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. [Operator Instructions] 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 for 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…

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…

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 ir@ispiretechnology.com. Operator, this completes our prepared remarks, and we are now open to questions. Please go ahead.

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

Okay. Bo, thank you. Good question there. Yes, tobacco side, because we use distributors to distribute products to retailers, naturally, here and there, there will be fluctuation from 1 quarter to the other. As you recall, last quarter was a real good quarter for tobacco revenue. It increased by almost 50% over same period last year. So unfortunately, this quarter or this recent quarter, we saw a bit of a dip. It dropped by 8% from the same period last year. However, we are very confident, if you average, I would say, quarterly numbers, we will still see a significant growth. So Second question, you asked about our confidence in delivering $26 million per quarter for 2 quarters straight in order to hit the guidance. We are very confident that can be achieved for a couple of reasons, though. All tobacco products have been open systems, by and large, open systems sold in Europe. That's where the main revenue segment is. Europe is our primary market for open systems. As you probably heard, France and the U.K. announced the banning of disposable E-cigarette, and both actually already took effect, especially the U.K. market reacted really strongly towards that banning -- the ban of the disposable devices -- in both markets. And also, European Union is considering a similar EU-wide ban of disposables. So all factors indicate that the open systems that we have been marketing and selling will actually gain strong, I would say, momentum through this change in regulation. In the future quarters, we expect to see increase in our E-cig sales there. That is 1 key factor. Second factor is really more, say, celebrity/brand E-cigarette business that we don't have a revenue for so far. We will see some contribution from that front between now and fiscal year. So those 2 factors combined give us that confidence. So 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.

Well, first part of your question, why did the gross margin for cannabis decrease over the same period last year. Yes, indeed, there were a few key factors that drove that change. Number 1 is really I would categorize as, before Chinese New Year holidays, all the factories tend to shut down their plants, typically 1 week before Chinese New Year, and that lasts typically 10 days after Chinese New Year. So during that shutdown and even before that shutdown, factories really couldn't commit to, let's say, additional capacity or couldn't commit to more orders. So in the December quarter, we obviously experienced the same challenge. During that time, we had to -- on one hand, we had increased demand from market; on the other hand, we had challenge being factories completing the product and shipping them in time. So several others incurred higher expenses, including, for example, shipping cost. Shipping cost has really increased tremendously between China and the U.S. So that affected our gross margin somewhat. I would say that's probably contributor #1 to the decrease in gross margin. That combined with several other factors drove gross margin down by, I think, over 2 points. So the second part of your question is how confident we are with getting to 40% gross margin after Malaysian operation should start its production. So it's really a capacity issue, Bo. Previously, we communicated our goal was, in 18 months' time, to transition most, if not all, say, production of cannabis vaping hardware from our related party factories in China to Malaysia. So that is still our goal. However, to get there, we need to make some, I would say, Phase 2 investment into the build-out for the Malaysian operation. That's still our commitment. The speed of getting there really depends on our working capital available to fund the expansion in Malaysia. So once again, our internal goal is still to achieve majority of the production of cannabis vaping hardware in Malaysia versus in China factories. With that, obviously, our goal is to see a significant improvement in gross margin. Every piece of product based on our past knowledge and based on Malaysian operations cost analysis, would yield us 40% or even more in gross margin if that operation can take over all the production of products. So that's my long answer to your questions.

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 introduced to the market in early November. So far -- I would just share a couple of data points to indicate where everything is. Part of our strategy with Ispire ONE has always been to provide value-added products and services to large brands and MSOs, because those are the organizations that would see the benefit of Ispire ONE more clearly in terms of operating efficiency gain and brand reputation. So that was part of our goal that we had in the back of our mind all the time. And the last 2.5 months prove that our approach or method, our strategy was spot-on. As of November 2023, we only had 2 customers that I would consider multi-state operators. As of now, we are entertaining another 6 MSOs since we launched Ispire ONE. So we don't have a major uptick in other volumes for Ispire ONE products yet, because most of the customers, especially MSOs, are taking their time to evaluate the products and the operating procedures. And as we all know, larger MSOs tend to be more careful and conservative in the decision-making process. So that process we expect to take a while. But in the meanwhile, we are starting to get orders in from medium-size brands. So that's my answer to 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?

Okay. A couple of things. For us -- you are spot-on. Obviously, the cash burn has been to fund the growth of the company. And on the other hand, we are mindful -- as you pointed out, we are mindful of the available cash to continue the support of the Malaysian operation and so on and so forth. First of all, we had just over $9 million worth of cash freed up 2 weeks ago. That used to be part of our investment in a certificate deposit account in Hong Kong. And that CD matured 2 weeks ago. So that dollar amount, just over $9 million, is freed up now. So as of now, as per the report, we had just over $17 million in cash. Adding the other $9.2 million to it. So we are now at $27 million in cash. But the key answer I want to share with you, Bo, is our team has been working diligently, especially under the leadership of our CFO, Dan, in addressing the accounts receivable side. In the coming quarter, we should expect to have, I would say, much improved picture of accounts receivable. This is partially because the team has implemented a new deal review, credit review, what we call, deal desk, within the sales function. So that certainly made it much, much easier for us to negotiate with the customers based on the credit worthiness to minimize any potential exposure. So with that deal desk, we are also very diligent with the payment terms. So on that front, I think in the coming quarters, we should see improvement. But by and large, as Dan pointed out in his part of the remarks, working capital at about $25 million is a drop of roughly $2.5 million from the previous quarter. So from that point of view, we are, on one hand, careful in managing our cash. On the other hand, we feel this still gives us enough runway. But on the other hand, though, I don't know if you saw that we filed registration to raise additional capital. So that is also going on. So we are addressing it both from cash management AR point of view and from investor point of view. Bo?

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 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?

Okay. Bo, I will provide a high-level answer. If it's not deep enough, Dan can jump in to share more. You are right about the AR side. So as you very well pointed out, growing revenue side and preserving cash certainly is a balancing act by itself. On one hand, we certainly strategically are more focused on medium-to-large accounts now than ever before. So that also helps with, I would say, risk exposure. As we all know, with lack of, let's just call, banking services to the cannabis industry, cash management for our branded customers is also a big challenge. So generally, cash cycle in this industry could be anywhere between 6 months to even up to 8 months. So the smaller the brand, the bigger challenge they face. As we, in the last couple of years, have grown in revenue and reputation, we are able to attain much more desirable and more creditworthy larger brands. So from that point of view, that's why the deal desk serves a great deal in our decision process. We feel, through the deal desk and through the type of customers we are working with, AR risk is going to get less and less. However, larger MSOs on the other hand also have the scale to demand a bit more favorable payment terms. So we are managing both aspects carefully. The typical deals or contracts include the payment plan. So basically, in addition to payment terms, for some of them, there is also -- even if they don't hear certain payment terms, they will need to get certain payment plan. There is minimum threshold there. So all those factors together that happen in the finance and sales organization, I think, will certainly help us managing cash and managing collection. For a lot of the past due accounts, we also worked out payment plans with them, and we feel, more than ever, those accounts will complete their payment plans. So Bo, did I miss anything?

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.

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