Ispire Technology Inc. (ISPR)

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 consolidated 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 and non-branded vaping hardware products in both
the nicotine and cannabis spaces. Vaping refers to the practice of inhaling and exhaling the vapor produced by an electronic vaping device.
These products are sold into the global nicotine and cannabis markets in the form of e-cigarettes or cartridges filled with oils by our
customers, respectively.

As stated in our corporate
mission, we are committed to delivering superior products that challenge industry norms, with the goal of delivering an unmatched customer
and adult consumer experience. In achieving this, risk reduction is central to our mission, and we aim to improve the lives of our consumers
through cutting-edge research and development. Our technology platforms look to reduce youth access to vaping products, which in turn
we believe will facilitate our ability to provide adult consumers with the products they desire.

We sell our e-cigarette (or
nicotine) products globally, in markets where we are legally permitted to do so. To date, our nicotine products are marketed under the
“Aspire” brand name and are sold primarily through our expansive distribution network. However, we are expanding our international
presence via the launch of nicotine products under the Ispire platform. These products have started to be launched under licensing arrangements
with the owners of selected partner brands.

We currently sell our cannabis
vaping hardware in the United States, Canada, and South Africa. However, we are continuing to develop our sales network across Europe,
South America, and other regions in preparation for legalization in these markets. Our cannabis products are sold under the Ispire brand
name, primarily on an ODM basis to other cannabis vapor companies including multi and single-state operators, brand owners and co-packers.
ODM generally involves the design and customization of the core products to meet each brand’s unique image and needs. Our hardware
products are sold by our customers under their own brand names. We do not “touch the cannabis plant” in the production and
sale of our hardware products and thus are not subject to the specific cannabis-related regulatory and taxation provisions of the industry
(e.g., Internal Revenue Code Section 280E).

Since our initial public offering
in April 2023, we have completed three fundraising rounds. The first was executed as part of our initial public offering, from which we
raised approximately $18.3 million after underwriting and other offering expenses.

In June 2023, we raised net
proceeds of approximately $7.4 million, after placement agent and offering expenses, from the private placement of our Common Stock to
three investors.

In March 2024, we raised net
proceeds of approximately $10.6 million, after placement agent fees and offering expenses, through a public offering of our Common Stock
priced at $6.00 per share. We used the net proceeds from this offering in connection with the establishment and operation of our manufacturing
facility in Malaysia, the funding of our joint venture with Touch Point Worldwide Inc. d/b/a/ Berify and Chemular Inc. and for working
capital and general corporate purposes, including research and development.

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Recent Developments

Malaysian Licensure

On March 17, 2026, Ispire Malaysia received full and final licensure
from the Ministry of Investment, Trade and Industry of Malaysia (“MITI”) to manufacture nicotine vapor products in the country
of Malaysia. This full and final licensure replaces Ispire Malaysia’s interim license issued in May 2025. Ispire Malaysia is the
only business in the country of Malaysia with such nicotine vapor manufacturing license, and we are now in the process of securing orders
and scheduling production for both nicotine vapor products (expected to commence production at the end of June 2026) and nicotine pouch
products.

We made the decision not to manufacture any nicotine vapor hardware
in Malaysia until the full and final license was issued. Now that such license is secured, the Ispire Malaysia and our business development
teams are fielding a backlog of customer demand for nicotine vapor production in Malaysia. We believe our production costs will be comparable
to production in China, and will continue to improve as the Ispire Malaysia business scales in volume and capacity. We will also work
to establish local supply chain partnerships, which we believe will further bring down the costs of nicotine vapor product manufacturing,
aiding in improving competitiveness and our ability to obtain increased profit margins.

The Ispire Malaysia business has also been positively impacted by policy
shifts from the Chinese government. On April 1, 2026, China cancelled the 13% export VAT rebate for nicotine-containing, non-combustion
inhalation products. This rebate cancellation caused an immediate effective price increase for exporting nicotine vapor products from
China, which we believe has directly improved the global price competitiveness for Ispire Malaysia’s nicotine vapor manufacturing
business.

Further, Chinese tobacco authorities have begun requiring nicotine
vapor manufacturers in the country to supply information on U.S. FDA PMTA Submission Tracking Numbers (“STNs”) for historical
nicotine vapor exports to the U.S. made in calendar year 2025. This development signals enhanced regulatory compliance requirements for
Chinese vapor manufacturers which previously did not exist, adding in enhanced compliance costs for shipments to the U.S. These two developments
suggest to us that there will be further tax and regulatory headwinds facing China’s domestic nicotine vapor manufacturing industry
in the coming months and years, potentially making our Malaysian nicotine vapor manufacturing business more appealing to global brands
and Chinese businesses looking to diversify their supply chain.

Management expects further
improvement in operating cash flow during 2026, driven by (i) continued quarterly operating expense reductions in U.S. operations, (ii)
revenue generation in Malaysia, (iii) continued cash generation from Hong Kong operations. Based on these initiatives, the Company expects
to achieve positive cash flow in the first half of fiscal year 2027. However, the timing and extent of such improvement remain subject
to execution and market conditions.

Ike Tech LLC Business Developments

On March 11, 2026, the U.S.
Food and Drug Administration (the “FDA”) issued draft guidance outlining evidentiary expectations for Premarket Tobacco Product
Applications (“PMTAs”) for flavored electronic nicotine delivery systems (“ENDS”), which could provide a lawful
pathway for flavored vaping products, the market for which is largely comprised of illicit products. The guidance marks the first time
the FDA has formally outlined a framework for evaluating flavored ENDS products, recognizing that device-level access technologies, or
device access restrictions (“DAR”), may factor into whether a product meets the “appropriate for the protection of public
health” standard for PMTA authorization. The draft guidance highlights DAR technologies such as biometric authentication, geofencing,
and continuous age verification as potential safeguards designed to prevent underage use of ENDS devices. The FDA also emphasized that
traditional safeguards such as local age restrictions and point-of-sale verification that do not directly prevent youth use may not, when
employed alone, sufficiently reduce youth use.

We remain an advocate for technology-driven youth prevention solutions.
As previously disclosed in our Current Report on Form 8-K filed with the SEC on April 11, 2024, on April 5, 2024, the Company, Chemular
Inc., a Michigan corporation, and Touch Point Worldwide, Inc. d/b/a/ Berify, a Delaware corporation, agreed to form Ike Tech LLC (“IKE”)
as a joint venture between the entities that would be in the business of licensing, owning and developing an industry-standard biometric,
blockchain-based, point of use age-verification solution for vapor (e-cigarette) devices in the U.S. market. We believe that the FDA guidance
is a positive development for IKE and that IKE is well positioned to capitalize on the creation of a pathway to a lawful market for flavored
vaping products.

25

Since its founding, IKE has
developed two core technology offerings: (i) NFC/RFID smart tags with unique block chain TokenIDs for embedding in packaging, providing
its customers’ packaging with a unique digital identity, and (ii) Bluetooth Low Energy (“BLE”) chips embedded in devices
such as ENDS that enable live communication with mobile applications and provide services such as continuous age verification, device
activation and control, and secure user authentication ((i) and (ii) together, the “Technology”). IKE’s Technology is
supported by a secure open ecosystem built on blockchain validation and open standards designed to enable reliable authentication across
devices and markets.

IKE exclusively licenses in the nicotine vapor field or owns 11 issued
patents related to its Technology to date, and in 2025, IKE submitted the first-ever component PMTA to the FDA for a standalone, interoperable
age-verification technology designed for integration across ENDS devices. The platform combines BLE chips, biometric authentication, and
block-chain secured identity verification to ensure that only verified adult users can activate a device. In addition to age verification,
IKE’s Technology can also support product authentication and anti-counterfeiting capabilities, helping manufacturers and regulators
identify illicit or counterfeit devices that bypass regulatory safeguards, evade taxes, and undermine consumer safety. IKE’s Technology
is currently engaged in a pilot and evaluation program operating within a test environment with a large strategic collaborator, as well
as pilot programs with several additional third-party vapor product manufacturers and brands.

Regulatory Risks

The sale of nicotine and cannabis
products is subject to regulations worldwide. Many countries prohibit the sale of any cannabis products, and many countries have regulations
relating to nicotine products, with a particular emphasis on underage sales. We work closely with our various global distribution partners
to help ensure our nicotine products comply with local regulations (e.g., packaging, ingredient disclosure, health warnings, etc.). Changes
in the regulatory environment can be enacted swiftly and may lead to our products becoming non-compliant in one or more international
markets. This regulatory scenario may severely disrupt our business in these markets while we resolve the deficiencies (if possible) with
the current product offering.

E-cigarette regulation

Regulation regarding e-cigarettes
varies across countries, from limited regulation to a total ban. The legal status of e-cigarettes is currently pending in many countries.
As e-cigarettes have become more and more popular recently, many countries are considering imposing more stringent law and regulations
to regulate this market. Changes in existing law and regulations and the imposition of new laws or regulations in countries and regions
that our major customers are in may adversely affect our business. Please see the sections titled “Item 1. Business – Regulation”
and “Item 1A. Risk Factors” above for our robust discussion of this topic.

Accounts Rec

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ITEM
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The
following discussion should be read in conjunction with our consolidated financial statements and the related notes contained elsewhere
in this Annual Report on Form 10-K and in our other Securities and Exchange Commission filings. The following discussion may contain
predictions, estimates, and other forward-looking statements that involve a number of risks and uncertainties, including those discussed
under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. These risks could cause our actual results to differ
materially from any future performance suggested below.

Overview

As
stated in our corporate mission, we are committed to delivering superior products that challenge industry norms, with the goal of delivering
an unmatched customer and adult consumer experience. In achieving this, risk reduction is central to our mission, and we aim to improve
the lives of our consumers through cutting-edge research and development. Our technology platforms look to reduce youth access to vaping
products, which in turn, will facilitate our ability to provide adult consumers with the products they desire.

We
are engaged in the research and development, design, commercialization, sales, marketing and distribution of branded and non-branded
vaping hardware products in both the nicotine and cannabis spaces. Vaping refers to the practice of inhaling and exhaling the vapor produced
by an electronic vaping device. These products are sold into the global nicotine and cannabis markets in the form of e-cigarettes or
cartridges filled with oils by our customers, respectively.

39

We sell our e-cigarette (or
nicotine) products globally, in markets where we are legally permitted to do so. To date, our nicotine products are marketed under the
“Aspire” brand name and are sold primarily through our expansive distribution network. However, we are expanding our international
presence via the launch of nicotine products under the Ispire platform. These products have started to be launched under licensing arrangements
with the owners of selected partner brands.

We
currently sell our cannabis vaping hardware in the United States, Canada, and South Africa. However, we are continuing to develop our
sales network across Europe, South America, and other regions in preparation for legalization in these markets. Our cannabis products
are sold under the Ispire brand name, primarily on an ODM basis to other cannabis vapor companies including multi and single-state operators,
brand owners and co-packers. ODM generally involves the design and customization of the core products to meet each brand’s unique
image and needs. Our hardware products are sold by our customers under their own brand names. We do not “touch the cannabis plant”
in the production and sale of our hardware products and thus are not subject to the specific cannabis-related regulatory and taxation
provisions of the industry (e.g., IRS Code Section 280E).

Since
our initial public offering in April 2023, we have completed three fundraising rounds. The first was executed as part of our initial
public offering, from which we raised approximately $18.3 million after underwriting and other offering expenses.

In
June 2023, we raised net proceeds of approximately $7.4 million, after placement agent and offering expenses, from the private placement
of our Common Stock to three investors.

In
March 2024, we raised net proceeds of approximately $10.6 million, after placement agent fees and offering expenses, through a public
offering of our Common Stock priced at $6.00 per share. We used the net proceeds from this offering in connection with the establishment
and operation of our manufacturing facility in Malaysia, the funding of our joint venture with Touch Point Worldwide Inc. d/b/a/ Berify
and Chemular Inc. and for working capital and general corporate purposes, including research and development.

Regulatory
Risks

The
sale of nicotine and cannabis products is subject to regulations worldwide. Many countries prohibit the sale of any cannabis products,
and many countries have regulations relating to nicotine products, with a particular emphasis on underage sales. We work closely with
our various global distribution partners to help ensure our nicotine products comply with local regulations (e.g., packaging, ingredient
disclosure, health warnings, etc.). Changes in the regulatory environment can be enacted swiftly and may lead to our products becoming
non-compliant in one or more international markets. This regulatory scenario may severely disrupt our business in these markets while
we resolve the deficiencies (if possible) with the current product offering.

E-cigarette
regulation

Regulation regarding e-cigarettes varies across countries, from limited
regulation to a total ban. The legal status of e-cigarettes is currently pending in many countries. As e-cigarettes have become more and
more popular recently, many countries are considering imposing more stringent law and regulations to regulate this market. Changes in
existing law and regulations and the imposition of new laws or regulations in countries and regions that our major customers are in may
adversely affect our business. Please see the sections titled “Item 1. Business – Regulation” and “Item 1A. Risk
Factors” above for our robust discussion of this topic.

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 $18.0 million and $5.9 million at June 30, 2025 and 2024, 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 customer’s
cash flow; (ii) our failure to implement effective collection efforts; and (iii) disputes over contract terms, product quality or delays
in delivery. Due to federal status of cannabis and the uncertainty of adverse economic conditions in cannabis industry, the company has
focused more on nicotine business in the past year. 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.

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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

The
following table sets forth a summary of our consolidated statements of operations and comprehensive income for the years ended June 30,
2025 and 2024 (dollars in thousands except per share amounts).

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Revenue

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

Our revenue decreased by
$24,414,387, or 16.1%, from $151,908,691 for the year ended June 30, 2024, to $127,494,304 for the year ended June 30, 2025. The decrease
in revenue is the combined effect of (i) decreases in product sales in the United States of $30.5 million from $63.1 million for the
year ended June 30, 2024, to $32.6 million for the year ended June 30, 2025, (ii) decreases in product sales in the Asia Pacific (excluding
PRC) of $5.3 million from $17.6 million for the year ended June 30, 2024, to $12.3 million for the year ended June 30, 2025, (iii) increases
in sales of vaping products in Europe of $8.8 million from $65.3 million for the year ended June 30, 2024 to approximately $74.1 million
for the year ended June 30, 2025, and (iv) increases in sales of vaping products in Africa and South America of $2.5 million from $6.0
million for the year ended June 30, 2024 to approximately $8.5 million for the year ended June 30, 2025.

Cost
of Revenue

Cost of revenue mainly consists
of cost of purchases of vaping products, that are mostly purchased from Shenzhen Yi Jia. Cost of revenue decreased by $17,281,612, or
14.2%, from $122,126,245 for the year ended June 30, 2024, to $104,844,633 for the year ended June 30, 2025. The decrease in cost of
revenue is in line with decrease in sales.

Gross
Profit

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

Gross profit decreased by
$7,132,775, or 23.9%, from $29,782,446 for the year ended June 30, 2024, to $22,649,671 for the year ended June 30, 2025, while our gross
margin decreased from 19.6% to 17.8%.

The
decrease in gross margin was primarily due to changes in product mix with less higher

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