Dragonfly Energy Holdings Corp

Good afternoon. My name is JP and I'll be your operator today for Dragonfly Energy's second quarter earnings call. This call can be accessed along with earnings press release and SEC file links on the investor 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 the 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 periodic SEC filings. Management will reference some non-GAAP financial measures. Reconciliations to the nearest corresponding GAAP measure can be found in today's release on the company's website. I'll now turn the call over to Dr. Dennis Fares, Chief Executive Officer of Dragonfly.

Thank you. And thank you to everyone joining us today. For those who are new to our story, Dragonfly Energy was founded in 2012 and today is a comprehensive lithium-ion battery technology company. We have operations that span the development of proprietary and patented battery cell manufacturing processes, the design and assembly of battery packs, as well as the integration of these packs and other ancillary components into full energy storage systems. We market and sell these systems into a wide range of consumer and industrial markets and uses, including the recreational vehicle, marine, and off-grid solar sectors. Traditionally, these markets have relied on lead acid batteries for energy storage. However, lead is toxic and remains a widespread problem in our environment. Dragonfly's lithium ion battery technology provides customers with a safer, cleaner, and better performing storage solution that also provides two to three times more power lasts over 10 times longer, is one-fifth the weight, charges faster, and requires no maintenance. We are proud of our patent portfolio, innovations, and growth to date. We are achieving growth within our core markets while continuing to expand our reach into new market adjacencies. The headwinds we continue to face in our core markets, which are dominated by consumer discretionary spending, are well documented and remain challenging. The RV industry in particular has experienced more severe unit declines than previously expected, with deliveries expected to fall to volumes not seen in a decade. As a result of this industry weakness, our largest RV customer has instituted a decontenting strategy that ultimately changed our premium energy storage offering from a standard install to a dealer option. In light of this change, we have removed all previously forecasted revenue from this customer for the remainder of the year. Although this has materially reduced our current year expectations, we do believe it is ultimately a matter of timing, as this customer has not moved to any competitive product, and just as importantly, we have continued to win market share within the industry as a whole. The RV Industry Association, or RVIA, is forecasting a slow recovery through 2024, and with our new customer wins, we expect to command even more of the industry as it recovers. We are also gaining traction with large customers in adjacent markets with transportation emerging as a promising source of future growth. We have more than 10 pilot or prototype programs underway across the fleet, long haul trucking, rail and work truck markets. And our expectation is that we will be able to announce several new contracts in these markets before year end. Importantly, these are large lead acid replacement market opportunities where our experience in the RV markets has enabled us to engineer full system solutions that are unique and differentiated. We believe these opportunities set the stage for additional growth in future quarters and years. More importantly, Dragonfly Energy has begun to execute on the aspect of the company that is less widely known, but we expect to be far more impactful. Briefly, we are at the start of our expansion to include cell manufacturing. This is significant for a number of reasons. First, it represents the deployment of our innovative and proprietary dry electrode manufacturing process that we have perfected over the last decade. We have demonstrated our ability to scale through our recent announcement of the application of our pilot line to the production of graphite anodes. Second, our cell manufacturing is an American innovation deployed for domestic production energy storage. Such activity has been identified by the U.S. government as crucial to our energy future. Incentives such as the IRA and grant opportunities for the development of domestic manufacturing infrastructure are key to this support. And finally, cell manufacturing is the ultimate diversification for the company. Although we will continue to grow in our historically core markets, chemistry agnostic and scalable cell manufacturing enables opportunities for faster growth into large developing markets such as grid storage. I will now turn the call over to John to provide a review of our second quarter financial and operational results, as well as a more detailed look for the third quarter of 2023. Thank you, Dennis.

In my remarks today, I will compare results from the second quarter of 2023 to the second quarter of 2022. All figures are GAAP unless otherwise noted. Dragonfly generated net sales of 19.3 million in the second quarter. in line with our 18 to 22 million revenue guidance. Our revenue declined by 2.3 million from 21.6 million in the second quarter of last year as growth from our OEM customers was offset by declines in our direct to consumer business. Our OEM customers accounted for approximately 48% of sales in the quarter compared to 34% of revenue in the second quarter of 2022. OEM revenue increased by 2.1 million year-over-year as a result of increased adoption of our products by new and existing customers, several of whom have begun to design in our batteries and various RV models as original equipment or have increased purchases in response to end customer demand for safer, more efficient batteries and as a replacement for traditional red acid batteries. However, as Dennis mentioned, given the steeper-than-expected downturn in the overall RV market, Our largest LG OEM customer has informed us that, beginning in the current quarter, it would no longer install our storage solutions as standard equipment, but rather return to offering those solutions as an option to dealers and customers. While this customer is not moving to a different solution or competitor, we do not have visibility into the timing or size of future orders. As a result, we have decided to be conservative and remove approximately $30 million of expected revenue from our forecast from this customer is a remainder of 2023. Our direct-to-consumer business, or DTC, represented approximately 52% of sales in the quarter, down from 67% of sales in the same quarter a year ago. The year-over-year decline of approximately 4.4 million was in line with expectations, as demand for our products has been negatively impacted by inflation and rising interest rates. While we continue to see signs of stability, we do not expect this segment of the market to materially improve through the remainder of 2023. Dragonfly's gross profit in the quarter was approximately $4.1 million, compared to $7 million in the second quarter of 2022. The decrease in gross profit was primarily due to the change in revenue mix that included a larger percentage of lower margin OEM sales and a lower percentage of higher margin DTC sales, as well as an increase in material costs as we continue to absorb some higher-priced inventory, particularly our imported battery cells. Operating expenses in the second quarter were $12.5 million, in line with our guidance, and an increase compared to $7.6 million in the second quarter of 2022. Second quarter operating expenses included increases of roughly $2 million for professional services, compliance, and insurance costs, as well as $1.1 million of higher sales and marketing personnel costs. In addition, savings, stock-based compensation, and materials and supply expenses were higher in the quarter relative to a year ago. Earnings in the second quarter were within guidance with a net loss of 11.7 million, or 25 cents per diluted share, compared to a net loss of 1.5 million, or a negative 4 cents per diluted share in the second quarter of 2022. The resultant 2Q was negatively impacted primarily by the lower DTC sales, increased cost of goods sold, higher operating expenses, and other increased other expenses due to the higher interest costs, partially offset by the fair value adjustment for wants. Second quarter EBITDA was a negative $7.3 million in 2023, compared to a negative $0.3 million in the second quarter of 2022. Adjusted EBITDA, excluding stock-based compensation, costs associated with our offering in June, and the impact of separation agreements and changes in the fair market value of the company's warrants, was a negative 5.5 million in the quarter, compared to a positive 0.2 million in the same quarter a year ago. For a reconciliation of EBITDA to adjusted EBITDA, please refer to our earnings press release. Dragonfly ended the quarter with approximately $33.0 million in cash and retains a strong financial flexibility, including access to $150 million equity line of credit. Now I'd like to turn our attention to our expectations for the third quarter of 2023. As discussed on previous calls, we expected new OEM program wins, particularly among RV customers, to drive revenue growth in the second half of 2023. While we have been successful in winning these new customers, with announcements like Airstream and Nuke Camp as a couple of examples, these new wins are not enough to offset the decision by our largest RV OEM customer to revert back to offering our storage solutions as an option rather than a standard install. Our DTC business, while stable, continues to face headwinds, with customers focused on macroeconomic challenges, such as rising interest rates and inflation. Given those dynamics, we expect third quarter revenue to be in the range of $16 to $20 million. We expect gross margin to improve modestly on a sequential basis, as we expect a more favorable mix, and we return to more normalized material costs following the utilization of some of the higher price buffer inventory. Operating expenses in the September quarter are expected to be in the range of $10 million to $13 million, and we expect total other income and expense to be an expense in the range of $4 million to $4.5 million. We expect to report a net loss in the third quarter in the range of $10 million to $13 million, or a negative 21 cents per share to a negative 27 cents per share, based on approximately 48 million shares outstanding. We are also now expecting our 2023 revenue to be in the range of 70 to 80 million, down from our prior outlook of 112 to 122 million. As mentioned earlier, we are moving approximately 30 million expected revenue from the second half of the year due to the change from our largest customer. And we are also now expecting approximately 10 million less than previously expected from new customer and new program winners as the volumes of these new awards are running below prior expectations given the deeper cuts to industry units than previously forecasted. Let me now turn the call back over to Dennis to provide some additional color and operational highlights and goals for the remainder of the calendar year.