Ispire Technology Inc.

Hello, everyone, and welcome to the Participating in iSpires Fiscal Year 2023 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in listen-only mode. Joining us today are Mr. Michael Wong, the company's co-CFO, and Mr. Daniel J. Machok, the company's CFO. First, Mr. Wong will brief you on the company's key highlights, and Mr. Machok will review the company's financial results. Before we begin, I'd like to remind you this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact in its announcement are forward-looking statements. Forward-looking statements are based on estimates and assumptions made by the company in terms of experience and its perception of historical trends, current conditions, and expected future developments, as well as other factors that the company believes are relevant. These forward-looking statements involve known and unknown risks and uncertainties, and many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements. Further information regarding this and other risk factors are included in the company's filings with the SEC. The company here takes no obligation to update forward-looking statements to reflect subsequent or current events or circumstances or changes in its expectations, except as may be required by law. All right, now I'd just like to call over to Mr. Wong. Mr. Wong, please go ahead.

Thank you, Keith. And thank you all for joining us this early morning. Just one clarification. The operator just mentioned that I was a co-CFO, just to clarify, co-CEO. And then our CFO is on the call with me. So before I start, I would like to first express that I'm very excited to partner with our chairman, Mr. Tom Fong Liu as the two co-CEOs of the company going forward. Our combined experience and leadership obviously are aimed to elevate iSpire's growth and further expansion to new heights. Exciting times ahead. I'm also pleased to welcome Daniel as our new CFO. He's over 20 years of experience in finance accounting and M&A. will be absolutely invaluable to our team. Together with other key leaders, we are able to capitalize on our combined expertise for iSpire's long-term success. So a major addition to the team. So now back to fiscal year 2023. First of all, we hit a significant milestone. We achieved a 100% increase in cannabis vaping product revenue. We doubled our revenue there, and we achieved 11% increase in tobacco vaping product revenue. And in all, our overall revenue increased by 31% over the previous fiscal year. However, the spotlight for our growth really is on our cannabis product-related revenue from the United States which really saw an impressive jump from $20 million the prior fiscal year to $40 million this recent fiscal year. While the U.S. has been our primary market for cannabis-facing products, our horizon is actually expanding now to new markets in Canada and Europe. We are also excited to share with you all for the fourth quarter of 2023, our non-GAAP net profit is $0.5 million as compared to $1.9 million net loss in fourth quarter of last fiscal year. So just on an apple to apple basis, from non-GAAP point of view, we turned a profit for the first time. So for the fiscal year 2024, We are projecting our revenue for cannabis vaping products to be at somewhere between $80 million and $90 million, representing another 100% to 125% growth rate over this recent fiscal year. On the other hand, the revenue for tobacco vaping products for the fiscal year 2024 is projected at $95 million to $105 million, representing a growth rate of 25% to 40%. So now building on obviously our growth narrative, this July, as you saw in the press release earlier, we unveiled the innovative iSpire One technology. and the corresponding products. This technology and this solution really address many, many challenges facing the baiting industry, such as from operational point of view, capping issues. When I say capping, it's really how the mouthpiece and the body of the devices go together. Capping issues, leaking issues, uh spitting issues and overheating issues very commonly associated with waiting cartridges disposables and part systems so beyond fixing those industry challenges the iceberg one technology also elevates device quality consistency and most importantly consumer safety because it's a pre-sealed device They are pre-filled devices that are assembled in clean room setting in the factory and are pressure tested. So there is no chance for contaminant during the transient process and in customer's warehouse. So we are very excited about this transformative potential in the cannabis baking sector. which of course will give us a remarkable competitive advantage over our competitors. So we have actively showcased our technology at important events and conferences, and we have received very positive feedback from the industry experts and also brands and market stakeholders. So we believe the Prospects of this iSpire One technology for our company and the broader market are very promising in at least the next year to two years to come. By nature, it's very transformative and it fundamentally changes how the industry, how the brands, how the manufacturers operate with efficiency and safety in mind. Our drive, of course, doesn't just stop at innovation and keeping coming out with new products. We are also diligently enhancing our manufacturing operations. As we stated in the prospectus, enhancing our manufacturing operations will not only give us an opportunity to expand our gross margin, but also it will afford us the ability to, I would say, de-risk from any geopolitical situations in the world. Our California facility recently welcomed our first fully automated assembly system. We are trying it out and getting the systems set up before the end of 2023. At the end of this year or very early part of next year, we ought to be able to start full-scale assembly operation. We are also currently scouting out solutions in Southeast Asia for potential locations for manufacturing as well, with the goal of further optimizing our production capabilities, positioning us for future market expansion. Now, also throughout the fiscal year 2023, we have redoubled efforts to refine our technology, amplify brand visibility, not only in the U.S. market, but in Europe and Canada as well, and deliver unparalleled products. We believe our agility in adopting to recent policies and regulatory changes combined with our diversified revenue strategy, spending from medical and recreational avenues will certainly fortify our future prospects. So all in all, looking ahead, our ongoing dedication to our product quality and innovation have solidified our reputation. And we're hopeful that the iSpire 1 product family and technology will further solidify our market position. So that's the important point I want to make. Now, at this point, I would also like to share some other updates with everybody on the call. Last week, we filed a 8K with SCC. So I would like to just take this opportunity to explain As I believe many of you have noticed that and have probably have questions about the adjustments that we made to intangible assets. So intangible assets really include over 200 core technology patents and trademarks. First of all, I want to highlight what core technology patents mean. Core technology, as you all know, in any industry, there are some fundamental transformative new technologies that move the industry forward. Then there are more design form factor related patents. We don't consider those core technology. Our company over the last 14 years accumulated well over 200 core technology patents and along with some trademarks. So all those have been valued at approximately $74 million by a third party evaluation firm last year. These patents and the technologies are all related to vaporization technology, atomization technology, and they can be widely applied not only to seeing e-cigarettes, cannabis vaping, CBD vaping, but also in medical and healthcare as well. So such IT or intangible assets is a crucial foundation for keeping our company on the cutting edge of innovation. And obviously, it's also built over 15 years of accumulation of expertise and know-how from our founder, Mr. Liu. So we initially, last year, we put the intangible assets of $74 million on our balance sheet. However, under U.S. GAAP regulation, If these patents and trademarks are booked as intangible assets, the company would be required to pay the $74 million in cash to our founder, Mr. Liu, in exchange. So that is by U.S. GAAP requirement. In the absence of a cash payment, obviously the company would need to account for it as it's book value. Again, this is by U.S. GAAP standard as well. Again, in the absence of cash payment to Mr. Liu, the company would need to account for it only at book value. Given that our company is currently in a very important growth phase, Mr. Liu has decided to generously contribute all this intangible assets to the company without any consideration. So given that position, our auditors recommended a revised accounting treatment to such intangible asset, valuing such asset at their book value. So to clarify, this changes, of course, the balance sheet, but it has absolutely no impact on our cash balance or cash flow. In fact, by removing the intangible assets off the balance sheets and eliminating the amortization, this change will result in a positive adjustment to our bottom line by about $2.3 million. So that means going forward, we are not going to be hit on annual basis by that amortization expenses. So obviously from that front, it's a positive impact on P&L and the cash going forward. So I want to take a moment to explain that important HK value from last week to everybody. So that's that. So with that, now we'll turn over the call to our CFO, Daniel, who will review and comment on financial results. Dan?

Thanks, Michael. And thanks, everyone, for being on the call. I'm truly honored to be a part of this dynamic team at iSpire, and I'm keen to contribute to our ongoing journey. I will summarize some of our key financial results for fiscal year 2023. In my comments on the annual results, I will refer to the fiscal year 2023 as the year ended June 30th, 2023. All comparisons to the prior years, 12 months ended June 30, 22, unless otherwise stated. As Michael outlined, fiscal year 2023 saw revenues soar 31% to a record $115.6 million. This increase combined result of the 100% year-over-year growth in cannabis vaping products to $40 million in the United States and the 13% year-over-year growth in sales of tobacco vaping products in Europe and the UK to $58.8 million. Our gross profit saw a commendable 58% rise to $21.1 million, with a 3% improvement in gross margin to 18.2%. The improvement was primarily due to discontinued discounts on cannabis vaping products, which were offered during fiscal year 2022 to capture market share, the change of higher margin products sold in our product mix, and the increase in volume leading to economies of scale as we've grown. Our total operating expenses increased 79% to $25.6 million compared to $14.3 million for the same period last year. This increase was primarily due to the 138% increase in our G&A expense encompassing additional payroll and contractor expenses related to the expansion of our cannabis vaporizing business in the United States, the planning of a new manufacturing facility in Los Angeles, as Michael discussed, and other related expenses to support our growth. As a result of the foregoing, our net loss was $6.1 million for the fiscal year 2023 as compared to $1.9 million for the fiscal year 2022. Now let's look at the balance sheet and liquidity. As of June 30, 2023 and June 30, 2022, we had working capital of $28.8 million and $10.5 million respectively. We believe that our current cash and cash flow generated from our operations will be sufficient to meet our working capital needs for the next 12 months. We plan to expand our business to implement our growth strategies by broadening our service and strengthening our position in the marketplace. Net cash used in operating expenses was $7.6 million for the fiscal year 2023 compared to $7.6 million for the same period last year. Net cash used in investment activities was $10.2 million compared to $0.1 million for the same period last year. Net cash used in finance activities was $16.4 million compared to $3.1 million for the same period last year. This concludes our fiscal year 2023 financial results review. Now I will share some exciting long-term prospects regarding our business outlook. Looking ahead, we're committed to staying on the forefront of technology advancements, as Michael discussed. We anticipate continued double-digit growth in our cannabis vaping segment. The imminent launch of our automated manufacturing facility and our strategic emphasis on the I-SPIRE I technology position us to realize promising growth in the coming year. If you have any questions, please contact us through email at ir at ispiretechnologies.com. Operator, this completes our prepared remarks, and we are now open to questions. Please go ahead.