Dragonfly Energy(DFLI) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements, management's analysis of financial condition and operations, and disclosures regarding market risk and internal controls Item 1. Financial Statements (unaudited) For the first quarter of 2023, Dragonfly Energy reported net sales of $18.8 million, a slight increase from $18.3 million in Q1 2022, shifting from a net loss of $2.3 million to a net income of $4.9 million primarily due to a significant positive change in warrant liabilities fair market value Condensed Consolidated Balance Sheets As of March 31, 2023, total assets were $90.5 million, a slight increase from year-end 2022, while total liabilities significantly decreased to $58.2 million primarily due to a reduction in warrant liabilities, leading to an increase in total equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash | $15,791 | $17,781 | | Inventory | $51,812 | $49,846 | | Total Current Assets | $75,016 | $73,489 | | Total Assets | $90,509 | $88,762 | | Liabilities & Equity | | | | Accounts payable | $18,824 | $13,475 | | Notes payable, current | $20,699 | $19,242 | | Warrant liabilities | $4,141 | $32,831 | | Total Current Liabilities | $50,483 | $40,566 | | Total Liabilities | $58,194 | $77,430 | | Total Equity | $32,315 | $11,332 | Condensed Consolidated Statements of Operations For the three months ended March 31, 2023, net sales increased slightly to $18.8 million, but gross profit decreased, and operating expenses surged, resulting in a $9.8 million loss from operations, which was offset by an $18.5 million gain from warrant liability revaluation, leading to a net income of $4.9 million Condensed Consolidated Statements of Operations (in thousands) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Sales | $18,791 | $18,303 | | Gross Profit | $4,743 | $5,495 | | Total Operating Expenses | $14,559 | $7,057 | | Loss From Operations | $(9,816) | $(1,562) | | Change in fair market value of warrant liability | $18,523 | - | | Net Income (Loss) | $4,892 | $(2,298) | | Income (Loss) Per Share- Diluted | $0.10 | $(0.06) | Condensed Consolidated Statements of Cash Flows For the first quarter of 2023, net cash used in operating activities improved to $3.8 million, while net cash provided by financing activities increased to $2.4 million, resulting in a $2.0 million net decrease in cash, ending the quarter with $15.8 million Cash Flow Summary (in thousands) | Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(3,838) | $(11,110) | | Net Cash Used in Investing Activities | $(589) | $(4,524) | | Net Cash Provided by Financing Activities | $2,437 | $111 | | Net Decrease in Cash | $(1,990) | $(15,523) | | Ending Cash | $15,791 | $13,107 | Notes to Condensed Consolidated Financial Statements Key notes highlight the company's business, a significant "Going Concern" issue due to operational losses, negative cash flow, and probable debt covenant breaches, a shift in revenue disaggregation from retail to OEM sales, and details on its $75 million term loan, warrants, stock-based compensation, and related party transactions - Going Concern: The company has incurred operational losses and negative cash flows, and it is probable that the company will fail to meet its Term Loan covenants within the next twelve months, which raises substantial doubt about its ability to continue as a going concern[24][25] Disaggregation of Revenue by Channel (in thousands) | Channel | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Retail | $7,069 | $13,035 | | Distributor | $2,968 | $2,087 | | Original equipment manufacturer (OEM) | $8,754 | $3,181 | | Total | $18,791 | $18,303 | - Debt Covenants: The company has a $75 million Term Loan with covenants for senior leverage ratio, liquidity, and fixed charge coverage, for which it obtained a waiver for Q1 2023 failures to satisfy the fixed charge coverage and senior leverage ratios, leading to the entire term loan being classified as a current liability due to uncertainty of future compliance[71][73][75] - Warrant Liability: The fair value of warrant liabilities decreased significantly from $32.8 million at year-end 2022 to $4.1 million at the end of Q1 2023, resulting in an $18.5 million gain recognized in the income statement due to both a change in fair value and the cashless exercise of a large number of warrants[51][96][11] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 2.7% increase in Q1 2023 net sales to strong OEM growth offsetting DTC declines, notes a decrease in gross profit margin due to sales mix shift, highlights surging operating expenses from increased compensation and fees, and expresses substantial doubt about going concern due to probable debt covenant breaches, with future plans including significant R&D investment requiring additional capital Results of Operations Net sales for Q1 2023 increased by 2.7% to $18.8 million, driven by a $5.6 million rise in OEM revenue offsetting a $5.1 million decrease in DTC revenue, while gross profit fell by 13.7% to $4.7 million due to sales mix shift, and operating expenses significantly increased by 106.3% to $14.6 million, primarily from G&A expenses, leading to a net income of $4.9 million due to a $14.7 million other income from warrant liability revaluation - Net sales increased by $0.5 million (2.7%) year-over-year, primarily due to a $5.6 million increase in OEM revenue, which was offset by a $5.1 million decrease in DTC revenue attributed to rising interest rates and inflation[147] - Gross profit decreased by $0.8 million (13.7%) year-over-year, as the revenue mix shifted to include a larger percentage of lower-margin OEM sales[149] - General and administrative expenses increased by $5.9 million (161.8%) year-over-year, mainly due to a $3.5 million increase in stock-based compensation and a $2.1 million increase in professional, compliance, and insurance costs[151] - Total other income was $14.7 million, compared to an expense of $1.3 million in the prior year, primarily due to an $18.5 million positive change in the fair market value of warrant liability[153] Liquidity and Capital Resources As of March 31, 2023, the company had $15.8 million in cash and plans significant capital investment exceeding $50 million for solid-state battery development over the next 2-3 years, while facing substantial doubt about its ability to continue as a going concern due to probable future breaches of its $75 million term loan covenants, despite obtaining a waiver for Q1 2023 - The company had $15.8 million in cash as of March 31, 2023[169] - Significant capital investment is planned, with over $50 million expected to be spent on solid-state development and cell manufacturing technologies over the next two to three years[170] - The company obtained a waiver for its failure to satisfy the fixed charge coverage ratio and maximum senior leverage ratio covenants for the quarter ended March 31, 2023, and it is probable that the company will fail to meet these covenants within the next twelve months[173][178] - These conditions, including probable future covenant breaches and the need to raise additional capital, raise substantial doubt about the company's ability to continue as a going concern[178][179] Non-GAAP Financial Measures The company uses Adjusted EBITDA as a non-GAAP measure, reporting a loss of $5.0 million for Q1 2023, compared to a loss of $0.4 million in the prior-year period, after adjusting net income for interest, taxes, depreciation, amortization, stock-based compensation, and the change in fair value of warrant liabilities Adjusted EBITDA Reconciliation (in thousands) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net income (loss) | $4,892 | $(2,298) | | Interest Expense | $3,815 | $1,263 | | Taxes | $0 | $(527) | | Depreciation and Amortization | $297 | $192 | | EBITDA | $9,004 | $(1,370) | | Stock-Based Compensation | $4,487 | $288 | | Change in fair market value of warrant liability | $(18,523) | $0 | | Other Adjustments | $0 | $702 | | Adjusted EBITDA | $(5,032) | $(380) | Quantitative and Qualitative Disclosures about Market Risk The company states this section is not applicable - Not applicable[186] Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of March 31, 2023, due to un-remediated material weaknesses previously reported in the 2022 Annual Report, with ongoing remediation efforts - Management concluded that due to previously reported material weaknesses that have not yet been remediated, the company's disclosure controls and procedures were not effective as of March 31, 2023[189] - No changes in internal controls over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls, other than the ongoing remediation plan[190] PART II. OTHER INFORMATION This section details legal proceedings, risk factors, recent securities sales, other disclosures, and a list of exhibits Legal Proceedings The company is not currently a party to any legal proceedings that are expected to have a material adverse effect on its business - The company is not currently a party to any litigation or legal proceedings that, in management's opinion, are likely to have a material adverse effect on the business[191] Risk Factors As a smaller reporting company, Dragonfly Energy is not required to provide this information - As a smaller reporting company, the company is not required to provide the information for this item[192] Recent Sales of Unregistered Securities None reported for the period - None[193] Other Information None reported for the period - None[196] Exhibits This section lists the exhibits filed as part of the Quarterly Report, including certifications by the CEO and CFO, and various agreements and corporate documents