Ispire Technology Inc.

Hello, everyone, and welcome to today's conference call to discuss iSPIRE's financial results for the fiscal first quarter 2025 and its September 30th, 2024. 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. Jim McCormick, the company's CFO. First, Mr. Wine will brief you on the company's key highlights, and then Mr. McCormick 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. Mike Wang. Mr. Wang, please go ahead.

Thank you, operator, and thank you all for joining us this morning. For the quarter, we generated revenues of $39.3 million. This represents a decrease of $3.5 million, or 8.2% from the same period of last year. This was partially impacted by delayed shipments as well as our careful and measured ramp up in our global nicotine business. However, the number one driver for the decrease in revenue is due to the shift in our U.S. strategy. As we reported previously, our U.S. hardware business is 100% from the cannabis industry. As all of you know, The key challenge facing this industry is cash flow, largely due to the Internal Revenue Code Section 280E and the general lack of banking services available to the industry. In the last two quarters, we have focused our US business operation on enhancing our overall customer portfolio of high quality accounts and strong financial stability. which we believe will ultimately lead to better bottom line for iSPAR. In other words, we have focused more on the quality of customers and the quality of revenue rather than quantity. As a result, we saw a decrease in U.S. revenue from the same period last year. However, we also have started seeing strong fundamentals in our U.S. operations. with a notable improvement in gross margin, payment terms, and account receivable management. We believe this approach of focusing on gross margin, better payment terms, and better account receivable will lead to a more sustainable long-term financial performance. While our top line revenue saw a dip this quarter, we expect this dip to be temporarily in nature. And I'm particularly pleased to report that fiscal first quarter 2025 delivered substantial improvements in our key profitability metrics. We achieved a notable 12.1% year-over-year increase in gross profit to $7.7 million. and expanded our gross margin to 19.5% from 16% in the same period of previous year. This is a significant step in the right direction. And what is especially encouraging is that we were able to deliver higher gross profit and a higher gross margin with a lower revenue, which directly reflects the success of our strategic focus on high quality accounts and enhanced operational efficiency, including the improvements we are seeing through the use of our Malaysian facility. We believe these results validate the strategic initiatives we have taken as our innovative vaping technology and precision dosing solutions continue to resonate with consumers. Our international expansion continues to build momentum, which is highlighted by our state-of-the-art Malaysian facility. This best-in-class asset continues to help drive margin expansion as we look to increase our global footprint in the international nicotine market while further driving down operating costs. This quarter, we continued to make significant progress through our joint venture with Verify and Camular on creating a next generation point of use AIDS verification technology for e-cigarettes that will prevent youth access and improve user experience. As we have stated previously, this is a cutting edge web hardware innovation using blockchain technology as we understand the critical needs for safety and security in this industry. I am particularly excited to share that we will have our first discussion with FDA regarding this transformative educating technologies this Wednesday, that is November 13th. We look forward to updating investors on the outcome of that meeting and the continued advancement of this initiative. We are also maintaining our strong regulatory posture as we recently submitted a PMTA application for a disposable ENDS product for four flavors. Again, four flavors. We are on track to submit a PMTA application for POD system in 2025. as we are close to finalizing the educating technology. This is an important step for the company as we aim to further capitalize on the approximately 80 billion US dollars in US nicotine market. As we look ahead, we remain confident in our strategic direction and ability to capture the significant opportunities in front of us. as we take the thoughtful approach to scaling our global nicotine business. Additionally, subsequent to quarter end, we announced the unveiling of our revolutionary i80 vape filling machine at the Benzinga Cannabis Conference in Chicago in early October. The industry-changing machine will redefine production efficiency as it is able to fully fill and seal 4,000 half-gram vapor devices per hour. In contrast to current methods being used, the I-80 is up to 10 times faster than traditional systems and twice as fast as the current automated systems. The i80 also eliminates the need for device capping, which helps to boost overall workflow efficiency by up to 1,000% compared to manual methods and 100% over current automated systems. Current users in the industry see the i80 as a must-have device, given the significant improvement in productivity and cost savings they are seeing. The i80 fits in perfectly with our overall objective of being the world's leading provider of bath-in-class vape technology and precision dosing solutions. Post-quarter end, we have expanded our global reach through a landmark five-year master distributor agreement with ANDS for the Middle East and the North Africa region and for the global duty-free markets. This partnership will enable us to bring our Hidden Hills Club nicotine portfolio to new markets, offering adult consumers innovative, harm-reduced alternatives to combustible cigarettes. We are confident that this collaboration will position iSpire for continued growth and success as we advance our mission of providing industry-leading vaping technology worldwide. With that, I will turn the call over to our CFO, Jim McCormick, who will review and comment on our financial results.

Thank you, Michael. I'd like to take this opportunity to summarize our key financial results for the fiscal first quarter 2025. In my comments, I will refer to the fiscal first quarter 2025 as the three months ended September 30, 2024. All comparisons are to the prior year ended September 30th, 2023, unless otherwise stated. As Michael mentioned, we achieved higher gross profit and improved margins, even with lower revenue. Overall, our total revenue for the fiscal first quarter decreased slightly to $39.3 million, or by 8.2% compared to the same period last year. This revenue was driven by the following performance across our key regions. European revenues of approximately $22 million in Q1 2025 increased by $2.1 million or 11% over the previous fiscal year. This rose primarily as a result of increased sales of Ace Fire vaping products in the region. In North America, Q1 2025 revenues of approximately $9.7 million represented a decrease of $8.1 million or 46% compared to the same period last year. The decline was driven by a decrease in cannabis vaping hardware sales in the U.S., as Michael mentioned previously. Asia-Pacific revenues were approximately 3.9 million, a decrease of 1.2 million compared to the same period last year. For the rest of the world, revenues were 3.8 million, an increase of 3.7 million from the same period last year due to an increased level of sales in South Africa of 2.9 million. During the three months ended September 30, 2024, our gross profit was approximately $7.7 million compared to approximately $6.8 million for the same period last year. Over this same period, our gross margin grew to 19.5% from 16%. The increase in gross profit and gross margin was primarily due to favorable changes in product mix with higher margin products being sold during the fiscal first quarter ended September 30, 2024. Total operating expenses for the fiscal first quarter ended September 30, 2024, were approximately $12.9 million, compared to approximately $7.7 million for the same period last year. This increase was primarily due to an increase in expenses to support the expanded business footprint in the areas payroll, contract wages, sales and marketing, professional fees, as well as increased stock-based compensation. As a result of these activities, our net loss was $5.6 million or $0.10 a share compared to a net loss of $1.3 million or $0.02 a share for the fiscal first quarter ended September 30, 2023. As of the end of the fiscal first quarter 2025, the company's cash position was $37.7 million with a working capital balance of $12.1 million. Net cash provided in operating activities was $3.6 million for the three-month period ended September 30, 2024. compared to 13.1 million used for operating activities in the same period last year. Net cash provided by investing activities was 0.9 million, compared to 0.8 million used in investing activities for the same period last year. There was no cash used in financing activities in the first fiscal quarter, compared to 0.7 million used for financing activities in the first fiscal quarter of 2024. With that, this concludes the review of iSpire's fiscal first quarter 2025 financial results. I will now turn the call back over to Michael.

Thanks, Jim. As we close this quarter, I'm pleased that we have continued to make significant progress across our global business lines. While our revenues softened slightly due to the shift in U.S. strategy and the timing of shipments, we were still able to achieve major growth in our growth margin, reflecting the strength of our innovative product portfolio. Our strategic focus on higher-quality customer relationships, as well as the use of state-of-the-art Malaysian facilities and efficient global operations. We also reached an important milestone in our joint venture to develop transformative educating technology, securing a fast-tracked meeting with FDA to discuss this critical industry initiative. We remain committed to our operational excellence and the profitability as we build on the momentum from the transformative fiscal year 2024. As we move forward into the second quarter of fiscal 2025, we are confident our strategic investments and continued innovation position us well for sustained profitable growth. I would like to thank you all again for your time today, and we look forward to sharing our continued progress in the quarters ahead. If you have any questions, please contact us through Email at ir at ispiretechnology.com. Operator, this completes our prepared remarks, and 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 touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Bo Pei with U.S. Tiger Securities. Please go ahead.

Hi, Michael. Hi, management. Thanks for taking my questions. So my first question is about our strategy shift in the U.S. market. So should we think about that a, I guess, the fiscal first quarter? Is it more like a bottom in our U.S. revenue? So meaning it will start to recover starting in the second quarter? Or is it more like, you know, a

longer period you had thank you so thank you so the US cannabis related revenue I would say the first quarter meaning the last quarter reported should bottom out our repositioning of the strategy really started the quarter before. So the recent quarter financial reflected the effect of that decision. We strongly believe we have bottomed out as we have completely repositioned our US strategy and shifted toward, let's just say, with our primary focus on the top 20 accounts. Certainly, we are entertaining next year, but the primary focus is the top 20 accounts. And this is going to be much assisted by the introduction of the I-80 feeding machine. As I previously reported, all customers who have tested our self-sealing product line, that iSpire 1 line, really love the hardware because of the efficiency, the simplicity involved in filling and packing the device. However, for the last six months, we have been working on a higher capacity filling machine First generation machine had only one needle. So even though each device could be filled within 10 seconds, still you can only fill one device at a time. So we then moved to three needle machine that much improved the production efficiency. And finally, we launched the AT machine. needle device or machine, hence the name i80. So with 80 needles filling 80 devices on a single tray in two minutes, you can just imagine how fast that whole process is, especially without the need of a capping device. So after we launched it, certainly it sped up our conversations and negotiations with several MSOs and the large accounts that had been waiting for this machine for a while. So on one hand, prior MSO or large accounts have accelerated their reordering. And additionally, with new accounts signing up, we strongly believe in the coming few quarters, revenue on the U.S. side will only increase.

Thank you, Michael. That's helpful and good to hear that. And then my second question is, with the shift in the strategy in the U.S., Do you still expect total revenue to grow in the 2025 fiscal year? Maybe can you talk about the total revenue and also the U.S. revenue?

Yeah. Overall revenue, we are still very optimistic about the year, even though the first quarter saw a dip we are very, very confident that the four-year result will still be very encouraging in terms of a growth rate. Of course, we are striving to grow at the same pace as last year, and we are confident with that endeavor. Specifically to the US, U.S. revenue, I think, given three quarters to go still in the year, we are, of course, striving to meet or exceed last fiscal year. But overall, global revenue should come more from our global initiatives.

Got it. And then Well, gross profit margin, I mean, our total revenue actually grew a little bit sequentially from fiscal fourth quarter 2024. But our gross margin declined quite a bit from 27.8% to less than 20%. Can you talk about the driver there? Is it about the US strategy shift? And then how should we think about the gross profit margin going forward or maybe just for this fiscal year?

Yeah. So I will break down into two parts. On one hand, the US revenue and its corresponding gross margin have continued to increase. So from that point of view, our strategy, our execution are still on track. Relative to the peak of a gross margin, like you mentioned a couple of quarters back, 19.5% seems to be lower than before. That is mainly because last quarter was the beginning of our ODM, relationship with a European brand and because this is a new customer of ours as you can imagine there is a great deal for initial learning involved and in any picking up any large accounts with ODM relationships there will be some inefficiency early on. And then over time, as we do more and more of the same work, efficiency certainly should increase, both from labor side as well as from supply chain, price negotiation, and the leverage point of view. I would say that is a key contributor to the relatively speaking, like you pointed out, lower gross margin from the peak quarter a couple of quarters back. But relative to the same quarter last year, we still saw an increase in gross margin. That was indeed driven by the cannabis slash U.S. revenue with a higher margin.

Got it. And my last question is about our accounts receivable. So now with the strategic shift in the U.S., when should we expect to see improvement in the accounts receivable line on the balance sheet related to that, also the cash flow statements? when should we see some improvement in the operating cash flow activities?

Yeah, this is a much bigger question that you ask. I think I'll break down into two parts. I'll actually answer a second part of the question first, as far as the cash flow. Cash flow-wise, we are striving to turn cash flow positive by not the current quarter, by the March quarter. That, of course, is a result of not only AR improvement, but more importantly, by then, we strongly believe our global nicotine business will start a normal cycle and we'll get into a more normalized operation. Right now, we are still in the early phase of a global niche initiative. As you know, anytime you attack a new market, you enter a new channel. There is a rather heavy lifting before everything gets into a normal flow. So that's why we strongly believe with our strategy and execution will turn cash flow positive the March quarter. And now back to the AR side, as you saw, AR actually increased only about $4 million this recent quarter versus the quarter before. So with the total revenue of $39.5 million, and AR increasing only by 4 million. It's an indication that on one hand, our US strategy is having effect. On the other hand, it's also a reflection that the team has worked diligently on a broader base in collecting AR, reinforcing the payment agreements we have with customers. So we think that progress on the AR side will continue this quarter and all the way into the next quarter as well. So from an AR point of view, I think the rapid increase has slowed, and now we are hoping to get into a healthy cadence. Bo?

Thank you, Michael.

That's all my questions.

As a reminder, if you would like to ask a question, please press star, then 1 to be joined into the question queue. This concludes our question and answer session. I would like to turn the conference back over to Michael for any closing remarks.

Thank you. And once again, I want to thank you all for your time today. We look forward to the next call. In the meanwhile, if you have any questions, please feel free to reach out. Thanks again.

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