Dragonfly Energy Holdings Corp

Good afternoon. My name is Jenny, and I will be your operator today for Track and Fly Energy's first quarter 2024 earnings call. The call can be accessed along with the earnings press release, earnings presentation, and SAC filings on the investor section of the Track and Fly Energy website found at www.trackandflyenergy.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. The consolations 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. Dennis Ferris Chief Executive Officer of Dragonfly Energy.

Thank you. And thank you to everyone joining us today. Ladies and gentlemen, the theme for today is return to growth. There is no doubt that this company faced many challenges in addition to market headwinds that consumed our core markets throughout last year. But our strengths make us uniquely capable as a technology company with both revenue and large upside potential. to weather historically bad economic conditions. We have demonstrated our ability to revolutionize an industry with broad adoption of our lithium batteries in RVs, and we are poised to repeat the same success in other adjacent downstream markets, including the heavy-duty trucking market. To update on that effort, during the first quarter of 2024, we have begun to take orders for our all-electric auxiliary power unit. In addition, we have launched our new liftgate power system, Both of these leverage our expertise in mobile alternator charging demonstrated by our wake speed technology. Our liftgate system has now been implemented in the trucking operations of bottling companies through Rush Enterprises, and we are looking to expand this application to the OEM level. Regarding the all-electric APU, we are pleased to announce that since the beginning of the year, we have begun taking purchase orders from fleets, including dry van fleet operator CRST, a tanker fleet operator, Oakley, as well as Ploeger, SNS, Worcester, Twin City, among others. The fleets are diverse in size and in application, demonstrating the versatility of the system. The previously announced pilot systems deployed within the larger fleets proved out the concept for these customers, consistently demonstrating reduced idling and enhanced ROI. Double-digit percentage improvements in miles per gallon have been commonly observed in the pilots. and we expect those improvements to only increase as we enter the warmer summer months. As some of these pilots are in their final stages, we expect to announce the transitioning of these fleets to our products throughout the summer. Moreover, the number of large fleets implementing pilot systems continues to grow. Regarding our core RV market, the latest RV Industry Association report forecasts a medium annual growth rate of 13.8%. RV shipments for the industry were up 9% for Q1 compared to the previous quarter. In Q1, our OEM revenue was $7.3 million. Although this represents a $1.5 million drop from the previous year's quarter, it is important to note that our batteries were standard on every Keystone trailer a year ago. Excluding Keystone, our OEM revenue grew year over year by 70% thanks to new partnerships such as the previously announced deal with Forest River, as well as expansion of standardization across legacy customers Airstream and NuCamp. This rapid growth is more demonstrative of our increased market penetration than growth of the RV market. We expect continued growth in this business line throughout the year, especially with the onset of the new model year in Q3 and the release of our intelligence line of batteries. In addition to these significant near-term growth drivers, I am pleased today to announce that we are poised to enter an entirely new adjacent downstream market, resulting from our efforts and relationships within the industrial solar and stationary storage markets. Over the last year, we have been quietly working on getting our products certified for deployment throughout the oil and gas industry. And in Q1, we have achieved the necessary certifications. At the same time, we have identified a large new customer in this space and worked with our previously announced integration partners at Conexa to deliver a unique power system that is fully certified to operate in the vicinity of oil and gas pipelines. The first of these power systems is expected to be deployed over the summer as an integral part of equipment that helps respond to the growing need to mitigate methane leakage into the atmosphere. This market is new and significant given the new EPA mandate through the Methane Emissions Reduction Program to both fund methane mitigation equipment and find each instance of methane leakage. Success for these power systems defined by successful technical performance in the field during the initial deployment could potentially yield thousands of deployments over the next 18 months. The customer we are working with on this project is a legacy equipment a market-leading natural gas compressor packager, and their dedicated affiliate Agnes Systems. We are very excited about this partnership and the new application of our technology, and we will share more details as this project progresses. Concurrent with our expanding potential market set, the development of our cell manufacturing technologies has continued as we push towards domestic cell production. The quality and scalability of our dry electrode process has garnered significant interest from large customers in sectors such as automotive, consumer electronics, and data centers. With the dry electrode process at pilot scale, we are now focusing our efforts on optimizing all other unit operations associated with cell manufacturing, especially optimizing aging, formation, and end of line testing. These tend to be very chemistry and application specific. Although we have historically focused on storage, which requires longevity and cyclability, propulsion and consumer electronics applications require higher electrode mass loadings and higher charge and discharge rates. We have demonstrated the ability of our dry electrode process to meet these metrics, and we are now becoming uniquely versatile in developing application-specific aging and formation protocols in-house. We have also demonstrated the ability of our dry electrode process to meet these metrics using PFAS-free electrodes, thereby eliminating the forever chemicals that are ubiquitous in conventional lithium ion batteries. This is a critical step in addressing the coming regulations to control the widespread use of these chemicals, especially within the European Union. We have provided some data demonstrating the results of our aging and formation protocols. as well as PFAS-free electrode data in our quarterly earnings presentation posted to our website. We are also at this time qualifying IRA-compliant suppliers, active material, binders, carbon conductors, current collectors, electrolytes, separators, etc., to support the scaling process of our products across new markets. I will now provide a review of our first quarter 2024 financial results as well as a more detailed outlook for the second quarter of 2024. Please note that the following figures presented are GAAP unless otherwise noted. Dragonfly generated net sales of $12.5 million in the first quarter of 2024, down from $18.8 million in the first quarter of 2023. As a reminder, the first quarter of 2023 included standard install revenue from Keystone, which was not the case in the first quarter of 2024. Net sales of $12.5 million in the quarter was in line with our $12 to $13 million guidance range. Our direct-to-consumer, or DTC, segment generated net sales of $5.2 million in the first quarter of 2024, down from $10.0 million in the first quarter of 2023. This segment has seen flat sales over the last several quarters, despite continued pressure on consumer discretionary spending. and we would expect a similar trajectory for this portion of the business at least through the second quarter of 2024. OEM sales in the first quarter of 2024 were $7.3 million, down from $8.8 million during the first quarter of 2023. As previously mentioned, we expect that OEM revenue will continue to increase as a percentage of overall sales throughout 2024. Dragonfly's gross profit in the first quarter of 2024 was approximately $3.1 million, compared to $4.7 million in the first quarter of 2023. Operating expenses in the first quarter of 2024 were $8.9 million, down from $14.6 million in the first quarter of 2023. The decrease was primarily driven by reduced headcount, lower shipping costs, lower legal costs, and lower overall stock-based compensation costs. Total other expense in the first quarter of 2024 was $4.5 million compared to total other income of $14.7 million in the first quarter of 2023. Other expense of $4.5 million in quarter ended March 31, 2024 is comprised primarily of interest expense of $4.8 million related to our debt securities offset by a change in fair market value of warrant liability in the amount of $0.2 million. Net loss in the first quarter of 2024 was $10.4 million or negative 17 cents per diluted share compared to net income of 4.8 million or 10 cents per diluted share in the first quarter of 2023. EBITDA in the first quarter of 2024 was negative $5.3 million compared to positive $8.9 million in the first quarter of 2023. In the first quarter of 2024, adjusted EBITDA excluding stock-based compensation offset by changes in the fair market value of our warrants was negative $5.2 million compared to negative $5.1 million for the first quarter of 2023. For reconciliation of our EBITDA to adjusted EBITDA, please refer to our earnings press release. Before I turn to our guidance for the second quarter of 2024, I wanted to take a moment to discuss our cash position and expectations. Dragonfly ended the first quarter with approximately $8.5 million in cash, down from $12.7 million at the end of 2023. Our uses of cash in the first quarter of 2024 included payment for critical cell manufacturing equipment, along with acceleration of payments to vendors, who we see as crucial partners as we expand into new markets. Our $150 million equity line of credit remains effectively unutilized, and we will continue to be prudent and opportunistic about its use going forward. As such, we believe that the levers we have to manage our cash spend provide us the necessary liquidity and resources to continue our R&D efforts, execute on our plans to enter new markets, and expand our market footprint. Now I would like to turn our attention to our expectations for the second quarter of 2024. As mentioned earlier, we believe that the RV market continues to show signs of recovery and our entry into the heavy duty trucking market is now gaining traction and will be a more meaningful revenue contributor in the second half of 2024. We expect second quarter 2024 revenue to be in a range of