Ispire Technology Inc.

Hello everyone, and welcome to today's conference call to discuss IASPIRE's financial results for its fiscal second quarter 2024, ended December 31st, 2023. At this time, I would like to inform you that this conference is being recorded and that all participants are in a 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. Mashok, the company's CFO. First, Mr. Rang will brief you on the company's key highlights, and then Mr. Mashok 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 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 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 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 undertakes no obligation to update forward-looking statements to reflect subsequent or current events or circumstances or to changes in its expectation, except as may be required by law. I would now like to turn the call over to Mr. Wang. Mr. Wang, please go ahead.

Thank you, operator, and thank you all for joining us this morning. This quarter, we were pleased to accomplish many key operational and business milestones. Overall sales reached $41.7 million, an increase of 30.7% over the same three-month period last year. The quarter also saw cannabis hardware revenue increase by 149% to $19.5 million compared to the same three-month period last year. Our strategy for delivering best-in-class precision dosing technology and the white-glove customer service in these sectors has led to the increase in demand for our products and increased brand recognition. This increase in demand has been showcased by the rapid increase in cannabis hardware sales that we have been seeing quarter after quarter. Another highlight is the recent launch of our breakfast-branded high-tech wafer products in collaboration with Nigerian Applebee's star, Burner Boys. The five-year exclusive global manufacturing and distribution agreement marks our second celebrity brand collaboration. Snoop Dogg's Dog Pounds being the first such deal. It strengthened our portfolio of partnerships and our global brand presence. We will launch breakfast products in Africa in Q1 this year, in Europe and the UK this summer, and in the Middle East later in the year. Additionally, we were able to achieve ISO and GMP certifications for our new Malaysian manufacturing facility, which opened on February 5th of this year. Attaining such certifications is a sign of our commitment to best practices at our plant. We believe that this facility will prove instrumental in enhancing our operational efficiency, and ultimately leading to improved gross margin and profitability. We expect to start seeing a meaningful impact from this facility on our financial performance as early as next quarter. Our Malaysian operations provide the opportunity to streamline our supply chain. Based on our experience with related priority factories, we believe that we can achieve our goal of more than 40% gross margin on products manufactured at the Malaysian operation. This operational initiative, in contrast to our previous arrangement involving third-party factories, represents a forward-thinking approach that aims to enhance our financial performance and drive sustained growth for the company. In tandem with our strategic growth internationally, we have begun pursuing multiple PMTA, that is pre-market tobacco product applications with the FDA in order to build our domestic market e-cig presence and distribute our innovative e-cig products within the U.S. market. Receiving PMTA approval will give iSpire the opportunity to sell into the $80 billion U.S. nicotine market, diversify our product lines, and leverage our growing brand recognition in the U.S., the largest nicotine market in the whole world. We plan to announce further details on this development in the coming months. Our brand continues to build upon our long-lasting recognition and visibility as iSpar solidifies itself as a leading, innovative, and premier precision dosing technology company. The positive reception and the customer loyalty we have garnered are reflective of the value associated with our ongoing innovations. Each quarter, we have witnessed tangible results reflecting our dedication to customer focused innovations also subsequent to quarter end we announced that we recently formed a joint venture with the verify a pioneering platform leveraging the power of blockchain to redesign product authentication consumer engagement user identification and access control. This joint venture will leverage Verify's multi-patented technology and iSpar hardware expertise to introduce an innovative age verification solution for cannabis and e-cigarette vapor devices, as well as the submission of PMTA applications that incorporate cutting-edge technologies such as Next generation e-cigarette hardware with point-of-use age verification and age-gating technology that is both secure and user-friendly. E-cigarettes with an end-to-end range of dynamic features, such as authentication, direct-to-consumer engagement, and exclusive offering, all built on the foundations of blockchain technology. A real-time biometric identity platform for user access controls, creating added security and reliability that deters counterfeiting. We are very excited about the joint venture and the future potential it holds as we aim to grow our footprint as a leading precision dosing technology company. Looking ahead to the remainder of fiscal year 2024, we are focused and committed to this steady trajectory of growth. Our strategic partnerships and innovation will position us to eventually enter the $80 billion US nicotine market and strengthen our celebrity partnership portfolio worldwide. Our own manufacturing capabilities We'll expand our gross margin and profitability as we transition more of our production to the Malaysian operation. With that, I will turn the call over to our CFO, Dan Machok, who will review and comment on our financial results.

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 second quarter 2024. In my comments on the quarterly results, I will refer to the fiscal second quarter 2024 as the three months ended on December 31st, 2023. All comparisons are to the prior year's three months ended December 31st, 2022 unless otherwise stated. As Michael mentioned, we achieved remarkable growth for the fiscal second quarter of 2024. including an all-time high for U.S. cannabis vaping hardware sales, increasing by 149% to $19.5 million. Sales of tobacco vaping products were $22.1 million in the fiscal second quarter of 2024 versus $24.0 million for the same period the previous fiscal year. Overall, our total revenue for the 2024 fiscal second quarter increased by 30% to 41.7 million year over year. For the six month period ended December 31st, 2023 revenue increased to 84.5 million or 43% compared to the same period last year. Gross profit for the fiscal second quarter in 2024 rose to 6.3 million representing a 24.1% increase compared to the same period of the previous fiscal year. We experienced a slight downtick in gross margin to 15.3% from 16.1% in the same period last year. The gross margin for tobacco vaping products was 15.3% for the fiscal second quarter of 2024 as compared to the 14.5% for the same period in the previous fiscal year. During the six-month period ended this quarter, gross profit increased to $13.3 million or by 33.6% year-over-year. Tobacco vaping products was 15.6% for the six-month period ending the quarter as compared to 15.2% for the same period in the previous fiscal year. We are poised to improve our margins as we ramp up sales of the new model product throughout fiscal 2024. The total operating expenses for the fiscal second quarter of 2024 increased by 114% to 10.3 million compared to 4.8 million for the same period the previous year. Operating expenses for the six-month period increased by 67% to 18.1 million. The increase in expenses was due primarily to an increase in reserving for accounts receivable. This was due to us adopting a new accounting policy, ASU 2016-13 BECL, which was effective July 1st of 2023. It is our belief that customers are all collectible, but we have taken a conservative approach to our accounts receivable reserve. This increase in operating expenses was also due to marketing expenses, trade shows, and working capital-relating expenses. to maintaining our 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 4.0 million for the fiscal second quarter 2024 as compared to 0.1 million for the fiscal second quarter 2023. This increase is indicative of our increased investment in our operational efficiency this quarter and our strategic financial growth path. Net loss for the six month period ending December 31st, 2023 was 5.4 million as compared to 2.1 million for the same period in the previous year. Turning to the balance sheet and liquidity. As of December 31st, 2023 and June 30th, 2023, we had working capital of 24.8 million and $28.8 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. Net cash used in operating activities was $20.2 million for the six-month period ended December 31, 2023, compared to the net cash provided by operating activities of $8.4 million for the same period last year. Net cash used in investing activities was $1.9 million compared to $0.5 million for the same period last year. Net cash used in financing activities was $0.7 million compared to $1.9 million provided by financing activities for the same period last year. This concludes our fiscal second quarter 2024 financial results review. I will now turn it back over to Michael. Michael?

Thanks, Dan. Before we open the call to questions, I would like to expand on how our above-mentioned key strategies relate to our long-term financial goals. As we move forward in fiscal year 2024, we believe our strategic investments and the continued innovation position us for sustained growth. On that front, for the current fiscal year, that's fiscal year 2024, We expect cannabis vaping hardware revenue to build upon their strong performance with revenue projected to generate between $80 million and $90 million. That represents another 100% to 125% growth rate over the last 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 33% to 47%. With the launch of our global e-cigarette distribution partnerships with the celebrities and brands, we expect our e-cigarette revenue to pick up pace in calendar year 2024 and 2025. Innovation remains at the core of our philosophy. We'll continue to channel resources to stay at the forefront of the market's needs and expectations, to solve consumer and customer pinpoints, to expand our reach, and to enhance our offerings. We are determined in our commitment to our shareholders and customers alike, determined to deliver superior products and sustained value in the quarters ahead. In meanwhile, if you have any questions, please contact us through email at ir at icebergtechnology.com. Officer, this completes our prepared remarks, and we are now open to questions.

Please go ahead.

Thank you.

We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation bell will indicate that your line is in the question queue. and you may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we pull for questions. Thank you.

Our first question comes from the line of Bo Pei with US Tiger Securities. Please proceed with your question.

Hi, good morning to the management. Thanks for taking my questions. I have a couple. So the first question is about tobacco revenue. So tobacco revenue declines sequentially. Can you discuss the drivers? And then given the fiscal year today, tobacco revenue to achieve the fiscal year guidance midpoint, which is $100 million, the company will have to generate at least $26 million tobacco revenue in the last two quarters per quarter. So can you also share some colors why you are confident in achieving this implied growth? Thank you. And I have a follow-up.

OK. Bo, thank you. Good question there. Yeah, tobacco side, because we use distributors to distribute products to retailers, Naturally, here and there, there will be fluctuation from one quarter to the other. As you recall, last quarter was a real good quarter for tobacco revenue. It increased by almost 50% over the same period last year. So unfortunately, this quarter, or this recent quarter, we saw a bit of a dip. It dropped by 8% from the same period last year. So, however, we are very confident if you average out the quarterly numbers, we will still see significant growth. So, second question, you asked about our confidence. in delivering $26 million per quarter for two quarters straight in order to hit the guidance. We are very confident that can be achieved for a couple of reasons. All tobacco products have been open systems by and large. Open systems sold in Europe, that's where the main revenue segment is. Europe is our primary market for open systems. As you probably heard, France and the UK announced the banning of disposable e-cigarettes, and both actually already took effect, especially the UK market reacted really strongly toward that banning, the ban of the disposable devices. So in both markets and also European Union is considering a similar EU wide ban of the disposables. So all factors indicate that the open systems that we have been marketing and selling will actually gain a strong, I would say, momentum through this change in regulation. In the future quarters, we expect to see increase in our e-cig sales there. That is one key factor. Second factor is really more, say, celebrity brand e-cigarette business. that we don't have a revenue for so far, we will see some contribution from that front between now and fiscal year. So those two factors combined give us that confidence. Back to you.

Thank you, Michael. That was helpful. And then my second question is, I remember last quarter, the management expected the cannabis growth margin to start improving in the December quarter, but the cannabis growth margin actually declined a little bit from the September quarter. So what caused the actual results to diverge from your previous outlooks? And then do you still believe we can achieve the 40% growth margin for cannabis business within the next 15 months?

First part of your question, why did the gross margin for cannabis decrease over the same period last year? Yes, indeed, there were a few key factors that drove that change. Number one is really I would categorize as Before Chinese New Year holidays, all the factories tend to shut down their plants, typically one week before Chinese New Year, and that lasts typically 10 days after Chinese New Year. So during that shutdown, and even before that shutdown, factories really couldn't commit to, let's say, additional capacity or couldn't commit to more orders. So in the December quarter, we obviously experienced the same challenge. During that time, we had to, on one hand, we had increased demand from market. On the other hand, we had challenge in factories completing the product and shipping them in time. So several orders incurred higher expenses, including, for example, shipping costs. Shipping costs have really increased tremendously between China and the US. So that affected our gross margin somewhat. I would say that's probably contributed to number one towards a decrease in gross margin. That combined with several other factors, it drove gross margin down by, I think, over two points. So the second part of our question is how confident we are with getting to 40% gross margin after a Malaysian operation to start its production. So it's really a capacity issue. Previously we communicated our goal was in 18 month time to transition most, if not all, the production of cannabis vaping hardware from our related party factories in China to Malaysia. So that is still our goal. However, to get there, we need to make some, I would say phase two investment. into the build-out for the Malaysian operation. That's still our commitment. The speed of getting there really depends on our working capital available to fund the expansion in Malaysia. So once again, our internal goal is still to achieve majority of the production of cannabis-making hardware in Malaysia versus in China factories. With that, obviously, our goal is to see the significant improvement in growth margin. Every piece of product based on our past knowledge and based on Malaysian operations cost analysis would yield us 40% or even more in growth margin if that operation can take over all the production of products. So that's my long answer to your question.

Got it, got it. That's helpful. And then my third question is about iSpire 1. So can you share any updates on iSpire 1? Has the order intake so far met your original expectation?

iSpire 1 was officially introduced to the market in early November. So far, I will just share a couple of data points to indicate where everything is. Part of our strategy with iSpire One has always been to provide value-added products and services to large brands and MSOs. because those are the organizations that would see the benefit of iSpire One more clearly in terms of operating efficiency gain and brand replication. So that was part of our goal that we held in the back of our mind all the time. And the last two and a half months, three months, proved that our approach, our method, our strategy was spot on. As of November 2023, we only had two customers that I would consider multi-state operators. As of now, we are entertaining another six MSOs since we launched iSpire 1. So we don't have a major update in other volumes for iSpiro on products yet because most of the customers, especially MSOs, are taking their time. to evaluate the products and the operating procedures. And as we all know, larger MSOs tend to be more careful and conservative in their decision-making process. So that process we expect to take a while. But in the meanwhile, we are starting to get orders in from medium-sized brands. So that's my answer to your question.

Got it, Michael. And then also I have a question on cash and cash equivalent. So I noticed the cash and cash equivalent declined again this quarter. So I mean, assuming we continue to burn cash at this rate, the company will probably run out of cash in a few quarters. And then you also mentioned we need to continue to invest in Malaysia factories. So what is the company's plan to manage the cash level going forward?

Okay, a couple of things. For us, You are spot on. Obviously, the cash burn has been to fund the growth of the company. And on the other hand, we are mindful, as you pointed out, we are mindful of the available cash to continue the support of the Malaysian operation and so on and so forth. We had just over $9 million worth of cash laid out two weeks ago. That used to be part of our investment in a certificate deposit account in Hong Kong. And that CD matured two weeks ago. So that dollar amount, just over $9 million, is laid out now. So as of now, as per the report, we had just over $17 million in cash, adding the other $9.2 million to it. So we are now at $27 million in cash. But the key answer I want to share with you both is our team has been working diligently, especially under the leadership of CFO Dan in addressing the account receivable side. In the coming quarter, we should expect to have, I would say, much improved picture for account receivable. This is partially because the team has implemented a new deal review, credit review, what we call deal desk within the sales department. So that certainly made it much, much easier for us to negotiate with the customers based on their creditworthiness to minimize any potential exposure in AR. So with that deal desk, we are also very diligent with the payment terms. So on that front, I think in the coming quarters, we should see improvement. But by and large, as Dan pointed out in his part of the remark, working capital is at about $25 million. it's a drop of roughly $2.5 million from the previous quarter. So from that point of view, we are on one hand careful in managing our cash. On the other hand, we feel this still give us enough runway. But on the other hand, Bo, I don't know if you saw that we for registration to raise additional capital. So that is also going on. So we are addressing both from cash management AR point of view and from investor point of view.

Got it, Michael. That was helpful as well. And that actually led to my next question. So we also noticed the accounts receivable continue to increase this quarter. And I understand you mentioned we're going to go into the more stringent in terms of the customer credit worthiness. So can you share more color how you are going to collect these accounts receivable, especially given its significant size because our cash balance is over 20 something million, but how constantly simple is over 45 million US dollars. So and then if we are going to be more stringent in terms of a customer quality working is will that impact our revenue growth for the cannabis basis going forward?

Okay, I will provide high-level answer if it's not deep enough, Dan can jump in to share more. You are right about the AR side. So you very well pointed out growing the revenue side and preserving cash certainly is a balancing act by itself. On one hand, we certainly strategically are more focused on medium to large accounts now than ever before. So that also helps with, I would say, risk exposure. As we all know, with the lack of, let's just call banking services to the cannabis industry, cash management for our branded customers is also a big challenge. So generally, cash to cash cycle in this industry could be anywhere between six months to even up to eight months. So the smaller the brand, the bigger challenge they face. As we, in the last couple of years, have grown in revenue and reputation, we are able to attain much more desirable and more credit-worthy larger brands. So from that point of view, that's why the deal desk serves a great deal in our decision process. We feel through the deal desk and through the type of customers we are working with, AR risk is going to get less and less. However, larger MSOs, on the other hand, also have the scale to demand a bit more favorable payment terms. So we are managing both aspects carefully. The typical deals or contracts include the payment plan. So basically, in addition to payment terms, For some of them, there is also, even if they don't hit certain payment terms, they will need to hit certain payment plans. There is minimum threshold there. So all those factors together that happen in the finance and sales organization, I think will certainly help us managing cash and managing collection For a lot of the past few accounts, we also work out the payment plans with them. And we feel more than ever those accounts will complete their payment to us.

So, Bo, did I miss anything?

No, yeah, I think that answered my question. Thank you so much. And then my last question is on operating expenses. I noticed operating expenses increased over 30% from last quarter. Can you just share some color on the increase and then how should we think about the operating expenses level going forward like the next few quarters?

Yeah, Dan probably can answer that question the best, but I will point out before Dan answer your question. As Dan pointed out, one new element in the OPEX is reserved for AR. So I think that's probably the largest contributor. Dan, can you jump in and answer both questions there?

Sure, Michael. We haven't really commented on future OPEX or future net loss, but we are excited to continue to invest in the initiatives that we spoke about on the call, specifically in Malaysia with our tobacco initiatives and just overall general OPEX in the United States. We'll continue to invest at the pace that we feel will continue to drive our revenue growth. I think we've proven that so far with our past few quarters, and we should see similar trends. We will see OpEx expand as gross margin expands, and that's something that we'll continue to monitor as we focus on break-even cash flow at some point in the future. Hopefully that answers your question.

Yes, that was helpful, and that were all my questions. Thank you so much.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Thank you.

There are no further questions at this time. And with that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.