Dragonfly Energy Holdings Corp. (DFLIW): Poised for Growth in Diverse Markets

Published on September 24, 2024 | Ticker: DFLIW

Dragonfly Energy Holdings Corp. (DFLIW) is a manufacturer of non-toxic deep cycle lithium-ion batteries designed to displace lead acid batteries in a variety of storage applications and end markets. The company has demonstrated its ability to revolutionize the RV industry with broad adoption of its lithium batteries and is now poised to repeat that success in other adjacent downstream markets.

In fiscal year 2023, Dragonfly Energy reported annual revenue of $64,391,999, a net loss of $13,817,000, annual operating cash flow of -$17,706,000, and annual free cash flow of -$24,591,000. For the first quarter of 2024, the company generated net sales of $12.5 million, down from $18.8 million in the prior year period. The decrease was primarily due to lower direct-to-consumer (DTC) and original equipment manufacturer (OEM) battery and accessory sales, offset by a higher average sales price.

Dragonfly's gross profit in the first quarter of 2024 was $3.1 million, compared to $4.7 million in the prior year period. Operating expenses decreased to $8.9 million from $14.6 million, driven by reduced headcount, lower shipping costs, lower legal costs, and lower stock-based compensation. The company reported a net loss of $10.4 million, or -$0.17 per diluted share, in the first quarter of 2024, compared to net income of $4.8 million, or $0.10 per diluted share, in the prior year period.

Business Overview

Dragonfly Energy sells lithium-ion battery packs for use in a wide variety of applications, including recreational vehicles (RVs), marine vessels, solar, oil and gas, and off-grid industries. The company sells to distributors under the Dragonfly Energy brand name and directly to consumers under the Battleborn Batteries trade name. In addition, Dragonfly develops technology for improved lithium-ion battery manufacturing and assembly methods, including innovative dry-electrode manufacturing processes that eliminate the use of harmful solvents and energy-intensive drying ovens.

The company's strategy includes plans to expand into new end markets that it has identified as opportunities for its lithium-iron-phosphate (LFP) batteries, including medium and heavy-duty trucking, specialty and work vehicles, solar integration, oil and gas, industrial, rail, material handling, and emergency and standby power. Dragonfly believes that its current LFP batteries and, eventually, its solid-state batteries, will be well-suited to these markets as a reliable power source for low power density uses.

Dragonfly's RV OEM customers currently include Keystone, THOR, Airstream, and REV, and the company is in ongoing discussions with additional RV OEMs to further increase adoption of its products. The company sources its LFP cells from a limited number of carefully selected suppliers in China and has signed a commercial offtake agreement with a lithium mining company in Nevada to secure supply for its future solid-state cell production.

Financials

Financial Highlights and Liquidity

Dragonfly ended the first quarter of 2024 with $8.5 million in cash, down from $12.7 million at the end of 2023. The company's uses of cash in the quarter included payment for critical cell manufacturing equipment and acceleration of payments to vendors. Dragonfly has a $150 million equity line of credit that remains effectively unutilized, and the company plans to be prudent and opportunistic about its use going forward.

The company is subject to certain financial covenants under its $75 million senior secured term loan facility, including a maximum senior leverage ratio, minimum liquidity, a springing fixed charge coverage ratio, and maximum capital expenditures. Dragonfly has obtained waivers from its lenders regarding its compliance with these covenants for the quarters ended March 31, 2023, September 30, 2023, December 31, 2023, and March 31, 2024. However, it is probable that the company will fail to meet these covenants within the next twelve months.

Dragonfly may need to raise additional debt and/or equity financing to fund its operations, strategic plans, and meet its financial covenants. The company has historically been able to raise additional capital through equity and debt financings and intends to use its equity facility and raise additional capital as needed. However, there is no guarantee that the company will be able to raise additional equity, contain expenses, or increase revenue, and comply with the financial covenants under its term loan.

Outlook

Guidance and Outlook

For the second quarter of 2024, Dragonfly expects revenue to be in the range of $14.0 million to $15.0 million, representing approximately 16% sequential growth at the midpoint of the range. The company expects gross margin to remain in the range of 24% to 26%, with operating expenses between $8.5 million and $9.5 million, and other income and expense to be an expense in the range of $3.0 million to $4.0 million. Dragonfly expects to report a net loss in the second quarter of 2024 in the range of $8 million to $10 million, or -$0.13 to -$0.16 per share.

The company believes that the RV market continues to show signs of recovery, and its entry into the heavy-duty trucking market is gaining traction and will be a more meaningful revenue contributor in the second half of 2024. Dragonfly also expects its deployment of products for use in the oil and gas industry to begin contributing to net sales by the fourth quarter of 2024.

Risks and Challenges

Dragonfly faces several risks and challenges, including the potential loss of key suppliers, customers, or personnel, the failure to successfully optimize or scale its solid-state cell technology, and the potential impact of changes in applicable laws or regulations, such as tariffs or adjustments to tariff amounts. The company's ability to maintain the listing of its common stock and public warrants on the Nasdaq exchanges is also a risk factor.

Additionally, Dragonfly's current dependence on a single manufacturing facility and the potential impact of geopolitical events, such as the Russia-Ukraine conflict and Hamas' attack on Israel, could adversely affect its operations. The company's ability to sell the desired amounts of shares of common stock at desired prices under its equity facility and its ability to raise additional capital to fund its operations and strategic plans are also critical to its success.

Conclusion

Dragonfly Energy Holdings Corp. (DFLIW) is a technology company with both revenue and large upside potential, poised to capitalize on growth opportunities in the RV, heavy-duty trucking, and oil and gas markets. The company's innovative battery technologies, including its dry-electrode manufacturing process and solid-state cell development, provide a competitive edge and position it for success in a variety of end markets. While Dragonfly faces several risks and challenges, its strong customer relationships, diversified product portfolio, and strategic initiatives suggest the potential for a return to growth in the coming quarters.

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