Ispire Technology Inc

DECEMBER 31, 2023

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

Ispire Technology Inc. (the “Company” or “Ispire”) was incorporated under the laws of the State of Delaware on June 13, 2022. Through its subsidiaries, the Company is engaged in the research and development, design, commercialization, sales, marketing and distribution of branded e-cigarettes and cannabis vaping products.

Ispire owns a 100% equity interest in Ispire International Limited, a business company incorporated under the laws of the British Virgin Islands (“BVI”) (“Ispire International”) on July 6, 2022.

Prior to July 29, 2022, all of the equity of Aspire North America LLC, a California limited liability company (“Aspire North America”), was owned by Aspire Global Inc. (“Aspire Global”), and all of the equity of Aspire Science and Technology Limited, a Hong Kong corporation (“Aspire Science”), was owned by Aspire Global Holdings Limited (“Aspire Holdings”), a wholly-owned subsidiary of Aspire Global.

Aspire Global and the Company are related parties since the same individual is the chief executive officer of both companies. As of December 31, 2023, the chief executive officer and his wife, being directors of both companies, owned 66.5% and 5.0% of the equity of Aspire Global, respectively. As of December 31, 2023, they owned 61.3% and 4.6% of the equity of the Company, respectively. On July 29, 2022, Aspire Global transferred 100% of the equity interest in Aspire North America to the Company. On the same day, Aspire Holdings transferred 100% of the equity of Aspire Science to Ispire International. At the time of transfer of the equity in Aspire North America and Aspire Science, the Company had the same stockholders as Aspire Global and the Company’s stockholders held the same percentage interest in the Company as they had in Aspire Global. Because the transfer of the equity in Aspire North America and Aspire Science is a transfer between related parties, the historical financial information of the subsidiaries is carried forward as the historical financial information of the Company and the 50,000,000 shares that were issued at or about the time of the Company’s organization are treated as being outstanding on July 1, 2020.

In September 2023, the Company established a wholly-owned subsidiary, Ispire Malaysia Sdn Bhd (“Ispire Malaysia”) under the laws of the Federation of Malaysia, in order to establish manufacturing operations in Southeast Asia. Ispire Malaysia was formed by Tuanfang Liu, the Company’s Chairman and Co-Chief Executive Officer on September 1, 2023, and assigned to the Company on September 22, 2023, at a consideration of 100 Malaysian ringgits.

The following table sets forth information concerning the Company and its subsidiaries as of December 31, 2023:

Ispire is a holding company and does not engage in any active operations. Its business is conducted by its two operating subsidiaries, Aspire North America, which is engaged in the development, marketing and sales of cannabis vapor products, which were introduced in mid-2020, and Aspire Science, which is engaged in the marketing and sales of tobacco vaping products, and the products are mainly sold in Europe and Asia Pacific (excluding PRC).

Restatement of Unaudited Condensed Consolidated Financial Statements - December 31, 2022

In audit of financial statements for the year ended June 30, 2023, the Company identified errors related to the recording of the intellectual property rights transferred to the Company by a control party during the three months ended December 31, 2022, as disclosed in Form 8-K, filed with the SEC on September 15, 2023. The Company determined that the intangible assets were incorrectly recorded in the unaudited financial statements, and that intellectual property rights which were transferred to the Company by a control party should be recorded at the transferor’s book value, which wasnil, rather than the valuation result from an independent third party valuer. As a result of the restatement, as of December 31, 2022, the restated intangible asset balance should be $0, instead of $73,487,283. For the three months ended December 31, 2022, the net loss decreased from $902,874, or $0.02 per share (basic and diluted), to the net loss of $130,242, or $0.01 per share (basic and diluted). For the six months ended December 31, 2022, the net loss decreased from $2,950,921, or $0.06 per share (basic and diluted), to $2,131,996, or $0.04 per share (basic and diluted).

In preparing the unaudited condensed consolidated statement of cash flows, the Company identified an additional error related to the presenting of operating leases. The Company determined that cash payments arising from operating leases were incorrectly classified under financing activities instead of operating activities. As a result of the restatement, the Company’s principal portion of lease payment of $449,638 in unaudited condensed consolidated statements of cash flows for the six months ended December 31, 2022 was reclassified to operating activities. The Company also omit to present the noncash activities in relation to leased assets obtained in exchange for operating lease liabilities. During the review of unaudited condensed consolidated financial statements for the three and six months ended December 31, 2022 and 2023, the Company has added disclosure of $3,714,979 of leased assets obtained in exchange for operating lease liabilities in the unaudited condensed consolidated statements of cash flows for the six months ended December 31, 2022.

Risk and Uncertainties

Impact of COVID-19

In December 2019, coronavirus disease 2019 (COVID-19) was first reported to have surfaced in Wuhan, China. During 2020, the disease spread to many parts of the world. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and facilities in much of the world, most of which are no longer in effect. The World Health Organization ended the global emergency status for COVID-19 on May 5, 2023, and the United States Department of Health and Human Services declared that the public health emergency from COVID-19 expired at the end of the day on May 11, 2023.

The extent to which COVID-19 impacts the Company’s operations on an ongoing basis is highly uncertain. Since the Company’s products are presently manufactured in China by a related party, any changes in the outbreak in China and any changes in the Chinese government’s policy may affect the Company’s supplier’s operations which could affect its ability to manufacture and deliver product in a timely manner.

Supply Chain Risks

One of effects of the COVID-19 has been delays resulting from supply chain issues, which relate to the difficulty that companies have in having their products manufactured, shipped to the country of destination, and delivered from the port of entry to the customer’s location. As the port delays have significantly decreased, the Company does not believe that the supply chain issues that affected its operations are currently affecting the Company. The Company cannot assure you that delays will not affect its business in the future.

In 2022, a slowdown in the delivery of components to Shenzhen Yi Jia resulting from supply chain slowdowns as a result of the effects of mainland China’s COVID policy resulted in an increase in cost of revenue during the three and six months ended December 31, 2022. The Company cannot assure you that it will not suffer from a chip shortage or that the effects of China’s COVID policy will not affect Shenzhen Yi Jia’s ability or the ability of its suppliers to delivery products in a timely manner.

Market and Economic Conditions

In recent years, the United States and other markets have experienced cyclical or episodic downturns, and worldwide economic conditions remain uncertain, including, as a result of the COVID-19 pandemic, supply chain disruptions, the Russian invasion of Ukraine, Hamas and Israel war, instability in the U.S. and global banking systems, rising fuel prices, increasing interest rates or foreign exchange rates and increased inflation and the possibility of a recession. A significant downturn in economic conditions may affect the market for the Company’s products and its supplier’s ability to provide products on acceptable terms.

The Company cannot predict the timing, strength, or duration of any future economic slowdown or any subsequent recovery generally, or in any industry. If the conditions in the general economy and the markets in which the Company operates worsen from present levels, its business, financial condition, operating results could be adversely affected.

E-cigarette regulation

Regulation regarding e-cigarette varies across countries, from no regulation to a total ban. The legal status of e-cigarettes is currently pending in many countries. But as e-cigarettes have become more and more popular recently, many countries are considering imposing more stringent law and regulations to regulate this market. Changes in existing law and regulations and the imposition of new laws and regulations in countries and regions that our major customers are located in may adversely affect the Company’s business.

The Federal Food, Drug, and Cosmetic Act requires all Electronic Nicotine Delivery Systems (“ENDS”) product manufacturers that market products in the United States to submit Premarket Tobacco Product Applications (“PMTAs”) to the Food and Drug Administration (“FDA”). For ENDS products that were on the U.S. market on August 8, 2016, a PMTA was required to be submitted to the FDA by September 9, 2020; for ENDS products that were not on the U.S. market prior to August 8, 2016, and for which a PMTA was not filed by September 9, 2020, a PMTA issued in response to a PMTA is required before the subject product may enter the U.S. market. The Company has submitted a PMTA filing for one ENDS product, and, under apparent FDA policies, the agency will not enforce the premarket review requirements for that product pending review of its PMTA. However, even with submission of the PMTA application, the FDA may reject the Company’s application and may prevent the Company’s ENDS products from being sold in U.S., which will adversely affect the Company’s business.

Amendments to the Prevent All Cigarette Trafficking (“PACT”) Act, which became law in 2021, extend the PACT Act to include e-cigarette and all vaping products, and place significant burdens on sellers of vaping products in the United States which may make it difficult to operate profitably in the United States. Because of tighter government regulations, the Company has stopped marketing tobacco vaping products in the United States, as the volume of sales from the one tobacco vaping product which the Company may sell in the United States does not justify the marketing and regulatory costs involved.

In the United States, cannabis vaping products are governed by state laws, which vary from state to state. Most states do not permit the adult recreational use of cannabis, and no states permit the sale of recreational cannabis products to minors. As a result of the reduced revenue to states resulting from the effects of the COVID 19 pandemic, states may seek to raise revenue by permitting and taxing the use of cannabis products. The Company cannot predict what action states will take or the nature and amount of taxes they may impose. However, to the extent the PACT Act applies to cannabis products that aerosolize liquids, it may be more difficult to sell our products in states that permit the sale of cannabis.

However, cannabis and its derivatives containing more than 0.3% delta-9 tetrahydrocannabinol on a dry weight basis remain Schedule I controlled substances under U.S. federal law, meaning that federal law generally prohibits their manufacture and distribution. United States federal law also deems it unlawful to sell, offer for sale, transport in interstate commerce, import, or export “drug paraphernalia,” which includes “any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance” the possession of which federal law prohibits, including Schedule I “marijuana.” Limited exemptions exist, most notably when state or local law authorizes these items’ manufacture, possession, or distribution.

The European Commission issued the Tobacco Products Directive (the “TPD”), which became effective on May 19, 2014 and became applicable in the European Union member states on May 20, 2016. The TPD regulates e-cigarettes on the packaging, labelling and ingredients of the products on the European Union market, the creation of smoke-free environments, tax measures and activities against illegal trade and anti-smoke campaigns. Member states of the European Union are required to ensure that advertisements for any tobacco related product are prohibited, and no promotion shall be made as to those devices with an intention to promote e-cigarettes. For the e-cigarettes released after May 20, 2016, TPD requires e-cigarette manufacturers to submit product sales applications to the regulatory market six months in advance, and ensure their products can meet the TPD requirements before they can be released. The Company has complied with TPD requirement for all its tobacco products sold in Europe.

The sale of cannabis vaping products is illegal in the European Union and the United Kingdom.*** ***

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

Theaccompanying unaudited condensed interim consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s consolidated financial position as of December 31, 2023, and the results of operations for the three and six month periods ended December 31, 2023 and 2022. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the financial statements not misleading have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accordingly do not include all of the disclosures normally made in the Company’s annual consolidated financial statements. Accordingly, these unaudited condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended June 30, 2023, included in the Company’s Annual Report on Form 10-K. The accompanying condensed consolidated balance sheet as of June 30, 2023 has been derived from the Company’s audited financial statements included in such Annual Report.

The results of operations for the three and six month periods ended December 31, 2023 are not necessarily indicative of the results of operations that may be expected for any other interim periods or for the year ending June 30, 2024.

Use of estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include allowance for credit losses, inventory reserve, deferred tax asset reserve, the useful lives of property, plant and equipment, incremental borrowing rate for operating leases and fair value of certain share based payment awards. Actual results could differ from those estimates.

Allowance for credit losses

The Company adopted Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” on July 1, 2023, under the modified retrospective method of adoption. The Company estimates its allowance for current expected credit losses based on an expected loss model, compared to prior periods which were estimated using an incurred loss model which did not require the consideration of forward-looking economic variables and conditions in the reserve calculation across the portfolio. The impact related to adopting the new standard was not material.

Based on the current expected credit loss model, the Company consider many factors, including age of balance, past events, any historical default, current information available about the customers, current economic conditions and certain forward-looking information, including reasonable and supportable forecasts.

Concentration of credit risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, accounts receivable and investments - others. The Company maintains its cash in financial institutions. To the extent that such deposits exceed the maximum insurance levels, they are uninsured. On June 30, 2023, amounts due from two customers totaled approximately 11% and 11% respectively, of accounts receivable. On December 31, 2023 accounts receivable from two customers totaled approximately 13% and 12%.

Inventories

Inventories mainly consist of finished goods purchased from suppliers. Inventories are stated at the lower of cost or net realizable value. The cost of an inventory item is determined using the weighted average method.

When management determines that certain inventories may not be saleable, or there is an indicator that certain inventory costs may exceed expected market value, the Company will record the difference between the cost and the net realizable value as a write down of inventories. The net realizable value is determined based on the estimated selling price, in the ordinary course of business, less estimated costs necessary to make the sale. The Company records an allowance for slow moving and potentially obsolete inventory based upon recent sales history, the quantity of inventory on-hand, and an estimate of expected sellable life of the inventory. The Company periodically reviews inventory to identify slow moving inventories and compares the forecast sales with the quantities and expected sellable life of inventory. Any inventories identified during this process are reserved for at rates based upon management’s judgment and historical rates. The quantity thresholds and reserve rates are based on management’s judgment and knowledge of current and projected demand. The reserve estimates may, therefore, be revised if there are changes in the overall market for the Company’s products or market changes that in management’s judgment, impact its ability to sell potentially obsolete inventory. For the three months ended December 31, 2022 and 2023, the Company recorded inventory reserve of $0 and $130,452, respectively. For the six months ended December 31, 2022 and 2023, the Company recorded inventory reserve of $0 and $130,452, respectively.

Property, plant and equipment, net

Property, plant and equipment are stated at cost less accumulated depreciation and depreciated on a straight-line basis over the estimated useful lives of the assets from the time the assets are placed in service. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.

When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income/loss in the year of disposition. Estimated useful lives are as follows:

Leases

The Company determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, the term of such lease is assessed based on the date on which the underlying asset is made available for the Company’s use by the lessor. The Company’s assessment of the lease term reflects any rent-free periods. The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the consolidated statements of operations over the lease term.

For leases with a term exceeding 12 months, an operating lease liability is recorded on the Company’s consolidated balance sheet at lease commencement reflecting the present value of its fixed minimum payment obligations over the lease term. A corresponding operating lease right-of-use asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received. For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are typically not readily determinable. The Company’s incremental borrowing rate reflects the rate it would pay to borrow on a secured basis and incorporates the term and economic environment of the associated lease.

For the Company’s operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term. For leases with a term of 12 months or less, any fixed lease payments are recognized on a straight-line basis over the lease term and are not recognized on the Company’s consolidated balance sheet as an accounting policy election. Leases qualifying for the short-term lease exception were insignificant.

Investment - other

The investment represents a certificate of deposit that the Company holds in HSBC bank. The entire balance of the investment presented on the balance sheet as of December 31, 2023, is $9,318,480 and it matured on February 8, 2024.

Intangible assets

Intangible assets refer to capitalized external costs, such as filing fees and associated attorney fees, incurred to obtain issued patents and patent license rights. All patents are internally generated. The Company expenses costs associated with maintaining patents subsequent to their issuance in the period incurred. Capitalized patent costs are amortized on a straight-line basis over estimated useful lives of 15 -20 years, which are based on the length of the license agreements as the Company expects to receive economic benefits over that time. The Company assesses the potential impairment to capitalized patent costs when events or changes in circumstances indicate that the carrying amount of our patent portfolio may not be recoverable. $255,650 and $731,593 of patent fees were capitalized during the three and six months ended December 31, 2023. The amortization of the intangible assets were $0 and $4,615 for the three months ended December 31, 2022 and 2023 respectively. The amortization of the intangible assets were $0 and $4,615 for the six months ended December 31, 2022 and 2023 respectively. The amortization expenses were included in the general and administrative expenses.

Revenue recognition

The Company sells its vaping products to customers and recognizes revenue in accordance with the guidance of ASC 606, Revenue from Contracts with Customers. Many customers are distributors that resell the Company’s products in various geographic regions. The performance obligations are for the Company to transfer the title and control of the goods to a customer for a determined price. Each order is considered a separate contract with single performance obligation. Revenue is recognized when control of goods has transferred to customers. For the majority of the Company’s customer arrangements, control transfers to customers at a point-in-time when goods have been delivered to the pickup location specified by the customer or a forwarder appointed by the customer, as that is generally when legal title, physical possession and risks and rewards of goods transfer to the customer.

Revenue is recognized at the transaction price based on the purchase order as adjusted for the anticipated rebates, discounts and other sales incentives. When determining the transaction price, management estimates variable consideration applying the portfolio approach practical expedient under ASC 606. The main sources of variable consideration for the Company are trade promotion funds, and cash discounts. These sales incentives are recorded as a reduction of revenue at the time of the initial sale using the most-likely amount estimation method. The most-likely amount method is based on the single most likely outcome from a range of possible consideration outcomes. The range of possible consideration outcomes is primarily derived from the following inputs: sales terms and historical experience.

The Company offers different payment terms to different customers. For tobacco vaping products, the general payment term is deposit of 30% of sales amount upon placing order, and the payment of remaining 70% to be made before shipment. For cannabis vaping products, tailored payment term is designed for each customer, based on business relationship, order size and other considerations. All contract liabilities at the beginning of the period were recognized as revenues in the reporting period. The Company offers a thirty - day warranty. The warranty is an assurance-type warranty, and it offers replacement of products in case the products sold do not function as expected. In certain sales contract, a right of return is offered. With a right of return, a customer is given the right to return the products if they are not satisfied with the product, and a credit would be given. The Company has a very low rate of return in history and a return reserve is accrued based on historical return rate and the management’s judgement. The Company has minimal incremental costs of obtaining a contract and are expensed when incurred. Sales taxes, which are sales and use or other similar taxes collected from the customer and remitted to the applicable taxing authority by the Company in accordance with applicable law, are excluded from revenue.

Disaggregated Revenue

The Company has taken into consideration the nature, amount, timing, and uncertainty of revenue and cash flows, and has determined to disaggregate its net sales of tobacco vaping products and cannabis vaping products. The net sales disaggregated by products for the three and six month period ended December 31, 2022 and 2023, were as follows:

Cost of revenue

Cost of revenue for the three and six months ended December 31, 2022 and 2023, consisted primarily of the cost of purchasing vaping products, which were mostly purchased from a related party. See Note 11.

Shipping and handling costs

Shipping and handling costs for the three months ended December 31, 2022 and 2023 are $69,901 and $123,308, respectively. Shipping and handling costs for the six months ended December 31, 2022 and 2023 are $173,378 and $166,752, respectively. They are included in the sales and marketing expenses. The shipping services relating to the shipping and handling costs, are not part of the revenue performance obligation.

Research and development expenses

Research and development expenses for the three months ended December 31, 2022 and 2023 are $25,266 and $297,405, respectively. Research and development expenses for the six months ended December 31, 2022 and 2023 are $27,629 and $465,575, respectively. They were included in the general and administrative expenses.

Stock-based compensation

The Company measures and recognizes compensation expenses for stock-based payment awards, including stock options, restricted stocks granted to directors and advisors, and restricted stock units (“RSUs”) granted to employees, based on the grant date fair value of the awards. The Company engages a third-party valuer to determine fair value of stock options using the binomial option pricing model. The fair value of RSUs is measured on the grant date based on the closing market price of the Company’s common stock. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period, which is generally four years for stock options and three years for RSUs. Stock-based compensation is recognized on a straight-line basis over the period during which services are provided in exchange for the award. Stock-based compensation expense is recorded in the general and administrative expense in the consolidated statements of operations. The Company recognizes forfeitures of stock-based payment awards upon occurrence.

Income taxes

The Company accounts for income taxes under ASC 740, Income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The provisions of ASC 740-10 prescribe a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. The Company classifies the interest and penalties, if any, as a component of income tax expense. For three and six months ended December 31, 2022 and 2023, the Company did not incur any interest or penalties related to an uncertain tax position. The Company does not believe that there were any uncertain tax positions as of June 30, 2023 and December 31, 2023.

Earnings per share

The Company computes earnings per share (“EPS”) in accordance with ASC 260, Earnings per Share. ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net loss divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (for example, convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Stock options and unvested restricted stock units, altogether 3,419,140 potentially dilutive shares, could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would have been antidilutive for the three and six months ended December 31, 2022 and 2023.

The following table presents a reconciliation of basic net loss per share:

Commitments and contingencies

In the normal course of business, the Company is subject to contingencies, such as legal proceedings and claims arising out of its business, which cover a wide range of matters. Liabilities for contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

If the assessment of a contingency indicates that it is probable that a material loss is incurred and the amount of the liability can be estimated, then the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, is disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.

Segment reporting

The Company uses the management approach to determine operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker (“CODM”) for making decisions, allocating resources, and assessing performance. The Company’s CODM has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company.

The Company’s CODM reviews the consolidated financial results when making decisions about allocating resources and assessing the performance of the Company as a whole and has determined that the Company has only one reportable segment. Notwithstanding that the Company has customers located around the world and the Company’s Hong Kong subsidiary serves as one of the sales and marketing centers, the Company’s long-lived assets and management are located substantially in the U.S. and management operates its business as a single segment.

Recent accounting pronouncements

As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company intends to take advantage of the benefits of this extended transition period.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures. The new guidance requires enhanced disclosures about significant segment expenses. The Company is required to adopt this guidance for its annual reporting in fiscal year 2025 and for interim period reporting beginning the first quarter of fiscal year 2026 on a retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this ASU on our segment disclosures.

Customer and Supplier Concentration

(a) Customers

For the three and six months ended December 31, 2022 and 2023, the Company’s major customers, who accounted for more than 10% of the Company’s consolidated revenue, were as follows:

(b) Suppliers

For the three and six months ended December 31, 2022 and 2023, the Company’s suppliers, who accounted for more than 10% of the Company’s total purchases, were as follows:

3. MISAPPLICATION OF FUNCTIONAL CURRENY

Before October 2023, Aspire Science had been using HKD as its functional currency and translated to USD for consolidation and reporting purposes. During the review of financial statements for the three and six months ended December 31, 2022 and 2023, the Company revisited and determined that the functional currency for Aspire Science should be USD in accordance with Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters. The Company evaluated the materiality of the error from qualitative and quantitative perspectives in accordance with ASC 250-10-20, and Staff Accounting Bulletin (“SAB”) 99. As HKD is pegged to USD in a narrow range of US$1:HK$7.75 -7.85, after evaluation the management concluded that the misstatement resulted from the change of functional currency to all reporting periods prior to October 1, 2023, and correction of the error during the three months ended December 31, 2023 is immaterial given consideration of both quantitative and qualitative factors in assessing an item’s materiality. The functional currency of Aspire Science would be USD from October 2023.

4. CASH

Below is a breakdown of the Company’s cash balances in banks as of June 30, 2023 and December 31, 2023, both by geography and by currencies (translated into U.S. dollars):

“HKD” refers to Hong Kong dollars, “GBP” refers to British pounds, “EUR” refers to Euros, “RM” refers to Malaysia ringgit, and “RMB” refers to Renminbi.

5. FAIR VALUE MEASUREMENT

As of June 30, 2023 and December 31, 2023, the Company’s assets and liabilities were not measured at fair value on a recurring basis. The carrying value of certain of the Company’s financial instruments, including cash, accounts receivable, prepaid expenses and other receivables, accounts payable, accounts payable - related party, contract liabilities, accrued liabilities and other payables and due to related parties, approximates their fair value because of their short-term maturity.

6. ACCOUNTS RECEIVABLE, NET

As of June 30, 2023 and December 31, 2023, accounts receivable consisted of the following:

The Company recorded $659,898, and $1,900,797 credit loss expenses for the three months ended December 31, 2022 and 2023, respectively. The Company recorded $1,029,655 and $2,126,284 credit loss expenses for the six months ended December 31, 2022 and 2023, respectively. For the three months ended December 31, 2022 and 2023, the Company wrote off accounts receivable against allowance for credit losses of $0 and $311,379, respectively. For the six months ended December 31, 2022 and 2023, the Company wrote off accounts receivable against allowance for credit losses of $0 and $706,160 respectively.

7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

As of June 30, 2023, and December 31, 2023, prepaid expenses and other current assets consisted of the following:

Prepayments primarily consist of prepayment for production testers and jigs for Ispire Malaysia, and prepayments for marketing services.

8. PROPERTY, PLANT AND EQUIPMENT, NET

As of June 30, 2023, and December 31, 2023, property, plant and equipment consisted of the following:

For the three months ended December 31, 2022 and 2023, depreciation expense amounted to $6,939, and $41,484, respectively. For the six months ended December 31, 2022 and 2023, depreciation expense amounted to $13,495 and $70,545, respectively.

Included in construction-in-progress are prepayment for production and office renovations for Ispire Malaysia.

9. CONTRACT LIABILITIES

As of June 30, 2023, and December 31, 2023, the Company had total contract liabilities of $988,556 and $1,705,171, respectively. These liabilities are advance deposits received from customers after an order has been placed. As of December 31, 2023, the Company expects all of the contract liabilities to be settled in less than one year. The increase in the balance at December 31, 2023 was due to more orders on hand on that date.

10. LEASES

The Company has operating lease arrangements for office premises in Hong Kong, California and Malaysia. These leases typically have terms oftwo tofive years.

Leases with an initial term of 12 months or less are not presented as right-of-use assets on the consolidated balance sheet and are expensed over the lease term. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date.

The balances for the right-of-use assets and lease liabilities where the Company is the lessee are presented as follow:

As of December 31, 2023, the maturities of our lease liabilities (excluding short-term leases) are as follows:

The Company incurred lease costs, which include the payment of short-term leases, of $369,185 and $335,678 on the Company’s unaudited condensed consolidated statements of operations and comprehensive loss for the three months ended December 31, 2022 and 2023, respectively. The Company incurred lease costs, which include the payment of short-term leases, of $758,735 and $734,991 on the Company’s unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended December 31, 2022 and 2023, respectively.

The Company made payments of $300,640 and $379,600 under the lease agreements during the three months ended December 31, 2022 and 2023, respectively. The Company made payments of $540,030 and $712,421 under the lease agreements during the three and six months ended December 31, 2022 and 2023, respectively.

The weighted-average remaining lease term related to the Company’s lease liabilities as of June 30, 2023 and December 31, 2023 was 4 years and 3.2 years, respectively.

The discount rate related to the Company’s lease liabilities as of both June 30, 2023 and December 31, 2023 was 8%. The discount rates are generally based on estimates of the Company’s incremental borrowing rate, as the discount rates implicit in the Company’s leases cannot be readily determined.

11. ACCRUED LIABILITIES AND OTHER PAYABLES

As of June 30, 2023 and December 31, 2023, accrued liabilities and other payables consisted of the following:

12. RELATED PARTY TRANSACTIONS

Name of related parties and Relationship with the Company

-Tuanfang Liu is the Co-Chief Executive Officer and Chairman of the Company.

-Jiangyan Zhu is the wife of Tuanfang Liu and a director of the Company.

-Eigate (Hong Kong) Technology Co., Limited (“Eigate”) is a wholly-owned subsidiary of Aspire Global.

-Aspire Global is a company controlled by the Chairman of the Company.

-Shenzhen Yi Jia, a Chinese company that is 95% owned by the Company’s Chairman and 5% by the Chairman’s cousin.

13. INCOME TAXES

For the three and six months ended December 31, 2022 and 2023 income (loss) before income taxes by major taxing jurisdiction consists of:

Income taxes recorded for the three and six months ended December 31, 2022 and 2023, were estimated using the discrete method. Income taxes are based on the Company’s financial results through the end of the period, as well as the related change in the valuation allowance on deferred tax assets. The Company is unable to estimate the annual effective tax rate with sufficient precision for purposes of the effective tax rate method, which requires the Company to consider a projection of full-year income and the expected change in the valuation allowance. The estimated annual effective tax rate method was not reliable due to its sensitivity to small changes to forecasted annual pre-tax earnings and the effect of the valuation allowance, which create results with significant variations in the customary relationship between income tax expense and pre-tax income for the interim periods. As a result, the Company determined that using the discrete method is more appropriate than using the annual effective tax rate method.

The Company’s effective tax rate for the three and six months ended December 31, 2022 and 2023, was different from the Hong Kong statutory income tax rate due primarily to the U.S. subsidiary being in a loss position. No tax benefit has been recognized for this current loss and the related carryforward losses of this subsidiary, as a full valuation allowance has been established against the deferred tax asset arising from the losses.

As at June 30, 2023, income tax payable of $63,853 was from income generated during the year ended June 30, 2023. As at December 31, 2023, there was no income tax payable as the tax position was prepaid provisional tax from Hong Kong operation of $440,094. All income tax payables or prepaid amounts arose solely from Hong Kong operation.

As at December 31, 2023, there were unrecognized deferred tax assets of $6,016,774, out of which $4,854,545 were net operating loss carryforwards in the U.S. that may result in future income tax benefits, resulting from net operating losses of $23,116,882 from Aspire North America LLC. The amount of the valuation allowance as of December 31, 2023 was $6,016,774, resulting from an addition of $1,516,330 to the valuation allowance of $4,500,444 as of June 30, 2023.

14. STOCK-BASED COMPENSATION

In October 2022, the directors and stockholders of the Company approved the 2022 Equity Incentive Plan (the “Plan”) pursuant to which up to 15,000,000 shares of common stock may be issued pursuant to options, restricted stock or RSUs grants. The Plan will be administered by the Compensation Committee of the Board of Directors. Awards under the Plan may be granted to officers, directors, employees and those consultants who qualify as a consultant or advisor under the instructions to Form S-8 filed with U.S. Securities and Exchange Commission on July 26, 2023. The Compensation Committee has broad discretion in making awards; provided that any options shall be exercisable at the fair market value on the date of grant.

Restricted stocks

During the six months ended December 31, 2023,56,976 shares of common stock were issued to the Company’s board of directors and consultants in settlement of restricted stock granted under the Plan. Restricted stocks granted to directors are vested over three months and fully vested as of December 31, 2023. Restricted stocks granted to consultants are vested over their respective service periods from six months to one year. The unrecognized compensation expenses related to unvested restricted stocks were $29,242 as of December 31, 2023.

During the six months ended December 31, 2023,2,910,000 stock options and 587,235 RSUs were granted to the Company’s employees under the Plan. See below for details.

Stock Options

The following is a summary of stock option activity transactions as of and for the period ended June 30, 2023 and December 31, 2023:

The aggregate intrinsic value of options outstanding with an exercise price less than the closing price of the Company’s common stock as of December 31, 2023 was $7,263,425. The aggregate intrinsic value of options exercisable with an exercise price less than the closing price of the Company’s common stock as of December 31, 2023 was $400,875. Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the period in excess of the weighted-average exercise price multiplied by the number of options outstanding or exercisable.

Total expense of options vested for the three months ended December 31, 2022 and 2023, was $0 and $1,201,114, respectively. Total expense of options vested for the six months ended December 31, 2022 and 2023, was $0 and $1,707,093, respectively. The options granted during the six months ended December 31, 2023 were valued using the binomial option pricing model based on the following range of assumptions:

RSUs

RSUs granted to employees vest cumulatively as to one-third of the restricted stock units on each of the first three anniversaries of the date of grant based on continues service. Each vested RSU entitles holder to receive one share of common stock upon exercise. RSUs are accounted for as equity using the fair value method, which requires measurement and recognition of compensation expense for all awards granted to employees, directors and consultants based upon the grant-date fair value.

Total expense for the RSUs during the three and six months ended December 31, 2023 was $468,361 and $604,325.

The following table summarizes the allocation of stock-based compensation in the accompanying consolidated statements of operations:

15. COMMITMENTS AND CONTINGENCIES

On December 11, 2023, the Company entered into a licensing agreement with BRKFST, LLC (“BRKFST”) for the licensing of marks owned by BRKFST. For a minimum of 3 years (and maximum of 9 years), the license agreement permits the Company to manufacture, market, sell, and distribute vape products bearing BRKFST’s marks. The license agreement calls for the Company to pay BRKFST royalties (equal to a mutually agreed upon percentage of net profits) on the sale of products bearing said marks, which said royalties may become material if the sales of said products are successful. Further, the license agreement requires (i) joint marketing efforts of the Company and BRKFST and (ii) that a mutually agreed upon percentage of net profits be used to fund the marketing of the licensed products. There was no sales with BRKFST’s marks during the three and six months ended December 31, 2023.

16. SUBSEQUENT EVENTS

On January 10, 2024, CO-CEO, as administrator of the 2022 Equity Incentive plan, granted pursuant to the Plan non-qualified stock options to its employees to purchase an aggregate of 70,000 shares of common stock, at an exercise price of $11.16 per share, being the closing price as of January 10, 2024. These options shall vest over four years with the initial vesting of 25% of the awarded options vesting on the one-year anniversary date hereof, with the remaining 75% of the award vesting pro-rata on a monthly basis for the following 36 months thereafter based on continued service.

On February 1, 2024, the Company reported in Form 8-K that on January 31, 2024, the “Company entered into a Letter of Intent and Term Sheet (the “Term Sheet”) with Touch Point Worldwide Inc. d/b/a Berify (“Berify,” and together with the Company, the “Parties”), a technology company specializing in linking physical products to the digital world, digital engagement, and brand protection. Under the terms of the Term Sheet, the Parties intend to create a new joint venture that is a Delaware limited liability company (the “NewCo”) that will be 50% owned by the Company and 50% owned by Berify. Ispire’s contribution to NewCo will be up to $10 million in funding to support research and development, submission by NewCo of premarket tobacco product applications to the U.S. Food and Drug Administration and software development. The Company expects that other parties, including strategic and financial partners, will participate in the joint venture and become shareholders of NewCo in the future. The Term Sheet also summarizes the terms of certain other commercial agreements to be entered into among the Parties and NewCo with respect to the development, production and exploitation of the assets and the operation of the NewCo business (the “Definitive Documents”).