DFLI

Business Context and Reporting Period

Company: Dragonfly Energy Holdings Corp. (DFLI)
Reporting Period: Quarter ended June 30, 2024 (Q2 2024)
Business Overview: Manufacturer of non-toxic deep cycle lithium-ion batteries for RV, marine, solar, and industrial applications. The company operates under the "Battle Born" (direct-to-consumer) and "Dragonfly" (OEM) brands and is developing solid-state cell technology.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. YTD refers to the six months ended June 30.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 31.5% QoQ and 32.4% YTD compared to 2023. This was driven by weaker demand in the RV and marine markets due to rising interest rates and inflation. A key OEM customer (Keystone) downgraded the product from standard equipment to an optional add-on.
• Margin Improvement: Despite lower volume, gross margin improved to 24.0% in Q2 2024 from 20.4% in Q2 2023, aided by higher average selling prices and the consumption of lower-cost inventory.
• Expense Reduction: Operating expenses decreased significantly. General and Administrative (G&A) expenses dropped 25.1% QoQ due to reduced headcount and lower stock-based compensation compared to prior year severance and offering costs.
• Warrant Liability Volatility: The company recorded a $2.0M loss in Q2 2024 due to the change in fair value of warrant liabilities, contrasting with a $0.8M gain in the same period in 2023.
• Inventory Drawdown: Inventory decreased by $10.1M YTD to $28.7M as the company reduced stocking levels to align with modest demand.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Recent Developments

• Licensing Deal: On July 29, 2024, the company entered a license agreement with Stryten Energy LLC for the "Battle Born" brand, securing a $5.0M initial licensing fee expected by end of August 2024.
• New Markets: Anticipates revenue contribution from oil & gas operations in Q4 2024 and expansion into commercial trucking (Highway Transport partnership).
• Capital Needs: Management expects to spend over $50M on solid-state development over the next 2-3 years and will likely need to raise additional capital via the ChEF Equity Facility or other means.

Risks and Contingencies

• Going Concern: The filing includes a "substantial doubt" disclosure regarding the company's ability to continue as a going concern due to recurring losses, negative cash flows, and a working capital deficit.
• Covenant Waivers: The company has repeatedly failed to meet financial covenants (liquidity, leverage, fixed charge coverage) under its $75M Term Loan. It has obtained waivers for Q1 and Q2 2024 but expects to fail covenants again in the next 12 months. Failure to secure future waivers could lead to debt acceleration.
• Debt Structure: Interest payments on the Term Loan are partially or fully payable-in-kind (PIK), increasing the principal balance. The entire debt is classified as current due to covenant non-compliance.
• Internal Controls: A material weakness in internal controls over financial reporting remains unremediated, stemming from improper tariff classification and valuation in prior years.

Investor Verification Checklist

• Covenant Compliance: Verify the status of the next required financial covenant tests and the likelihood of obtaining further waivers from Term Loan lenders.
• Licensing Fee Receipt: Confirm the receipt of the $5.0M initial licensing fee from Stryten Energy LLC and its impact on liquidity.
• Debt Acceleration Risk: Assess the risk of the $69.7M Term Loan being accelerated if future covenant waivers are denied.
• Inventory Valuation: Review the adequacy of inventory reserves given the drawdown and potential obsolescence in a slowing market.
• Internal Control Remediation: Monitor progress on remediation of the material weakness regarding tariff accounting and financial reporting controls.