Ispire Technology Inc.: Form 10-Q for the period ended Dec 31, 2023

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 People’s Republic of China (the “PRC”) and Russia. Our tobacco vaping products are marketed under the Aspire brand name and are sold primarily through our distribution network and we have plans to launch various third-party branded lines of tobacco vaping products in the future. 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. Most 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.

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 $0.1 million and $47,000 for the three months ended December 31, 2022 and 2023, respectively. Our tobacco vaping sales were approximately $0.5 million and $0.2 million for the six months ended December 31, 2022 and 2023, respectively. Because the volume of sales did not justify the marketing and regulatory costs, we have ceased marketing tobacco vaping products in the United States. If any similar regulations are adopted with respect to cannabis products, our business may be severely impacted since all of our cannabis revenue for the three and six months ended December 31, 2022 and 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 nearly all of 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 the 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, we do not believe that the supply chain issues that affected our operations are currently affecting us. We cannot assure you that delays will not affect our 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 the PRC’s COVID policy resulted in an increase in cost of revenue during the period. We cannot assure you that we will not suffer from a chip shortage or that the effects of COVID or the PRC’s COVID policy will not affect Shenzhen Yi Jia’s ability or the ability of its suppliers to delivery products in a timely manner.

E-cigarette regulation

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

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

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

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

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

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

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

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 $1.5 million and $2.9 million at June 30, 2023 and December 31, 2023, respectively. 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 customers; (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 the 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.
• Our ability to develop and market tobacco and cannabis vaping products to meet the changing tastes of users.
• 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.
• The effect of the outbreak of another pandemic or other disease that results in restrictions imposed by governments which may impact our ability to purchase or assemble products as well as the ability of end users to purchase our products.

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Results of Operations

Three Months and Six Months Ended December 31, 2022 and 2023

The following table sets forth a summary of our unaudited condensed consolidated statements of operations and comprehensive income for the three months ended December 31, 2022 and 2023, and six months ended December 31, 2022 and 2023 (dollars in thousands except 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 on where the distributors are reselling to.

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Our revenue increased by $9,788,162, or 30.7%, from $31,897,399 for the three months ended December 31, 2022, to $41,685,561 for the three months ended December 31, 2023. All cannabis vaping products are sold in 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 cannabis vaping products of $11.8 million from $7.8 million for the three months ended December 31, 2022 to approximately $19.6 million for the three months ended December 31, 2023, partially offset by (ii) decreases in sales of tobacco vaping products in Europe of $2.6 million from $18.3 million for the three months ended December 31, 2022 to approximately $15.7 million for the three months ended December 31, 2023.

Our revenue increased by $25,709,759, or 43.7%, from $58,840,449 for the six months ended December 31, 2022, to $84,550,208 for the six months ended December 31, 2023. All cannabis vaping products are sold in 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 cannabis vaping products of $21.1 million from $15.8 million for the six months ended December 31, 2022 to approximately $36.9 million for the six months ended December 31, 2023, (ii) increases in sales of tobacco vaping products in Asia Pacific (excluding PRC) of $3.0 million from $8.1 million for the six months ended December 31, 2022 to approximately $11.1 million for the six months ended December 31, 2023, (iii) increases in sales of tobacco vaping products in Europe of $2.1 million from $33.4 million for the six months ended December 31, 2022 to approximately $35.5 million for the six months ended December 31, 2023.

Cost of Revenue

Cost of revenue mainly consists of cost of purchases of vaping products, which we mainly purchased from Shenzhen Yi Jia. Cost of revenue increased by $8,550,534, or 32.0%, from $26,758,821 for the three months ended December 31, 2022, to $35,309,355 for the three months ended December 31, 2023. The increase in cost of revenue reflects the increase in period-to-period unit sales.

Cost of revenue increased by $22,375,942, or 45.7%, from $48,909,768 for the six months ended December 31, 2022, to $71,285,710 for the six months ended December 31, 2023. The increase in cost of revenue reflects the increase in period-to-period unit sales.

Gross Profit

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

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Gross profit increased by $1,237,628, or 24.1%, from $5,138,578 for the three months ended December 31, 2022 to $6,376,206 for the three months ended December 31, 2023, and our gross profit percentage decreased from 16.1% to 15.3%. The gross profit percentage for tobacco vaping products remained constant. The decrease in gross profit percentage for cannabis vaping products was primarily due to larger customers that negotiated lower prices resulting in lower margins, and a change in product mix with more lower margin products being sold during the three months ended December 31, 2023.

Gross profit increased by $3,333,817, or 33.6%, from $9,930,681 for the six months ended December 31, 2022 to $13,264,498 for the six months ended December 31, 2023, while our gross profit percentage decreased from 16.9% to 15.7%. The gross profit percentage for tobacco vaping products remained constant. The decrease in gross profit percentage for cannabis vaping products was primarily due to larger customers that negotiated lower prices resulting in lower margins, and a change in product mix with more lower margin products being sold during the six months ended December 31, 2023.

Operating Expenses

Operating expenses increased $5,498,107 or 113.9%, from $4,828,735 for the three months ended December 31, 2022 to $10,326,842 for the three months ended December 31, 2023. Operating expenses increased $7,290,701 or 67.3%, from $10,835,706 for the six months ended December 31, 2022, to $18,126,407 for the six months ended December 31, 2023.

Our sales and marketing expenses mainly consist of employees’ salaries and benefits, marketing expense, travel expenses and others.

Sales and marketing expenses increased by $611,343, or 67.4%, from $906,372 for the three months ended December 31, 2022, to $1,517,715 for the three months ended December 31, 2023. The increase in sales and marketing expenses was primarily due to an increase in our marketing campaign and trade shows for our cannabis vaping products. Sales and marketing expenses increased by $178,850, or 7.4%, from $2,407,528 for the six months ended December 31, 2022, to $2,586,378 for the six months ended December 31, 2023. The increase in sales and marketing expenses was primarily due to increase in headcount and payroll expense for Aspire Science and an increase in our marketing campaign and trade shows for our cannabis vaping products.

Our general and administrative expenses mainly consist of compensation and benefits, rental expense, professional fees and other administrative expenses. General and administrative expenses increased by $4,886,764, or 124.6%, from $3,922,363 for the three months ended December 31, 2022, to $8,809,127 for the three months ended December 31, 2023. The increase was primarily due to (i) stock-based compensation expense of $1.9 million incurred in the three months ended December 31, 2023, as compensation for management, employees and service providers, (ii) an increase in credit loss expenses of $1.9 million, (iii) an increase in professional fees of $0.6 million for expenses incurred being a public company for the three months ended December 31, 2023.

General and administrative expenses increased by $7,111,851, or 84.4%, from $8,428,178 for the six months ended December 31, 2022, to $15,540,029 for the six months ended December 31, 2023. The increase was primarily due to (i) stock-based compensation expense of $2.8 million incurred in the six months ended December 31, 2023, as compensation for management, employees and service providers, (ii) an increase in credit loss expenses of $2.1 million, (iii) an increase of $1.5 million for payroll expenses as more employees were hired by us for expansion of our cannabis business and building a manufacturing plant in Malaysia.

Other expense (income), net

Other income, net includes interest income, interest expense, exchange gain (loss), net and other income (expense).

Interest income was $76,301 for the three months ended December 31, 2022, and $203,101 for the three months ended December 31, 2023. Interest income was $76,811 for the six months ended December 31, 2022, and $275,347 for the six months ended December 31, 2023.

Exchange loss (gain) changes by $7,644, or 32.9%, from net exchange gain of $23,212 for the three months ended December 31, 2022, to net exchange gain of $30,856 for three months ended December 31, 2023. Exchange loss (gain) changes by $512,099, or 107.2%, from net exchange loss of $477,582 for the six months ended December 31, 2022, to net exchange gain of $34,517 for six months ended December 31, 2023.

As a result of these factors, other expense (income), net increased by $202,265, from other income, net of $78,227 for the three months ended December 31, 2022, to other income, net of $280,492 for three months ended December 31, 2023. Other expense (income), net increased by $754,453, from other expense, net of $441,258 for the six months ended December 31, 2022, to other income, net of $313,195 for six months ended December 31, 2023.

Income Taxes

Income taxes decreased by $166,132, or 32.1%, from $518,312 for the three months ended December 31, 2022, to $352,180 for the three months ended December 31, 2023. Income taxes increased by $62,512, or 8.0%, from $785,713 for the six months ended December 31, 2022, to $848,225 for the six months ended December 31, 2023. We had a consolidated net loss for both three and six month periods ended December 31, 2022 and 2023, 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 in Hong Kong. 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 $3,892,082, from net loss of $130,242, or $(0.01) per share (basic and diluted) for the three months ended December 31, 2022, to a net loss of $4,022,324, or $(0.07) per share, for the three months ended December 31, 2023. Net loss increased by $3,264,943, from net loss of $2,131,996, or $(0.04) per share (basic and diluted) for the six months ended December 31, 2022, to a net loss of $5,396,939, or $(0.10) per share, for the six months ended December 31, 2023.

Liquidity and Capital Resources

The following table summarizes our changes in working capital from June 30, 2023, to December 31, 2023 (dollars in thousands).

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The following table sets forth information as to consolidated cash flow information for the six months ended December 31, 2022 and 2023 (dollars in thousands).

Net cash flow provided by operating activities for the six months ended December 31, 2022 of $8.4 million, reflected our net loss of $2.1 million, adjusted primarily as follows: an add back of credit loss expenses of $1.0 million, an increase in accounts payable of $25.5 million and increase in income tax payable of $0.8 million, offset by an increase in accounts receivable of $10.8 million, and an increase in inventories of $5.7 million.

Net cash flow used in operating activities for the six months ended December 31, 2023, of $20.2 million, reflected our net loss of $5.4 million, adjusted primarily as follows: an increase in accounts receivable of $22.8 million, offset by an add-back of stock-based compensation expenses of $2.9 million, an add-back of credit loss expenses of $2.1 million, a decrease in prepaid expenses and other current assets of $0.2 million, an increase in accounts payable of $1.8 million, an increase in contract liabilities of $0.6 million and an increase in accrued liabilities and other payables of $0.3 million.

Net cash flow used in investing activities for the six months ended December 31, 2022, of $0.5 million reflected primarily the purchase of property, plant and equipment of $0.5 million.

Net cash flow used in investing activities for the six months ended December 31, 2023, of $1.9 million reflected primarily the purchase of property, plant and equipment of $1.2 million and acquisition of intangible assets of $0.7 million.

Net cash flow provided by financing activities for the six months ended December 31, 2022, of $1.9 million reflected primarily advances from related parties of $1.9 million.

Net cash flow used in financing activities for the six months ended December 31, 2023, of $0.7 million reflected primarily repayments of advances from related parties of $0.7 million.

To date, we have financed our operations primarily through cash flow from operations and working capital loans 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 working capital 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 June 30, 2023, and December 31 2023, we had contract liabilities of $988,556 and $1,705,171, 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 our right-of-use assets and lease liabilities where we are the lessee are presented as follow:

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

Trend Information

Other than as disclosed elsewhere in 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 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.

Critical Accounting Policies and Estimates

Allowance for credit losses

We adopted Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” in July, 2023. We estimate the 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, we considers 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.

Inventory reserves

We record 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. We periodically reviews inventory to identify slow moving inventories and compares the forecast sales with the quantities and expected sellable life of inventory. Any inventory s identified during this process are reserved for at rates based upon our management’s judgment, historical rates, and industry practices. The quantity thresholds and reserve rates are subjective and are based on management’s judgment and knowledge of current and projected industry demand. The reserve estimates may, therefore, be revised if there are changes in the overall market for our products or market changes that in our management’s judgment, impact its ability to sell potentially obsolete inventory. For the three months ended December 31, 2022 and 2023, we recorded inventory reserve of $0 and $130,452, respectively. For the six months ended December 31, 2022 and 2023, we recorded inventory reserve of $0 and $130,452, respectively.

Emerging Growth Company

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. We could lose Emerging Growth Company status if we becomes a “Large Accelerated Filer”. This would occur if we have a public float of $700 million or more, as of the last business day of our most recently completed second fiscal quarter.

Cybersecurity

Cyberattacks are a growing geopolitical risk, becoming larger, more frequent, more intricate and more relentless. They are a significant threat to individual organizations and national security. We rely on accounting, financial, and operational management information systems to conduct our operations. Any disruption in these systems could adversely affect our ability to conduct our business. Furthermore, as part of our normal business activities, we collect and store common confidential information about customers, employees, vendors, and suppliers. This information is entitled to protection under a number of regulatory regimes. Any failure to maintain the security of the data, including the penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also result in deterioration in customers’ confidence in us and other competitive disadvantages, and thus could have a material adverse impact on our financial condition and results of operations. While we devote resources to security measures to protect our systems and data, these measures cannot provide absolute security and the insurance coverage we maintain may be inadequate to cover claims, costs, and liabilities relating to cybersecurity incidents.

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.

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective, due to (1) the lack of controls needed to enable us to record assets acquired from a controlling stockholder in accordance with GAAP. Our failure to have such controls in place resulted in the need for us to restate our unaudited financial statements for the three and nine months ended March 31, 2023. 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), and our net loss for the three months ended March 31, 2023 decreased from $3,106,855, or $0.06 per share (basic and diluted) to $2,334,223, or $0.05 pe share (basic and diluted). The decrease in net loss reflects the elimination of amortization of the intangible assets transferred from the controlling stockholder. On the March 31, 2023, balance sheet, (i) intangible assets decreased from $72,714,652 to nil. (ii) capital contribution decreased from $74,259,915 to nil and (iii) stockholders’ equity decreased from $79,953,608 to $7,238,957. (2) The lack of controls needed to enable us to evaluate significant estimates, including (i) the sufficiency of inventory reserve for slow-moving inventories and (ii) the credit loss history and use it to evaluate the sufficiency of credit loss reserve for accounts receivable under the Topic 326. (3) The lack of written control policies.

Subsequent to June 30, 2023, we have appointed a new chief financial officer and a vice president of finance to address material weaknesses in internal control as evidenced by our restatement of the unaudited interim consolidated financial statements for the period ended March 31, 2023, as part of our program to develop and implement effective internal controls over financial reporting.

Changes in Internal Control over Financial Reporting

During the three months ended December 31, 2023, we developed the implementation of internal controls over financial reporting, and we are continuing to develop and implement internal controls over financial reporting particularly in view of the material weakness described above.

Inherent Limitations of Controls

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. Controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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. Our current risk factors are set forth in our Form 10-K, filed with the SEC on September 19, 2023 and our Form S-1, filed with the SEC on February 1, 2024.