by Aspire North America and Ispire Malaysia. The profit from Aspire Science resulted in a current tax expense. The increase
in valuation allowance reflects our view that the taxable income in the future will not be sufficient to utilize the carryforward loss.
Net Loss
As a result of the foregoing, net loss increased
by $4,931,372, from net loss of $5,925,123, or $(0.11) per share (basic and diluted) for the three months ended March 31, 2024 to a net
loss of $10,856,495, or $(0.19) per share, for the three months ended March 31, 2025. Net loss increased by $13,191,532, from net loss
of $11,258,622, or $(0.21) per share (basic and diluted) for the nine months ended March 31, 2024 to a net loss of $24,450,154, or $(0.43)
per share, for the nine months ended March 31, 2025.
24
Liquidity and Capital Resources
The following table summarizes our changes in
working capital from June 30, 2024 to March 31, 2025 (dollars in thousands).
March 31,
2025
June 30,
2024
Change
%
Change
Current Assets
$ 94,027
$ 102,572
$ (8,545 )
(8.3 )%
Current Liabilities
96,176
85,991
10,185
11.8 %
Working Capital
(2,149 )
16,581
(18,730 )
(113.0 )%
The following table sets forth information as
to consolidated cash flow information for the nine months ended March 31, 2025 and 2024 (dollars in thousands).
Nine Months Ended
March 31,
Increase
Consolidated cash flow data:
2025
2024
(Decrease)
Net cash used in operating activities
$ (12,069 )
$ (16,878 )
$ 4,809
Net cash (used in) provided by investing activities
(1,690 )
5,949
(7,639 )
Net cash provided by financing activities
2,279
10,083
(7,804 )
Net decrease in cash and cash equivalents
(11,480 )
(846 )
(10,634 )
Net cash flow used in operating activities for
the nine months ended March 31, 2025 of $12.1 million, reflected our net loss of $24.5 million, adjusted primarily as follows: an add-back
of credit loss expenses of $13.4 million, an add-back of stock based compensation expense of $4.9 million, increase in accounts payable
of $11.0 million, offset by an increase in accounts receivable of $14.1 million, an increase in accrued liabilities and other payables
of $1.0 million, and an increase in inventories, net of $1.5 million.
Net cash flow used in operating activities for
the nine months ended March 31, 2024 of $16.9 million, reflected our net loss of $11.3 million, adjusted primarily as follows: an add-back
of stock-based compensation expenses of $4.7 million, an add-back of credit loss expenses of $3.3 million, an increase in accounts payable
of $11.9 million, a decrease in prepaid expenses and other current assets of $1.7 million, an decrease in accrued liabilities and other
payables of $1.2 million, offset by an increase in accounts receivable of $26.6 million, and an increase in inventories, net of $2.5 million.
Net cash flow used in investing activities for
the nine months ended March 31, 2025 of $1.7 million reflected primarily purchase of property, plant and equipment of $0.1 million, acquisition
of intangible assets of $0.8 million and payment made for long term investment of $0.8 million.
Net cash flow used in investing activities for
the nine months ended March 31, 2024 of $5.9 million reflected primarily maturity of short term investment of $9.1 million, offset by
acquisition of equity investment of $1.0 million, purchase of property, plant and equipment of $1.2 million and acquisition of intangible
assets of $1.0 million.
Net cash flow provided by financing activities
for the nine months ended March 31, 2025 of $2.3 million reflected primarily proceeds from long term debt of $2.3 million, offset by common
stock repurchase of $60 thousand.
Net cash flow provided by financing activities
for the nine months ended March 31, 2024 of $10.1 million reflected primarily proceeds from a secondary offering of $12.3 million, offset
by cost of the secondary offering of $1.5 million and repayment to related parties of $0.7 million.
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To date, we have financed our operations primarily
through cash flow from operations and working capital accounts payable from our major stockholders, who are our co-chief executive officer
and his wife, when necessary. We plan to support our future operations primarily from cash generated from our operations and cash on
hand. We believe that our current cash and future cash flows provided by operating activities, the net proceeds from our initial public
offering of $18.3 million and bank loan will be sufficient to meet our working capital needs in the next 12 months. If we experience
an adverse operating environment or incur unanticipated capital expenditure requirements, or if we decide to accelerate our growth, then
additional financing may be required. We cannot give any assurance that additional financing will not be required or, if required, would
be available on favorable terms if at all. Such financing may include the use of additional debt or the sale of additional equity securities.
Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in
dilution to our stockholders, which may be substantial.
The cash at bank held by our Hong Kong operating
subsidiary can be freely transferred within our corporate structure without restriction. If our Hong Kong operating subsidiary were to
incur additional debt on its own behalf in the future, the instruments governing the debt may restrict the ability of our operating subsidiaries
to transfer cash to our U.S. investors.
Contractual Obligations
As of March 31, 2025, and June 30, 2024, we had
contract liabilities of $1,561,842 and $2,218,166, respectively. These liabilities are advance deposits received from customers after
an order has been placed. We expect all of the contract liabilities to be settled in less than one year.
We have operating lease arrangements for office
and factory premises for Hong Kong, California and Malaysia, which are treated as right-of-use assets. These leases typically have terms
of two to five years. Leases with an initial term of 12 months or less are not presented as right-of-use assets and are expensed over
the lease term. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease
term at commencement date.
The balances for the right-of-use assets and lease
liabilities where we are the lessee are presented as follow:
As of
March 31,
2025
As of
June 30,
2024
Operating lease right-of-use assets
$ 5,356,384
$ 3,579,140
Operating lease liabilities – current
$ 1,667,641
$ 1,207,832
Operating lease liabilities – non-current
3,551,386
2,194,094
Total
$ 5,219,027
$ 3,401,926
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As of March 31, 2025, the maturities of our lease
liabilities (excluding short-term leases) are as follows:
As of
March 31,
2025
April 1, 2025 to June 30, 2025
477,512
July 1, 2025 to June 30, 2026
1,995,914
July 1, 2026 to June 30, 2027
1,473,496
July 1, 2027 to June 30, 2028
745,509
July 1, 2027 to June 30, 2029
664,833
July 1, 2027 to June 30, 2030
443,222
Total future lease payments
5,800,486
Less: imputed interest
(581,459 )
Total lease liabilities
5,219,027
As of March 31, 2025, we have a bank loan balance
of $2,339,362 outstanding. The maturities of our bank loan are as follows:
As of
March 31,
2025
April 1, 2025 to June 30, 2025
167,215
July 1, 2025 to June 30, 2026
1,276,015
July 1, 2026 to June 30, 2027
896,132
Total bank loan
2,339,362
As of March 31, 2025, we recorded an unpaid $8.2
million consideration in accrued liabilities and other payables on the consolidated balance sheet for a committed investment of $9 million
into a joint venture investment named IKE Tech LLC.
Trend Information
Other than as disclosed elsewhere in this this
Form 10-Q, we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material
effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported
financial information not necessarily to be indicative of future operating results or financial condition.
Seasonality
Seasonality does not materially affect our business
or the results of our operations.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements.
As a company with less than $1.235 billion
in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth
company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies.
These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in
the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging
growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is
otherwise required to comply with such new or revised accounting standards. We have elected to take advantage of such exemptions.
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ITEM 3: Quantitative and Qualitative Disclosure
About Market Risk
As a “smaller reporting company” as
defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.