Dragonfly Energy Holdings Corp. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 14, 2023. Amounts below are in millions of dollars unless stated otherwise. Dragonfly sells lithium-ion battery packs and accessories to consumers and OEMs and is developing domestic and solid-state battery manufacturing technology.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $15.9 | $26.1 | $54.0 | $66.0 |
| Gross profit / margin | $4.6 / 28.8% | $7.0 / 26.9% | $13.4 / 24.9% | $19.6 / 29.6% |
| Operating loss | $(5.9) | $(3.4) | $(24.1) | $(5.5) |
| Net loss | $(10.0) | $(3.7) | $(16.8) | $(7.5) |
| Basic and diluted loss per share | $(0.17) | $(0.10) | $(0.34) | $(0.20) |
- Q3 OEM sales fell to $5.6 million from $13.9 million; direct-to-consumer sales fell to $10.3 million from $12.2 million. For the nine-month period, OEM sales were $23.6 million and direct-to-consumer sales $30.3 million.
- Operating expenses were $10.5 million in Q3, versus $10.4 million a year earlier. For the nine months, they rose to $37.5 million from $25.1 million, including higher general and administrative costs, research and development, and selling and marketing expenses.
- Nine-month other income included a $19.2 million gain from the change in warrant fair value, partly offset by $11.9 million of interest expense. The warrant gain is a significant noncash item; Q3 warrant remeasurement resulted in $0.1 million of expense.
- Cash used in operations was $16.7 million for the nine months, compared with $24.7 million in 2022. Investing used $6.5 million, chiefly for property and equipment; financing provided $18.7 million, including offering proceeds. Cash declined by $4.5 million to $13.2 million.
Balance sheet, debt and liquidity
- At September 30, cash was $13.2 million, current assets $63.0 million, and current liabilities $41.0 million. The company reported working capital of $22.0 million. Inventory was $41.9 million, down from $49.8 million at year-end 2022.
- The term loan’s principal was $69.7 million plus $4.9 million of paid-in-kind interest, or approximately $74.7 million outstanding. The balance-sheet carrying amount was $18.7 million after unamortized debt discount; the entire carrying amount was classified current because of covenant uncertainty. The loan is secured, matures October 2026 absent acceleration, and bears high interest, including cash and PIK components.
- Dragonfly obtained lender waivers for covenant failures related to the March and September 2023 quarters. Management said failure to meet covenants within the next 12 months was probable; lenders may accelerate the loan if waivers are unavailable or the company cannot comply. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- The June 2023 public offering generated approximately $21.1 million net proceeds; the company used $5.3 million to prepay loan principal. Through September, ChEF equity-facility sales generated about $0.7 million net; subsequent sales generated about $0.6 million.
Material changes, outlook and risks
- Sales fell 39.2% in Q3 and 18.3% for the nine months year over year. Management attributed the decline to weaker consumer demand amid inflation and higher interest rates, and weaker RV-market demand. In July, Dragonfly’s largest RV OEM customer stopped including its storage products as standard equipment and returned them to an optional offering. Management expected this to constrain revenue through the remainder of 2023 and potentially into 2024.
- Q3 gross margin improved year over year, which management attributed partly to a higher share of higher-margin direct sales and a lower share of lower-margin OEM sales. Nine-month gross margin declined, reflecting lower volumes, less favorable channel mix and higher-cost inventory.
- Management expects operating and capital needs to increase as it develops solid-state batteries, expands production and enters adjacent markets. It expects to spend more than $50 million on solid-state development and cell-manufacturing technologies over the next two to three years and says additional financing will be needed. Future financing may be dilutive; unavailable or unfavorable financing could require spending cuts or delayed expansion.
- The company announced successful scaled dry deposition of anode and cathode electrodes in October 2023 and expected to begin U.S. LFP cell production by year-end 2023. These are forward-looking plans, not results reported for the quarter.
- Risks include reliance on two China-based cell suppliers, one battery-management-system supplier and one manufacturing facility; customer and supplier concentration; execution and funding risks in new markets and solid-state development; and possible Nasdaq listing risks. Two customers represented 38% and 15% of receivables at quarter-end; one vendor represented 68% of accounts payable.
- Management concluded disclosure controls were not effective at September 30, 2023 because previously reported material weaknesses had not been remediated. A remediation effort was underway, with no assurance it would be effective. Management reported no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether the company can maintain minimum liquidity and meet term-loan covenants, and whether lenders provide any further waivers.
- Cash runway, financing availability and terms, including use of the ChEF facility and potential dilution.
- Subsequent revenue, orders and customer arrangements following the largest RV customer’s shift to optional equipment.
- Progress and funding for domestic cell production and solid-state development, including whether year-end 2023 production expectations were met.
- Warrant-related valuation effects, potential share dilution and progress remediating material weaknesses in disclosure controls.