Dragonfly Energy Holdings Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Dollar amounts are in millions unless stated otherwise; financial statement figures are unaudited. Dragonfly sells lithium-ion battery packs under the Dragonfly and Battle Born brands, along with accessories, and is developing dry-electrode and solid-state battery technology.
Financial results and position
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $12.5 | $18.8 |
| Gross profit / margin | $3.1 / 24.4% | $4.7 / 24.8% |
| Operating expenses | $8.9 | $14.6 |
| Operating loss | $(5.8) | $(9.9) |
| Net income (loss) | $(10.4) | $4.8 |
| Adjusted EBITDA, non-GAAP | $(5.2) | $(5.1) |
| Cash used in operations | $(3.4) | $(3.8) |
Revenue fell 33.5% year over year. Direct-to-consumer sales were $5.2 million (down from $10.0 million); OEM sales were $7.3 million (down from $8.8 million). Cost of goods sold declined 33.1%, broadly tracking lower volume, while gross margin narrowed 0.4 percentage points. Research and development expense increased 51.5% to $1.3 million. General and administrative expense decreased 49.3% to $4.8 million, and selling and marketing expense decreased 34.4% to $2.7 million.
The 2023 quarter’s $4.8 million net income included an $18.5 million noncash gain from a decrease in warrant liabilities. Q1 2024 recorded only a $0.2 million warrant-liability gain and $4.8 million of net interest expense, contributing to the year-over-year swing to a loss. Adjusted EBITDA was approximately flat year over year.
Cash was $8.5 million at March 31, down $4.2 million from year-end. Working capital was $4.2 million. Inventory declined $5.2 million to $33.6 million. Capital expenditures were $0.8 million; financing cash flow was nil, as $2.7 million of related-party note proceeds were repaid during the quarter.
The Term Loan’s principal was $69.7 million, with $7.4 million of paid-in-kind interest accrued. Its balance-sheet carrying amount was $21.8 million after unamortized debt discounts; the full carrying amount was classified as current because of covenant noncompliance. Total liabilities were $70.6 million and stockholders’ equity was $17.8 million. Operating lease liabilities increased to $24.4 million, principally reflecting commencement of a new Reno facility lease.
Material changes, outlook and risks
- Demand and sales: Management attributed lower sales to weaker RV and marine demand amid higher interest rates and inflation, and to a major RV customer shifting Dragonfly products from standard equipment to an optional offering. Excluding that customer, RV OEM sales increased 69% year over year. Management expects RV-market revenue to increase in the second half of 2024; this is an expectation, not a quantified revenue forecast.
- New markets and development: The company reported full certification for oil-and-gas energy storage products in May 2024 and expects initial deployments in Q3 2024, with sales contribution beginning in Q4 2024. It expects to scale dry-electrode production in the second half of 2024. Management anticipates spending more than $50 million over the next two to three years on solid-state development and cell-manufacturing technologies.
- Liquidity and going concern: The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Management expects it may need additional debt or equity financing and intends to use its $150 million ChEF equity facility, but reported no facility share issuances from January 1 through May 14, 2024. Financing availability and terms are uncertain; equity issuance may dilute shareholders.
- Debt covenants: At March 31, the company was not in compliance with liquidity, fixed-charge-coverage and maximum-senior-leverage requirements. Lenders waived the March-quarter liquidity requirement on March 31 and, on May 13, waived the relevant tests for the quarter, in exchange for immediately exercisable warrants to purchase up to 2.55 million shares at $0.01 per share. The company also disclosed that covenant failures are probable within the next 12 months; lenders may accelerate the loan if waivers are unavailable or requirements are not met. The loan matures October 7, 2026 absent acceleration.
- Tariffs and controls: The company identified approximately $1.58 million of tariff underpayments related to product classification and valuation and reported them to U.S. Customs and Border Protection. It revised Q1 2023 comparative statements for an immaterial tariff-related error. A previously reported material weakness in internal control over financial reporting had not been remediated; management concluded disclosure controls were ineffective as of March 31, 2024.
- Other exposures: The business depends on two China-based LFP cell suppliers, one China-based battery-management-system supplier, and a single manufacturing facility. Customer and supplier concentration is notable: one vendor represented about 60% of accounts payable at quarter-end. Management reports no pending legal proceeding expected to have a material adverse effect. The company has significant lease commitments and a potential dilution overhang, including 24.5 million warrants and 40 million earnout shares reserved for issuance at March 31.
Most important facts for investors to verify
- Current cash runway, forecast cash needs, and whether the company can raise financing on acceptable terms.
- Status of each Term Loan covenant, the scope and duration of waivers, and any further lender concessions or warrant issuances.
- Actual RV/OEM demand recovery and whether the anticipated oil-and-gas deployments convert into sales on the stated timeline.
- Tariff liability exposure, any further CBP assessment, and progress remediating the material control weakness.
- Solid-state development milestones, expected capital requirements, and the potential effect of warrant, equity-facility and other share issuances on dilution.