Ispire Technology (ISPR) - 2025 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The company reported increased net losses and a decline in assets and equity, with significant cash used in operations Unaudited Condensed Consolidated Balance Sheets Total assets decreased while liabilities increased, resulting in a significant decline in stockholders' equity Condensed Consolidated Balance Sheet Data (in USD) | Balance Sheet Item | March 31, 2025 | June 30, 2024 | | :--- | :--- | :--- | | Assets | | | | Cash | $23,518,560 | $35,071,294 | | Accounts receivable, net | $60,425,835 | $59,734,765 | | Total current assets | $94,026,657 | $102,571,605 | | Total assets | $115,727,726 | $122,640,966 | | Liabilities & Equity | | | | Accounts payable – related party | $77,121,850 | $67,046,472 | | Total current liabilities | $96,176,082 | $85,990,532 | | Total liabilities | $100,942,604 | $88,184,626 | | Total stockholders' equity | $14,785,122 | $34,456,340 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss Revenue declined and net loss widened significantly for both periods due to lower gross profit and higher operating expenses Statement of Operations Highlights (in USD) | Metric | Three Months Ended Mar 31, 2025 | Three Months Ended Mar 31, 2024 | Nine Months Ended Mar 31, 2025 | Nine Months Ended Mar 31, 2024 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $26,190,725 | $30,015,036 | $107,356,898 | $114,565,244 | | Gross Profit | $4,775,905 | $6,121,953 | $20,172,854 | $19,219,699 | | Loss from Operations | $(10,585,441) | $(5,655,295) | $(23,208,365) | $(10,453,764) | | Net Loss | $(10,856,495) | $(5,925,123) | $(24,450,154) | $(11,258,622) | | Net Loss Per Share (Basic & Diluted) | $(0.19) | $(0.11) | $(0.43) | $(0.21) | Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity significantly declined due to net loss, partially offset by stock-based compensation and equity issuance - For the nine months ended March 31, 2025, stockholders' equity decreased from $34,456,340 to $14,785,122[22][23] - The main factors reducing equity were a net loss of $24,450,154 and a common stock repurchase of $60,488[22] - Positive contributions to equity included stock-based compensation of $3,642,152 and issuance of common stock for equity incentives worth $1,281,599[22] Unaudited Condensed Consolidated Statements of Cash Flows Net cash used in operations improved, but overall cash decreased by $11.5 million due to shifts in investing and reduced financing activities Consolidated Cash Flow Data (in USD) | Cash Flow Activity | Nine Months Ended Mar 31, 2025 | Nine Months Ended Mar 31, 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | $(12,069,519) | $(16,878,126) | | Net cash (used in) provided by investing activities | $(1,689,495) | $5,948,696 | | Net cash provided by financing activities | $2,278,874 | $10,082,584 | | Net decrease in cash | $(11,480,140) | $(846,846) | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail the company's vaping business, significant customer/supplier concentration, increased credit loss allowance, and a subsequent preference share issuance - The company is engaged in the R&D, design, commercialization, and distribution of branded e-cigarettes and cannabis vaping products, with recent expansion through new subsidiaries in the UAE, California, and the UK[27][29][30] - For the nine months ended March 31, 2025, one customer (Customer A) accounted for 24% of consolidated revenue, and one supplier (Supplier C, a related party) accounted for 93% of total purchases[55][56] - The allowance for credit losses on accounts receivable increased to $14.6 million as of March 31, 2025, from $5.9 million as of June 30, 2024[62][64] - The company has a 40% membership interest in a joint venture, IKE Tech LLC, focused on developing age-verification solutions for vapor devices[66] - Subsequent to the quarter end, on April 24, 2025, the company's Malaysian subsidiary issued a preference share to its government affairs firm, entitling the holder to a 5% annual dividend of the subsidiary's net profit after tax[98][99] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue decline, widened net loss from increased expenses, significant regulatory and tariff risks, and tightened liquidity Results of Operations Nine-month revenue decreased, gross margin improved, but operating expenses surged, leading to a significantly increased net loss Revenue by Region (in USD) | Region | Nine Months Ended Mar 31, 2025 | Nine Months Ended Mar 31, 2024 | Change (%) | | :--- | :--- | :--- | :--- | | Europe | $59,174,779 | $49,144,807 | +20.4% | | North America | $29,441,624 | $50,191,212 | -41.3% | | Asia Pacific | $10,453,766 | $14,831,769 | -29.5% | | Africa | $5,840,041 | $261,113 | +2136.4% | | South America | $2,446,688 | $136,343 | +1694.6% | | Total | $107,356,898 | $114,565,244 | -6.3% | - Gross margin for the nine months ended March 31, 2025, increased to 18.8% from 16.8% in the prior year, due to a more favorable product mix with higher-margin products[133] - General and administrative expenses for the nine months increased by $11.2 million (43.8%), primarily due to a $10.1 million increase in credit loss expense[138] Liquidity and Capital Resources Liquidity significantly deteriorated with negative working capital and decreased cash, though management expects sufficiency for 12 months Working Capital (in thousands USD) | | March 31, 2025 | June 30, 2024 | Change | | :--- | :--- | :--- | :--- | | Current Assets | $94,027 | $102,572 | $(8,545) | | Current Liabilities | $96,176 | $85,991 | $10,185 | | Working Capital | $(2,149) | $16,581 | $(18,730) | - Net cash used in operating activities for the nine months ended March 31, 2025 was $12.1 million, primarily reflecting a net loss of $24.5 million, offset by non-cash charges like a $13.4 million credit loss expense and a $4.9 million stock-based compensation expense[148] - The company has an outstanding bank loan of $2.3 million and a committed but unpaid investment of $8.2 million for its IKE Tech LLC joint venture as of March 31, 2025[158] Quantitative and Qualitative Disclosures About Market Risk The company is not required to provide this information as it qualifies as a "smaller reporting company" - As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the company is not required to provide information for this item[163] Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in asset recording, estimate evaluation, policies, and personnel expertise - Management concluded that disclosure controls and procedures were not effective as of March 31, 2025[164] - Identified material weaknesses include: - Lack of controls for recording assets acquired from a controlling stockholder - Lack of controls for evaluating significant estimates (inventory reserve, credit loss) - Lack of a comprehensive accounting policies and procedures manual - Lack of sufficient personnel with appropriate technical expertise[164] PART II - OTHER INFORMATION Legal Proceedings The company is not currently a party to any legal proceedings that are expected to have a material adverse effect on its business, financial condition, or results of operations - The company is not a party to, nor aware of, any legal proceedings, investigations or claims likely to have a material adverse effect on its business[168] Risk Factors The company highlights significant risks from global political events and tariffs, especially new U.S. tariffs on Chinese and Malaysian goods - The company highlights the risk of geopolitical events, specifically tariffs; as of May 5, 2025, tariffs on most Chinese-made products entering the U.S. are 145%[170] - A U.S. executive order instituted a 24% tariff on Malaysian goods and 54% on Chinese goods, which was later paused for 90 days (except for China) and replaced with a blanket 10% tariff for non-China imports[170] - Since the company purchases the majority of its products from Shenzhen Yi Jia in China, these tariffs could significantly increase its cost of revenue and adversely affect financial results[170] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered equity sales but initiated a $10 million share repurchase program, buying back 14,600 shares Issuer Purchases of Equity Securities (March 2025) | Period | Total Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Maximum Dollar Value that May Yet Be Purchased Under the Programs | | :--- | :--- | :--- | :--- | :--- | | March 2025 | 14,600 | $4.14 | 14,600 | $9,939,556 | - On January 20, 2025, the Board of Directors authorized a share repurchase program for up to $10 million of the company's common stock over a 24-month period[173][175] Other Information During the reported quarter, no director or Section 16 officer adopted or terminated a trading arrangement under Rule 10b5-1(c) or any other non-Rule 10b5-1 trading arrangement - No director or Section 16 officer adopted or terminated a Rule 10b5-1(c) trading arrangement or a non-Rule 10b5-1 trading arrangement during the quarter[177] Exhibits The report includes various exhibits filed with the Form 10-Q, such as loan and consulting agreements, officer certifications, and interactive data files - Key exhibits filed include agreements with Avon River Ventures LLC (Master Loan and Security Agreement, Promissory Note, Master Consulting Agreement) and required CEO/CFO certifications (302 and 906)[179]