ISPR - NASDAQ

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ispire Technology Third Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Philip Carlson from KCSA. Please go ahead.

Hello, everyone, and welcome to Ispire Technology's earnings conference call for the third quarter of fiscal 2025 ended March 31, 2025. At this time, I'd like to inform you that this conference call is being recorded and that all participants are in a listen-only mode. Following the Company's prepared remarks, we will be facilitating a question-and-answer session. Joining us today are Mr. Michael Wang, the Company's Co-CEO and Mr. Jim McCormick, the Company's CFO. To begin, Mr. Wang will recap the Company's key fiscal third quarter financial results and recent corporate highlights, after which Mr. McCormick will discuss the Company's fiscal third quarter financial results in more detail. 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 will now turn the call over to Mr. Wang. Mr. Wang, please go ahead.

Thank you, Phil, and thank you to all who have joined us today. I'm glad to be here today to review our fiscal third quarter 2025 results and the recent highlights. As our results over the third quarter demonstrated, we have continued to deliver on our promises across multiple fronts of our business. Our commitment to executing on our strategic roadmap is clear, as we strive towards becoming a leading manufacturer of precision dosing, basing technology for global nicotine companies. We've made significant progress throughout our fiscal third quarter. One of our main priorities has been on managing our account receivables more tightly. I'm pleased to announce that during the quarter, we were able to reduce our accounts receivable by approximately $7.3 million from the previous quarter to approximately $60.4 million. This includes a reduction in the underlying accounts receivable balance of approximately $2.6 million. Reversing the trend, we have seen with the increase in accounts receivable during previous quarters. This improvement was due to our team putting in place strict payment and collection policies, and further demonstrates our commitment to enhancing our financial stability. We expect to continue making more progress on reducing our account receivable in the coming quarters, as we focus on higher quality and the larger customers with improved payment terms. For the third quarter of fiscal 2025, we've reported revenues of approximately $26.2 million, compared to $30 million even for the same period in fiscal 2024. The pending increase in tariffs on Chinese made goods has impacted product pricing dynamics in the market. However, we expect to be less impacted, given that we also manufacture our products in Malaysia, which I'll talk to shortly. Moving forward, we are optimizing our pricing strategy by shifting more from landed pricing to FOB factory pricing, which will enhance our flexibility and strengthen our market position, regardless of the tariff conditions affecting our gross margin. Regarding our Malaysian operation, we have now secured our interim nicotine product manufacturing license, as promised on our last earnings call. Our growing business in Malaysia is a central part of our global business strategy of delivering leading vaping and age-gating technology solutions to consumers. The interim license allows us to officially begin marketing our nicotine manufacturing capabilities externally. We anticipate receiving our final manufacturer's license in the coming few months, which will complete our regulatory requirements in Malaysia. Our Malaysian facility will soon feature 80 production lines, that's 8-0, significantly expanding our manufacturing capacity from the current fixed lines we are running now. This diversification of our production base is strategically important and positions us advantageously in the global marketplace as it lowers risk of geopolitical factors that increase our pricing. I'm also pleased to report that on May 1st, we announced that IKE Tech LLC, a key joint venture, filed a component PMTA for its blockchain-based point of use age-gating system with the FDA, delivering on another key promise. This age verification component is a necessary step towards regulation in our industry, as traditional systems typically verify the user's age only once at purchase, which offers a lower bar of safety and security for underage individuals looking for vaping products. This new and innovative platform requires continual real time verification for device access. This is the type of security that is needed, especially as we aim to curb the issue of the youth vaping use. Our joint venture, IKE Tech, requested an expedited review of the PMTA application, citing the system's potential to enhance public health. Furthermore, Ispire will benefit from commercial sales of the component as well as from the rights to integrate the technology into our own devices. These new revenue opportunities will further position Ispire as the leading innovator of a regulatory compliant precision dosing vaping technology. As we discussed last quarter, our plug and play component PMTA strategy through our IKE joint venture has transformative potential for the entire nicotine delivery market. If approved, this would be the first component PMTA in FDA history, allowing for modular use in hundreds of ENDS products. In parallel, Ispire is also preparing to file its own pod system and the disposable vape PMTAs for flavored ENDS products that will incorporate the IKE Tech's age-gating system. We are planning to first introduce four-flavored products with the potential to increase to between six and ten flavors. If approved, this would provide adult consumers with safe-regulated alternatives, while effectively preventing new access. This is a much needed change to the current market, where consumers often endanger their health with risky unregulated products that continue to flood the marketplace. This technology represents a pioneering approach to expanding adult access to PMTA-authorized flavored products, while setting new standards for industry safety and compliance. Another exciting development during the third quarter was the launch of the Sprout, developed in partnership with Raw Garden, a leading California-based cannabis company. Sprout is an advanced all-in-one cannabis vapor device designed for purity, performance and safety. Sprout is specifically developed to optimize the new sensors and the use cases of sophisticated cannabis oil, while eliminating common industry flaws like plastic degradation, clogged airflow and inconsistent heating. This ensures an experience for consumers, as clean as the plant itself. Initially launching with the Raw Garden, the Sprout technology is available to cannabis operators across the U.S. Our innovation with the Sprout product underscores our commitment to raising industry standards, prioritizing material safety, and putting consumer well-being first. We continue to engage in discussions with several large global nicotine and tobacco providers, who are looking to diversify their supply chain. While we are under NDAs and cannot reveal specific names at this time, we look forward to making announcements as soon as possible. As you can see here, we have made significant progress on our strategic priorities. We have reduced our accounts receivable, secured our interim Malaysian nicotine product manufacturing license, filed the IKE Tech PMTA on schedule, and positioned ourselves to capitalize on growing international opportunities. We remain focused on driving a more-profitable business model through our Malaysian manufacturing operations, as well as focusing on high-quality customers, all while driving innovative technology solution for the global vaping market With that, I'll turn the call over to our CFO, Jim McCormick, to review our financial results in more detail. Jim?

Thank you, Michael. As a reminder, I will refer to the fiscal third quarter 2025 at the three months ended March 31, 2025. All comparisons are to the prior year ended March 31, 2024, unless otherwise stated. For the third quarter of fiscal 2025, total revenue decreased to $26.2 million, representing a change of 12.7% or $3.8 million compared to $30 million in the same period last year. Our revenue results were driven by the performance across our key geographical regions as follows. European revenues were approximately $13.2 million in Q3 fiscal 2025 represented a slight decline of $0.3 million or 2.9% compared to $13.6 million in the same period last year. Revenue from North America of approximately $8.8 million in Q3 fiscal 2025 represented a decline of $3.6 million or 28.9% compared to $12.4 million for the third quarter in fiscal 2024. This was largely driven by the new tariffs on China made products, the impact of our transition of some manufacturing activities from China to Malaysia and the effect of us on working only with larger and high-quality customers such as multistate operators. Asia Pacific revenues of approximately $3 million represented a decline of $0.8 million or 21.4% compared to $3.8 million in the third quarter of last fiscal year. This was primarily the result of reduced demand in South Korea ahead of anticipated changes in the regulatory environment. Revenues from Africa of $0.1 million were roughly flat compared to the revenue from the same period last year. For the nine-month period ending March 31, 2025, revenues decreased by 6.3% to $107.4 million compared to the same period in fiscal 2024. Once again, this is tied directly to the focus on higher quality customers in the cannabis space, ongoing revenue for higher levels of accounts receivable collection. For the three months ending March 31, 2025, we've reported gross profit of approximately $4.8 million compared to approximately $6.1 million for the same period in fiscal 2024. Gross margins for Q3 were down to 18.2% from 20.4% last year. During the nine-month period to March 31, 2025, gross profit increased to $20.2 million from $19.2 million for the same period last year. Gross margins for the nine-month period to March 31, 2025, were up to 18.8% versus 16.8% for the same period last year. This was primarily due to changes in the product mix and generally improving gross margins in North America. Total operating expenses for fiscal Q3 2025 were approximately $15.4 million versus approximately $11.8 million for the same period last year. Operating expenses over the nine-month period to March 31, 2025, were $43.4 million up from $29.7 million through the third fiscal quarter of 2024. This increase reflects higher stock-based compensation expense, bad debt expense, higher sales and marketing costs and one-off severance costs related to the Company's previously disclosed North American restructuring. It is worth noting that the benefits of this restructuring will begin to be realized in fiscal Q4 2025. The net loss for the third fiscal quarter of 2025 was $10.9 million or $0.19 per share compared to a net loss of $5.9 million or $0.11 per share for the same period last year. As of March 31, 2025, Ispire held cash and cash equivalents of $23.5 million a reduction of $10.9 million versus the same previous quarter of last year, with a working capital balance of negative $2.1 million. The reduction in cash equivalents is related to a reduction in standard and related party accounts receivable. The Company fully expects to return to a positive working cash balance moving forward. For the nine months ended March 31, 2025, net cash flow used by operating activities was $12.1 million compared to $16.9 million in the same period last year. Net cash used in investing activities for the nine months to March 31, 2025, was $1.7 million compared to $5.9 million provided by investing activities in the prior comparable period. Net cash provided by financing activities for the nine months to March 31, 2025, was $2.3 million compared to $10.1 million used in the same period last year. That concludes our discussion of Ispire's fiscal third quarter 2025 financial results. I will now turn the call back over to Michael.

Thanks, Jim. In closing, I'm very pleased with the progress we made over the third fiscal quarter. As I stated previously, we achieved several significant milestones this quarter. Securing our interim mixing manufacturing license in Malaysia, restructuring our global operations to be more cost-effective, transitioning more of our manufacturing to Malaysia, filing of IKE Tech component PMTA with FDA on schedule, and reversing the increasing trend of our accounts receivable. In addition, our pricing strategy shift from landed to FOB factory pricing demonstrates our adaptability and commitment to long-term profitability regardless of the external market conditions. There are several unique and exciting opportunities that exist for Ispire going forward. In particular, receiving Malaysia's First federal nicotine manufacturing license, our age-gating technology's potential to revolutionize the electronic nicotine delivery systems, namely ENDS devices worldwide and our ongoing discussion with global nicotine providers. With our strategic focus on innovation, regulatory compliance and increased financial stability, we are well placed to capitalize on significant market opportunities, while also being a leader in responsible industry practices. Thank you again to our investors for their continued support and to everyone who joined us today for your time. We look forward to updating you further in the coming months. If you have any questions, please contact us through e-mail at ispirethechnology.com. This completes our prepared remarks, and we are now open to questions. Operator, please go ahead.

[Operator Instructions] Our first question will come from the line of Nick Anderson with ROTH Capital Partners. Please go ahead.

First one for me, just on the FDA and the focus on port shopping. Just help us understand what that could mean regarding the illicit vape supply in the U.S.? And I guess two questions off this. Do you expect a significant reduction in illicit product flow off this? And two, does this change the way you look at the growth opportunity in North America kind of near-term here?

Nick, thank you. So, with the approval of this technology, we strongly believe, we will convert a lot of consumers from currently using gray- or black-market vaping products to actually compliant and safer products so they can trust. Right now, of course, from different estimate, you get different dollar amount. But, by and large, the consensus is, the black market for vaping products, especially e-cigarettes, accounts for anywhere between 5x and 7x of the legal market, which last year reached over $10 billion. So that means in the U.S., black market is anywhere between $5 -- $50 billion to potentially even up to $70 billion in retail. So, those are products we really don't feel comfortable enough to use, we personally. So, by allowing so many consumers, especially adult consumers, we use them. So, of course, for us, there hasn't been a reliable solution to age-gate products for adult consumers to use and to prevent youth access to such products. But, finally, with such solution, we are very optimistic about how many percent of the consumers we can convert from black market to legal market. So, that's number one. Number two, I think in -- our products are FDA approved. We, of course, don't plan or cannot sell products in the U.S. So, in the near-term, in the U.S., there is probably very little revenue from such products. However, this technology could be used outside the United States. As we all know, most countries face the same challenge as we face here in the U.S. that's uncontrolled youth access to flavored e-cigarette. So, many governments are looking for solutions right now. In fact, we already spoke to a couple of governments in terms of regulation and tobacco control aspect. There are encouraging opportunities outside the U.S., where the deployment of such technology could happen much, much faster than within the U.S. So, in the near-term, I think the opportunities are more outside the U.S. when our own products are FDA approved, U.S. represents an enormous market for us. Nick, did I answer your question completely?

Yes, sounds perfect. Thank you. Second one for me, just wanted to follow up on the EU and the disposable vape bans taking place over the coming months here. Are there any countries in particular you're looking at and are excited about? And are there any supply constraints that need to be addressed before kind of expanding your product offering overseas?

As far as -- first of all, to address the EU market, as we all know, UK-led European market by banning disposables, EU would follow suit. So, obviously, the industry will switch to what we know as, number one, pod systems, where you only need to replace the pods that you use on your device. And the other opportunity would be for some consumers to actually switch to open systems or refillable systems. So, this is where Ispire's brand, Aspire is super strong. Largely, so far, our global nicotine or e-cig revenue comes from the European region. So, we strongly believe we'll benefit from the ban for disposable whether it's the UK or across the whole EU. Now, second question -- second part of the question is, whether or not we will have any restriction or bottleneck in terms of our supply chain manufacturing capabilities to support such initiative. We think we'll be in good shape supporting that endeavor and support the change in that regulation. As I stated previously, with our Phase 2 factory, our second factory in Malaysia, we'll be able to build out up to 80 production lines in total. Of course, we are, on one hand, very excited about this manufacturing license for nicotine products. On the other hand, we are also very mindful for financial discipline and strategic use of our cash. So, on that front, we are -- as we continue our conversation with our potential customers and to support our own demand, we are also looking at whether certain product lines are better supported by more automated production process. So, from output point of view, we feel very confident with 80 lines. I mean, fully automated. We could pump out somewhere between 700 million pod devices in a year's time. So, the capacity certainly will be able to support significant growth in demand, whether it's from our own products or to support other brands. Nick?

Thank you. And our next question will come from the line of Pablo

Thank you and good morning, everyone here in the U.S. Just my question more in terms of cannabis. Can you talk about customer reactions in the U.S. for your new hardware devices, your new innovation. How much inroads are you making there? And then related to that, of course, we don't know what's going to happen with tariffs. It's on and off every day pretty much. But what alternatives do customers have really? They need the vaping hardware, so we'll just have to pass it on to pricing to their customers, I suppose, but if you can discuss that.

Thank you, Pablo. The first part of your question, specific to the Sprout product we talked about, that's just one of the recent innovations. The other product we launched a quarter before is what we call Volt platform. That's a V-O-L-T, Volt platform. We shortened it for VLT. So essentially, with the Volt platform, we are providing a pod system that can become a new standard for the vaping industry. As you recall a long time ago and even to some degree today, the traditional battery plus S10 card configuration, it was very, very much standard for the industry. But over time, consumer space change and brands want more attractive looking devices. So, that's why two quarters ago, we launched the Volt platform. It offers alternative to traditional individually designed pod system and the traditional old battery stick approach, making the product easier to carry, compact and good to look. And we launched that on industry basis. By that, I mean, so all the brands could share the same battery part of the pod system. They don't have to spend all the money to reprocure, resell such battery part when a consumer already has a battery from another brand or a generic brand. So, we are trying to build a new essentially platform for the industry that was taking shape. Now with this new Sprout product, this is really performance focused and the more, let's call it, specifically designed for cannabis oil, especially with highly corrosive proteins. So, this is setting a brand-new safety standard for the industry. And similar to the Volt platform I shared earlier, we would like to make this a new standard for the industry as well. So, that's why we think our approach of trying to offer the industry a new platform, whether from performance or from safety point of view or from cost effectiveness point of view for consumers. Those are our focus and we think both new platforms will be very attractive to MSOs. As they not only launch new and more-innovative products, but also from their point of view to offer safer products to their consumers. So, that's my answer to your first part of your question. As far as your second part that's related to tariff situation we are facing right now, as Jim stated in his part, as soon as President Trump was elected in November, he made it very clear, he was going to raise tariff on import, especially on Chinese-made products. In this industry, literally 99.99% of vaping devices up to, say, two years ago were made in China. Today, there is a little bit of diversification in terms of country of origin, but still well over 90 of products are made in China. So as soon as President Trump was elected, nearly all of our customers started almost a panic search for solution phase. And we talked to most of them. We negotiated a lot of other customers' brands. We're worried about the tariff level. Just as a background, for most of the customers, cannabis MSO are individual operators we had business with, we generally would sign a supply agreement. In the agreement, we typically specify landed cost. As you heard me saying several times in my prepared remarks, we generally sold the products to the customers on a landed cost basis, meaning, that's what they pay, when they receive the products from us in the U.S. But given the uncertainty about -- regarding the tariffs, many brands wanted to almost get guaranteed landed price in the coming quarters and the years ahead. And of course, we could not agree to that, because we couldn't control the tariffs, or the levels of tariffs exposed specifically upon this industry. So, since November, there have been, I would say, a lot of conversations, negotiations on existing supply agreement. So, to a degree, that directly affected our cannabis revenue from the U.S. in the quarter we reported. That's a big reason for the decline in revenue there. But as of now, we have successfully renegotiated with most of our U.S. cannabis customers. Most of them agreed to switch to FOB factory price, whether the factory is, in China or in Malaysia. Obviously, if they place order with our Malaysian factory, they will enjoy lower tariff. And we obviously, from Malaysia and China both point of view, since Malaysia is still in the scaling phase -- scaling up phase, our product costs slightly more in Malaysia than in China. But the differential is more than being offset by the current tariff difference between Chinese made good and Malaysian made good. So, no matter what, Malaysia is already more attractive to our customers. But over the next one to two quarters, we plan on moving most, if not 100% of the cannabis hardware to our Malaysian operation to help our customers lower tariff on their end. But, in order to really prevent any further exposure to tariff risks, we have, as I said, successfully renegotiated most of the contracts with our customers to FOB factory. Pablo, sorry about the long-rounded answer to your question.

That's very helpful. Very good color. If I may, just one quick follow-up. So, I know it's hard to know about your competitors, right? And there are several, especially in the cannabis, vaping hardware space, of course, also nicotine. But do you think that you have more flexibility, because we have Malaysian facility than others of your competitors or they have also been diversifying the supply chain or it's just hard to know?

I think even though -- first of all, even though the U.S. and China reached a 90-day agreement on tariff now. On one hand, we still don't know what the picture looks like after 90 days. So, even if we follow the current situation here, that is 30% tariff on Chinese mixed goods in the next 30 days, it's still significant tariff. And on the other hand, as you are very aware, many of the Chinese factories have added some overseas manufacturing capabilities. I know our key competitor is in Indonesia, and some other competitors are also in Indonesia. Indonesia products, according to President Trump's tariff chart, are expected to be 35% to 45%. And 35% for Indonesia, 45% for Vietnam, that's where a couple of our competitors are trying to set up factories. So, among those key locations for our competitors' factories, our Malaysian setup is still advantageous, because Malaysia, among all those countries I mentioned, enjoy the lowest tariff rate so far. We strongly believe, it will continue to have that edge over the other countries in Asia. Pablo?

Understood. Thank you very much. That's very helpful. Thank you. Good color.

And that will conclude our question-and-answer session. I will now turn the call back over to Michael Wang for closing remarks.

And thank you all again for joining us for the opportunity to share our progress with you. We look forward to reporting back more, as we continue to make progress. So, I hope to talk to you all again, during our next quarterly call. Thank you.