ISPR - NASDAQ

Hello, everyone, and welcome to Ispire Technologies Earnings Conference Call for the Fourth Quarter and Full Year for fiscal 2025. I would now like to introduce Phil Carlson, from KCSA Strategic Communications. Please go ahead, sir.

Hello, everyone, and welcome to Ispire Technologies Earnings Conference Call for the fourth quarter and fiscal year 2025 ended June 30, 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 our question-and-answer session. Joining us today are Mr. Michael Wang, the company's Co-CEO; and Mr. Jie Yu, the company's CFO. Mr. Wang will start by reviewing the company's key fiscal fourth quarter and full year 2025 financial results and recent corporate highlights. Mr. Yu will then discuss the company's financial results in greater detail. Before I 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 facts 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 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 welcome to everyone, who has joined us today. I'm pleased to be here reviewing our fiscal fourth quarter and full year 2025 results and recent corporate highlights. Fiscal year 2025 was a pivotal period for Ispire. We made important strategic decisions to position Ispire for sustainable long-term growth and executed on this transformation across several areas of the Ispire business. While our revenue declined during the fourth quarter and full year 2025, this was due to our strategic pivot away from the cannabis industry to focus more on the higher-value nicotine sector. This intentional shift reflects our disciplined approach to building a more sustainable and a profitable business model. We have been selective in our cannabis operations. While simultaneously investing in our nicotine manufacturing capabilities. This includes scaling up our production in Malaysia. Additionally, our investments in breakthrough technologies like IKE Tech and our G-Mesh technology are beginning to gain significant traction with the interest from major tobacco companies. Positioning us well for future growth as we move through the regulatory approval process. As I just mentioned, in fiscal 2025, we continue to invest strategically in the build-out of our facilities in Malaysia and have several very exciting business development opportunities that we hope to report on in the coming quarters. Our Malaysian operations are planned to have capacity for up to 80 production lines. Significantly growing our manufacturing abilities from the 6 lines we are currently operating. Our focus on production in Malaysia not only diversifies our production base and derisk our operations from geopolitical factors, but also positions us to capitalize on the growing global demand for precision dosing vaping. As I have discussed, on the cannabis front, we made the intentional decision to refocus on quality of customers versus quantity. Given the ongoing uncertainty and the financial challenges, facing all of the players in the cannabis industry. This approach prioritizes building sustainable, long-term partnerships over short-term volume gains. This has already translated into improvements with a cut to expenses in several areas. We reduced our net accounts receivable on a year-over-year basis by over 21% from fiscal 2024 to fiscal 2025. This is the first time in the company's history that the net accounts receivable declined year-over-year. In addition, we reduced our quarter-over-quarter gross accounts receivable by $6.9 million or 9.1% from Q3 of fiscal 2025 to Q4 of fiscal 2025. We also reduced our general and administrative expenses from $7.6 million in fiscal Q3 2025 to $6.7 million in fiscal Q4 2025. These improved metrics as a result of our focus on reducing fixed costs, while further streamlining our operations. During fiscal 2025, we undertook significant cost optimization measures, reducing annual expenses by a total estimated annual savings of $10.2 million. These actions have positioned our company to become a more focused and more agile organization, while enhancing our path to profitability. We expect the trend of declining costs to continue in the coming quarters as we maintain our focus on larger and higher-quality customers with the improved payment terms and as we strengthen our financial stability. On the regulatory front, we continue to advance our PMTA activities for our own devices, while awaiting updates on the groundbreaking component PMTA submission filed by our strategic joint venture, IKE Tech LLC. As we have previously discussed, this blockchain-based age verification technology represents a potential game changer for the industry, requiring continuous real-time authentication rather than the single point of purchase verification used by traditional systems. The FDA's review of what could be the first-ever component PMTA approval remains a critical milestone that would unlock modular deployment across hundreds of [ ENDS ] products. Fundamentally transforming the regulatory landscape for nicotine delivery systems. We remain committed to our role as a regulatory leader, continuing to invest in compliance initiatives that position us at the forefront of the key evolving market. Looking ahead, our international nicotine ODM business. Represents a key growth opportunity that is now gaining significant momentum after a slower-than-anticipated start -- this acceleration in our ODM business, combined with our expanding Malaysian manufacturing capabilities positions us well to capitalize on growing global demand for precision rating technology. As we continue to build out our international manufacturing footprint, we expect our ODM partnerships to be a substantial contributor to our revenue growth in the coming quarters. We are also currently engaged in discussions with several major international nicotine and tobacco providers, who are looking to diversify their supply chain systems. Well, we cannot yet review more specific details yet. We look forward to providing an update to the market when possible. As we execute on these strategic initiatives, we have also strengthened our leadership team with the appointment of Jie Yu as our new Chief Financial Officer in May. Jie brings extensive public company accounting experience and has demonstrated exceptional performance, as our Vice President of Finance since June 2023. Building deep knowledge of our operations and financial structures. This promotion reflects our commitment to maintaining strong financial stewardship as we navigate this period of transformation. To sum up, we delivered substantial progress across our key strategic priorities during the fourth quarter and fiscal year 2025, while maintaining financial discipline. Most importantly, our revenue decline this quarter was a result of our intentional strategic shift away from cannabis towards the higher-value mixing sector, positioning us for stronger and more sustainable growth ahead. I will now turn the call over to our new CFO, Jie Yu to review our financial results in more detail. Jie?

Thank you, Michael, for introducing me, and thank you to everyone for joining the call today. I'm pleased to be here to review Ispire's key financial results for the fourth quarter and the fiscal year 2025. As a reminder, I will refer to fiscal year 2025 as the year ended on June 30, 2025. All comparisons are to the prior fourth fiscal quarter or year ended June 30, 2024 unless otherwise stated. Dollar revenue for the fiscal year 2025 declined from $151.9 million to $127.5 million or by $24.4 million versus fiscal year 2024. As Michael has discussed, this was due to realignment of our business toward nicotine, while moving away from Cannabis customers, which we believe will deliver improved accounts receivable and more sustainable long-term growth. Taking a look at revenue by geographic regions. For fiscal 2025 European revenue totaled approximately $74.5 million, an increase of $8.8 million or 13.6% compared to $65.3 million last year. For fiscal 2025, North American revenue was approximately $32.6 million compared to $63.1 million in fiscal 2024. This was predominantly due to our strategic pivot away from cannabis and being more selective with larger and quality customers such as MSOs. For fiscal 2025 Revenue from Asia Pacific totaled approximately $12.3 million compared to $17.6 million last fiscal year. For fiscal 2025, revenue from other countries were $8.5 million, an increase of $2.6 million compared to $6 million in fiscal 2024. The majority of these sales are from South Africa. During fiscal 2025, gross profit declined to $22.7 million from $29.8 million for the year prior. Gross margins were 17.8% for fiscal year 2025, a decrease of 1.8% from 19.6% in fiscal 2024. As Michael has discussed, this was due to the strategic repositioning away from cannabis, which led to the revenue reduction for this period. Operating expenses over the 12 months period to June 30, 2025 were $60.5 million, up from $43.7 million for fiscal 2024. This increase was largely due to a rise in sales and marketing expenses with a ramp-up of marketing activities as well as an increase in bad debt expense for an allowance in credit losses, offset by a decrease in stock-based compensation expense due to CAR-T head count in streamlining North American operations and a reduction in R&D expenses. Importantly, since Q3 2025, general and administrative expenses declined by $0.9 million, this reflects the impact of our cost-cutting initiatives that Michael discussed in detail, which we expect it to continue into fiscal 2026. For fiscal 2025, net loss was $39.2 million compared to $40.8 million in fiscal 2024. Moving now to the balance sheet. At June 30, 2025, Ispire held cash of $24.4 million, a reduction of $10.7 million versus the previous year. With working capital balance of $0.4 million. For the 12 months to June 30, 2025 Net cash flow used by operating activities was $7.4 million compared to $18.3 million in the same period last year. Net cash used in investing activities for the 12 months to June 30, 2025 was $5.2 million compared to $3 million provided by investing activity in prior comparable period. Net cash provided by financing activities for 12 months to June 30, 2025 was $1.9 million compared to $10.1 million used in the same period last year. This concludes our review of the financial results for fiscal fourth quarter and full year 2025. I will now hand the call back over to Michael.

Thanks, Jie. In closing, I'm proud of the substantial organizational and operational transformation we achieved throughout our fiscal fourth quarter and the full year 2025. As I outlined today, we accomplished multiple critical strategic objectives this period. Further developing our Malaysian manufacturing capabilities dramatically accelerating our international ODM business with over $18 million in pipeline revenue. Strengthening our financial position through improved accounts receivable management and significant expense reductions and advancing our regulatory initiatives including ongoing PMTA progress. Furthermore, our successful pivot from cannabis to the higher-value global nicotine market, demonstrates our strategic agility and commitment to building a more profitable and sustainable business model. Looking ahead, Ispire is uniquely positioned to capture several transformative growth opportunities. Our exclusive Malaysian manufacturing authorization provides unparalleled competitive advantages in the global nicotine market. While our breakthrough technologies like IKE Tech's age gating system and our G-Mesh innovation, have the potential to reshape industry standards for safety and performance. Combined with our expanding ODM partnerships and strategic focus on regulatory compliance. We are exceptionally well positioned to emerge as a leader in the precision dosing vaping technology, while setting new benchmarks for responsible industry practices. Thank you to our investors for the trustee support through this pivotal transformation and to everyone, who joined us today. We look forward to reporting on our continued progress and exciting developments in the coming quarters. If you have any questions, please contact us through e-mail at [email protected]. This completes our prepared remarks, and we are now open to questions. Operator, please go ahead.

[Operator Instructions] Our first question comes from the line of Pablo

Look, just the first question in terms of age gating technology. Can you tell us about what are the key milestones to look for here over the next few months or years what's the timetable? What's the realistic target date for approval, if you have any visibility on that, please?

Thank you, Pablo. Right now, the age gating technology is being, I would say, discuss not only within the United States, on a global basis, this has become a hot topic. So many countries are looking at this technology and progress, some could be much faster than others out there. Now back to the U.S. with this technology, we filed the component PMTA back in late-April. And within 4 weeks, we received the FDA's acceptance ladder, which is really speed-wise unprecedented. Never before did the FDA accept any applications regarding the nicotine business within 4 weeks. So of course, we are very encouraged with that speed. And this particular application is expected to be reviewed at so-called expedited basis. So we don't know exactly when the next step will happen but typically, a major next step is FDA's issuance of a letter called deficiency later. Generally, that's based on FDA's evaluation of your product. And if there are minor modifications or fixes that need to be done before the green light, typically FDA issues such deficiency letter I guess, to suggest the companies or brands to fix overcome the deficiency. So we within the U.S. FDA's response to Pablo, we don't know exactly when that letter would arrive. So that generally is the next step. It could be as quick as 3 months or as long as in some cases, over a year for other nicotine specific products. But this is a unique application. So certainly, it's the first case of so-called component PMTA that FDA is reviewing or has reviewed, so there is no prior experience regarding this. But we trust with youth access to e-cigarette being such a worldwide epidemic, we strongly believe lawmakers, regulators will find a suitable solution for this crisis per se. And we feel we are in the forefront of this solution offering, Pablo.

Right. On the same topic, is it realistic to expect that perhaps in other major markets outside the U.S., maybe the EU that you could get approval for the age verification technology sooner than in the U.S. or the U.S. would probably happen first?

Pablo, of course, we are very optimistic about just project getting special attention from FDA for the purpose of solving this crisis and we certainly are hoping within short order, we would receive such letter from the FDA. That will be very encouraging to the industry and to us, specifically. However, at least 2 countries could potentially get ahead of FDA at this point. I'm not at liberty to share the name of those 2 countries, but the regulators are just embracing this technology with open arms. And in several other countries, we have been working with regulators as well. We don't have expected time line at this point, but 2 are moving real fast outside the U.S.

Right. And I'm sorry, 1 more on the same topic, if I may. -- in terms of age verification. I know you said you believe that you're at the forefront of this technology. Can you talk about your patents, intellectual property, how are you protecting this because I'm assuming there are other companies that are also working on similar technologies, but as you think you will be first. But just remind us about the protections you have from an IP perspective?

Yes. Indeed, Pablo, we for every major development, we have filed the patents, especially in the United States and then EU, U.K. and China, et cetera. We now IP is a key enabler in this particular solution. So we own critical patents our IP in this space, especially in 1 key area, how the device communicate to the -- and then communicated to the back-end data processing to secure the mechanism, specifically for blockchain-based technology. So -- we strongly believe our IP defensibility is very strong. And we -- from the beginning of this project, we have been building IP as a key strategy not only in providing such solution, but more importantly, in defending such a solution. So both on the use for blockchain site and on the unique communication with data processing, generally government approved and compliant operators and such as CLEAR. Those are unique IP for us, Pablo.

Right. Very much. If I may, I'm going to ask 2 more questions, and that's all for me. But the first 1 in terms of -- you had this -- you talked about the receivables. You had this big provision of $22 million, I think, in the fourth quarter. Was that related to just 1 client in 1 region. I don't know. If you can give a bit more color about that. It just seems like a big provision on receivables. And then the second one, I understand the pivot away from cannabis, but cannabis in the U.S. is still a $30 billion industry, vape it's about 25% of that. There's demand for vape parts. So we think that, that business is still there for someone to take, right? So I'm just -- maybe you can give more color in terms of -- I understand the economics are challenging, but there is the demand for vape parts. So just trying to understand the -- the pivot away from cannabis. But if you can answer those 2, that's all for me.

Okay. Pablo, I'll answer the second 1 first. The U.S. cannabis industry indeed, is very strong, and I think will continue to be a strong market from a revenue, from a sales point of view. However, we all know until cannabis is federally legalized and the correspondingly, there is a financial service or banking services available to the industry. Cash flow will continue to be the challenge. I think this is a typical case of a very promising industry with a lot of -- like you said, a lot of revenue, a lot of opportunities. We have been in this space for many years, and we have seen the challenges facing all the operators in terms of cash flow and it directly affects our business of the past. So to a large degree, our high amount of account receivable -- this has been largely driven by the cash flow challenges that our customers face. So yes, indeed, from a revenue point of view, there is continued opportunity here. However, we feel the cash flow challenges facing everybody is not facilitating to what we want to accomplish financially, at least in the near future, until the capital market becomes available to the cannabis industry. So legalization of course, will be step one. We are watching the development on that front. When the right moment comes, we will come back to the industry. So it's just -- in the near term, we don't see any ways of cash flow improvement. So that's why we made it a pivot. Pablo, sorry, remind me your first question again?

In terms of the receivables, I mean, if I -- I think -- I mean, I went through the financials, I miss the details, but -- it seems there was a big provision of about EUR 22 million in the fourth quarter. And I'm just trying to understand was that related to just 1 client in 1 region or just bigger precaution in general. It just seemed like a big provision compared to other quarters.

Yes. Pablo, yes, that bad debt provision is not based on a few large accounts. It's really quite a cumulative effect of all the customers we did the business within the last 2-plus years after going public. So not a particular customer stands up to answer your question.

[Operator Instructions] Our next question comes from the line of Nick Anderson with ROTH Capital Partners.

First 1 for me is just on the U.K. supply agreement, you're starting to really monetize that deal. I was just wondering if you could maybe share the early feedback from that client and how the agreement is going in terms of order trends? And just going forward, is this the SKU you'll use to shop around to other larger clients? Or are there more additional iterations coming? Thank you.

Nick. So this particular ODM client, when we're launching this project now late calendar 2024. We had a version 1 of the product -- and correspondingly, as we all know, the U.K. disposable bans affected the dynamic in the e-cig industry in that particular market. And throughout the last 12 months, there have been several significant changes in the market trend. So -- as a result of such a dynamic, version 1 really didn't take off as the client originally expected. So earlier this year, collectively, we made several changes to their design and upgraded its product significantly. And we officially launched it right during the summer this year. Initial feedback is very, very encouraging. To a large degree, in my prepared speech, I mentioned that there was a backlog of $18 million from this space is really largely tied to this particular customer. So merchant tool is truly, truly taking off, and I feel it will meet the original target that the customer set more than a year ago for this product. Of course, I think, we are still working on the next iteration, we expect to Ispire towards the end of this calendar year. This is such a dynamic industry, competitive industry. Literally, if you don't introduce new products faster than other brands it is really, really challenging for the players. So we are trying to make our particular customer very, very competitive.

Got it. I appreciate that color. Next 1 for me, just on the tariff landscape. You mentioned several larger companies looking to diversify their supply chain -- what do you expect just in terms of potentially onboarding some of these larger clients? And has that changed kind of the expansion road map for your Malaysian facility?

Okay. Yes. many companies, including brands, including manufacturers have been shifting production outside of China. Of course, largely to the Southeast Asian countries. So tariff was truly a consideration there. And from our point of view, we did see large, I would say, number of inbound increase from brands and even manufacturing competitors. So we have seen that part -- and certainly, we have been preparing for this moment a couple of years back with the selection from Malaysia as our key manufacturing base. So as we have been talking about for the last 2 years, Malaysian operation has been carefully scaled. We wanted to go faster, but we need to -- to obtain regulatory approval, this will take time so our expansion there is timed by how quickly, we get government permit and approval. So -- but on the other hand, with that careful consideration, we built 2 facilities, 1 small, 1 large, and 2 for demand that we anticipated a couple of years back regarding geopolitical situations. So -- right now, we are seriously considering a third facility, which will be much, much larger in nature to entertain what you just described as some potential large ODM projects. So it's slow going. Of course, we need to be mindful of the regulatory requirements and the compliance. But with the presence of a such large opportunities. It's important for us to get ahead of the wave of opportunities and get facilities in place before we scale. So we are working on building out the production line in the second facility that could house up to 80 e-cigarette production lines. So we are modifying that as the second building. So the first building, we already talked before, there were only 6 lines in that building far too small to support such expanding global e-cigarette ODM business. So second one comes handy for us. But still not enough to handle all the opportunities we could potentially entertain.

Got it. Last 1 for me. Just wanted to build off the last cannabis question you answered. I appreciate the color you gave. Rationalization is playing out, and we understand the difficulties in that segment. Would you say the 4Q cannabis revenue number is a more realistic run rate for your U.S. business going forward? Just wondering what that segment could look like this coming year. And just off that, if rescheduling does happen, would it change the way you're looking at U.S. cannabis?

Okay. So yes, cannabis revenue, Q4 is really on the low side. Right now, we are already going at a higher speed per se, volume-wise, -- so I would say financial -- fiscal Q4 2025 is the bottom for our cannabis business and that largely had to do with -- as we pivoted. We purposely ended many customer relationships. So that was really giving us the biggest impact on revenue growth. Q4 really reached the very bottom, and we started gaining new customers who would need for, let's say, quality assessment. So plus, we, of course, are continuing with new product development before the end of the year, we'd have several new products were launched -- so combined with what we call high-quality customer base, but we think the new products will also bring additional revenue. So your second part of the question regarding risk scheduling. Yes, when the risk scheduling would take place, we would certainly evaluate the opportunity of beefing up the investment in the cannabis sector. Nick?