Dragonfly Energy Holdings Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparison is with Q1 2022. Financial amounts are in thousands of dollars unless stated otherwise. The company manufactures and sells lithium-ion batteries and accessories and is developing solid-state battery technology. Following its October 2022 business combination, Legacy Dragonfly is the accounting predecessor.
Financial performance and position
- Revenue: $18.8 million, up 2.7% from $18.3 million. OEM sales rose to $8.8 million from $3.2 million, while retail and distributor sales combined fell to $10.0 million from $15.1 million; management attributed the shift to stronger OEM demand and weaker direct-to-consumer demand.
- Gross profit and margin: $4.7 million and 25.2%, versus $5.5 million and 30.0%. The company cited lower-margin OEM mix and higher material costs.
- Operating results: Operating loss was $9.8 million, compared with $1.6 million. Operating expenses increased to $14.6 million from $7.1 million, including higher stock compensation, professional fees, compliance and insurance costs, and sales and marketing payroll.
- Net income: $4.9 million, or $0.11 per basic share ($0.10 diluted), compared with a $2.3 million loss, or $0.06 per share, in Q1 2022. The 2023 result included an $18.5 million non-cash gain from remeasurement of warrant liabilities; absent that gain, reported net income does not reflect the operating loss.
- Cash flow: Operating cash use was $3.8 million, improved from $11.1 million used in Q1 2022. Investing cash use was $0.6 million, versus $4.5 million; financing provided $2.4 million. Cash declined by $2.0 million to $15.8 million.
- Liquidity and working capital: Current assets were $75.0 million and current liabilities $50.5 million; reported working capital was $24.5 million. Inventory was $51.8 million, up from $49.8 million at year-end 2022.
- Debt: The term loan has $75.0 million principal plus $2.4 million of payment-in-kind interest. Its $20.7 million net carrying amount was classified as current because of covenant uncertainty. The loan matures October 7, 2026, subject to acceleration rights; cash interest is based on adjusted SOFR plus contractual margins.
- Margins and adjusted EBITDA: Management-reported adjusted EBITDA was negative $5.0 million versus negative $0.4 million in Q1 2022. This non-GAAP measure excludes specified items, including the warrant remeasurement gain.
Changes, outlook and risks
- Revenue growth reflected a major channel shift: OEM revenue increased by about $5.6 million, while DTC revenue declined by about $5.1 million. Management noted inflation and rising interest rates as pressures on consumer demand.
- The company received a March 29, 2023 waiver for specified term-loan covenant failures for the quarter. Management stated that further covenant failures within 12 months were probable; failure to obtain waivers or comply could permit lenders to accelerate the loan. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Management expects to seek additional capital, including through a $150 million equity facility, and said it expects to spend more than $50 million over the next two to three years on solid-state development and cell-manufacturing technology. No specific revenue or earnings guidance is provided.
- Plans include continued battery-production automation and expansion, with a 390,240-square-foot Reno warehouse expected to be completed in early 2024. These plans and solid-state commercialization require funding and execution; management cautioned that financing may not be available on acceptable terms.
- Risks include reliance on two China-based cell suppliers and one battery-management-system supplier, a single current manufacturing facility, customer and supplier concentration, demand sensitivity, and potential dilution. One customer represented 26% of quarterly revenue and one customer 50% of receivables at quarter-end; one vendor represented 67% of accounts payable.
- Disclosure controls were reported ineffective as of March 31, 2023 because previously reported material weaknesses had not been remediated. Management said remediation efforts continue.
- Unusual and subsequent items include $4.5 million of stock-based compensation in Q1, including immediately vested RSUs; a $1.0 million related-party note and $100,000 fee, both paid in April; and $334,000 of severance following the Chief Legal Officer’s departure in April.
Important facts for investors to verify
- Progress toward meeting term-loan covenants, the scope and duration of any waivers, and the company’s near-term liquidity and going-concern plans.
- Cash burn, inventory conversion and obsolescence exposure, and the funding required for planned facility and solid-state investments.
- Whether OEM growth can offset continued weakness in DTC sales without further gross-margin erosion.
- Availability, pricing and potential dilution from the equity facility or other financing; also assess the 40 million potential earnout shares and outstanding warrants and options.
- Status of remediation of material weaknesses in disclosure controls and internal control over financial reporting.