Good afternoon. My name is Lester, and I will be your operator today for Dragonfly Energy's Third Quarter Earnings Call. The call can be accessed along with the earnings press release and SEC filings on the Investors section of the Dragonfly Energy's website found at www.dragonflyenergy.com. As a reminder, this conference call is being webcast and recorded. [Operator Instructions] 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. Reconciliations to the nearest corresponding GAAP measures could be found in today's release on the company's website. I will now turn over the call to Dr. Denis Phares.

Thank you, and thank you to everyone joining us today. Before handing the call over to John to review our third quarter financial results, I wanted to spend a few minutes providing an update on our core markets, our progress and our revenue diversification efforts and to highlight the important milestones that we have achieved in our domestic battery cell manufacturing operation. As many of you know, the majority of our revenue today comes from the recreational vehicle market, either through aftermarket sales or through OEMs, when they place our storage solutions on their RVs during the manufacturing process. The RV industry, which is dependent on consumer discretionary spending, continues to face significant challenges with unit shipments down over 50% year-over-year, well below the industry's expectations just a few quarters ago. As discussed during our last earnings call, this steeper-than-expected decline in the RV industry has had a negative impact on our revenue. This is particularly the case with our largest OEM customer, who informed us in July that they would no longer be installing our storage solutions as standard equipment and have returned to offering our solutions as an optional feature. The loss of this revenue combined with overall RV weakness was the primary driver behind the year-over-year decline in our third quarter revenue. While we expect this weakness to continue in the near term, demand in the RV market does appear to be stabilizing. And it is important to note that despite weaker sales, our customers are not moving to competitor products. In fact, we continue to gain market share with both new customer wins and new programs and models with existing customers. So as the industry begins to recover in 2024, we expect the RV market will return as an important growth driver for the company. This…

Thank you, Denis. Please note that all figures are GAAP unless otherwise noted. Dragonfly generated net sales of $15.9 million in the third quarter of 2023, down from $26.1 million in the third quarter of 2022 and at the low end of our guidance range as we saw year-over-year declines in both our OEM and DTC businesses due to RV market weakness. OEM revenue of $5.6 million in the third quarter declined by $8.3 million compared to the same quarter a year ago, primarily as a result of the previously disclosed decision by our largest RV OEM customer that due to weaker demand for its products and their need to focus on reducing costs, it is no longer installing our storage solutions as standard equipment, but instead has returned to offering our solutions as an option to dealers and consumers. To reiterate, this customer is not moving to a different solution or a competitor. But as expected, its decision has had a material adverse impact on our OEM sales in the third quarter, and we expect this change to continue to have a material limiting effect on our revenue through the remainder of 2023. Our direct-to-consumer, or DTC, revenue was $10.3 million in the third quarter of 2023, down $1.9 million compared to the third quarter of 2022. The decrease was in line with our expectations and is a result of decreased customer demand, given ongoing macroeconomic factors, such as higher interest rates and inflation. 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 $4.6 million compared to $7.0 million in the third quarter of 2022. The decrease in gross profit was due to lower overall…

Thank you, John. Before moving to questions, I just want to take a moment to emphasize that we continue to execute and achieve our stated milestones, despite market headwinds. We have developed, patented and deployed an entirely new cell manufacturing process that reduces the cost, energy usage and footprint of conventional cell manufacturing. Despite an RV industry contraction, we have rapidly expanded into larger downstream vertical markets. We are extremely excited about 2024 and beyond as the convergence of the new cell manufacturing, the new Dragonfly IntelLigence technology and the expansion of customer base and market segments sets the stage for an expected return to growth and profitability. With that, I will turn the call back over to the operator, who can open the line for questions.

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

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Sure. Thanks, George. It's John. Just -- I mean, I think the -- when we go back and look at the capital raise that we did, right, a big, big driver behind that was to finish up the pilot line and start getting the anode and cathode material made and then be in a position to deliver those sample cells, as Denis highlighted, by the end of the calendar year. So there was a fair bit of spending that went into that effort, in particular, that I don't think is necessarily something that we expect to repeat on an ongoing basis in terms of some of the capital intensity and some things that we're looking at there. From an ongoing operations standpoint, from a working capital need, with revenue being down a little bit from the weaker demand, we're able to pull, I think, from existing inventory levels for the most part. So we continue to work down those inventory levels, and we expect that would certainly continue over the short term here. But ultimately, I think, for us, we certainly feel comfortable with where we're sitting right now from a cash perspective, understanding that we're still in a net income or a net loss position and expect to be for the next 2 quarters at least. But between what we've got on the balance sheet today, and as I mentioned, having access to that equity line of credit, which we really have not used much at all, we feel like we've got access to the resources we need here to continue to execute on the plan and then hopefully be bringing these cells to market and things along those lines, which should improve as we go through next calendar year.

And so just with regard to the $150 million, the equity line of credit, may I ask why haven't you used that yet? And what's been the stumbling block? Because it seems like it's there, it's available, why not do a little investment?

So a lot of it had to do with the registration statements, George, and where we were. We were locked up in the beginning part of the year as we were coming out of the SPAC process. We then -- as we were looking to raise capital, we're fairly restricted as a result of that equity raise that we did in June. So now with those restrictions off, we expect to be S-3 eligible here in the not-too-distant future. So I think that our intent is certainly to be more active with that on a go-forward basis.

And when do you expect that to happen? In the not too distant -- or I would assume in the next few weeks or...

I think that’s accurate, George.

Your next question comes from Vincent Anderson from Stifel.

So the RVIA wholesale data showed shipments kind of decelerate or, I guess, the decline slowing in the third quarter. I think it was down about 20% year-over-year. Your OEM revenues fell disproportionate to that, but we're running well ahead of the market in the first half of the year. Can you just speak to how much of the first half of the year were orders that maybe had been more or less committed to? And what we're seeing now maybe just reflects inventory management? Or is there some kind of deselection of the battery options on the units being offered by sellers kind of regardless of whether they are spec-ed in by that major customer or issued as an option?

Sure, Vince. I mean the short answer to your question really is the lack of Keystone contribution in the third quarter, particularly on a year-over-year basis. If we go back to the third quarter of 2022, that was actually our peak quarter for the Keystone revenue. The program had gone standard on that model year beginning in July, and that was really our peak revenue quarter with Keystone. So it's a tough compare to begin with, as you rightly point out, with the unit declines. But on top of that, as we indicated on the last earnings call, Keystone in an effort to cut costs has gone and put us as an option rather than as a standard on whatever units they are bringing off those lines. So with them working through a little bit of inventory that they still have on the books and all of that, we had very little Keystone revenue in the third quarter as expected, which is why we kind of removed them overall from that guidance at the -- when we were on the 2Q earnings call.

Okay. Okay. Yes, that makes sense. That ties out. Switching over for Denis here. I was just kind of curious if there were inquiries to begin replicating your technology in an established cell manufacturing plant for further testing, thinking along lines like a joint development agreement that could lead to licensing. Is your process kind of dialed in? Obviously, the testing isn't done, but dialed into the point where you could efficiently transfer that knowledge and training to a partner if one showed up at your door step?

Yes. The nice thing is that we're changing the front end in terms of the deposition of the anode and cathode. The rest of the line can be pretty identical. So if -- it's a hard sell, I guess, if companies have a lot invested in their existing lines because with the slurry coating process, you really have to go to scale pretty early to get to profitability there. But yes, if someone came to us and said, yes, we're interested in applying this technique to the front end, then we'd be ready to demonstrate.

Got you. I mean I ask specifically because we have seen quite a few cell capacity expansions. Maybe getting a little bit more time to plan, I think, is the nice spin on that. But I'm not sure what level of commitment they've made on, particularly, that front end of their engineering if they wanted to maybe think about going with something different. I guess switching over to the announcement on the Class 8 auxiliary power supply units. I'm just kind of curious if you could help me visualize what a retrofit would look like in that, particularly to get a sense of like how large of a commitment we're thinking about in terms of having vehicles out of service versus the simple economics on the battery itself.

The installation itself is pretty easy. So we've developed the product so it's more or less a drop-in from what they're used to having in there in terms of a conventional APU. But the fact that we have so many pilots out there when you have to take trucks off the road is indicative of the interest because these are trucks that are not making revenue during those changeovers. So now that we've got a lot out there and we've got some very good data coming in, it bodes very well in terms of their ability to use this to save money on diesel fuel and to comply with anti-idling regulations. So we're excited about the prospects for this new market because it's no longer a luxury. Oh, here, have lithium batteries and you can do things you couldn't before. This is truly a cost-saving measure for the fleet, and it's resonating quite well.

Excellent. And I don't believe there's a ton of precedent for a retrofit quite like this in the trucking industry. But have you received any indication about how long their test cycle would likely last?

We've had tests out there for up to 8 months. So they definitely want to try summers, they want to try winters. But as soon as -- I will say that we are working with standard bearing-type fleets, where if some of these change over, it will affect the changeover of others as well.

Excellent. And then last one on that point. The supply chain for the components around kind of the BMS and the broader system, how comfortable are you with that, that your suppliers that you have now could scale quickly, if necessary?

We’re very comfortable.

Your next question comes from Brian Dobson from Chardan.

So you mentioned the potential for a 2024 recovery in the RV market. I guess, what are you seeing that would drive that recovery? And what are you hearing from your contacts in the RV industry?

Sure, Brian. Part of that is obviously looking at some of the RVIA forecast data for the industry and things along those lines, both in terms of what the dealers are giving back up to the OEMs as well as where some of the inventory levels and things like that stand today. I think there still is a pretty good and healthy debate about what the slope of that recovery looks like and how early or late in '24 it may actually start to occur. We have seen some of the year-over-year declines in unit shipments start to shrink. So it's -- we are, at least, I think, getting back to more of that level of normalcy that the industry was expecting to achieve. And I guess the only other comment I would make there is despite some of the challenges, and we certainly have talked about the overall industry weakness, but even some of the specific things we have with our largest OEM customer, we continue to win share elsewhere. So I still do expect that as this recovery does start to take place, that we'll come out of it with more share on the other side of it than we went into.

And then just to ask another follow-up question on the trucking industry. It seems like there's a significant opportunity there to reduce idle times. Could you maybe speak to the, call it, cost benefit for these truckers to transition to lithium-ion? And maybe give us a little bit of color on the conversations you've been having with some of those key players?

Well, obviously, the conversations have been very positive, given their willingness to move so quickly, especially on the time line of this industry. And it really is an analysis of how much fuel they're burning during idling. And that's it. The industry as a whole can save billions of dollars if they switch over to the electric APU option and basically eliminate idling. So what happens is as you're driving, some of that is -- some of that energy is going from the alternator to charging the battery so that when the truck is off and you're basically in standby mode, you can power all of your appliances there, including your air conditioner and other devices, basically overnight. So it definitely pays off pretty quickly. And it's something that, in addition to the payoff, there are increasing regulations, air quality-type regulations, fuel burning regulations, where idling is just not allowed anymore in a lot of places.

Yes, excellent. And then just this one final question. In terms of the dry electrolyte, you had mentioned that you've been receiving indications of interest. Do you think you can just tell us which sectors of the economy those indications are coming from? I know it's still very, very early.

Yes. The interest has come from the consumer electronics sector, the vehicle sector and the data center backup sector. So we’ve gotten quite a bit of interest here. These are end customers. In relation to the last question, these are not cell suppliers, but rather cell end users or pack end users that have expressed interest.

Your next question comes from Jeff Grampp from Alliance Global Partners.

I have a question on the Dragonfly IntelLigence. I think you mentioned in the prepared remarks that you shipped your first batteries there recently. I'm curious. What kind of capacity do you guys have to manufacture those? Maybe it's a proportion of overall capacity, if that's the easiest way to look at it. And if you could just kind of characterize the overall demand for batteries with that feature set?

Well, that's a good question. In terms of capacity, we've basically replicated a line that is able to produce these batteries with that IntelLigence feature. So we can basically produce what we're producing now in addition to what we're producing now, so we can double production, and basically half of that will be with the IntelLigence feature. In terms of what the actual market looks like there, there's a couple of areas where we think it bodes very well. And the first one is in the marine market. A lot of the hindrance to the incorporation of lithium in the marine market has been insurance issues. And insurers have been reluctant to insure boats with lithium-ion batteries. The American Boat & Yacht Consortium came out with a set of standards to try to address this issue, try to actually standardize what lithium systems should look like. And that's what we've -- one of the things that we've addressed with the IntelLigence system is that. So the marine market itself is enormous. The aftermarket in marine is similar to RV, probably a little bit bigger, in the billions of dollars. So we see a lot of potential there. In addition to that, the stationary storage market where remote monitoring is important, where accurate state of health, state of charge determination is important. We don't have much traction in that market now, and we hope that this feature will help us to accelerate there as well.

Great. And my follow-up, right, is to the guide for Q4. It looks like you guys are projecting some sequential deterioration on the gross margin side. Is that a volume factor just with the lower sequential revenue? Or maybe some reversion mix away from DTC? Just wondering kind of the main driving forces there relative to the strong margins you guys had in Q3.

Sure. Yes. I mean, part of that, I think, is very much just the lower overall volumes that we’re trying to account for there. There’s a couple of year-end inventory items that will get folded into that as well, but it’s primarily because of the lower unit volumes that are expected.

[Operator Instructions] There are no further questions at this time. Denis Phares, please proceed with your closing remarks.

Thank you for everyone joining us today. We look forward to sharing additional details with all of you in the coming quarters. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect.