Ispire Technology Q2 2024 Earnings Call Transcript

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Provided by Quartr
February 21, 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 its Fiscal Second Quarter 20 24 Ended December 31, 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.

Operator

Daniel J. Mashok, the company's CFO. First, Mr. Rine will brief you on the company's key highlights and then Mr. Meshach will review the company's financial results.

Operator

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.

Operator

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.

Speaker 1

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 $41,700,000 an increase of 30.7% over the same 3 month period last year. The quarter also saw cannabis hardware revenue increase by 149 percent to $19,500,000 compared to the same 3 month period last year. Our strategy of delivering best in class precision dosing technology and the white glove customer service in these sectors has led to the increasing demand for our products and increased brand recognition.

Speaker 1

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 FOBs star, Burna Boy. The 5 year exclusive global manufacturing and distribution agreement marks our 2nd celebrity brand collaboration. Snoop Dogg's Dog Pumps being the 1st such deal. This strengthened our portfolio of partnerships and our global brand presence.

Speaker 1

We will launch breakfast products in Africa in Q1 this year, in Europe and the U. K. 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 5 this year. Attaining such certifications is a sign of our commitment to best practices at our plant.

Speaker 1

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 provides opportunity to streamline our supply chain. Based on our experience with related party 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 3rd party factories, represents a forward thinking approach that aims to enhance our financial performance and drive sustained growth for the company.

Speaker 1

In tandem with our strategic growth internationally, we have begun pursuing multiple PMTA, that is premarket 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 $80,000,000,000 U. S.

Speaker 1

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.

Speaker 1

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 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 Verified's multi patented technology and Istar 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 a 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 foundation of blockchain technology. The real time biometric identity platform for user access controls, creating added security and reliability that deters counterfeiting.

Speaker 1

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 for growth. Our strategic partnerships and innovation will position us to eventually enter the $80,000,000,000 U. S. Nicotine market and strengthen our celebrity partnership portfolio worldwide.

Speaker 1

Our own manufacturing capabilities will 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 Matczuk, who will review and comment on our financial results.

Speaker 2

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 Q2 2024. In my comments on the quarterly results, I will refer to the fiscal Q2 2024 as the 3 months ended on December 31, 2023. All comparisons are to the prior year's 3 months ended December 31, 2022, unless otherwise stated.

Speaker 2

As Michael mentioned, we achieved remarkable growth for the fiscal Q2 of 2024, including an all time high for U. S. Cannabis vaping hardware sales, increasing by 149 percent to 19,500,000 dollars Sales of tobacco vaping products were $22,100,000 in the fiscal Q2 of 2024 versus $24,000,000 for the same period the previous fiscal year. Overall, our total revenue for the 2024 fiscal 2nd quarter increased by 30% to $41,700,000 year over year. For the 6 month period ended December 31, 2023, revenue increased to $84,500,000 or 43% compared to the same period last year.

Speaker 2

Gross profit for the fiscal 2nd quarter in 2024 rose to $6,300,000 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 Q2 of 2024 as compared to the 14.5% for the same period in the previous fiscal year. During the 6 month period ended this quarter, gross profit increased to $13,300,000 or by 33.6% year over year. Tobacco and baby products was 15.6% for the 6 month period ending the quarter as compared to 15.2% for the same period in the previous fiscal year.

Speaker 2

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 Q2 of 2024 increased by 114% to $10,300,000 compared to $4,800,000 for the same period the previous year. Operating expenses for the 6 month period increased by 67% to 18,100,000 dollars 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 20 sixteen-thirteen BECL, which was effective July 1, 2023. It is our belief that customers are all collectible, but we have taken a conservative approach to our accounts receivable reserve.

Speaker 2

This increase in operating expenses was also due to marketing expenses, trade shows and working capital relating 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 $4,000,000 for the fiscal Q2 2024 as compared to $100,000 for the fiscal Q2 2023. This increase is indicative of our increased investments in our operational efficiencies this quarter and our strategic financial growth path. Net loss for the 6 month period ending December 31, 2023 was $5,400,000 as compared to $2,100,000 for the same period in the previous year. Turning to the balance sheet and liquidity.

Speaker 2

As of December 31, 2023 June 30, 2023, we had working capital of $24,800,000 $28,800,000 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 $20,200,000 for the 6 month period ended December 31, 2023 compared to the net cash provided by operating activities of $8,400,000 for the same period last year. Net cash used in investing activities was $1,900,000 compared to $500,000 for the same period last year. Net cash used in financing activities was $700,000 compared to $1,900,000 provided by financing activities for the same period last year.

Speaker 2

This concludes our fiscal Q2 2024 financial results review. I will now turn it back over to Michael. Michael?

Speaker 1

Thanks, Stan. 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 fiscal year 2024, we expect cannabis vaping hardware revenue to build upon their strong performance with revenue projected to generate between $80,000,000 $90,000,000 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 $95,000,000 to $105,000,000 representing a growth rate of 33% to 47%.

Speaker 1

With the launch of our global e cigarette distribution partnerships with celebrities and brands, we expect our e cigarette revenue to take up pace in calendar year 2024 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 pain points, to expand our reach and to enhance our offerings. We are determined in our commitment to our shareholders and customer select, determined to deliver superior products and sustained value in the quarters ahead. In the meanwhile, if you have any questions, please contact us through e mail at irispiretechnology.com.

Speaker 1

Operator, this completes our prepared remarks and we are now open to questions. Please go ahead.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Bo Pei with U. S. Tiger Securities.

Operator

Please proceed with your question.

Speaker 3

Hi, good morning to management. Thanks for taking my questions. I have a couple. So the first question is about tobacco revenue. So tobacco revenue declined sequentially.

Speaker 3

Can you discuss the drivers? And then given the fiscal year to date tobacco revenue, to achieve the fiscal year guidance midpoint, which is $100,000,000 the company will have to generate at least $26,000,000 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.

Speaker 4

Okay. Well, thank you. Good question there. Yes, tobacco side, because we use distributors to distribute products to retailers, naturally here and there, there will be fluctuation from 1 quarter to the other. As you recall, last quarter was a real good quarter for tobacco revenue.

Speaker 4

It increased by almost 50% over same period last year. So unfortunately, this quarter or just recent quarter, we saw a bit of a dip, it dropped by 8% from same period last year. So, however, we are very confident, if you average out the quarterly numbers, we will still see a significant growth. So second question, you asked about our confidence in delivering $26,000,000 per quarter for 2 quarters straight in order to hit the guidance. We are very confident that can be achieved for a couple of reasons, both.

Speaker 4

Our 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 cigarette and both actually already took effect, especially the UK market reacted really strongly toward that banning. The ban of the disposable devices.

Speaker 4

So in both markets and also European Union is considering similar EU wide band of disposables. So all factors indicate that the open systems that we have been marketing and selling will actually gain strong, I would say, momentum through this change in regulation. In the future quarters, we expect to see increase in our E6 sales there. That is one key factor. 2nd factor is really more, say, celebrity brand e cigarette business that we don't have a revenue for so far.

Speaker 4

We will see some contribution from that front between now and the end of the fiscal year. So those two factors combined give us that confidence. So back to you.

Speaker 3

Thank you, Michael. That was helpful. And then my second question is, I remember last quarter, the management expected the cannabis gross margin to start improving in the December quarter, but the cannabis gross 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 14% gross margin for cannabis business within the next 15 months?

Speaker 4

Well, First part of your question, why did the gross margin for cannabis decrease over the same period last year? Yes, indeed, there was a few key factors that drove that change. Number 1 is really, I would categorize as before Chinese New Year holidays, all the factories tend to shut down their plants, typically 1 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.

Speaker 4

We had to on one hand, we had increased demand from market. On the other hand, we had a challenge in factories completing the product and shipping them in time. So several orders incurred higher expenses, including, for example, shipping cost. Shipping cost has really increased tremendously between the U. S.

Speaker 4

And between China and the U. S. So that affected our gross margin somewhat. I would say that's probably contributed number 1 towards a decrease in gross margin. That combined with several other factors, it drove gross margin down by, I think, over a point 2 points over 2 points.

Speaker 4

So that second part of your question is how confident we are with getting to 40% of gross margin after Malaysian operation kick start its production. So it's really a capacity issue, but previously we communicated our goal was in 18 months' 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 2 investment into the build out for the Malaysian operation. That's still our commitment.

Speaker 4

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 vaping hardware in Malaysia versus in China factories. With that, obviously, our goal is to see the significant improvement in gross 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 gross margin if that operation can take over all the production of product. So both that's my long answer to your question.

Speaker 3

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?

Speaker 4

IStar 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 I SpyroOne has always been to provide value added product and services to large brands and MSOs, because those are organizations that would see the benefit of I Spyro 1 more clearly in terms of operating efficiency gain and brand reputation. So that was part of our goal that we held in the back of our mind all the time. And the last 2.5 months, 3 months proved that our approach, our method, our strategy was spot on.

Speaker 4

As of November 2023, we only had 2 customers that I would consider multistate operators. As of now, we are entertaining another 6 MSOs since we launched the I Spyro 1. So we don't have a major uptick in order volume for I Spyro 1 product 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.

Speaker 4

But in the meanwhile, we are starting to get orders seen from medium sized brands. So that's my answer to your question.

Speaker 3

Got it, Michael. And then also I have a question on cash and cash equivalents. So I noticed the cash and cash equivalents 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.

Speaker 3

So what is the company's plan to manage the cash level going forward?

Speaker 4

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.

Speaker 4

First of all, we had just over $9,000,000 worth of cash laid out that 2 weeks ago. That used to be a part of our investment in a certificate deposit account in Hong Kong. And that CD matured 2 weeks ago. So that dollar amount, just over $9,000,000 is freed up now. So as of now, as per the report, we had just over $17,000,000 in cash, adding the other $9,200,000 to it.

Speaker 4

So we are now at $27,000,000 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 our CFO, Dan, in addressing the account receivable side. In the coming quarter, we should expect to have, I would say, much improved picture for accounts receivable. This is partially because the team has implemented a new deal review, credit review, what we call deal desk within the sales function. So that certainly made it much, much easier for us to negotiate with the customers based on their credit worthiness to minimize any potential exposure in AR.

Speaker 4

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 remarks, Working capital is at about $25,000,000 It's a drop of roughly $2,500,000 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.

Speaker 4

But on the other hand, though, I don't know if you saw that we filed a registration to raise additional capital. So that is also going up. So we are pressing it both from cash management AR point of view and from investor point of view, both.

Speaker 3

Got it, Michael. That was helpful as well. And then that actually led to my last 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 quality worthiness.

Speaker 3

So can you share more color how you are going to collect these accounts receivable, especially given it's significantly sized, because our cash balance is over $20 something million, but our accounts receivable is over 45 $1,000,000 So and then if we are going to be more stringent in terms of customer quality work, will that impact our revenue growth for the cannabis business going forward?

Speaker 4

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, it is a balancing act by itself.

Speaker 4

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 canvas industry, cash management for our branded customers is also a big challenge. So generally, cash cycle in this industry could be anywhere between 6 months to even up to 8 months. So the smaller the brand is the bigger challenge we face.

Speaker 4

As we in the last couple of years have grown in revenue and reputation, we are able to attain much more desirable and more creditworthy larger brands. So from that point of view, we 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.

Speaker 4

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 plan. 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 due accounts, we also work out payment plans with them.

Speaker 4

And we feel more than ever those accounts will complete their payment for us. So, Bo, did I miss anything?

Speaker 3

No. Yes, 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.

Speaker 3

Can you just share some color on the increase? And then how should we think about operating expenses level going forward like the next few quarters?

Speaker 4

Yes. 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?

Speaker 2

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 breakeven cash flow at some point in the future.

Speaker 2

Hopefully that answers your question.

Speaker 3

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

Operator

Thank

Speaker 2

you.

Operator

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.

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