Earnings Call Transcript - ISPR Q3 2025

Operator, Operator

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. I would now like to turn the conference over to Philip Carlson from KCSA. Please go ahead.

Philip Carlson, KCSA

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 this 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 expectations except as may be required by law. I will now turn the call over to Mr. Wang. Mr. Wang, please go ahead.

Michael Wang, Co-CEO

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 technology for global nicotine companies. We've made significant progress throughout our fiscal third quarter. One of our main priorities has been managing our accounts 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 accounts receivable in the coming quarters, as we focus on higher quality and 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, 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 the 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, fulfilling 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 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 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 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 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 solutions 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?

Jim McCormick, CFO

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, representing 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 working only with larger 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 and 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.

Michael Wang, Co-CEO

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 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 email at ispiretechnology.com. This completes our prepared remarks, and we are now open to questions. Operator, please go ahead.

Operator, Operator

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

Nick Anderson, Analyst

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?

Michael Wang, Co-CEO

Thank you, Nick. With the approval of this technology, we believe we will successfully transition many consumers from using gray or black-market vaping products to safer, compliant alternatives they can trust. Estimates suggest that the black market for vaping products, particularly e-cigarettes, is about 5 to 7 times larger than the legal market, which surpassed $10 billion last year. This implies that the U.S. black market could be valued between $50 billion and $70 billion in retail. These are products we do not feel safe using. By enabling more consumers, especially adults, to access compliant products, we are hopeful about the number of consumers we can draw away from the black market. Additionally, our products are FDA approved, but we cannot sell them in the U.S. in the near term, leading to minimal revenue from such products in this market. Nevertheless, this technology has potential for use outside the United States, where many countries face similar challenges regarding uncontrolled youth access to flavored e-cigarettes. Numerous governments are currently seeking solutions, and we are already in discussions with a few regarding regulations and tobacco control. There are promising opportunities internationally where the implementation of this technology could occur more rapidly than in the U.S. Thus, we see more immediate opportunities outside the U.S. as our products gain FDA approval. The U.S. remains a significant market for us. Nick, did I fully address your question?

Nick Anderson, Analyst

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?

Michael Wang, Co-CEO

To address the EU market, the UK has led the move to ban disposable products, and we expect the EU to follow that trend. Consequently, the industry will likely shift towards pod systems, where users only need to replace the used pods. There is also the possibility for some consumers to shift to open or refillable systems, which is a strong area for our brand. Currently, a significant portion of our global nicotine or e-cig revenue comes from Europe, and we believe we will benefit from the ban on disposables in both the UK and the EU. Regarding potential supply chain or manufacturing limitations to support these changes, we believe we are well-prepared to meet the demands of the new regulations. Our Phase 2 factory in Malaysia will enable us to operate up to 80 production lines. We are excited about our manufacturing license for nicotine products, but we remain committed to financial discipline and careful cash management. As we engage with potential customers to address our own demand, we are also evaluating whether some product lines would benefit from more automated production processes. With 80 fully automated lines, we project we could produce around 700 million pod devices in a year, which positions us well for significant growth in both our own products and those of other brands.

Pablo Zuanic, Analyst

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.

Michael Wang, Co-CEO

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 the Volt platform. We shortened it for VLT. Essentially, with the Volt platform, we are providing a pod system that can become a new standard for the vaping industry. As you recall long ago, and even to some degree today, the traditional battery plus S10 card configuration was very standard for the industry. But over time, consumer preferences changed and brands want more attractive looking devices. So, that's why two quarters ago, we launched the Volt platform. It offers an alternative to traditional individually designed pod systems and the traditional old battery stick approach, making the product easier to carry, compact, and visually appealing. We launched that on an industry basis. By that, I mean, all the brands could share the same battery part of the pod system. They don't have to spend all the money to re-procure or resell such battery part when a consumer already has a battery from another brand or a generic brand. We are trying to build a new platform for the industry that is taking shape. Now with this new Sprout product, this is performance-focused and more specifically designed for cannabis oil, especially with highly corrosive proteins. This sets 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. We think both new platforms will be very attractive to MSOs as they launch new and more innovative products while safely offering products to their consumers. So, that's my answer to your first part of your question. Regarding the second part related to the 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 would raise tariffs on imports, 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 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 solutions. We talked to most of them. We negotiated a lot with other customer brands worried about tariff levels. Just as a background, for most of the customers, cannabis MSOs are individual operators we have business with, we generally sign a supply agreement specifying the landed cost. As you heard me saying several times in my prepared remarks, we generally sell 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 the tariffs, many brands wanted to guarantee landed prices in the coming quarters and years ahead. 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. Since November, there have been many conversations and negotiations on existing supply agreements. This 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 agreed to switch to FOB factory pricing, whether the factory is in China or in Malaysia. Obviously, if they place orders with our Malaysian factory, they will enjoy lower tariffs. From both Malaysia and China, our products currently cost slightly more in Malaysia than in China. However, the differential is more than offset by the current tariff difference between Chinese-made goods and Malaysian-made goods. So, Malaysia is already more attractive to our customers. We plan on moving most, if not 100%, of the cannabis hardware to our Malaysian operation to help our customers lower their tariffs. In order to prevent further exposure to tariff risks, as I said, we have successfully renegotiated most of the contracts with our customers to FOB factory pricing. Pablo, sorry for the long-winded answer to your question.

Pablo Zuanic, Analyst

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 you have the Malaysian facility than others of your competitors, or have they also been diversifying the supply chain or is it just hard to know?

Michael Wang, Co-CEO

I think even though, first of all, even though the U.S. and China reached a 90-day agreement on tariffs 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. 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%. 35% for Indonesia, 45% for Vietnam, 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, enjoys the lowest tariff rate so far. We strongly believe it will continue to have that edge over the other countries in Asia. Pablo?

Operator, Operator

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

Michael Wang, Co-CEO

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. I hope to talk to you all again during our next quarterly call. Thank you.

Operator, Operator

This concludes today's call. Thank you all for joining. You may now disconnect.