Dragonfly Energy Holdings Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Dollar amounts below are in millions unless noted. Dragonfly sells lithium-ion battery packs and related products and is developing solid-state battery technology. The financial statements reflect Legacy Dragonfly as accounting predecessor following the October 2022 business combination.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $19.3 | $21.6 | $38.1 | $39.9 |
| Gross profit / margin | $4.1 / 21.3% | $7.0 / 32.5% | $8.8 / 23.2% | $12.5 / 31.4% |
| Operating expenses | $12.5 | $7.6 | $27.0 | $14.6 |
| Operating loss | $(8.4) | $(0.5) | $(18.2) | $(2.1) |
| Net loss | $(11.7) | $(1.5) | $(6.8) | $(3.8) |
| Basic and diluted loss per share | $(0.25) | $(0.04) | $(0.15) | $(0.10) |
Q2 revenue fell 10.9%, while first-half revenue declined 4.7%. Gross margin contracted as sales shifted toward lower-margin OEM business, away from higher-margin direct-to-consumer sales, and higher-cost inventory flowed through cost of goods sold. First-half net loss included a $19.3 million noncash gain from the change in fair value of warrant liabilities; excluding this item, operating performance remained weak. Interest expense was $4.1 million in Q2 and $7.9 million for the first half.
At June 30, cash was $33.0 million, working capital $30.6 million, and current assets $84.2 million versus current liabilities of $53.6 million. First-half operating cash outflow was $5.6 million (versus $19.9 million in 2022); investing outflow was $2.6 million and financing inflow $23.4 million. Financing was primarily supported by the June offering, which generated approximately $21.1 million in net proceeds. The operating cash-flow improvement also reflected lower inventory and higher accounts payable and accrued expenses.
The $75.0 million term loan bears interest at SOFR-based rates with substantial cash and paid-in-kind components. Including accrued PIK interest, principal was approximately $78.7 million; the balance-sheet carrying value, after unamortized debt discounts, was $22.4 million. The entire carrying balance was classified as current because of covenant-compliance uncertainty. Lease liabilities totaled $4.1 million.
Material changes and business developments
- Q2 direct-to-consumer revenue decreased $4.4 million year over year, partly offset by $2.1 million higher OEM revenue. For the first half, DTC revenue fell $9.5 million while OEM revenue rose $7.6 million.
- Operating expenses rose sharply: Q2 G&A increased to $7.6 million, primarily from professional, compliance and insurance costs, severance, and stock compensation. First-half stock-based compensation was $5.4 million, compared with $0.7 million a year earlier.
- Dragonfly sold 10.0 million common shares and issued 10.0 million investor warrants in its June offering; the underwriters partially exercised the over-allotment, bringing investor warrants issued to 11.405 million. Common shares outstanding increased from 43.3 million at year-end 2022 to 58.5 million at June 30, 2023.
- Inventory declined to $44.2 million from $49.8 million at year-end 2022. The company said it was working inventory down as supply-chain conditions eased.
Outlook, risks and unusual items
- Revenue headwind: In July, Dragonfly’s largest RV OEM customer said it would stop installing Dragonfly storage systems as standard equipment and instead offer them as an option. Management expects this to materially limit revenue through the rest of 2023. One customer represented 27% of Q2 revenue and 26% of first-half revenue.
- Going concern and covenants: Dragonfly disclosed substantial doubt about its ability to continue as a going concern. It received a lender waiver for covenant failures in Q1 and was compliant at June 30, but said failure to meet covenants within the next 12 months is probable. Lenders may accelerate the loan if a waiver is unavailable or the company cannot comply. Additional financing may be needed; availability and terms are uncertain and equity financing could dilute shareholders.
- Investment plans: Management expects to spend more than $50 million over the next two to three years on solid-state development and cell manufacturing, alongside production automation and facility expansion. No formal revenue or earnings guidance is provided.
- Other financing update: In July, at lenders’ request, Dragonfly repaid $5.275 million of term-loan principal. Subsequent to quarter-end, 273,100 investor warrants were exercised for $0.546 million in net proceeds through August 8.
- Operating and execution risks: The company relies on two China-based LFP cell suppliers, one China-based battery-management-system supplier, and a single manufacturing facility. Demand is exposed to RV-market weakness, inflation, interest rates, customer concentration, competition, and the execution risks of entering new markets and commercializing solid-state cells.
- Controls and leadership: Disclosure controls were deemed ineffective at June 30 because previously reported material weaknesses had not been remediated. On August 20, the CFO resigned from that role and the CEO became interim CFO while the company planned a search for a permanent CFO.
- Contingencies and dilution: Up to 40 million earnout shares may be issuable subject to revenue, operating-income, or share-price conditions. The company reported no pending legal matters expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether Dragonfly can meet term-loan covenants, obtain any needed waivers, and sustain liquidity without further dilution or debt financing.
- The realized impact and timing of the largest RV OEM customer’s move from standard installation to optional equipment.
- Underlying cash use and gross-margin trends, including the effects of customer mix, inventory costs, and increased payables.
- Term-loan principal, PIK interest, repayment terms, and the effect of the July $5.275 million repayment on covenant headroom.
- Potential dilution from issued and outstanding warrants, the equity facility, options, and earnout shares; confirm current share and warrant counts.
- Progress and funding requirements for solid-state development and facility expansion, and remediation of the reported control weaknesses.