Hello, everyone, and welcome to today's conference call to discuss Ispire's financial results for its fiscal second quarter 2024 ended December 31, 2023. At this time, I would like to inform you that this conference is being recorded. Joining us today are Mr. Michael Wang, the company's Co-CEO; and Mr. Daniel J. Machock, the company's CFO. First, Mr. Wang will brief you on the company's key highlights, and then Mr. Machock will review the company's financial results. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact in its announcement are forward-looking statements. Forward-looking statements are based on estimates and assumptions made by the company in terms of its experience and its perception of historical trends, current conditions, and expected future developments, as well as other factors that the company believes are relevant. These forward-looking statements involve known and unknown risks and uncertainties, and many factors could cause the company's actual results or performance to differ materially from those expressed or implied by the forward-looking statements. Further information regarding this and other risk factors are included in the company's filings with the SEC. The company undertakes no obligation to update forward-looking statements to reflect subsequent or current events or circumstances or to 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.

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 $41.7 million, an increase of 30.7% over the same 3-month period last year. The quarter also saw cannabis hardware revenue increase by 149% to $19.5 million compared to the same 3-month period last year. Our strategy of delivering best-in-class precision dosing technology and white glove customer service in these sectors has led to the increase in demand for our products and increased brand recognition. 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 BRKFST-branded high-tech wafer products in collaboration with Nigerian Afrobeats star, Burna Boy. The 5-year exclusive global manufacturing and distribution agreement marks our second celebrity/brand collaboration, Snoop Dogg's Dogg Lbs being the first such deal. It strengthened our portfolio of partnerships and our global brand presence. We will launch BRKFST 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 1 of this year. Attaining such certifications is a sign of our commitment to best practices at our plant. 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 the 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 third-party factories, represents a forward-thinking approach that aims to enhance our financial performance and drive sustained growth for the company. 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 billion U.S. 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 Ispire 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. 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 Berify, a pioneering platform leveraging the power of blockchain to redesign product authentication, consumer engagement, user identification, and access control. This joint venture will leverage Berify's multi-patented technology and Ispire's 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 point-for-use age-verification and educating 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 the exclusive offering, all built on the foundation of blockchain technology. The real-time biometric identity platform for user access control, creating added security and reliability that deters counterfeiting. We are very excited about the joint venture and the future potential it holds as we aim to grow our footprint as the leading precision dosing technology company. Looking ahead to the remainder of fiscal year 2024, we are focused and committed to the steady trajectory of growth. Our strategic partnerships and innovation will position us to eventually enter the $80 billion U.S. nicotine market and strengthen our celebrity partnership portfolio worldwide. Our own manufacturing capabilities will expand our gross margin and profitability as we transition more of our production to the Malaysian operation.

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 second quarter 2024. In my comments on the quarterly results, I will refer to the fiscal second quarter 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. As Michael mentioned, we achieved remarkable growth for the fiscal second quarter of 2024, including an all-time high for U.S. cannabis vaping hardware sales increasing by 149% to $19.5 million. Sales of tobacco vaping products were $22.1 million in the fiscal second quarter of 2024 versus $24.0 million for the same period the previous fiscal year. Overall, our total revenue for the 2024 fiscal second quarter increased by 30% to $41.7 million year-over-year. For the 6-month period ended December 31, 2023, revenue increased to $84.5 million or 43% compared to the same period last year. Gross profit for the fiscal second quarter in 2024 rose to $6.3 million, 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 second quarter 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 $13.3 million or by 33.6% year-over-year. Tobacco vaping 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. We are poised to improve our margins as we ramp up sales of the new model products throughout fiscal 2024. The total operating expenses for the fiscal second quarter of 2024 increased by 114% to $10.3 million compared to $4.8 million for the same period the previous year. Operating expenses for the 6-month period increased by 67% to $18.1 million. 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 2016-13 CECL, 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. 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 $4.0 million for the fiscal second quarter 2024 as compared to $0.1 million for the fiscal second quarter 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 $5.4 million as compared to $2.1 million for the same period in the previous year. Turning to the balance sheet and liquidity. As of December 31, 2023, and June 30, 2023, we had working capital of $24.8 million and $28.8 million, respectively. We believe that our current cash and cash flow generated from our operations will be sufficient to meet our working capital needs for the next 12 months. Net cash used in operating activities was $20.2 million for the 6-month period ended December 31, 2023, compared to the net cash provided by operating activities of $8.4 million for the same period last year. Net cash used in investing activities was $1.9 million compared to $0.5 million for the same period last year. Net cash used in financing activities was $0.7 million compared to $1.9 million provided by financing activities for the same period last year. This concludes our fiscal second quarter 2024 financial results review. I will now turn it back over to Michael.

Thanks, Dan. 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's fiscal year 2024, we expect cannabis vaping hardware revenue to build upon their strong performance with revenue projected to generate between $80 million and $90 million. 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 million to $105 million, representing a growth rate of 33% to 47%. With the launch of our global E-cigarette distribution partnerships with the celebrities and brands, we expect our e-cigarette revenue to pick up pace in calendar year 2024 and 2025. Innovation remains at the core of our philosophy. We will 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 customers alike, 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 [email protected]. Operator, this completes our prepared remarks, and we are now open to questions. Please go ahead.

Our first question comes from Bo Pei with US Tiger Securities.

I have a couple. So the first question is about tobacco revenue. So tobacco revenue declined sequentially. 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 million, the company will have to generate at least $26 million tobacco revenue in the last 2 quarters per quarter. So can you also share some colors why you are confident in achieving this implied growth? And I have a follow-up.

Thank you for the question, Bo. Regarding tobacco revenue, we utilize distributors to supply products to retailers, which can lead to some fluctuations from one quarter to another. Last quarter was particularly strong for tobacco revenue, seeing an increase of nearly 50% compared to the same period last year. However, in the most recent quarter, we experienced an 8% decline from the previous year. Despite this, we believe that if we look at the average quarterly numbers, we will still see significant growth. As for your second question about our confidence in reaching $26 million per quarter for two consecutive quarters to meet our guidance, we are quite optimistic for a few reasons. Most tobacco products currently operate in open systems, particularly in Europe, which is our main revenue segment. Recently, France and the U.K. implemented a ban on disposable e-cigarettes, which has led to strong reactions in both markets. Furthermore, the European Union is also contemplating a similar ban across the region. These developments suggest that the open systems we are marketing will gain significant momentum as a result of these regulatory changes, and we expect to see an uptick in our e-cigarette sales in future quarters. Additionally, we anticipate revenue contributions from the celebrity and brand e-cigarette business that we have not yet seen. These two factors combined reinforce our confidence moving forward. Back to you.

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 outlook? And then do you still believe we can achieve the 40% gross margin for cannabis business within the next 15 months?

The gross margin for cannabis decreased over the same period last year due to several key factors. First, the shutdown of factories ahead of the Chinese New Year holidays, which typically lasts about two weeks, hindered their ability to increase capacity or take on more orders during the December quarter. This created a challenge as we faced increased market demand while factories struggled to complete and ship products on time. Additionally, we incurred higher expenses, particularly with significantly increased shipping costs between China and the U.S., which impacted our gross margin. Overall, these factors contributed to a decrease of more than 2 points in gross margin. Regarding our confidence in achieving a 40% gross margin after our Malaysian operations begin production, it really comes down to capacity. We previously stated our goal to transition most, if not all, production of cannabis vaping hardware from our related party factories in China to Malaysia within 18 months. However, reaching this goal will require Phase 2 investments to expand our Malaysian operation, which remains a priority for us. The speed at which we can accomplish this will depend on the working capital available to fund the expansion. Our aim is still to achieve the majority of our cannabis vaping hardware production in Malaysia rather than in China, and we expect this shift to lead to a significant improvement in gross margin. From what we know and based on cost analyses of Malaysian operations, every product produced there could yield a gross margin of 40% or more if we can transfer all production to that facility.

Got it. Got it. That's helpful. And then my third question is about Ispire ONE. So can you share any updates on Ispire ONE? Has the order intake so far met your original expectation?

Ispire ONE was officially launched in early November. I want to share a few data points to illustrate our progress. Our strategy with Ispire ONE has always focused on delivering value-added products and services to large brands and multi-state operators, as these organizations are likely to recognize the benefits of Ispire ONE in terms of operational efficiency and brand reputation. This has always been part of our vision. The past 2.5 months have confirmed that our strategy is effective. As of November 2023, we had 2 customers classified as multi-state operators, and now we are considering an additional 6 since the launch of Ispire ONE. We haven't seen a significant increase in order volumes for Ispire ONE products yet, as many customers, especially multi-state operators, are taking their time to assess the products and operating procedures. Larger multi-state operators are typically more cautious in their decision-making, and we expect this process to take some time. However, we have started to receive orders from medium-sized brands. That addresses your question.

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, our factories. So what is the company's plan to manage the cash level going forward?

Sure. A couple of things. You are absolutely correct. The cash burn has been primarily to support the company’s growth. However, we are also conscious of the cash available to maintain the Malaysian operation and other priorities. Recently, just over $9 million in cash became available after our investment in a certificate deposit account in Hong Kong matured. This brings our total cash to just over $17 million, plus the additional $9.2 million we just unlocked, totaling around $27 million in cash. Importantly, our team, under the leadership of our CFO, Dan, has been working hard on the accounts receivable aspect. We expect to see significant improvements in the coming quarter due to new processes we've implemented in deal and credit reviews within the sales team. This has facilitated negotiations with customers based on credit worthiness, which helps mitigate potential risk. We're also being very careful with payment terms. Overall, we anticipate improvements in this area moving forward. Additionally, as Dan mentioned earlier, our working capital is around $25 million, which has decreased by about $2.5 million from the previous quarter. This indicates that while we are managing our cash carefully, we still have a sufficient runway. It’s worth noting that we have filed for registration to raise additional capital. We are approaching this from both a cash management perspective and actively seeking investor support.

Got it, Michael. That was helpful as well. And that actually led to my last question. So we also noticed accounts receivable continued to increase this quarter. And I understand you mentioned we're going to be more stringent in terms of customer credit worthiness. So can you share more color on how you are going to collect this accounts receivable, especially given its significant size, because our cash balance is over $20-something million, but our accounts receivable is over $25 million. And then if we are going to be more stringent in terms of customer credit worthiness, will that impact our revenue growth for the cannabis business going forward?

Sure, Bo. I’ll give a broad overview, and if it’s not detailed enough, Dan can provide more insights. You're correct regarding the accounts receivable aspect. Growing revenue while managing cash flow is indeed a balancing act. We are currently placing a greater focus on medium-to-large accounts, which helps reduce our risk exposure. With the limited banking services available to the cannabis industry, managing cash for our branded customers poses a significant challenge. The cash cycle in this industry can range from six to eight months, and smaller brands face greater difficulties. As we have increased our revenue and built our reputation over the last couple of years, we are now attracting larger, more creditworthy brands, which is why our deal desk plays a crucial role in our decision-making process. We believe that working with these larger clients through the deal desk will reduce our accounts receivable risk. However, larger multi-state operators have the leverage to negotiate more favorable payment terms, so we are carefully managing both sides of this equation. Typically, our contracts include payment plans, and even when specific payment terms are not set, clients are still required to adhere to a minimum payment schedule. All these elements within our finance and sales teams will aid in managing our cash and collections. We have also developed payment plans for many past due accounts, and we believe these will be fulfilled more than ever. Did I overlook anything, Bo?

No. Yes, I think that answers my question. And then my last question is on operating expenses. I noticed operating expenses increased over 30% from last quarter. Can you just share some color on the increase? And then, how should we think about the operating expenses level going forward like the next few quarters?

Yes. Dan probably can answer that question the best, but I will point out, before Dan answers 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 Bo's question there?

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 trend. 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. Hopefully, that answers your question.

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

There are no further questions at this time. And with that, this concludes today's teleconference. You may disconnect your lines at this time.