Ispire Technology Inc. (ISPR) Q1 2027 Earnings Report, Transcript and Summary

Good morning, and welcome to Ispire Technology First Quarter 2027 Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to James Carbonara with Hayden Investor Relations. Please go ahead.

Good morning, and welcome to Ispire Technology First Quarter 2027 Earnings Conference Call. 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 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 changes in expectations, except as may be required by law. Further, management's remarks today will include certain non-GAAP financial measures. These measures are calculated by management and do not have any standardized meaning under U.S. GAAP. These non-GAAP measures supplement GAAP measures, which should not be viewed as substitutes for GAAP measures. A reconciliation of the most directly comparable GAAP financial measures to these non-GAAP financial measures is available in the company's earnings press release. I will now turn the call over to Steven Przybyla, President of Ispire Technology. Steve, you may begin.

Thank you, James, and good morning to everyone. Thank you for joining the call today and giving us the opportunity to discuss our first quarter fiscal 2027 results, our operational progress and the strategic initiatives we believe can position the company for long-term growth. First quarter revenue was $27.5 million, up 3.2% sequentially from $26.7 million in the fourth quarter of fiscal 2026. Adjusted EBITDA was approximately $136,000 for the quarter, an improvement of $2.4 million from the fourth quarter, and our net loss narrowed significantly. We continue to build on the turnaround successes of Q4 2026 with incremental revenue growth, greatly reduced accounts receivable, reduced operating expenses and quarter-over-quarter EBITDA growth. In addition, gross margin has returned to historical levels after the onetime inventory impairments and return charges taken in Q4 2026. Net accounts receivable are now $13.5 million, a decrease of 80% from peak levels in fiscal Q2 2025, representing a multiyear commitment from the company to strengthen its customer credit standards, payment terms and collections actions. The company is committed to finishing its AR rationalization in fiscal year 2027, meaning no further write-downs or major credit loss accounting are planned for future fiscal years. We believe this will lead to a dramatic positive effect on our GAAP operational performance. Also of note, the company received a $3.4 million judgment against a former customer in mid-October. We believe this customer is fully collectible and have begun efforts to enforce the judgment. Net cash used in operating activities in the quarter was $1.6 million. This included $3 million used to pay down aged payables to our related party manufacturer under our flexible payment arrangement. If we exclude this payment, operating activities would have generated approximately $1.4 million in cash for the quarter, showing potentially significant underlying profitability from operations. We continue our efforts to advance strategic initiatives that we believe position the company for long-term success and profitability. Our focus remains on strengthening our balance sheet, expanding company-owned production in Malaysia and developing additional growth opportunities through our proprietary technology initiatives and our expansion into adjacent product categories. We believe this work is translating into commercial traction, stronger operating performance and long-term shareholder value. Malaysia remains one of the most important near-term catalysts for our business. Fiscal 2027 is our first full year of vapor and nicotine pouch production at our company-owned factories in Malaysia. Beyond the added capacity, Malaysia gives us a meaningful cost advantage, including approximately 25% tariff advantage over China-based production on exports to the United States. And it allows us to serve customers who want to diversify their supply chains outside of China. In April 2027, the Chinese government will end VAT reimbursement for e-cigarette exports from China. The elimination of the 13% export VAT rebate is expected to increase cost pressures on Chinese e-cigarette manufacturers, potentially further enhancing our cost competitiveness and strategic positioning of our Malaysian operations. As previously discussed, the company has received significant interest from global, regional and local Southeast Asian brands regarding our e-cigarette and nicotine pouch production capabilities in Malaysia. We are in the closing stages of securing a major OEM and ODM deal from a well-known regional e-cigarette brand in Southeast Asia. This deal would include immediately leveraging our G-Mesh technology, substantial production in Malaysia and development of new and innovative ODM products for the Southeast Asian marketplace. We believe securing this relationship would increase both top and bottom line results for the company and gain a tangible foothold in a very desirable regional market. We hope to officially announce this relationship in January 2027 and begin production shortly thereafter. We're also expanding our presence in the nicotine pouch category through our joint venture with Jincheng Pharmaceuticals, which we announced in May. Combined with the nicotine pouch production license we received in our Malaysian facility, we believe this joint venture gives us a credible entry point into a high-growth nicotine pouch market. We also have some exciting updates related to our IKE Tech joint venture, in which, as a reminder, we hold a 40% ownership interest alongside Chemular and Berify. IKE's component PMTA remains under review with the FDA, and we are optimistic to see movement on this application in the current fiscal year. IKE is also in talks with multiple companies regarding potential supplemental PMTA filings using its age-gating technology as an additional avenue for FDA authorization of IKE's technology. As I mentioned last quarter, our strategy with IKE is broader than any single regulatory pathway, and IKE continues to pursue commercial partnerships with large international brands and manufacturers. In September, IKE Tech launched IKE 2.0, delivering on the time line we discussed on our last call. IKE 2.0 is a major upgrade to the IKE point-of-use age-gating platform. Its upgrades include a dramatically improved user experience, AI agents to assist with onboarding and device access, a web-based app that allows for brands and manufacturers to fully customize and brand the user experience for their age-gated products, in addition to a suite of additional features related to device control, gamification, customer rewards and user privacy controls. Finally, IKE 2.0's age-gating platform will be going live in the United States through a collaboration with Charlie's Holdings. Charlie's Holdings has over 800 PMTA applications pending with the FDA or under administrative stay. Under the guidance promulgated by FDA in May 2026, companies that have products in the scientific review stage of the PMTA process may commercialize these products without risk of FDA enforcement. IKE has agreed to allow Charlie's Holdings to use the IKE 2.0 point-of-use age-gating technology in a test pilot using certain SKUs of its PACHA disposable flavored e-cigarette products. The initial pilot is expected to launch through Smoker Friendly before year-end 2026. We expect that the results of the pilot will be used to update a number of Charlie's Holdings flavored ENDS PMTAs to incorporate IKE's age-gating system. We also believe this pilot on the PACHA devices will make IKE's age-gating system the first age-gating system to be commercially available in the United States to consumers, a truly exciting milestone for our joint venture and for public health. Taken together, these initiatives give Ispire several pathways to growth: our manufacturing platform in Malaysia, vapor, OEM and ODM, nicotine pouches and our IKE joint venture. Our job this year is to convert these opportunities into commercial results while continuing to improve on the operating performance of the business. I will now turn the call over to Jie for a more detailed view of our financial results. Jie?

Thank you, Steve. Before I begin, please note that all numbers I present are approximate and they have been rounded for ease of presentation. For the fiscal first quarter ended September 30, 2026, Ispire Technology reported revenue of $27.5 million, compared with $30.4 million in the first quarter of fiscal 2026 and $26.7 million in the fourth quarter of fiscal 2026. That represents a decrease of 9.3% period-over-period and an increase of 3.2% sequentially. The period-over-period decrease was primarily attributable to reduced sales in the European market. As a result of an increasingly restrictive regulatory environment for vaping products, regulatory developments, including the ban on disposable vaping products and changes in excise taxation, have created uncertainties among European distributors. Consequently, these distributors have adopted a more cautious approach to inventory management, resulting in reduced order volume and delayed purchases during the period. Gross profit for the quarter was $4.5 million and gross margin was 16.2% compared with $5.1 million and 17%, respectively, in the first quarter of fiscal 2026. The period-over-period change in gross margin was primarily driven by competitive pricing pressure that lowered selling prices in certain products. On a sequential basis, gross margin improved from 6.3% in the fourth quarter. During the prior quarter, gross margin having been negatively impacted by inventory impairment. Total operating expenses were $10.6 million compared with $7.8 million in the first quarter of fiscal 2026. Excluding credit loss, operating expenses were $5.9 million, down 3.7% from $6.1 million in the first fiscal quarter of 2026 and slightly below the $6 million we reported in the fourth quarter. Our cost base remains substantially lower than it was before the turnaround began, and we believe that positions the business to translate revenue growth into improved operating results. Credit loss expense was $4.8 million compared with $1.8 million in the first quarter of fiscal 2026 and $9.2 million in the fourth quarter. We remain focused on disciplined receivables and working capital management as we complete the final stage of financial cleanup. Net loss for the quarter was $6.4 million or $0.11 per share compared with a net loss of $3.3 million or $0.06 per share in the first quarter of fiscal 2026 and $13.8 million in the fourth quarter. Next, to supplement our financial statements presented in accordance with GAAP, we use certain non-GAAP financial measures, including Adjusted EBITDA, because we believe these metrics provide investors with additional meaningful method to evaluate certain aspects of our results. We define adjusted EBITDA as net loss, excluding income tax expense, depreciation and amortization, debt issuance cost amortization, share-based compensation, credit loss expense and inventory impairment. Adjusted EBITDA for the first quarter was slightly above breakeven at a positive $136,000 compared with a loss of $2.3 million in the fourth quarter and positive Adjusted EBITDA of $0.6 million in the first quarter of fiscal 2026. The sequential improvement of $2.4 million reflects the recovery in gross margin and the lower cost base we have established. Turning to the balance sheet and cash flow, we ended the quarter with $15.6 million in cash and cash equivalents compared with $19.3 million at June 30, 2026, and a total debt of $0.5 million. Working capital was $0.4 million, a decrease of $0.38 million from June 30, 2026. Net cash used in operating activity was $1.6 million in the first quarter compared with $1.2 million in the first quarter of fiscal 2026, as a decrease in accounts payable by $4.3 million during the quarter. Investing activity used $1.8 million, primarily $1.6 million payment related to our IKE joint venture investment and acquisition of intangible assets of $0.2 million. Net cash flow used in financing activity for the three months ended September 30, 2026, was approximately $0.3 million and primarily reflects a repayment of borrowing. As we complete the final stages of our financial cleanup, we remain focused on building on this momentum and translating the foundation we have established into sustainable growth, stronger cash flow generation and improved profitability. With that, I will turn the call back to Steve.

Thank you, Jie. The first quarter showed continued sequential progress. Revenue grew sequentially, gross margin recovered. Our cost base came down further, adjusted EBITDA reached above breakeven and our net loss narrowed significantly from the fourth quarter. We still have work to do on receivables and cash flow. We're addressing both with the same discipline that has guided our turnaround so far. At the same time, we are building the next version of Ispire. Our Malaysia facility is in its first full year of production. Vapor ODM is bringing new brand relationships. Our Jincheng joint venture extends our reach in the nicotine pouches, and IKE Tech has launched a broader compliance platform with IKE 2.0. Each of these gives us a path to grow revenue and improve the economics of the business over the course of fiscal 2027. We are excited about what we're building and believe these opportunities have the potential to create meaningful long-term value for our shareholders. And with that, we will open the call for questions.

[Operator Instructions] Your first question comes from Nick Anderson with ROTH Capital Partners.

Congrats on the quarter. First for me on Malaysia. You've noted strong interest from Chinese brands moving production out on the anticipated higher costs and the FDA starting to inspect factories over there. Would you say those customers are paying extra for a Malaysian origin and a cleaner regulatory record? Or do you think Malaysia also has to beat Shenzhen on price? And if we include the VAT fees set to hit, where does Malaysia compare on an all-in price today?

Nick, thanks for the question. I think customers are price sensitive, but they're also looking at the broader offering from Malaysia. So to recall, Malaysia is a very stable multicultural country. It has a very strong rule of law in terms of enforcing economic agreements. And the IP situation in Malaysia is also interesting for these factories. Whereas in China, you develop a product, your competitor factories have copies of that product within weeks, you get knockoffs, you get things like that. Malaysia, that just doesn't exist in the same way. There's more regulatory certainty. I think there are questions about the long-term support of e-cigarettes by the Chinese government. So those are the things, those are the noneconomic factors that are going into the Malaysia selection. On a price basis, we have started to quote significant orders from Malaysia, and they're very close. There is, I think, a slightly higher price at the moment. But as these orders scale and we build out supply chains here, we'll be at least the same cost as China, if not less, I think due to labor costs being slightly less in Malaysia. So I think the companies are looking for more than just price here. I think they're looking for stability. They're looking for security and they're looking for diversification. I hope that answers the question, Nick.

Great. Yes, that's exactly what I was looking for. Second for me on the regulatory environment. We've seen some political pressure in the past exerted on the FDA to rule on lower-risk nicotine products. Do you think last week's midterm result changes anything from a regulatory standpoint? Do you envision the FDA continuing to move with kind of the same or maybe more urgency now to get products approved? Any color there would be helpful.

Yes. I think in terms of CTP, I don't think the midterms change anything. The review teams are still active. I don't think there's going to be any congressional inquiries into the activities related to authorization of reduced risk tobacco products. I think those are based on very strong science. The agency works hard to support its decisions. They have been sued in the past and they're sued regularly. So they're very conscious about when they're putting out a decision or an authorization to make sure it's heavily supported by science, the administrative record and is in accordance with the statute. I think what you might see is inquiries into other parts of the HHS operation, but I don't think CTP will be affected by anything in Congress at the moment. I do hear that we are going to be getting a new Chairman of the FDA, new commissioner rather. I think those confirmation hearings will begin this month from what I'm told. And I believe we'll continue to see strong support for getting reduced risk products into the market.

Great. If I could squeeze one more in. You mentioned seeing a lot of opportunities internationally outside of the four large tobacco majors. I think you've mentioned Indonesia in the past. Are there any regions you're particularly excited and worth calling out here? And where do you see growth coming from in calendar '27?

Yes. Nick, great question. We are seeing these, what I'll call it, midsized regional brands grow and expand and become more aggressive in their sort of desire for market share, their desire for expansion. And we feel like we fit really well within their supply chain production. We really, really like Southeast Asia in terms of converting from a higher-risk product, right, to combustible tobacco, whether it's cigarettes or something else into vapor and pouch. As that conversion begins, you have populations with very high nicotine use incidence moving from high risk to lower risk or reduced risk products. We like to be part of that value chain. And these brands see that as well. So Southeast Asia and South America are two of the regions that we feel really bullish about going forward for the rest of '26, '27 and '28, primarily fueled by regional brand expansion and growth.

We currently have no questions in our queue at this time. I will now turn the call back over to management for closing comments.

Well, thank you, everyone, for joining. We are happy and proud to put these results out for our first fiscal quarter of 2027, and we remain committed to ensuring maximum shareholder value going forward, and we look to updating you in the future on the company's progress. So thank you for joining the call.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.