Ispire Technology Inc

NASDAQ:ISPR

Earnings Call Transcript 2024-Q3

[Operator]

Hello everyone, and welcome to today's conference call to discuss Ispire's financial results for its fiscal third quarter 2024 ended March 31, 2024. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] 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. Machock, the company's CFO. First, Mr. Wang will brief you on the company's key highlights and then Mr. Machock 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 change 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.

[Michael Wang, executive]

Thank you, operator, and thank you, all, for joining us this morning.During the fiscal third quarter, we continued building the foundation for future growth while maintaining our momentum in financial performance. Total revenue reached $30 million. That's an increase of 24% over the same 3-month period last year. The quarter saw cannabis hardware revenue increase by 57% to $11.9 million compared to the same 3-month period last year, while tobacco vaping products grew 9% to $18.1 million.During the quarter, we successfully balanced increasing profitability and increasing in our research and innovation, while maintaining and sustaining growth in our existing markets as well as positioning ourselves to expand into new markets with broad potential.The third quarter proved to be very productive for Ispire, as multiple segments of our business experienced growth and expansion. We entered into a joint venture with Berify and Chemular to leverage Berify's patented blockchain-based authentication technology and Chemular's industry-leading regulatory expertise to create a next-generation point-of-use age verification technology for e-cigarettes that will prevent under-aged access and improve user experience.This joint venture represents an opportunity for Ispire to bring our innovation to the e-cig market while addressing an unmet need within the sector to better safeguard under-aged access to vaping products. This technology aims to introduce safer industry practices including real-time biometric identity platforms, geo fencing capabilities, user-friendly point-of-use age verification and the product authentication systems.Innovation remains one of the core values of our mission and we are thrilled to pioneer this groundbreaking advancement. On April 30, we announced a collaboration with a subsidiary of Acreage Holdings, expanding the use of our innovative Ispire ONE technology into Acreage retail facilities across the U.S.Acreage is a leading retailer with a strong customer network. And our goal is to infuse our best-in-class precision dosing vapor products and the filling machine technology into their facilities to streamline vape production for them. Ultimately, the partnership will strengthen our brand by showcasing our technology and manufacturing capabilities and demonstrates the strength of our full suite of OEM/ODM customization services.Ispire ONE technology includes capless technology that simplifies devices by creating single-piece device, reducing leakage, contamination and device failure. Another advantage includes bottom filling capabilities that prevents heating core oversaturation, enhancing device reliability; and thirdly, a one-step operation that allows for easier device loading, unparalleled accuracy and speed, simplified operation and reduced operating expenses for operators and brands.Our Ispire ONE technology offers enhanced operational efficiency and marks a pivotal moment for Ispire by leveraging our capabilities beyond traditional products, to provide enhanced customer operation and brand reputation and solidifying our position in the industry as a strategic partner and a leading innovator.Another key highlight this quarter is the successful closing of our $12.3 million public offering in March. We are very encouraged by our achievement as our team was able to overcome a very volatile macro environment to successfully complete this transaction, creating additional growth opportunities for Ispire. Gross proceeds from the offering will primarily be used to fund the previously mentioned joint venture with Berify and Chemular as well as expanding and streamlining operations in our Malaysian manufacturing facility.Since its opening in February of 2024, our Malaysian facility continues to trend in alignment with our operational initiatives to achieve a higher gross margin. In just a few short months, we have already started shipping products and generating revenue. We are also seeing a positive impact on our gross margin.Our team continues to work diligently on multiple PMTA, that is premarket tobacco product applications. We are working on multiple applications to ensure that our best-in-class e-cigarette technology can access additional nicotine markets and customers, such as the $80 billion U.S. nicotine market, ultimately driving worldwide demand for our technology and creating long-term value.Finally, turning to another key partnership, our 5-year exclusive global manufacturing and distribution agreement with BRKFST has seen tremendous growth relative to revenue and global brand recognition. After a successful 2-month test marketing in Africa, we are on target to launch our co-branded product, first in Africa this month with a major retailer, followed by Europe, the U.K. and the Middle East later in the year.Our core mission focuses primarily on innovation and maintaining our market leadership position. The third quarter was critical for Ispire as we implemented many of our key strategic initiatives and entered into several partnerships as well as expanding many of our existing relationships. We continue to expand Ispire's cutting edge technology into additional markets in the U.S. and globally, while raising our expectations for the opportunities for our products.With that, I will turn the call over to our CFO, Dan Machock, who will review and comment on our financial results.

[Daniel Machock, executive]

Thank you, Michael, and thanks to everyone for being on the call.I'd like to take a minute to walk through our financials. I will summarize some of our key financial results for the third quarter of 2024. In my comments on the quarterly results, I will refer to the fiscal third quarter of 2024 as the 3 months ended March 31, 2024. All comparisons are to the prior 3 months ended March 31, 2023, unless otherwise stated.As Michael mentioned, we achieved continued sustainable growth for the fiscal third quarter of 2024. U.S. cannabis vaping hardware sales increased by 57% to $11.9 million, and the sales of tobacco vaping products were $18.1 million in the third quarter of 2024 versus $16.5 million for the same period in the previous fiscal year.Overall, our total revenue for the 2024 fiscal third quarter period increased by 24% to $30 million year-over-year. For the 9-month period ending March 31, 2024, revenue increased to $114.6 million or by 38% compared to the previous year. Gross profit for the fiscal third quarter in 2024 rose to $6.1 million, representing a 35% increase compared to the same period of the previous fiscal year.We experienced an increase in gross margin to 20.4% from 18.7% in the previous last year. The gross margin for tobacco vaping products was 15.8% for the fiscal third quarter of 2024 compared to 15.8% for the same period in the previous fiscal year. Cannabis gross margin for the quarter was 27.4% compared to 25.0% during the same period last year. During the 9-month period ending this quarter, gross profit increased to $19.2 million or 34.6% year-over-year.Total operating expenses for the fiscal third quarter of 2024 increased by 53.7% to $11.8 million compared to $7.2 million for the same period the previous year. Operating expenses for the 9-month period increased by 66.5% to $29.8 million. The increase in expenses was due primarily to an increase in our marketing campaign in Trader Joe's and an increase in employee head count related to the expansion of our cannabis business and manufacturing.As a result, our net loss was $5.9 million for the fiscal third quarter 2024 as compared to $2.3 million for the fiscal third quarter 2023. This increase reflects the impact of our increased operating expenses primarily due to the opening of our Malaysian facility and activities to support the growth of our business. Net loss for the 9-month period ending March 31, 2024, was $11.3 million as compared to $4.5 million for the previous year.Turning to the balance sheet and liquidity, as of March 31, 2024, and June 30, 2023, we had working capital of $28.9 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 $16.9 million for the 9-month period ending March 31, 2024, compared to the net cash provided by operating activities of $1.6 million for the same period last year.Net cash provided by investing activities was $5.9 million compared to $10.1 million used in investment activities in the same period last year. Net cash provided by financing activities was $10.1 million compared to $42.0 million used in financing activities in the previous year.This concludes our fiscal third quarter 2024 financial results review. I will now turn it back over to you, Michael. Michael?

[Michael Wang, executive]

Thanks, Dan. Before I open the call to questions, I would like to expand on how our key strategies relate to our long-term financial goals. As we move forward in fiscal 2024, we believe our strategic investments and continued innovation position us for sustained future profitable growth.I would like to reiterate that our focus at Ispire remains on innovation. We strive to be a leader in the industry using our technology to help redefine what best-in-class products are and set new standards for excellence. We are evaluating potential partnerships, growth opportunities and ways to streamline our supply chain so that they align with our overall mission on a consistent basis. We look forward to sharing future updates and progress. If you have any questions, please contact us through e-mail at [e-mail], this completes our prepared remarks and we are now open to questions. Please go ahead.

[Operator]

[Operator Instructions] Our first question comes from the line of Scott Fortune with ROTH MKM.

[Scott Fortune, analyst]

Just want to put a little focus on the cannabis segment to start and kind of the drop off in revenue sequentially. Nice year-over-year growth there, but just really unpack the drivers that drove the revenues in that segment and what now moving forward expectations in the last quarter into 2025 here? I know you've given a previous outlook of the cannabis revenue of $80 million to $90 million. But just any additional color would be great on how we look at that, the cannabis segment moving forward here, going forward. That would be great.

[Michael Wang, executive]

Scott, thank you for the question. A very important one. As far as the drop off in revenue from cannabis side, I would say there are 2 key drivers. Number one is really the Chinese factory New Year shutdown period that essentially affect -- stopped production for more than 3 weeks for us. Of course, it's not just us, it's everybody in the whole industry.So that really put a dent on the revenue generation side and how much they could fulfill after they came back from holiday and still yet ship out in time to the customers before the end of March. So that was, I would say, driver number one.But I think a more meaningful driver, Scott, is our Ispire ONE. We had high expectations for Ispire ONE, so did our customers. After we presented Ispire ONE to the customers in November last year, this product line was absolutely well-received by all customers and potential customers alike. Everybody was embracing this product. However, in the actual execution phase, we realized that there was a bit of a challenge we need to overcome for all the customers.With Ispire ONE, essentially, our primary target customers would be the big MSOs and large brands. This is where they can gain the most efficiency through using our device as well as filling mechanism. In talking to those customers, we found out that a lot of those large brands and the MSOs already invested millions and millions of dollars in filling machines that fills the devices. So of course, a lot of the customers are saying, we already invested so much into existing filling machines, even though they do things all the way from expense point of view, we really hate to throw those machines out.So that certainly gave us, on one hand, a very important data point. On the other hand, we had to find ways to not only internally provide newer machines with more capabilities, but on the other hand, we have been working with key filling machine manufacturers to provide the so-called add-on capabilities. So such capabilities would cost very little in most cases and that would give the operators, in this case, MSOs and big brands, the ability to continue to use the equipment to invest millions of dollars in. So this process of designing the add-on capabilities and so on slowed down the revenue growth in the Ispire ONE family. So that's another key -- I would say, a key driver.Scott, I think this is probably a bigger driver because it takes, I would say, a few months for such add-on capabilities to be ready and shipped to the customers. So I think to answer your second half of the question, this process is probably going to impact our revenue by 4 to 6 months, I would say, to be on the safe side.So I think second half of this year, we will have everything ready. I think the effect would be somewhat on the recent quarter, somewhat on the current quarter. So cannabis side will be affected by this filling machine challenge. But we are optimistic we'll overcome it and we will partner up with many MSOs and big brands. Scott?

[Scott Fortune, analyst]

Yes. Appreciate that color. Just a little quick follow-up on that. I mean, you focused a lot on the MSOs and the large brand operators. Congrats on signing up Acreage. But kind of where you're at as far as penetration in MSO is still very early [Technical Difficulty]

[Michael Wang, executive]

Sorry, I heard was music.

[Scott Fortune, analyst]

Yes. Sorry about that. I just wanted to follow up on -- you signed Acreage recently. How many of the large MSOs have you brought onboard with the Ispire ONE? And obviously, kind of with the add-on you expect more there. But just kind of very early in the process, but just want to get a sense of the large operators adopting Ispire ONE now currently?

[Michael Wang, executive]

We are talking to multiple MSOs, Scott. I would say right now, actively in negotiation and the testing phase for MSOs and a couple of big brands. At this point, I am not able to share the names, but one big brand is from California. They purchase about $20 million worth of vaping devices every year.So we are hoping to carve out a big chunk of that $20 million. Another is an MSO that we are working with, Chicago-based, and this MSO is expecting to purchase well over $20 million worth of Ispire ONE on an annual basis. So these are 2, I would say, deep in negotiation type of deals, but we certainly are talking to several others, Scott.

[Scott Fortune, analyst]

Got it. Really appreciate that. And then kind of a similar question on the tobacco outlook. Since you guys are removing guidance, you had a $95 million to $100 million expectation there, but just kind of a sequential decrease there. And what were you expecting from growth-wise to meet that fiscal year guidance that you proposed for? Just kind of a little more color on the tobacco side of things, will it be helpful?

[Michael Wang, executive]

Yes. Tobacco side, Scott, in a way, as a result of the cannabis revenue, I guess, impact from the 2 factors I described, we decided to stop giving guidance altogether on both cannabis and e-cigarette. On the e-cig side, I think from original guidance point of view, we will fare much better than the cannabis side.Indeed, this recent quarter, as you saw, nicotine side didn't grow as much. It only grew by 9% from last year. This is partially too because of the 3-plus weeks of factory shutdown by a little bit.Second thing is more about the European market. I think there is a phenomenon where because, let's say, in the U.K. -- U.K. right now is our largest European market for our tobacco products. U.K., as we all know, regulators decided to stop selling disposables altogether by April 1, 2025, next year. So while that in the long run will certainly benefit our open systems business, which is the majority of our current nicotine products worldwide, but in the short term, there almost seems to be a big rush into buying disposables and so on and so forth until April next year when disposables disappear from the U.K. market. So that was our interpretation of why that market is affected a little bit.But overall, I think in nicotine side, Scott, we'll be closer to the original guidance than cannabis side. However, looking ahead, Scott, as we launch our disposable products worldwide, I think the potential is obviously promising, but the expectation varies greatly. So from that point of view, we decided until we have a rather predictable trend, we don't want to give that guidance right now. We'll just see how it exactly shapes up in the next 6, 7 months.

[Scott Fortune, analyst]

Perfect. And then one last question for me. A nice improvement on the gross margin side, but kind of digging in there, kind of really unpack the drivers of the improved 500 basis points in gross margins, kind of moving forward with some Malaysian manufacturing coming onboard, just kind of expectations. I know you've kind of targeted 30% plus gross margins over next year potentially. But just kind of how we should look at gross margins moving forward as you saw a nice pickup on the cannabis side, but a little bit flat on the tobacco side?

[Michael Wang, executive]

Gross margin is going to be, Scott, a very important priority for us. We know it's important to boost gross margin. That's number one. And most importantly, Scott, also to get us to breakeven or profitability ASAP while trying to juggle the growth opportunities. So from that point of view, on the cannabis side, certainly gross margin saw a big boost from same period last year.Cannabis gross margin for the recent quarter went up to 27.5%. So on one hand, is a reflection of Malaysians' contribution to our business. On the other hand, it's also because as we become more mindful of the financial performance and profitability, we are very conscientious about each deal and what kind of long-term and short-term impact each deal would have on our business.I think I mentioned to everybody last quarter during the call that we implemented a so-called deal desk process for a series of reviews to be carried out on each proposed deal. So on one hand, we minimize credit risk. On the other hand, we maximize gross margin through the process.So that deal desk process also started to impact the business. So I think, Scott, on the cannabis side, those factors together made gross margin go up. Going forward, I think I would expect for us to continue to make progress on both the cannabis side and nicotine side to improve gross margin. And as nicotine business globally takes off, I have confidence that gross margin on the nicotine side will see the increase rather quickly. So far, the disposable products we make or are currently making would yield a very healthy margin for us. So I think it will be reflected in the margin in the coming quarters and the years. Scott?

[Operator]

Our next question comes from the line of Bo Pei with U.S. Tiger Securities.

[Bo Pei, analyst]

So I have a follow-up on the Ispire ONE delay. So in your original guidance or expectation, I just want to know what percentage in revenue was expected to come from Ispire ONE, I guess, to quantitatively understand the potential impact on our cannabis revenue in the last few quarters? And also related to that, with the new add-on technology, does that impact your potential revenue outlook? Like the potential market-size of the Ispire ONE, does that mean you have to change your strategy to get customers or get customers at a slower pace than you originally expected? I also have a follow-up.

[Michael Wang, executive]

Okay. Bo, thank you. I would say a couple from -- answer your question from a couple of different angles. Angle number one is the machine side. We are well underway in terms of getting the add-on features developed with existing filling machine manufacturers. So in some cases, the capabilities should become available by July and additional capabilities would come soon after that.So I think the impact of Ispire ONE on our overall cannabis revenue for this fiscal year, according to our original plan, certainly, it will expect, just the current quarter, I don't mean Q3, I mean Q4, the current quarter, probably a little more than it affected the recent quarter. So you got it right, in our projections certainly in the next 8 quarters or 2 years out, Ispire ONE would generate a bigger and bigger percentage of our total cannabis revenue. So that future outlook doesn't change. It's just, I think, a 4- to 6-month delay because of the machine would push the model our projection out by 4 to 6 months.On the other hand, this filling machine issue mainly only affects the big operators, MSOs and big brands. It doesn't affect smaller operators. So we are selling the machine and the devices to smaller operators now because they view this machine very suitable to the volumes they are producing. So it's not a complete stop.It's just with larger accounts we will need the solution for. And these solutions, Bo, do not come as expensive development. They are just basic add-on features to the existing filling machines. So from our value proposition point of view and from a cost to customer point of view, it doesn't really change from our original plan, because our original plan was based on us providing the filling machine to the customer directly and the cost of those machines is similar to the add-on features the big filling machine manufacturers will incur in developing the add-on. So I hope I answered the question. Basically, the revenue expectation is pushed out by about 4 to 6 months, I would say, larger accounts. Bo?

[Bo Pei, analyst]

Yes. And then also, if I remember correctly, last quarter earnings call you mentioned based on brand expectation, right, you expect the company to be breakeven in the June quarter. Now with Ispire ONE got delayed and then you have the tobacco sales also not as strong as we expected, what is the updated breakeven outlook for the company?

[Michael Wang, executive]

Yes. You totally are correct. We were expecting based on -- amongst those expectations, we would breakeven the current quarter, the June quarter. Yes, as a result of revenue shortfall on the Ispire ONE side and probably a little bit of shortfall on the tobacco side, I think we will also need to push the breakeven quarter out by another quarter.We know the global co-brand of e-cigarette with -- through the partnership with Burna Boy will kick in this quarter, in the June quarter and it would accelerate towards the second half of the year. So we know that will start contributing to the top line and the bottom line. And so based on that, we feel breakeven would be happening the next quarter, the September quarter.

[Bo Pei, analyst]

Got it. Got it. And then one last question from me. So I see you have a strengthened balance sheet with the recent secondary offering and then since also the operating cash flow returned to positive in the March quarter. But can you also share some outlook for the operating cash flow in the last and next few quarters? Are you seeing any special activities from your accounts payable and accounts receivable?

[Michael Wang, executive]

Overall, cash flow consideration for the next couple of quarters, Bo, I would say will be largely driven by a couple of strategic projects. Number one is our PMTA applications. As I said earlier, this summer, we will submit our applications with its verification technology built-in. So with that application process, we expect to spend upwards of $5 million in applications fee. As we all know, FDA charges a significant amount for PMTA. So I think that will be a key driver.The second relatively smaller driver is our contribution, capital contribution to the joint venture with Berify and Chemular. The actual cash outlay there is going to be actually based on the operating needs of the joint venture. The Board of the joint venture will review financial condition and cash flow and would require capital investors to fund the ongoing needs. So that would be a second factor, although I know that will be relatively small.Now indeed, what affects the cash flow a lot is in -- on the AR side and to a lesser degree on the AP side. On the AR side, through our deal desk, we have maintained, I would say, quite nice control in terms of not only credit risk, but also payment terms. So with review of each potential deal, we have become very, very aggressive in terms of collecting cash from the customer ASAP.So on that front, I think we should start seeing progress in terms of total AP. However, internally, we have a tracking KPI. That's what we view as a leading indicator of AP condition. That KPI we use is days sales outstanding. So that's basically everybody knows that average number of days sales outstanding.By that KPI, we have seen in the last 6 months that days sales outstanding nearly halved. So that's the indication for what our AP condition going forward.And we are going to stick to this very strict deal desk process on the cannabis side until -- we all know until 280E is removed and the operators have better cash to play with or more cash flow to use, I think the industry will continue to be under payment pressure. So this is our way of dealing with this pressure through the deal desk. And on the other hand, we certainly hope 280E will some day be removed. That will be a huge one to everybody, including us. But I hope I answered your question.

[Bo Pei, analyst]

Yes. That's most helpful.

[Operator]

And we have reached the end of the question-and-answer session. I will now turn the call back over to Michael Wang for closing remarks.

[Michael Wang, executive]

Once again, I want to thank everybody for joining me and Dan today. On one hand, as I just shared, the strategic investment we have made will have a long-term implication and value-generation promise for us. On the other hand, existing partnerships have really started to pay off. And most importantly, we -- even though we talked about the shortfall from Ispire ONE side, it's going to be a very powerful weapon for us going forward. We feel this is a learning process for us in understanding the filling machine landscape. So now we have a solution, we feel real good about the next 4, 5 quarters ahead.In the meanwhile, I want to thank you all for supporting us and for joining us to hear our story today. Please reach out directly if you have my contact info. We can have one-on-one times if certain questions are more suited for that. Thank you, operator.

[Operator]

Thank you. And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.