Dragonfly Energy Holdings Corp. (DFLI) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Dragonfly Energy Holdings 3Q 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Szymon Serowiecki, Investor Relations.

Thank you, operator. Appreciate you joining us for today's call. Joining me today are Denis Phares, Dragonfly Energy's Chairman, President and Chief Executive Officer; and Wade Seaburg, Chief Commercial Officer. Before turn the call over to Denis, I'd like to make a brief statement regarding forward-looking statements. During this call, the company will be making forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 based on current expectations. These forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These risks are described more fully in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2025, and our subsequent periodic reports. 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. Reconciliations to the nearest corresponding GAAP measure can be found in today's release on the company's website. Please note that all comparisons will be discussed today on a year-over-year basis unless otherwise noted. I'll now turn the call over to Denis.

Thank you, Szymon, and good afternoon, everyone. The third quarter was highlighted by the continued acceleration in commercial fleet adoption of our suite of heavy-duty trucking solutions. Trucking revenue more than doubled sequentially to $1.3 million, in line with the outlook we provided in August, driven by deliveries to an expanded customer base. We have clearly moved beyond the development and trial phase and are seeing growing commercial industry adoption. For several years, our work in this market has been centered on proving our technology through testing and extensive pilot programs. This quarter, for the first time, we received orders from fleets that moved directly to commercial deployment without a pilot, reflecting the credibility our early deployments have earned across the industry. This dynamic also shortens our sales cycle, accelerating the path from initial conversations to orders. Based on our current order book, we expect trucking revenue to nearly double sequentially in the fourth quarter as we continue to not only expand shipments to existing customers, but also expand our overall customer base. Looking further ahead, we are already seeing strong demand momentum build into 2027 with several fleets now in discussions about next year's deployments. We are excited by the progress in trucking and the opportunity still ahead of us, which Wade will cover in more depth shortly. RV market conditions remained challenging and industry shipments continued to decline during the quarter. Lower OEM volume, together with continued softness in DTC resulted in total net sales of $12.2 million, below our guidance of approximately $13.5 million. Through this period, we have remained focused on deepening our OEM relationships. We have deliberately aligned with premium brands that continue to make lithium standard and adoption within those partnerships remains healthy as partners increase energy storage content and standardize our systems across more of their lineups. Turning to Dakota Lithium. At the end of July, we completed the acquisition of the Dakota Lithium brand and associated assets. The acquisition represents an important step in our strategy to expand our addressable market, bringing an established and recognized lithium battery brand into our portfolio that complements Battle Born across additional applications and price points. Since closing the acquisition, we have been focused on rebuilding Dakota's inventory and reengaging its established dealer and distribution network. In parallel, we have been strengthening Dakota's e-commerce platform and digital marketing capabilities to better support direct-to-consumer sales as product availability improves. Early commercial signals have been encouraging. The products we have available are selling well and conversations with our channel partners have reinforced our confidence that demand for the brand remains intact. We expect new product inventory to begin arriving towards the end of the fourth quarter with broader product availability and a more meaningful revenue contribution beginning in the first quarter of 2027. Importantly, we expect Dakota to be accretive to adjusted EBITDA as we can leverage our existing infrastructure and operating capabilities with minimal incremental overhead. On the technology side, in August, we announced a partnership with Sphere Energy to bring AI-driven battery health and performance modeling into our next-generation systems. By drawing on years of field data from our installed base, we expect this work to give customers more accurate insight into how their batteries are performing and help us refine future products. We also continue to advance our dry electrode and solid-state programs, which represent a significant long-term opportunity. We have made substantial upgrades to our R&D facility and technical capabilities supported through Tech Hub funding while maintaining our near-term focus on revenue growth. Now I'll turn the call over to Wade to discuss trends in our commercial markets in more detail.

Thank you, Denis. I'll start with heavy-duty trucking, where the work of the past several years is now translating into a growing base of high-profile commercial fleet customers. Third quarter trucking revenue grew to $1.3 million, up from approximately $0.5 million in the second quarter. Growth was primarily driven by shipments under the Stevens Transport purchase order as Stevens' works through the transition of its fleet, along with our first deliveries against Werner Enterprises' initial production order. We also made initial deliveries to several additional fleets. For the fourth quarter, we expect trucking revenue to nearly double sequentially, supported by expanding deliveries to Stevens and Werner and orders from new customers. As Denis mentioned, we are starting to see fleets order our systems and move straight to deployment without a pilot. That is a significant change, and we believe it reflects the credibility we have earned through years of extensive pilot programs, independent testing and real-world operation with some of the largest carriers in North America. We are also seeing these benefits validated in real-world fleet operations. Stevens Transport, which now has hundreds of trucks equipped with Dragonfly systems, has reported approximately 4% lower diesel consumption compared to trucks operating with traditional diesel-powered APUs. Stevens has also reported meaningful reductions in maintenance requirements and downtime, reinforcing the broader economic benefits of our technology. With diesel prices remaining elevated, these operating efficiencies have become increasingly valuable to fleet operators. Importantly, the savings begin as soon as our systems are deployed, which we believe gives carriers a compelling financial incentive to accelerate adoption. Our solutions deliver these benefits without requiring a transition to fully electric trucks or investment in new charging infrastructure. Based on our internal fleet modeling, the DualFlow Power Pack can achieve payback in approximately 4 months at current diesel prices with comparable payback on our all-electric APU. We believe these savings are one of the reasons we are seeing fleets shorten their decision time line. At the same time, we continue to see successful pilot programs translate into larger commercial commitments, while our pipeline of prospective customers continues to expand. We are actively engaged with some of the largest commercial carriers and company-owned fleets in North America, including discussions around deployments planned for 2027. Turning to RV. Conditions remained soft in the third quarter with RVIA reporting wholesale shipments down 13.7% year-to-date through September. Our RV strategy continues to center on aligning with premium manufacturers, brands like Airstream, Ember RV and Awaken RV have made Battle Born standard across select lineups, and those relationships continue to deepen as partners add our systems to more models and increase energy storage content. Importantly, our key partners continue to stand behind our solutions based on years of their own field experience. In industrial markets, intelligent transportation systems have become an area of growing traction. Applications such as traffic signal backup power have historically relied on lead-acid batteries and agencies and operators are evaluating lithium as a longer-lasting, lower maintenance alternative. During the quarter, we supplied batteries for a State Department of Transportation project, representing another example of our expanding presence in industrial applications. We continue to pursue additional opportunities in this market as demand grows for reliable, long-lasting backup power solutions. Across these markets, we are seeing a consistent theme. Customers are looking for reliable, long-lasting power that also lowers their operating costs. In trucking, commercial deployment is accelerating as our fleet customers are seeing those savings and operational benefits in real-world operations, and we believe the same value proposition applies across the markets we serve. I'll now hand the call back to Denis to review our financial results.

Thank you, Wade. Turning to our third quarter results. Net sales were $12.2 million compared to $16 million in the prior year period. OEM net sales were $7.1 million and DTC net sales were $4.8 million, with the declines primarily reflecting lower RV volumes and continued softness in consumer demand. Gross profit was $3.3 million with gross margin of 27% compared to gross profit of $4.7 million with gross margin of 29.7% in the prior year period. The declines were driven by lower volumes. Operating expenses were $7.3 million compared to $8.5 million a year ago. Given the significant progress we have already made on our ongoing cost reduction initiatives, we are now operating from a more efficient cost base. Net loss attributable to common shareholders was $6.7 million or $3.71 per diluted share compared to a net loss of $11.1 million or $16.45 per diluted share in the prior year period. Adjusted EBITDA was negative $2.3 million, only modestly below negative $2.1 million in the prior year period. Despite revenue coming in below expectations, adjusted EBITDA came in ahead of our guidance of negative $2.4 million, reflecting the progress we have made on our cost structure. We continue to pursue additional operational efficiencies. For the fourth quarter, we expect net sales of approximately $12.5 million and adjusted EBITDA to be approximately breakeven, reflecting continued progress on our cost initiatives and the anticipated benefit of certain tariff-related refunds. We expect trucking revenue to nearly double sequentially, partially offset by continued softness in the RV market. As a reminder, last year's fourth quarter benefited from RV OEM orders that were pulled forward from the first quarter of 2026. Since the start of the year, we have established trucking as a growing source of revenue, added the Dakota brand and reduced our cost base. We believe these actions have put Dragonfly on a stronger footing heading into 2027. We remain focused on achieving sustainable positive adjusted EBITDA, supported by continued growth in trucking, Dakota Lithium and ongoing cost efficiencies. I would like to thank our employees, customers and shareholders for their continued support. Operator, we would now like to open the call for questions.

[Operator Instructions] Our first question comes from George Gianarikas with Canaccord Genuity.

With regard to your guidance to be at about breakeven EBITDA in the fourth quarter, I'm just curious what gives you conviction in that trajectory? And what sort of synergies are you seeing and potential cost-cutting opportunities to get you there?

Thank you, George. Thanks for your question. We have continued our cost efficiency activities throughout the year, which includes consolidation of our operating rental space and making that to resize given the revenues that we've been experiencing and expecting. So we have achieved continued increased benefits in the cost structure, and therefore, we've been expecting better performance on the bottom line. And specifically with the fourth quarter, we are starting to see some of those IEEPA tariff-related refunds, which were anticipated to continue to increase this quarter and beyond. So that is something that we were expecting and are starting to come to fruition.

And with regard to the balance sheet, any efforts that you can talk about just to sort of shore that up a little bit as you enter 2027?

Well, I would say in terms of cash management, this is a position that we've been in for a few years now. We've had to tighten the belt. We continue to tighten the belt. We're always looking for opportunistic, I would say, opportunities for sources of capital, things like grants and the Tech Hub funding, pursuing refunds where we can get them. But obviously, we're always going to be looking for the opportunity to raise capital when it's in front of us.