Ispire Technology Inc.

Good morning, everyone. Hello and welcome to participate in today's conference call to discuss I-SPIRE's financial results for its fiscal first quarter 2024 ended September 30th, 2023. At this time, I would like to inform you that this conference is being recorded and that all participants are in listen-only mode. We will be facilitating a question and answer session following the prepared remarks from the company. Joining us today are Mr. Michael Wang, the company's co-CEO, and Mr. Daniel J. Machok, the company's CFO. First, Mr. Wang will brief you on the company's key highlights, and then Mr. Machok will review the company's financial results. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact in its announcements are forward-looking statements. Forward-looking statements are based on estimates and assumptions made by the company in terms of its 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 forelooking 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 forelooking statements. Further information regarding this and other risk factors are included in the company's filings with the SEC. The company undertakes no obligation to update forelooking statements to reflect subsequent or current events or circumstances or to changes in its expectations except as may be required by law. I'll now like to turn the conference over to Mr. Wang. Mr. Wang, please go ahead.

Okay. Thank you, operator. And thank you all for joining us this morning. Before we dive into the numbers, I just want to highlight one important new partnership development. Earlier this week, we signed and announced a global e-cigarette design, manufacturing, and distribution partnership with Snoop Dogg's Dogg Pannels brand. We will begin to execute this partnership immediately outside of the U.S. You may ask, why outside the U.S.? This is because in the U.S., we'll need to obtain FDA's PMTA approval before we could distribute any e-cigarette product. I will share more detail on this partnership development later on, but this is not the only global EC-brand partnerships that we will launch in the coming months. In fact, we are in the final phase of negotiations with two other brands, to launch their global eSquare distribution business. That's one key thing I'd like to bring up first. Obviously, it's very encouraging development on that front. Now, back to the fiscal first quarter. For the fiscal first quarter of 2024, iSpire delivered strong financial results to sum it up. the cannabis vaping product revenue increased by 117% over the same period last year. And the tobacco vaping product revenue increased by 35% over the same period last year. So in all, overall revenue for the first quarter increased by 59% compared to the same period last year. The remarkable growth, obviously, particularly doubling in our cannabis product sales underscores the market's robust acceptance for high-quality product offerings and our adept marketing strategies. Since the launch of iSpire One four months ago, our revolutionary vaping technology that we introduced at CHAMPS show in Las Vegas and later on at the Bandinga conference in Chicago. We have been vigorously engaging with the market through major trade shows and conferences as we aim to expand our vaping ecosystem. The ecosystem is truly what separates us from our competitors who are more transaction-based. Our ecosystem obviously is more based on relationships and trust than price. Our customers understand our competitive technology advantage, but also understand that we are well established in the community, in the industry, well connected, and well respected throughout the whole vaping and cannabis communities. Our dynamic market engagement strategy has not only amplified our visibility, but also brought us industry recognition and valuable feedback as we continue to expand our global footprint. As the premier precision dosing technology company, our confidence in iSpire 1 technology is rooted in our innovative mindset and its innovative design and the positive response we have already observed. We believe it has the capacity to make truly meaningful impact on both the waiting experience and the market overall through the impact the technology makes. Our recent Best End-User Technology Award at the 2023 Bandinda Conference in Chicago is further evidence of our momentum and our commitment to continue setting industry benchmarks. Our strategic expansion is advancing very well on several phases of build-out that have been completed at our new Malaysian manufacturing operation. where we are already receiving orders for products. We'll start production in December. As we continue to onboard several key leadership personnel at this facility, we are certainly well positioned to capitalize on the sustainable opportunities in Southeast Asia market while also enhancing our own production capabilities and, most importantly, to improve our growth margin over time. Also, subsequent to the end of the recent fiscal first quarter, I covered briefly early in my update, we signed a manufacturing and distribution agreement with Hanpaco. Hanpaco is a company that focuses on disrupting the $1 trillion tobacco industry by manufacturing and marketing products like herb, spice, and cannabinoids, smoke boards, and rolling papers as alternative to nicotine cigarettes. So our first collaboration with Hanpako will be centered around global icon and rep artist Snoop Dogg and his iconic brand Dogg's Pound. I-SPIRE, as part of the agreement, I-SPIRE will have exclusive worldwide distribution rights to these vaping products as they are sold into I-SPIRE's existing vapor network ecosystem. Also, we'll provide manufacturing and quality control of all hardware for Hanpaco vapes. and we anticipate additional celebrity and influencer brand collaborations to follow in the coming quarters, so please stay tuned. As we head into fiscal 2024, we are certainly fueled by this quarter's robust performance and continue to dedicate ourselves to product innovation, brand enhancement, and market agility. Our strategic product development coupled with a keen understanding of regulatory landscapes globally, positions us well in both the medical and the recreational arenas. Our focus on product excellence, as demonstrated with iSpire 1, has solidified our reputation. And we are confident that iSpire 1 will further strengthen our market presence as a premier precision dosing technology company. So with that, I'll turn the call over to our CFO, Dan, who will review and comment on our financial results. Dan?

Thank you, Michael, and thanks to everyone for being on the call. Let's take a deeper dive into our financials. I will summarize some key financial results for the fiscal first quarter 2024. In my comments on the quarterly results, All comparisons are to the prior year's three-month end of September 30, 2022, unless otherwise stated. As Michael outlined, we've experienced exceptional top-line growth for the fiscal to 17 million in the United States, and 35% year-over-year growth in sales of tobacco vaping products to 26 million in Europe and the Asia Pacific, excluding the PRC. Our gross profit rose to 7 million, representing a 44% increase compared to the same period last year. We experienced a slight dip in gross margin to 16.1% from 17.8% in the same period last year, The gross margin for tobacco vaping products remains constant. We're poised to recover and improve our gross margins as we ramp up sales of the new model product throughout fiscal 2024. seeing additional payroll expenses related to the expansion of our cannabis business and building manufacturing plant in malaysia and increased professional fees for expenses incurred being a public company as a result of the foregoing our net loss was 1.4 million for fiscal first quarter 2024 as compared to 2 million for fiscal first quarter 23. this reduction let's look at the balance sheet and liquidity. As of September 30th, 2023 and June 30th, 2023, we had working capital of $28 million and $29 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 at least the next 12 months. That cash used in operating activities was $13 million for the fifth year. That cash used in investing activities was 0.8 million compared to 0.3 million for the same period last year. That cash used in financing activities was 0.9 million compared to 0.3 million for the same period of last year. This concludes our fiscal first quarter 2024 financial results review. I will now turn the call back over to Michael.

Okay. Thank you, Dan. Before we open the call to questions, I'd just like to share some longer-term perspective regarding our business overlook. As we move forward into fiscal 2024 with one quarter behind us, our strategic investments and continued innovation position us for sustained growth in the quarters and years to come. As far as the current fiscal year, that's fiscal 2024, we expect cannabis product revenue to continue its strong performance to somewhere between $80 million and $9 million versus $40 million last fiscal year. That represents another 100% to 125% growth rate over the last fiscal year. On the other hand, the revenue for tobacco-rating products for the fiscal year 2024 is projected at $100 million to $110 million, representing a growth rate of 33% to 47%. With the launch of our global e-cigarette distribution partnership with celebrities and brands, we expect our e-cigarette revenue to pick up pace in calendar year 2024. Innovation remains at the core of our philosophy. We will continue to channel resources to stay at the forefront of the market's needs and expectations to expand our reach and to enhance our offerings. We are committed to our shareholders and customers alike, determined to deliver superior products and sustain the value in the quarters ahead. If you have any particular questions later on, please contact us through our IR email, that's IR at iaspiratechnologies.com. So at this point, operator, we completed our prepared remarks. We are now open to questions. Please go ahead.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your hands up before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Aaron Gray with Alliance Global Partners. You may now go ahead.

Hi, good morning and thank you for the questions and congrats on the quarter here. First question for me, on iSpire 1, can you speak to the traction you're getting early days? Any color you could provide on the early feedback from operators in terms of efficiencies or cost savings that are being realized? And do you believe this will also help you, you know, obtain new customers? And can you continue to gain market share and outpace the sector in terms of growth? Thank you.

Okay, thank you, Eric. Yes, first of all, we... We soft-launched the technology in July, and we immediately identified 10 brands, from medium-sized to large brands, to conduct beta tests with. So beta tests concluded by the end of October. The feedback has been, overall, to address your questions, overall, number one, truly a more efficient way of operating. The savings on the labor front is significant, and the impact on the brand's gross margin is proven to be very meaningful from the brand's perspective. Obviously, the beta customers also provided feedback. for the improvement that we would like to make to the technology. That will certainly come in phase two and phase three, different generations for new technology in the quarters to come. But so far, the feedback has confirmed what we anticipated early on in terms of benefits. On the other hand, where the benefits are the greatest are for the operators who currently operate more on a manual to semi-annual basis. Those operators see the greatest cost savings from using this system. On the other hand, this technology since we launched, especially at the Bandinga Conference in Chicago, has received close attention from many MSOs. Obviously, MSOs operate differently from smaller, 2 million-size brands. So the fact that this technology attracted attention and also ongoing negotiation with It's a further testimony that the technology is addressing the pinpoints for the industry. Aaron, I hope I answered your question.

No, you did. That was great. Thank you for the color there. Second question for me. On the gross margin side, we can certainly appreciate the growth outlook you guys have, but can you speak to how you're looking to balance market share gains and profitability? It sounds like there's some legacy discounts that impacted gross margins. you're now moving away from. So do you think that – obviously you don't think that will be growth given your growth outlook. So can you just speak to why you believe now you're able to kind of shift away from the discounts and still see the growth, and potentially that's because of the IFR1 offering you have, just so kind of high level, you know, how you continue to see the growth outlook despite maybe not having as aggressive of discounts? Thank you.

Okay. Thank you. A very important question you asked. So as far as the gross margin, I would say there are two key initiatives that we have undertaken will help us tremendously with our gross margin going forward. Like I said earlier, our Malaysian operation will start production in December, just next month. So obviously the transition from our China factories to the Malaysian factory will take time, but we shall start seeing the impact that factory has on our gross margin very soon. One of the key reasons for the Malaysian operation is to expand our gross margin over time because we previously knew when we had the manufacturing support, our vertical growth margin would be around 40%. Obviously, with that in mind, with that as a goal, Malaysian operation over time, when it takes over majority of the products in terms of manufacturing, it will drive us toward 40% growth margin. On the other hand, the iSpire One technology by itself it's not only beneficial to the brand and operators, it also is advantageous to iSpire. This is because with the iSpire 1 series, the products are designed differently. I think I stated earlier on the last call, iSpire 1 technology is not only about the filling process, it's more about the device. The device is made into an integral piece rather than multiple pieces put together. With that, we designed the product with strong manufacturability in mind. With that approach, obviously, not only did we make it easy for the brands and the co-packers and operators to manage the operational process more efficiently. It also made our product cost less to manufacture. So, Aaron, to address other ways to improve and go smarter beyond Malaysian manufacturing is that the true manufacturing cost for our IceBerry One series in terms of disposable and cartridges is actually much, much lower than conventional products. So we will certainly, as we launch iSpire 1, we'll gain added gross margin from that aspect as well. So we have value-added technology and product offering. On the other hand, or cost manufacturing is lower versus other products. So that will contribute to our margin expansion. Aaron, I hope from those two angles I answered your question.

Very detailed answer. I appreciate that. And I'll go back to the queue. Thank you.

Again, if you have a question, please press star then 1. Our next question will come from Bo Pei with US Tiger Securities. You may now go ahead.

Hi, Benjamin. Thanks for taking my questions. I have two questions if I can. So first is about our tobacco growth. It seems our tobacco revenue grew nicely quarter over quarter. Could you share any drivers there? And then the second question is about could you also share any updates on the California manufacturing side, have we decided what model we plan to produce at a California manufacturing site? Thank you.

Okay. Bo, I will answer your second question first. So specific to the second question, California manufacturing operation, Previously, we planned on going live with a California manufacturing operation in September, October timeframe. However, after we launched iSpire 1, we decided to change the timeline a little bit. Obviously, iSpire 1 will be the key technology for us for the next year and the year after. It will provide tremendous demand in terms of NSOs and large, medium-sized brands demand for this particular product to improve their efficiency. Given that situation, we decided to postpone the launch of the manufacturing operation in California a little bit. We want to see how the market reacts to the iSpire One technology, and more importantly, from the iSpire One technology series, we are launching over 45 SKUs into the market, 45 SKUs. So that's a large SKU. So, on one hand, we want to start manufacturing right away, but on the other hand, we want to make sure that the California manufacturing operation truly only focuses on the high-volume products. So, given that, and given that we'll start taking orders for I-SPIRE-1 at the end of this month, we will very quickly determine which SKU will drive the volume for us. Once we can decide on that, we can then immediately tune our manufacturing lines and the equipment accordingly so that we can begin manufacturing in California. Remember, the key for a California operation is high-volume products. This is the way to keep our costs down, and to keep our efficiency up in a rather high labor environment. So part of our approach is to use fully automated lines so that we minimize labor costs, but we still need to be mindful of efficiency. So we will only produce the high volume drivers in California. So consequently, we will determine which product will assemble in California. in December or January timeframe. That's pushed out slightly so that we can operate more efficiently here. That's the answer to our second question. First question regarding tobacco products, why the revenue grew over 30% and what are the drivers there? I would say a couple drivers. I think on one hand, just from a regulatory point of view, we all know from our data that Majority of our tobacco product revenue comes from Europe. Europe is a very unique market, especially in terms of environmental consideration and sensitivity. As most of you know, France announced a couple of months ago to ban disposable e-cigarettes. Immediately following France was the UK announcing the same ban for disposable devices. By all indications, the EU will move in the same direction, banning disposable e-cigarettes across the EU region potentially next year. So that obviously was good news on all fronts. in that our products that we sold in Europe in terms of e-cigarette products by far has been our legacy products that is open systems. Open systems are, in simple terms, are refillable systems. So it just falls squarely into the sweet spot for European consumers. because they are environmentally very conscientious and representative. So reusable, refillable will become even more of a preference for the consumers there. So I think that that certainly grew part of the growth, but more importantly is all of marketing and approach to selling in the last quarter across Europe. So that obviously stirred up more demand as well. So those are the two key contributing factors.

That's quite helpful. I'll go back to the queue. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Michael Wang for any closing remarks.

Thank you, Anthony. I would like to thank everyone again for your time this morning. It was obviously another strong quarter for iSpire, both financially and operationally. As we continue to execute on our business strategy of becoming what we call the premier global precision dosing technology company. We look forward to updating you on our continued progress on our next quarterly conference call. In the meanwhile, if you have any questions, like I said earlier, please contact us through our IR email. That's ir at icebergtechnology.com. Thanks again. Operator.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.