Ispire Technology Q1 2025 Earnings Call Transcript

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November 11, 2024

There are 5 speakers on the call.

Operator

Hello, everyone, and welcome to today's conference call to discuss Ispire's financial results for the fiscal Q1 2025 ended September 30, 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 Wine, the company's Co CEO and Mr.

Operator

Jim McCormick, the company's CFO. First, Mr. Weine 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.

Operator

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.

Operator

I would now like to turn the call over to Mr. Mike Wang. Mr. Wang, please go ahead.

Speaker 1

Thank you, operator, and thank you all for joining us this morning. For the quarter, we generated revenues of $39,300,000 This represents a decrease of $3,500,000 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.

Speaker 1

Strategy. As we reported previously, our U. S. Hardware business is 100 percent 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.

Speaker 1

In the last two quarters, we have focused our U. S. 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 Istar. 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.

Speaker 1

S. Revenue from the same period last year. However, we also have started seeing strong fundamentals in our U. S. Operation, with notable improvements in gross margin, payment terms and account receivable management.

Speaker 1

We believe this approach of focusing on gross margin, better payment terms and better accounts 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 Q1 2025 delivered substantial improvements in our key profitability metrics. We achieved a notable 12.1% year over year increase in gross profit to $7,700,000 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.

Speaker 1

And what is especially encouraging is that we were able to deliver higher gross profit and a higher gross margin with 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 Saad Malaysia 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 VERIFI and the Kemular on creating a next generation point of use aid verification technology for e cigarettes that will prevent youth access and improve user experience.

Speaker 1

As we have stated previously, this is a cutting edge vape 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 edge gating technology this Wednesday, that is November 13. 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 PMPA application for a disposable ends product for 4 flavors, against 4 flavors. We are on track to submit a PMPA application for pod system in 2025, as we are close to finalizing the gate gating technology.

Speaker 1

This is an important step for the company as we aim to further capitalize on the approximately US80 $1,000,000,000 in U. S. 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 I-eighty vape filling machine at the Banzinga Cannabis Conference in Chicago in early October.

Speaker 1

The industry changing machine will redefine production efficiency as it is able to fully fill and seal 4000 half gram vapor devices per hour. In contrast to current methods being used, the I-eighty is up to 10 times faster than traditional systems and twice as fast as the current automated systems. The I-eighty 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 sees I-eighty as a must have device, given the significant improvement in productivity and cost savings they are seeing. The I-eighty fits in perfectly with our overall objective of being the world leading provider of best in class vape technology and precision dosing solutions.

Speaker 1

Also, post quarter end, we have expanded our global reach through a landmark 5 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 Ixpire 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.

Speaker 2

Thank you, Michael. I'd like to take this opportunity to summarize our key financial results for the fiscal Q1 2025. In my comments, I will refer to the fiscal Q1 2025 as the 3 months ended September 30, 2024. All comparisons are to the prior year ended September 30, 2023, unless otherwise stated. As Michael mentioned, we achieved higher gross profit and improved margins even with lower revenue.

Speaker 2

Overall, our total revenue for the fiscal Q1 decreased slightly to $39,300,000 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 $22,000,000 in Q1 2025 increased by $2,100,000 or 11% over the previous fiscal year. This rose primarily as a result of increased sales of Aspire vaping products in the region. In North America, Q1 2025 revenues of approximately $9,700,000 represented a decrease of $8,100,000 or 46 percent compared to the same period last year.

Speaker 2

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 $3,900,000 a decrease of $1,200,000 compared to the same period last year. For the rest of the world, revenues were $3,800,000 an increase of $3,700,000 from the same period last year due to an increased level of sales in South Africa of 2,900,000 dollars During the 3 months ended September 30, 2024, our gross profit was approximately $7,700,000 compared to approximately $6,800,000 for the same period last year.

Speaker 2

Over the same period, our gross margin grew to 19.5% from 16%. The increase in gross profit and gross margin was primarily due to a favorable changes in product mix with higher margin products being sold during the fiscal Q1 ended September 30, 2024. Total operating expenses for the fiscal Q1 ended September 30, 2024 were approximately $12,900,000 compared to approximately $7,700,000 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 of 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 $5,600,000 or $0.10 a share compared to a net loss of $1,300,000 or $0.02 a share for the fiscal Q1 ended September 30, 2023.

Speaker 2

As of the end of the fiscal Q1 2025, the company's cash position was $37,700,000 with a working capital balance of 12,100,000 Net cash provided in operating activities was $3,600,000 for the 3 month period ended September 30, 2024 compared to $13,100,000 used for operating activities in the same period last year. Net cash provided by investing activities was $900,000 compared to $800,000 used in Investec activities for the same period last year. There was no cash used in financing activities in the 1st fiscal quarter compared to $700,000 used for financing activity in the 1st fiscal quarter of 2024. With that, this concludes the review of Ixpire's fiscal Q1 2025 financial results. I will now turn the call back over to Michael.

Speaker 1

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 revenue 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 gross margin, reflecting the strength of our innovative product portfolio.

Speaker 1

Our strategic focus on higher quality customer relationships, as well as the use for state of the art Malaysian facility and efficient global operations. We also reached an important milestone in our joint venture to develop transformative edge gating technology, securing a fast tracked meeting with FDA to discuss this critical industry initiative. We remain committed to our operational excellence and profitability as we build on the momentum from the transformative fiscal year 2024. As we move forward into the Q2 of fiscal 2025, we are confident our strategic investments and the 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.

Speaker 1

If you have any questions, please contact us through e mail at irispiretechnology.com. Operator, this completes our prepared remarks, and we are now open to questions. Please go ahead.

Speaker 3

We will now begin the question and answer session. The first question today comes from Bo Pei with U. S. Tiger Securities. Please go ahead.

Speaker 4

Hi, Michael. Hi, management. Thanks for taking my questions. So my first question is about our strategy shift in the U. S.

Speaker 4

Market. So should we think about that I guess the fiscal Q1, 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 a longer period effect?

Speaker 4

Thank you.

Speaker 1

So, the U. S. Cannabis related revenue, I would say the Q1, 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.

Speaker 1

We strongly believe we have bottomed out as we have completely repositioned our U. S. Strategy and shifted toward, let's just say, with our primary focus on the top 20 accounts, Certainly, we are entertaining next tier, but the primary focus is the top 20 accounts. And this is going to be much assisted by the introduction of the I-eighty sealing machine. As I previously reported, all customers who have tested our self sealing product line, that's I Spyro line, really love the hardware because of the efficiency, the simplicity involved in filling and packing the device.

Speaker 1

However, for the last 6 months, we have been working on a higher capacity filling machine. 1st generation machine had only 1 needle. So even though each device could be filled within 10 seconds, still you can only fill 1 device at a time. So we then moved to 3 needle machine that much improved the production efficiency. And finally, we launched the 80 needle device or machine, hence the name I-eighty.

Speaker 1

So with 80 needles filling 80 devices on a single tray in 2 minutes, you can just imagine how fast that whole process is, especially without the need of capping the 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, our 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.

Speaker 1

Side will only increase.

Speaker 4

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.

Speaker 4

S. Revenue?

Speaker 1

Yes. Overall revenue, we are still very optimistic about the year. Even though the Q1 saw a dip, we are very, very confident that the full year result will still be very encouraging in terms of the 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 U.

Speaker 1

S, U. S. Revenue, I think, given 3 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 lifting initiatives.

Speaker 4

Got it. And then, for gross profit margin, I mean, our total revenue actually grew a little bit sequentially from fiscal Q4 2024, but our gross margin declined quite a bit from 27.8 percent to less than 20%. Can you talk about the driver there? Is it about the U. S.

Speaker 4

Strategy shift? And then how should we think about the gross profit margin going forward, maybe just for this fiscal year?

Speaker 1

Yes. So, I will break down into 2 parts. On one hand, the U. S. Revenue and its corresponding gross margin have continued to increase.

Speaker 1

So from that point of view, our strategy, our execution are still on track. Relative to the peak of 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 of initial learning involved. And in any picking up any large accounts with ODM relationships, there will be some inefficiency early on.

Speaker 1

And then over time, as we do more and more 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. So, I would say that is a key contributor to the relatively speaking, like you pointed out, a 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 cannabisUS revenue with a higher margin. Both.

Speaker 4

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 statement, when should we see some improvement in the operating cash flow activities?

Speaker 1

Yes. This is a much bigger question that you asked. I think from I'll break down into 2 parts. I'll actually answer your 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.

Speaker 1

That, of course, is a result of not only AR improvement, but more importantly, it's 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 global nicotine initiative. As you know, anytime you attack new market, you enter a new channel, there is rather heavy lifting before everything gets into a normal flow. So that's why we strongly believe with our strategy and execution, we'll turn cash flow positive, the March quarter. And now back to the AR side, as you saw, AR actually increased only about $4,000,000 this recent quarter versus the quarter before.

Speaker 1

So with the total revenue of $39,500,000 and AR increasing only by $4,000,000 it's an indication that on one hand our U. S. 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.

Speaker 1

So, from your point of view, I think the rapid increase has slowed and now we are hoping to get into a healthy cadence.

Speaker 4

Thank you, Michael. That's all my questions.

Speaker 3

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

Speaker 1

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.

Speaker 3

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

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Earnings Conference Call
Ispire Technology Q1 2025
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