ISPR Ispire Technology Inc

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to              

Commission file number: 001-41680

Ispire Technology Inc.

(Exact name of registrant as specified in its charter)

19700 Magellan Drive

Los Angeles, CA 90502

(Address of principal executive offices)

(310) 742-9975

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 7, 2023, there were 53,105,000 shares of common stock outstanding.

EXPLANATORY NOTE

Ispire Technology Inc. (the “Company,” “we” and “our”) is filing this amendment to its Quarterly Report on Form 10-Q (the “Amended Report”) for the three and nine months ended March 31, 2023 originally filed with the Securities and Exchange Commission (“SEC”) on May 15, 2023 (the “Original Report”). On September 15, 2023, the Company filed a report on Form 8-K which reported that the Company concluded that its unaudited financial statements at March 31, 2023 and for the nine months then ended should not be relied upon, This amended report includes the restated financial statements for the three and nine months ended March 31, 2023 and updated disclosure as to the Company’s controls and procedures.

Restatement

The Company identified errors related to the recording of the intellectual property rights transferred to the Company by a controlling party. We determined that the intangible assets were incorrectly recorded in the unaudited financial statements, and that the unaudited financial statements had to be restated to record the acquired intangible assets at the transferor’s book value, which was nil, rather than $74,259,915, which represents an independent third party evaluation of the assets. As a result of the restatement, our net loss for the nine months ended March 31, 2023 decreased from $6,057,776, or $0.12 per share (basic and diluted), to $4,512,513, or $0.09 per share (basic and diluted), our net loss for the three months ended March 31, 2023 decreased from $3,106,855, or $0.06 per share, to $2,334,223, or $0.05 per share (basic and diluted), and our stockholders’ equity at March 31, 2023 declined from $79,953,608 to $7,238,957.

The Company has also revised Item 4 to reflect that, as a result of the factors giving rise to the restatement, the Company disclosure controls and internal controls over financing reporting are not effective.

The Company is also including with this Amended Report currently dated certifications of the Company’s Principal Executive Officer and Principal Financial Officer.

Except as discussed above and as further described in the notes to the unaudited condensed consolidated financial statements, the Company has not modified or updated the disclosures presented in this Amended Report. Accordingly, this Amended Report does not reflect events occurring after the Original Report or modify or update those disclosures affected by subsequent events. Information not affected by the restatement is unchanged and reflects disclosures made at the time of the filing of the Original Report.

ISPIRE TECHNOLOGY INC.

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements,but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our prospectus dated April 3, 2023 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

OTHER PERTINENT INFORMATION

Unless specifically set forth to the contrary, “Company”, “we,” “us,” “our” and similar terms refer to Ispire Technology Inc. and its subsidiaries, unless the context indicates otherwise.

PART I – FINANCIAL INFORMATION

ITEM 1 – Financial Statements

ISPIRE TECHNOLOGY INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to unaudited condensed consolidated financial statements.

ISPIRE TECHNOLOGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

See notes to unaudited condensed consolidated financial statements.

ISPIRE TECHNOLOGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

See notes to unaudited condensed consolidated financial statements.

ISPIRE TECHNOLOGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to unaudited condensed consolidated financial statements.

ISPIRE TECHNOLOGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed financial statements and the related notes appearing elsewhere in this report. See “Cautionary Forward-Looking Statements.” Actual results could differ materially from those discussed below.

Overview

We are engaged in the research and development, design, commercialization, sales, marketing and distribution of branded e-cigarettes and cannabis vaping products. We sell our tobacco vaping products worldwide except for the PRC and Russia. Our tobacco vaping products are marketed under the Aspire brand name and are sold primarily through our distribution network. We currently sell our cannabis vaping hardware only in the United States, and we have recently commenced marketing activities in Canada and Europe, primarily in the European Union. All of our products are vaping hardware. Vaping refers to the practice of inhaling and exhaling the vapor produced by an electronic vaping device, and includes dabbing, which is the recreational inhalation of extremely concentrated tetrahydrocannabinol, the main psychotropic cannabinoid derived from the marijuana plant. Our cannabis vaping products are marketed under the Ispire brand name, primarily on an ODM basis to other cannabis vapor companies. ODM generally involves the design and customization of the core products to meet each brand’s unique image and needs, and our products are sold by our customers under their own brand names although they may also include our brand name on the products.

Restatement of Unaudited Financial Statements

We were required to restate our unaudited financial statements at March 31, 2023 and for the three and nine months then ended. The unaudited financial statements have been restated to correct the amount at which intangible assets consisting of intellectual property rights which were transferred to us by a controlling shareholder was recorded. Under GAAP, assets transferred by a controlling stockholder should be recorded at the transferor’s book value. Our unaudited financial statements recorded the intangible assets that were transferred by the controlling stockholder at $74,259,915, which represents a third party evaluation of the assets.

We determined that the intangible assets were incorrectly recorded in our unaudited financial statements, which were restated to record the acquired intangible assets at the transferor’s book value, which was nil. Accordingly, the unaudited financial statements at March 31, 2023 and for the three and nine months then ended in this Form 10-Q have been restated to reverse the intangible assets, related amortization and contributed capital. As a result of the restatement, our net loss for the nine months ended March 31, 2023 decreased from $6,057,776, or $0.12 per share (basic and diluted), to $4,512,513, or $0.09 per share (basic and diluted), our net loss for the three months ended March 31, 2023 decreased from $3,106,855, or $0.06 per share, to $2,334,223, or $0.05 per share (basic and diluted), and a decline in stockholders’ equity at March 31, 2023 from $79,953,608 to $7,238,957.

Initial Public Offering

In April 2023, we completed the public offering of 3,105,000 shares of common stock at a public offering price of $7.00 per share, which includes 405,000 shares issued upon the exercise by the underwriters of their over-allotment option. Gross proceeds were approximately $21.7 million, less underwriting discounts and non-accountable expense allowance of approximately $1.7 million, and other expenses of approximately $1.5 million, resulting in net proceeds of $18.5 million. US Tiger Securities, Inc. acted as sole book-running manager for the offering, and TFI Securities and Futures Limited and Prime Number Capital, LLC acted as underwriters.

Regulatory Risks

The sale of tobacco and cannabis products is subject to regulations worldwide. Many countries prohibit the sale of any cannabis products, and many countries have regulations relating to tobacco products, with a particular emphasis on underage sales. As a result of regulations in the United States, we are able to sell only one tobacco vaping product line, the Nautilus Prime, in the United States. Our tobacco vaping sales in the United States were approximately $0.9 million for the year ended June 30, 2022. Because the volume of sales did not justify the marketing and regulatory costs, we have ceased marketing tobacco vaping products in the United States and did not have any sales of tobacco vaping products in the United States in the nine months ended March 31, 2023. If any similar regulations are adopted with respect to cannabis products, our business will be severely impacted since all of our cannabis revenue for the three months and nine months ended March 31, 2023 was generated from sales in the United States.

Effects of COVID-19 Pandemic 

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

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

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 a result of the COVID-19 pandemic, during 2021 and early 2022 there were fewer longshoremen unloading ships and fewer truckers to deliver the products to market, which has resulted in significant delays in the delivery of products to markets. Since the port delays have significantly decreased, we do not believe that the supply chain issues that previously affected our operations are currently affecting us.

In 2021, Shenzhen Yi Jia suffered a chip shortage resulting in a slowdown in delivery of its products to us from April to August 2021. To secure the supply of chips, Shenzhen Yi Jia changed the payment terms to chip supplier from 30 days after delivery in the past to prepayment, and it engaged two new chip suppliers. Since September 2021, Shenzhen Yi Jia has obtained a supply of chips to meet its production need and a chip shortage no longer affects its production. However, we cannot assure you that we will not suffer from a chip shortage affecting Shenzhen Yi Jia or any other supplier.

The delay in shipment and chip shortage had a negative impact on our results of operation in the three months and nine months ended March 31, 2022 and 2023. Although mainland China’s COVID policy changed in early January 2023 from its zero COVID policy, many people were infected following the termination of the zero-COVID policy which affected the supply chain in the three months ended March 31, 2023. We believe delays in supply chain may continue to affect us. In order to mitigate the possible supply chain disruptions and to have more control of our manufacturing operations, we are using a portion of the net proceeds from our initial public offering to take the initial steps toward the development of manufacturing operations in Vietnam and in California. If we can establish our own production facilities, we will have better control of the manufacturing process and shipment of our products to customers, as well as diversifying risks of any production shutdown. However, we do not have any experience in manufacturing operations, and in order to establish manufacturing operations, we will have to hire personnel with experience in setting up and operating manufacturing operations. With respect to operations in Vietnam, we will need to engage personnel who have experience in managing operations in Vietnam. Further, to the extent that our Vietnam or California operations rely on Chinese suppliers for any components, we will be subject to any shortages and delays as a result of any lockdowns pursuant to China’s COVID policies. We cannot assure you that if our suppliers are impacted by China’s COVID policy, we will be able to obtain products or components from suppliers outside of China.

We are planning to establish manufacturing facilities in California and Vietnam as part of our efforts to reduce the effects of inflation because of the lower cost structure in Vietnam, and to reduce the potential impact of China’s COVID policy. We are not experienced in operating manufacturing facilities and we will need to hire key employees in Vietnam who understand the applicable laws and regulations, as well as local customs, in order to operate our proposed facilities. We cannot assure you that we will be able to operate efficiently in compliance with all applicable construction, environmental and other laws and regulations affecting the manufacture of our products in Vietnam. While our proposed facilities in California may provide protection from the effect of China COVID policy, it may not reduce the impact of inflation. In addition, our California facilities may be subject to unplanned expenses and delays as a result of compliance with local rules and regulations relating to construction. Thus, we cannot assure you that we will be able to commence manufacturing options in either location in the near future or that we will be able to reduce our costs as a result of operating our own facilities. Until we have established our own facilities, we anticipate that we will continue to rely on Shenzhen Yi Jia for our products.

Through March 31, 2023, inflation in PRC has not materially impacted our cost of revenue. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for three months ended March 31, 2022 and 2023 were increases of 1.1% and 1.3%, respectively, and for the nine months ended March 31, 2022 and 2023 were increases of 1.2% and 1.9%, respectively. Although we have not in the past been materially affected by inflation, we can provide no assurance that we will not be affected in the future by higher rates of inflation in PRC.

Market and Economic Conditions 

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

We 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 we operate worsen from present levels, our business, financial condition, operating results could be adversely affected. For example, in January 2023, the outstanding national debt of the U.S. government reached its statutory limit. The U.S. Department of the Treasury has announced that, since then, it has been using extraordinary measures to prevent the U.S. government’s default on its payment obligations, and to extend the time that the U.S. government has to raise its statutory debt limit or otherwise resolve its funding situation. The failure by Congress to raise the federal debt ceiling could have severe repercussions within the U.S. and to global credit and financial markets. If Congress does not raise the debt ceiling and if the U.S. government defaults on its payment obligations or experiences delays in making payments when due, such payment default or delay by the U.S. government, as well as continued uncertainty surrounding the U.S. debt ceiling or the U.S. Government’s ability to pay debts, could result in a variety of adverse effects for financial markets, market participants and U.S. and global economic conditions. In addition, U.S. debt ceiling and budget deficit concerns have increased the possibility a downgrade in the credit rating of the U.S. government and could result in economic slowdowns or a recession in the United States. Although U.S. lawmakers have passed legislation to raise the federal debt ceiling on multiple occasions, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States as a result of disputes over the debt ceiling. The impact of a potential downgrade to the U.S. government’s sovereign credit rating or its perceived creditworthiness could adversely affect economic conditions, as well as our business, financial condition and operating results.

Key Factors that Affect Our Results of Operations

We believe the following key factors may affect our financial condition and results of operations:

Results of Operations 

Three Months and Nine Months Ended March 31, 2022 and 2023

The following table sets forth a summary of our consolidated statements of operations and comprehensive income for the three months ended March 31, 2022 and 2023, and nine months ended March 31, 2022 and 2023 (dollars in thousands except per share amounts). 

Revenue

The following tables set out the breakdown of our revenue percentage by region based on information provided to us by our distributors.

Our revenue increased by $5,122,148, or 26.9%, from $19,014,149 for the three months ended March 31, 2022, to $24,136,297 for the three months ended March 31, 2023. All sales of cannabis vaping products are from United States, which were included in sales in North America. Sales in North America also include sales of tobacco vaping products in Canada. Sales to regions other than North America are from tobacco vaping products. The increase in revenue is the combined effect of (i) increases in sales of tobacco vaping products in Europe of $3.7 million from $8.9 million for the three months ended March 31, 2022 to approximately $12.6 million for the three months ended March 31, 2023, (ii) increases in sales of tobacco vaping products in Asia Pacific (excluding PRC) of $1.6 million from $1.8 million for the three months ended March 31, 2022 to approximately $3.4 million for the three months ended March 31, 2023.

Our revenue increased by $16,729,239, or 25.3%, from $66,247,507 for the nine months ended March 31, 2022, to $82,976,746 for the nine months ended March 31, 2023. The increase in revenue is the combined effect of (i) increases in sales of tobacco vaping products in Europe of $7.1 million from $38.9 million for the nine months ended March 31, 2022 to approximately $46.0 million for the nine months ended March 31, 2023 and (ii) increases in sales of cannabis vaping products in the United States of $7.5 million from $15.9 million for the nine months ended March 31, 2022 to $23.4 million for the nine months ended March 31, 2023.

Cost of Revenue

Cost of revenue mainly consists of cost of purchases of vaping products, which we purchased from Shenzhen Yi Jia. Cost of revenue increased by $3,577,673, or 22.3%, from $16,038,425 for the three months ended March 31, 2022 to $19,616,098 for the three months ended March 31, 2023. The increase in cost of revenue reflects the increase in period-to-period unit sales and the effects of 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 which impacted both nine-month periods. Although mainland China’s COVID policy changed in early January 2023 from its zero COVID policy, many people were infected following the termination of the zero-COVID policy which affected the supply chain in the three months ended March 31, 2023.

Cost of revenue increased by $12,565,907, or 22.5%, from $55,959,959 for the nine months ended March 31, 2022 to $68,525,866 for the nine months ended March 31, 2023. The increase in cost of revenue reflects both the increase in period-to-period unit sales and the effects of 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 which impacted both nine-month periods.

Gross Profit

The following tables show the revenue, cost of revenue and gross profit of our tobacco and cannabis vaping products (dollars in thousands).

Gross profit increased by $1,544,475, or 51.9%, from $2,975,724 for the three months ended March 31, 2022 to $4,520,199 for the three months ended March 31, 2023, while our gross margin increased from 15.7% to 18.7%. The gross margin for tobacco vaping products remained constant. The increase in gross margin for cannabis vaping products was primarily due to (i) a change in product mix with more higher margin products being sold during the three months ended March 31, 2023, and (ii) increase in sales volume that led to economies of scale.

Gross profit increased by $4,163,332, or 40.5%, from $10,287,548 for the nine months ended March 31, 2022 to $14,450,880 for the nine months ended March 31, 2023, while our gross margin increased from 15.5% to 17.4%. The gross margin for tobacco vaping products remains constant. The increase in gross margin for cannabis vaping products was primarily due to (i) a lower margin on cannabis vaping products in the nine months ended March 31, 2022 as a result of greater discounts in price offered as we commenced the cannabis business in late 2021 and our primary focus was on capturing market of cannabis vaping products; (ii) a change in product mix with more higher margin products being sold during the nine months ended March 31, 2023, and (iii) an increase in sales volume that led to economies of scale.

Operating Expenses

Operating expenses increased $3,338,225, or 86.2%, from $3,871,403 for the three months ended March 31, 2022 to $7,209,628 for the three months ended March 31, 2023. Operating expenses increased $8,645,891, or 92.0%, from $9,399,443 for the nine months ended March 31, 2022 to $18,045,334 for the nine months ended March 31, 2023.