Dragonfly Energy Holdings Corp. (NASDAQ:DFLI) Q4 2023 Earnings Call Transcript

Dragonfly Energy Holdings Corp. (NASDAQ:DFLI) Q4 2023 Earnings Call Transcript April 15, 2024

Dragonfly Energy Holdings Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Jenny, and I will be your operator today for Dragonfly Energy's Fourth Quarter and Full-Year 2023 Earnings Call. The call can be accessed along with the earnings press release and SEC filings on the Investors section of the Dragonfly Energy website found at www.dragonflyenergy.com. As a reminder, this conference call is being webcast and recorded. All attendees are in a listen-only mode at this time. During this call, the company will be making forward-looking statements based on current expectations. Actual results may differ due to factors noted in the press release and in periodic SEC filings. Management will reference some non-GAAP financial measures. Reconciliation to the nearest corresponding GAAP measure can be found in today's release on the company's website. I will now turn the call over to Dr. Denis Phares. Please go ahead.

Denis Phares: Thank you, and thank you to everyone joining us today. 2023 was a difficult year for our core markets, which are highly dependent on consumer discretionary spending. The RV market in particular, which accounted for the majority of our revenue in 2023 continued a steady decline, which began in late 2022. Importantly, we believe that this market has bottomed, and we are finally beginning to see a recovery not only in RV shipments, but in the reincorporation of lithium as the preferred energy storage solution for the industry. And as we noted last quarter, we continue to gain share in the market with both new customer wins and new program and model wins with existing customers. So as the industry begins to recover in 2024, we expect the RV market will return as an important growth driver for the company.

Our diversification into the heavy duty trucking market continues with an expanded pipeline of fleets that have either initiated pilot projects using our electric auxiliary power unit or that have committed to its incorporation. The significant return on investment combined with the resulting compliance with anti-idling regulations, has made our solution highly visible in the industry. The product was even recognized as one of the top 20 products of 2024 by the trade publication heavy duty trucking. We expect that the deployment of our EAPU in long-haul trucking fleets, combined with the application of our mobile storage solutions in liftgate applications and refrigerated trucks will result in the heavy duty trucking market providing a significant contribution to our revenue.

We have begun to take purchase orders and expect continued growth in this sector throughout the year. In the last quarter of 2023, we began shipping batteries equipped with our proprietary Dragonfly Intelligence feature, which represents a significant advancement in wireless monitoring and communication and storage systems. The stability associated with wireless mesh networking is well documented in other industries and its application to storage far supersedes the existing Bluetooth standard that is typically applied for wireless battery monitoring. We are working closely with our OEM partners to further specify the information to be transmitted over the vehicle communication network so that the storage system will be stable and robust for consumers and technicians.

We expect that Dragonfly Intelligence will be included in RV models in the new model year among new and existing customers. Our direct to consumer or DTC business has been flattish, yet trending towards our more differentiated products such as our larger capacity GC3 battery, which have higher average sales prices. We expect that when we release the Intelligence systems for consumers, the product differentiation will allow us to expand our DTC business, primarily on larger stationary systems and marine systems where monitoring and system health are critical to the user. What has set Dragonfly Energy apart from our inception is our dual focus on product development for consumer and OEM markets and fundamental research and development. Our primary R&D focus is our proprietary dry electrode cell manufacturing process and the unique cells and chemistries that can be applied using the process, such as the solid state sale we have previously discussed.

Last year, we announced that we completed our pilot line for anode and cathode production. We have since received inbound interest from large customers in the consumer electronics, data center backup and automotive markets. The greatest inbound interest we have had in terms of potential scale has been from automotive. As a result of that interest, we calibrated our deposition and subsequent manufacturing processes such as formation and aging to meet customer requirements in the EV and propulsion sector. Notably, our discussions with both a large consumer electronics company and large automotive companies has revealed some unique benefits of our process that had alluded our focus to date. More specifically, it turns out that our dry deposition process is capable of producing both anode and cathode films that are PFAS free.

PFAS chemicals Perfluoroalkyl (ph) and polyfluoroalkyl substances often referred as forever chemicals, our commonplace in lithium-ion batteries today. The European Union has begun taking steps to ban these substances altogether. Current slurry-based processes and dry extrusion-based processes rely on these chemicals to find the electrodes. We have demonstrated the at-scale production of electrodes that are PFAS free. Moreover, we have produced coin cells and pouch cells using these electrodes that have matched the performance characteristics of conventional electrodes containing PFAS chemicals. Concurrently, we commissioned a third-party study to evaluate the benefits of our manufacturing process in terms of cost and sustainability as we continue to scale.

We have, therefore, begun evaluating processing technology for gigawatt hour annual production. The study has demonstrated that even with domestic manufacturing, we will be cost competitive with Asian manufacturers without the need of government subsidies. The study showed a 25% reduction in energy usage, a 22% reduction in factory area and most notably, a 5% reduction in overall manufacturing costs for full production in Nevada, and this is before the effects of tariffs and the Inflation Reduction Act. As the EV industry continues to look to dry deposition as a potential solution to a host of environmental issues associated with current cell manufacturing processes, the fact that we are also deploying American innovation on American soil is becoming an increasingly attractive proposition for prospective customers and partners.

I will now turn the call over to John to provide a review of our fourth quarter and full year 2023 financial results, as well as a more detailed outlook for the first quarter of 2024.

John Marchetti: Thank you, Denis. Please note that all figures presented are GAAP unless otherwise noted. Dragonfly generated net sales of $10.4 million in the fourth quarter of 2023, down from $20.2 million in the fourth quarter of 2022. As a reminder, the fourth quarter of 2022 included standard install revenue from Keystone, which was not the case in the fourth quarter of 2023. Revenue of $10.4 million in the quarter was at the low end of our $10 million to $14 million guidance range, as overall demand from RV customers remain sluggish. For fiscal 2023, Dragonfly generated approximately $64.4 million in net sales compared to $86.3 million in 2022. The decrease was primarily driven by lower battery and accessory sales due to demand declines in our core RV markets.

Significant cuts to overall unit sales from RV OEMs, combined with higher financing costs for retail RV customers were the primary drivers of the year-over-year decline in revenue. As Denis mentioned, despite these challenges, we continued to gain share in the overall RV market and believe we are well positioned to return to growth as the industry begins to recover. Our direct-to-consumer or DTC segment, generated net sales of $6.6 million in the fourth quarter of 2023, down from $10.7 million in the fourth quarter of 2022. For the full year of 2023, our DTC segment generated net sales of $36.9 million, down from $52.4 million in 2022. DTC net sales represented 57.3% of total 2023 revenue down from 60.8% in 2022. OEM net sales in the fourth quarter of 2023 were $3.9 million, down from $9.2 million during the fourth quarter of 2022.

As previously mentioned, our fourth quarter 2022 revenue included standard install revenue from Keystone, which was not the case in the fourth quarter of 2023. For the full year 2023, OEM net sales totaled $27.5 million, down from $33.8 million in 2022. The year-over-year decline in OEM revenue was driven by overall weaker demand and cuts within the RV market, partially offset by new customer wins. OEM sales contributed 42.7% of total net sales in 2023, up from 39.2% in 2022. With the growing base of RV OEMs, combined with our revenue diversification efforts into adjacent markets, we expect that OEM revenue will continue to increase as a percentage of overall sales throughout 2024. Dragonfly's gross profit in the fourth quarter was approximately $2.0 million compared to $4.0 million in the fourth quarter of 2022.

Our full year 2023 gross profit was $15.4 million down from $23.6 million in 2023. The year-over-year decline in 2023 gross profit was primarily driven by lower unit volume sales, a change in revenue mix that included a larger percentage of lower margin OEM sales, as well as higher material costs. Operating expenses in the fourth quarter of 2023 were $5.4 million, down from $32.9 million in the fourth quarter of 2022. As a reminder, operating expenses in the fourth quarter of 2022 included approximately $21.3 million in business combination expenses associated with our going public in October of 2022. Operating expenses for the full year 2023 were $42.9 million, down from $58.0 million in 2022. This decrease was primarily driven by the absence of expenses associated with the business combination in 2022 and lower overall employee-related costs, partially offset by an increase in stock-based compensation costs as well as higher compliance, insurance and professional fees related to public company expenses.

Total other income in the fourth quarter of 2023 was approximately $6.3 million compared to an expense of $2.7 million in the fourth quarter of 2022. Other income for fiscal 2023 was approximately $13.6 million compared to an other expense of $6.3 million in 2022. The income contribution in 2023 was primarily due to a change in fair market value of our warrant liability in the amount of $29.6 million partially offset by interest expense of $16.0 million. Net income in the fourth quarter of 2023 was $3.0 million or $0.05 per diluted share compared to a net loss of $32.5 million or a negative $0.76 per diluted share in the fourth quarter of 2022. Our net loss for the full year 2023 was $13.8 million or a negative $0.26 per share compared to a net loss of $40.0 million or a negative $1.04 per share in 2022.

As discussed, the change in our 2023 net loss was driven by lower sales due to reduced demand in the RV market, partially offset by lower cost of goods sold, lower operating expenses and increased other income. EBITDA in the fourth quarter of 2023 was $7.4 million, compared to a negative $28.0 million in the fourth quarter of 2022. Full year 2023 EBITDA totaled $3.4 million compared to a negative $32.8 million in 2022. In the fourth quarter of 2023, adjusted EBITDA, excluding stock-based compensation, changes in the fair market value of our warrants and other one-time expenses was a negative $2.1 million compared to a negative $4.7 million for the fourth quarter of 2022. For the full year 2023, adjusted EBITDA, excluding stock-based compensation, changes in the fair market value of our warrants and other one-time expenses was a negative $17.1 million compared to a negative $7.9 million for the full year of 2022.

For a reconciliation of EBITDA to adjusted EBITDA, please refer to our earnings press release. Before I turn to our guidance for the first quarter of 2024, I wanted to take a moment to discuss our cash position and expectations. Dragonfly ended the year with approximately $12.7 million in cash, down modestly from $13.2 million at the end of the third quarter of 2023. We continue to use our inventory of the source of working capital and expect that this will continue through at least the first half of 2024. We believe that this reduced cash burn, combined with access to our largely untapped $150 million equity line of credit provides us the necessary liquidity and resources to execute on our operational plans. Now I'd like to turn our attention to our expectations for the first quarter of 2024.

As Denis mentioned earlier, we believe that the RV market appears to have stabilized and is showing early signs of recovery. In addition, our entry into the heavy-duty trucking market, while still in its early stages is gaining traction and has the potential to be a more meaningful revenue contributor in the second half of 2024. We expect first quarter 2024 revenue to be in the range of $12 million to $13 million, representing approximately 20% sequential growth at the midpoint of the range. We expect gross margin in the first quarter to be in the range of 24% to 26%. Operating expenses in the first quarter of 2024 are expected to be in the range of $8 million to $9 million. We expect other income and expense to be an expense in the range of $3.5 million to $4.5 million.

We expect to report a net loss in the first quarter of 2024 in the range of a negative $8 million to a negative $10.5 million or a negative $0.13 per share to a negative $0.17 per share based on approximately 61 million shares outstanding. Let me now turn the call back over to Denis to provide some summary comments before turning the call over to Q&A.

Denis Phares: Thank you, John. Before opening the call for questions, I want to take a moment to highlight that despite the near-term growth and market headwinds, we have continued to execute and achieve our stated targets and milestones. In 2023, we completed the pilot line for our patented chemistry agnostic dry deposition process, prove that we could produce anode and cathode materials at scale and are now in the process of delivering sample battery cells to customers across several different industries and markets. We are extremely excited about 2024 as the convergence of the new cell manufacturing, the expansion of our customer base and market segments and the stabilization and return to growth of the RV markets sets the stage for an expected return to growth. With that, I will turn the call back over to the operator, who can open the line for questions.

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