Filed Pursuant to Rule 424(b)(3)
Registration No. 333-267983
PROSPECTUS
DRAGONFLY
ENERGY HOLDINGS CORP.
Up
to 21,512,027 Shares of Common Stock
This
prospectus relates to the potential offer and resale, from time to time, of up to 21,512,027 shares of our common
stock, par value $0.0001 per share (“common stock”), by the selling stockholder, Chardan Capital Markets LLC (“CCM”
or the “selling stockholder”).
The shares
of common stock to which this prospectus relates includes shares that have been or may be issued to CCM pursuant to a purchase
agreement between us and CCM, dated October 7, 2022 (the “Original Purchase Agreement”, and, as amended and
restated on May 20, 2024, the “A&R Purchase Agreement”, and as may be further amended, supplemented, and restated from time to time, the “Purchase
Agreement”) establishing an equity facility (the “ChEF Equity Facility”).
We
are not selling any securities under this prospectus and will not receive any of the proceeds from the sale of shares by the selling
stockholder. However, we may receive gross proceeds of up to $150 million from the sale of shares to CCM under the Purchase Agreement,
from time to time, in our discretion after the date of the registration statement of which this prospectus is a part is declared effective
and after satisfaction of other conditions in the Purchase Agreement.
CCM
is an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act of 1933, as amended, (the “Securities
Act”). See “ChEF Equity Facility” and “Plan of Distribution (Conflicts of Interest)”
for more information about how CCM may sell the shares of common stock being registered pursuant to this prospectus and for a description
of compensation payable to CCM.
CCM
may sell the shares of common stock described in this prospectus in a number of different ways and at varying prices. The price that
CCM will pay for the shares to be resold pursuant to this prospectus will depend upon the timing of sales and will fluctuate based on
the trading price of our common stock. While the number of shares of common stock that CCM is required to purchase is subject to certain
limitations under the Purchase Agreement, including the Beneficial Ownership Limitation, the number of shares of common stock that we
can sell to CCM under the Purchase Agreement could constitute a considerable percentage of our public float at the time of such sales.
As a result, the resale by CCM of shares of our
common stock pursuant to this prospectus could have a significant negative impact on the trading price of our common stock. See “ChEF
Equity Facility” on page 104 for more information.
In
addition, we have filed separate registration statements registering the issuance to and resale
by certain third parties of certain shares of common stock and/or warrants issued prior to, or in connection with, the
Business Combination. These third parties include CNTQ’s Sponsor, members of our senior management and our Term Loan Lenders. Any
sales of such shares into the public market by such certain third parties could similarly have a significant negative impact on the
trading price of our common stock.
We
have agreed to bear all of the expenses incurred in connection with the registration of the shares to which
this prospectus relates. CCM will pay or assume discounts, commissions, and fees of underwriters, selling brokers or dealer managers,
if any, incurred in connection with the sale of shares of our common stock.
Our
common stock is currently listed on the Nasdaq Global Market under the symbol “DFLI” and our public warrants are currently
listed on the Nasdaq Capital Market under the symbol “DFLIW.” As of May 17, 2024, the closing price of our
common stock was $1.12. As of May 16, 2024, the closing price of our public warrants was $0.0498.
We
are an “emerging growth company” under applicable federal securities laws and will be subject to reduced public company reporting
requirements.
INVESTING
IN OUR SECURITIES INVOLVES RISKS THAT ARE DESCRIBED IN THE “RISK FACTORS” SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued
under this prospectus or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The
date of this prospectus is May 21, 2024.
TABLE
OF CONTENTS
You
should rely only on the information contained in this prospectus. No one has been authorized to provide you with information that is
different from that contained in this prospectus. This prospectus is dated as of the date set forth on the cover hereof. You should not
assume that the information contained in this prospectus is accurate as of any date other than that date.
For
investors outside the United States: We have not done anything that would permit this offering or possession or distribution of this
prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
INTRODUCTORY
NOTE
On
October 7, 2022 (the “Closing” and such date the “Closing Date”), Chardan NexTech Acquisition 2
Corp., a Delaware corporation (“CNTQ”), and Bronco Merger Sub, Inc., a Nevada corporation and newly formed wholly-owned
subsidiary of CNTQ (“Merger Sub”), consummated the previously announced Business Combination (as defined below) pursuant
to the terms of the Business Combination Agreement (as defined below).
On
the Closing Date, (i) CNTQ changed its name to “Dragonfly Energy Holdings Corp.” (“Dragonfly” or the “Company”);
(ii) Merger Sub merged with and into Dragonfly Energy Corp., a Nevada corporation (“Legacy Dragonfly”), with Legacy
Dragonfly surviving the Merger as a direct, wholly-owned subsidiary of the Company (the “Merger”); and (iii) the parties
to the Business Combination Agreement consummated the other transactions contemplated thereby. On March 31, 2023, Dragonfly was reincorporated
under the laws of the State of Nevada pursuant to a reincorporation by conversion.
FREQUENTLY
USED TERMS
Unless
the context otherwise requires, references in this prospectus to “Dragonfly,” the “Company,” “us,”
“we,” “our” and any related terms are intended to mean Dragonfly Energy Holdings Corp. and its consolidated subsidiaries.
“$10
Warrants” means warrants to initially acquire 1,600,000 shares of common stock at an initial $10.00 per share exercise price
issued at Closing in connection with the Term Loan.
“$10
Warrants Shares” means the 457,142 shares of common stock issued upon exercise of the $10 Warrants.
“Beneficial Ownership Limitation”
means the limitation by which CCM shall not be obligated to purchase or acquire, any shares of common stock under the Purchase Agreement
which, when aggregated with all other shares of common stock then beneficially owned by CCM and its affiliates (as calculated pursuant
to Section 13(d) of the Exchange Act and Rule 13d-3 promulgated thereunder), would result in the beneficial ownership by CCM and its
affiliates (on an aggregated basis) of more than 9.9% of the outstanding voting power or shares of common stock.
“Business
Combination” means the Merger and the other transactions contemplated by the Business Combination Agreement.
“Business
Combination Agreement” means that certain Agreement and Plan of Merger, dated May 15, 2022, as amended on July 12, 2022, by
and among CNTQ, Merger Sub and Dragonfly.
“CCM”
means Chardan Capital Markets LLC, a New York limited liability company.
“Charter”
means the articles of incorporation of Dragonfly, in effect as of the date of this prospectus.
“Closing”
means the closing of the Business Combination.
“CNTQ”
means Chardan NexTech Acquisition 2 Corp., a Delaware corporation, which was renamed “Dragonfly Energy Holdings Corp.” in
connection with the Closing.
“CNTQ
Common Stock” means, prior to consummation of the Business Combination, to CNTQ common stock, par value $0.0001 per share,
and, following consummation of the Business Combination, to the common stock, par value $0.001 per share, of Dragonfly.
“CNTQ
IPO” means the initial public offering by CNTQ, which closed on August 13, 2021.
“Dragonfly”
means Dragonfly Energy Holdings Corp., a Nevada corporation.
“Earnout
Shares” means up to an additional 40,000,000 shares of Company common stock that may be issued to the Legacy Dragonfly stockholders
at Closing if certain financial metrics or trading price metrics are achieved and other conditions are satisfied.
“Founder
Shares” means the shares of CNTQ common stock held by the Sponsor, CNTQ’s directors, and affiliates of CNTQ’s management
team.
“Legacy
Dragonfly” means Dragonfly Energy Corp., a Nevada corporation, and includes the surviving corporation after the Merger. References
herein to Dragonfly will include its subsidiaries, including Legacy Dragonfly, to the extent reasonably applicable.
“Merger”
means the merger of Merger Sub with and into Legacy Dragonfly, with Legacy Dragonfly continuing as the surviving corporation and as a
wholly-owned subsidiary of CNTQ (which changed its name to Dragonfly Energy Holdings Corp. upon the Closing), in accordance with the
terms of the Business Combination Agreement.
“Merger
Sub” means Bronco Merger Sub, Inc., a Nevada corporation.
“NRS”
means the Nevada Revised Statutes.
“Penny
Warrants” means warrants to purchase shares of Dragonfly common stock with an exercise price of $0.01 per share (i)
issued in connection with the Term Loan to initially acquire 2,593,056 shares of
common stock issued at Closing, (ii) issued pursuant to certain anti-dilution provision set forth within the form of Penny
Warrant, and (iii) issued in connection with certain waivers received from the Term Loan Lenders
and Administrative Agent.
“Private
Warrants” means warrants to acquire shares of common stock at an $11.50 per share exercise price issued to an affiliate of
the Sponsor in a private placement simultaneously with the closing of the CNTQ IPO.
“Public
Warrants” means warrants to acquire shares of common stock at an $11.50 per share exercise price sold as part of the units
in the CNTQ IPO (whether they were purchased in the CNTQ IPO or thereafter in the open market).
“Sponsor”
means Chardan NexTech Investments 2 LLC, a Delaware limited liability company and an affiliate of CCM.
“Term
Loan” means the $75 million aggregate principal amount senior secured term loan facility entered into at Closing.
“Transactions”
means the Merger, and the other transactions contemplated by the Business Combination Agreement.
“Trust
Account” means the trust account of CNTQ that held the proceeds from the CNTQ IPO.
“Warrant
Holdings” means Chardan NexTech 2 Warrant Holdings LLC, a Delaware limited liability company.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements contained in this prospectus may constitute “forward-looking statements” within the meaning of the “safe
harbor” provisions of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. Forward-looking statements may be identified by the use of words such as “estimate,”
“plan,” “project,” “forecast,” “intend,” “will,” “expect,” “anticipate,”
“believe,” “seek,” “target,” “designed to” or other similar expressions that predict
or indicate future events or trends or that are not statements of historical matters. We caution readers of this prospectus that these
forward-looking statements are subject to risks and uncertainties, most of which are difficult to predict and many of which are beyond
our control, that could cause the actual results to differ materially from the expected results. These forward-looking statements include,
but are not limited to, statements regarding estimates and forecasts of financial and performance metrics, projections of market opportunity
and market share, potential benefits and the commercial attractiveness to our customers of our products and services, the potential success
of our marketing and expansion strategies, the potential for us to achieve design awards, and the potential benefits of the Business
Combination (including with respect to shareholder value). These statements are based on various assumptions, whether or not identified
in this prospectus, and on the current expectations of our management and are not predictions of actual performance. These forward-looking
statements are provided for illustrative purposes only and are not intended to serve as, and must not be relied on by any investor as,
a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Actual events and circumstances are difficult
or impossible to predict and will differ from assumptions. These forward-looking statements are subject to a number of risks and uncertainties,
including:
There
are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking
statement made by us. These factors include, but are not limited to:
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our
ability to successfully increase market penetration into target markets; |
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the
addressable markets that we intend to target do not grow as expected; |
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the
potential for events or circumstances that result in our failure to timely achieve the anticipated benefits of our customer arrangements
with THOR Industries and its affiliate brands (including Keystone RV Company (“Keystone”)), including Keystone’s
decision in July 2023, that, due to weaker demand for its products and its subsequent focus on reducing costs, it would no longer
install our storage solutions as standard equipment, but rather return to offering those solutions as an option to dealers and consumers; |
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our
ability to generate revenue from future product sales and our ability to achieve and maintain profitability; |
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the
loss of any members of our senior management team or other key personnel; |
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the
loss of any relationships with key suppliers, including suppliers in China; |
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the
loss of any relationships with key customers; |
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our
ability to protect our patents and other intellectual property; |
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the
failure to successfully optimize solid-state cells or to produce commercially viable solid-state cells in a timely manner or at all,
or to scale to mass production; |
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changes
in applicable laws or regulations, including changes in the rates of tariffs or any adjustments to the amounts payable by us to
customs as a result of improperly identifying the applicable tariff rate payable on our products; |
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our
ability to maintain the listing of our common stock on the Nasdaq Global Market and Public Warrants on the Nasdaq
Capital Market; |
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the
possibility that we may be adversely affected by other economic, business and/or competitive factors (including an economic slowdown
or inflationary pressures); |
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our
ability to sell the desired amounts of shares of common stock at desired prices under our equity facility; |
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our
ability to raise additional capital to fund our operations; |
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the
accuracy of our projections and estimates regarding our expenses, capital requirements, cash utilization, and need for additional
financing; |
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developments
relating to our competitors and our industry; |
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our
ability to engage target customers and successfully retain these customers for future orders; |
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the
reliance on two suppliers for our lithium iron phosphate cells and a single supplier for the manufacture of our battery management
system; |
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the potential impact of geopolitical events, including
the Russia-Ukraine conflict and Hamas’ attack on Israel, and their effects on our operations; and |
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our
current dependence on two manufacturing facilities. |
The
foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or
risk factors that we are faced with that may cause our actual results to differ from those anticipated in such forward-looking statements.
Please see “Risk Factors” for additional risks which could adversely impact our business and financial performance.
All
forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue
reliance on any forward-looking statements, which speak only as of the date of this Registration Statement. We have no obligation,
and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result
of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and believe
they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved
or accomplished.
SUMMARY
OF THE PROSPECTUS
This
summary highlights selected information from this prospectus and does not contain all of the information that is important to you in
making an investment decision. This summary is qualified in its entirety by the more detailed information included in this prospectus.
Before making your investment decision with respect to our securities, you should carefully read this entire prospectus, including the
information under “Risk Factors,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and the financial statements included elsewhere in this prospectus.
The
Company
We
are a manufacturer of non-toxic deep cycle lithium-ion batteries that caters to customers in the consumer industry (including
the recreational vehicle (“RV”), marine vessel, solar, oil and gas, and off-grid residence industries),
and industrial and energy storage markets, with proprietary, patented and disruptive battery cell manufacturing and
non-flammable solid-state cell technology currently under development. Our goal is to develop technology to deliver environmentally
impactful solutions for energy storage to everyone globally. We believe that the innovative design of our lithium-ion batteries is ideally
suited for the demands of modern customers who rely on consumer electronics, connected devices and smart appliances that require continuous,
reliable electricity, regardless of location.
Since
2020, we have sold over 300,000 batteries. For the quarters ended March 31, 2024, and March 31, 2023, we sold 11,098 and 20,331 batteries, respectively,
and had $12.5 million and $18.8 million in net sales, respectively.
We have a dual-brand strategy for battery products, Dragonfly Energy (“Dragonfly Energy”) and Battle Born Batteries
(“Battle Born”). Battle Born branded products are primarily sold direct-to-consumers (“DTC”),
while the Dragonfly Energy brand is primarily sold to original equipment manufacturers (“OEMs”). However, with
the growing popularity and brand recognition of Battle Born, these batteries have become increasingly popular with our OEM customers.
Based on the extensive research and optimization undertaken by our team, we have developed a line of products with features including
a proprietary battery management system and an internal battery heating feature for cold temperatures, and we have recently launched
our unique battery communication system. We currently source the lithium iron phosphate (“LFP”) cells incorporated into our batteries from a limited number of carefully
selected suppliers that can meet our demanding quality standards and with whom we have developed long-term relationships.
We
currently offer several lines of batteries across our two brands, each differentiated by size, power and capacity, consisting
of seven different models, four of which come with a heated option. To supplement our battery offerings, we are also a reseller of
accessories for battery systems. These include chargers, inverters, monitors, controllers and other system accessories from brands
such as Victron Energy, Progressive Dynamics, Magnum Energy and Sterling Power. Pursuant to the Asset Purchase Agreement dated
April 22, 2022 by and among us and Thomason Jones Company, LLC (“Thomason Jones”) and the other parties
thereto, we also acquired the assets, including the Wakespeed Offshore brand (“Wakespeed”) of Thomason Jones,
allowing us to include our own alternator regulator in systems that we sell.
In addition, we have successfully developed innovative manufacturing processes
for dry-electrode manufacturing of lithium-ion cells, and we are continuing development efforts relating to next-generation solid-state
technology. Since our inception, we have built a comprehensive patent portfolio around our proprietary dry-electrode battery manufacturing
process, which eliminates the use of harmful solvents and energy-intensive drying ovens compared to traditional methods. This translates
to significant environmental and cost benefits, including reduced energy consumption, smaller space requirements, and a lower carbon
footprint.
The
mailing address of our principal executive office is 1190 Trademark Dr. #108, Reno, Nevada 89521, and our telephone number is (775) 622-3448.
For
more information about us, see the sections entitled “Business” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”
Emerging
Growth Company
We
are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various
reporting requirements that are applicable to other public companies that are not “emerging growth companies” including,
but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of
2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports
and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder
approval of any golden parachute payments not previously approved. If some investors find our securities less attractive as a result,
there may be a less active trading market for our securities and the prices of our securities may be more volatile.
We
will remain an emerging growth company until the earlier of: (1) the last day of the fiscal year (a) ending December 31, 2026, (b) in
which we have total annual gross revenue of at least $1.235 billion, or (c) in which we are deemed to be a large accelerated filer, which
means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the prior fiscal year’s
second fiscal quarter; and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year
period. References herein to “emerging growth company” shall have the meaning associated with it in the JOBS Act.
Smaller
Reporting Company
Additionally,
we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take
advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements.
We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held
by non-affiliates exceeds $250 million as of the prior June 30, or (ii) our annual revenues exceeded $100 million during such completed
fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the prior June 30.
Risk
Factors Summary
You
should consider all the information contained in this prospectus before making a decision to invest in our common stock or warrants.
In particular, you should consider the risk factors described under “Risk Factors” beginning on page 9. Such
risks include, but are not limited to, the following risks:
Risks
Related to this Offering
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It
is not possible to predict the actual number of shares of our common stock we will sell under the Purchase Agreement to CCM, or the
actual gross proceeds resulting from those sales. Further, we may not have access to the full amount available under the ChEF Equity
Facility. |
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The
issuance and sale of shares of our common stock
to CCM will cause dilution to other holders of shares of our common stock, and the sale of the shares
of our common stock acquired by CCM, or the perception that such sales may occur, could cause the price of the shares
of our common stock to fall. |
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Investors
who buy common stock from CCM at different times will likely pay different prices. |
Risks
Related to Our Existing Lithium-Ion Battery Operations
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Our
business and future growth depends on the needs and success of our customers. |
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We
operate in a competitive industry. We expect that the level of competition will increase and the nature of our competitors will change
as we develop new LFP battery products for, and enter into, new markets, and as the competitive landscape evolves. |
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We
may not succeed in our medium- and long-term strategy of entering into new end markets for LFP batteries and our success depends,
in part, on our ability to successfully develop and manufacture new products for, and acquire customers in, these new markets and
successfully grow our operations and production capabilities (including, in time, our ability to manufacture solid-state cells in-house). |
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We
currently rely on two suppliers to provide our LFP cells and a single supplier for the manufacture of our battery management system.
Any disruption in the operations of these key suppliers could adversely affect our business and results of operations. |
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We
are currently, and likely will continue to be, dependent on two manufacturing facility until the construction of our new
facility is completed, if at all. If our facilities become inoperable for any reason, or our automation and expansion
plans do not yield the desired effects, our ability to produce our products could be negatively impacted. |
Risks
Related to Our Solid-State Technology Development
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We
face significant engineering challenges in our attempts to develop and manufacture solid-state battery cells and these efforts may
be delayed or fail which could negatively impact our business. |
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We
expect to make significant investments in our continued research and development of solid-state battery technology development, and
we may be unable to adequately control the costs associated with manufacturing our solid-state battery cells. |
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If
our solid-state batteries fail to perform as expected, our ability to further develop, market and sell our solid-state batteries
could be harmed. |
Risks
Related to Intellectual Property
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We rely heavily upon our
intellectual property portfolio. If we are unable to protect our intellectual property rights, our business and competitive position
would be harmed. |
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We
may need to defend ourselves against intellectual property infringement claims, which may be time-consuming and could cause us to
incur substantial costs. |
General
Risk Factors
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The
uncertainty in global economic conditions, including the Russia-Ukraine conflict and Hamas’ attack on Israel, could
reduce consumer spending and disrupt our supply chain which could negatively affect our results of operations. |
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The
loss of one or more members of our senior management team, other key personnel or our failure to attract additional qualified personnel
may adversely affect our business and our ability to achieve our anticipated level of growth. |
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If
we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of customer service,
or adequately address competitive challenges. |
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Changes in applicable laws or regulations could impact
our operations, including changes in the rates of tariffs or any adjustments to the amounts payable by us to customs as a result
of improperly identifying the applicable tariff rate payable on our products. |
Risks
Related to Our Financial Position and Capital Requirements
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Our
business is capital intensive, and we may not be able to raise additional capital on attractive terms, if at all. Any further indebtedness
we incur may limit our operational flexibility in the future. |
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Failure
to comply with the financial covenants in our loan agreement could allow our lenders to accelerate payment under our loan agreement,
which would have a material adverse effect on our results of obligations and financial position and raise substantial doubt about
our ability to continue as a going concern. |
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Restrictions
imposed by our outstanding indebtedness and
any future indebtedness may limit our ability to operate our business and to finance our future operations or capital
needs or to engage in acquisitions or other business activities necessary to achieve growth. |
Risks
Related to Ownership of Our Common Stock
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Future
issuances of debt securities and equity securities may adversely affect us and may be dilutive to existing stockholders. |
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We
may issue additional shares of our common stock or other equity securities without your approval, which would dilute your ownership
interests and may depress the market price of your shares. |
THE
OFFERING
Issuer |
Dragonfly
Energy Holdings Corp. |
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Securities
offered by CCM as the selling stockholder |
Up
to 21,512,027 shares of common stock that we may sell to CCM, from time to time in accordance
with the Purchase Agreement. All sales under the Purchase Agreement are at our sole discretion.
The actual number of our common stock issued and sold to CCM under the
ChEF Equity Facility will vary depending on the then current market price of our common stock sold to CCM under the ChEF Equity Facility.
As of May 13, 2024, 588,500 shares have been issued pursuant to the Purchase Agreement with CCM for aggregate net proceeds to us of $1,278,566. |
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Terms
of the Offering |
CCM
will determine when and how it will dispose of any shares of common stock registered under this prospectus for resale. |
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Use
of proceeds |
We
will receive no proceeds from the sale of shares of common stock by CCM in this offering. We may receive up to $150 million in gross
proceeds from the sale of shares to CCM pursuant to the Purchase Agreement from time to time. However, the actual proceeds we receive
may be less than $150 million (before being reduced for the discount to CCM) depending on the number of shares of common stock sold
and the price at which the shares of common stock are sold. Any proceeds we receive from CCM, we intend to use for the repayment
of all or a portion of our outstanding debt and for working capital and general corporate purposes. Additionally, pending the uses
described above, we plan to invest the net proceeds from the sale of shares of common stock to CCM, if any, in short- and intermediate-term,
interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S.
government. See “Use of Proceeds” for additional information. |
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Conflicts
of Interest |
CCM,
an affiliate of the Sponsor, is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and is
expected to act as an executing broker for the resale of common stock in this offering. CCM’s receipt of all the proceeds from
resales of common stock results in a “conflict of interest” under FINRA Rule 5121. Accordingly, resales by CCM will be
conducted in compliance with FINRA Rule 5121. To the extent that the common stock does not have a “bona fide public market,”
as defined in FINRA Rule 5121, a qualified independent underwriter will participate in the preparation of, and exercise the usual
standards of “due diligence” with respect to, the registration statement. LifeSci Capital, LLC has agreed to act as qualified
independent underwriter for this offering and will receive an upfront fee of $100,000 and, beginning one year after the date of the
Purchase Agreement until its termination, a quarterly fee of $25,000 for doing so, or up to $300,000 in the aggregate. Pursuant to
FINRA Rule 5121, CCM will not confirm resales of common stock to any account over which it exercises discretionary authority without
the prior written approval of the customer. See “Plan of Distribution (Conflicts of Interest) - Conflicts of Interest.” |
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Nasdaq
ticker symbol |
Our
common stock is currently listed on the Nasdaq Global Market under the symbol “DFLI”. |
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Risk
factors |
Any
investment in the securities offered hereby is speculative and involves a high degree of risk. You should carefully consider the
information set forth under “Risk Factors” and elsewhere in this prospectus. |
Unless
we specifically state otherwise or the context otherwise requires, the information above is as of May 13, 2024, does not
give effect to issuances of our common stock, warrants or options to purchase shares of our common stock, or the exercise of warrants
or options after such date, and excludes:
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25,000,000
Earnout Shares reserved for issuance; |
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1,501,386
shares of common stock (the “Private Warrant Shares”) issuable upon exercise of the private placement warrants
that were originally issued in a private placement at the time of the CNTQ IPO; |
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9,422,519
shares of common stock (the “Public Warrant Shares”) issuable upon exercise of the Public Warrants sold as part
of the units in the CNTQ IPO; |
|
● |
4,434,510
shares of common stock (the “Penny Warrant Shares”) currently issuable upon exercise of the Penny Warrants; |
|
● |
11,131,900
shares of common stock (the “Investor Warrant Shares”) currently issuable upon exercise of the Investor Warrants
issued as part of the June 2023 S-1 Offering; |
|
● |
570,250
shares of common stock (the “Underwriters’ Warrant Shares”) currently issuable upon the exercise of the
Underwriters’ Warrants (defined below) issued as part of the June 2023 S-1 Offering; |
|
● |
2,014,531
shares of common stock underlying outstanding options; and |
|
● |
2,421,752
shares of common stock underlying outstanding restricted stock units (“RSUs”). |
RISK
FACTORS
Investment
in our securities involves risk. You should carefully consider the following risk factors in addition to the other information included
in this prospectus, including matters addressed in the section entitled “Cautionary Note Regarding Forward-Looking Statement.”
Please see the section entitled “Where You Can Find More Information” in this prospectus. These risk factors
are not exhaustive, and investors are encouraged to perform their own investigation with respect to our business, financial condition
and prospects. We may face additional risks and uncertainties that are not presently known to us, or that we currently deem immaterial,
which may also impair our business or financial condition. The following discussion should be read in conjunction with the financial
statements and notes to the financial statements included herein.
Risks
Related to the ChEF
It
is not possible to predict the actual number of shares of our common stock, if any, we will sell under the Purchase Agreement to CCM,
or the actual gross proceeds resulting from those sales. Further, we may not have access to the full amount available under the ChEF
Equity Facility.
Under
the Purchase Agreement entered into in connection with the ChEF Equity Facility, we have the right from time to time at our option to
direct CCM to purchase up to a specified maximum amount of shares of our common stock, up to a maximum aggregate purchase price of $150
million, over the term of the ChEF Equity Facility. See “ChEF Equity Facility” on page 104 for more information regarding
the Purchase Agreement and the ChEF Equity Facility. We generally have the right to control the timing and amount of any common stock
sales to CCM under the Purchase Agreement. The timing and amount of common stock sold by us to CCM under the Purchase Agreement will
be determined by us from time to time in our sole discretion and will depend on a variety of factors, including market conditions and
the terms, conditions and limitations set forth in the Purchase Agreement (including certain limitations on CCM’s obligation to
purchase shares including, among other things, daily trading volumes and the Beneficial Ownership Limitation). We may ultimately decide
to sell to CCM all, some or none of the common stock shares available for our sale to CCM pursuant to the ChEF Equity Facility. Depending
on market liquidity at the time, resales of those shares by CCM may cause the public trading price of our common stock to decrease.
Because
the purchase price per share to be paid by CCM for shares of common stock that we may elect to sell to CCM under the ChEF Equity Facility,
if any, will fluctuate based on the volume weighted average price (“VWAP”) of our common stock during the applicable
period for each purchase made pursuant to the Purchase Agreement, it is not possible for us to predict, prior to any such sales, the
number of shares of common stock we will sell to CCM under the Purchase Agreement, the per share purchase price CCM will pay for such
shares, or the aggregate gross proceeds that we will receive from those purchases by CCM under the Purchase Agreement, if any.
As
a result of the fluctuation of the purchase price per share to be paid by CCM, we may need to issue and sell more than the number of
shares that we initially expect to issue to CCM under the Purchase Agreement to receive aggregate gross proceeds equal to the maximum
aggregate purchase price of $150 million under the Purchase Agreement, which could cause additional substantial dilution to holders of
our common stock. The number of shares of common stock ultimately offered for sale by CCM is dependent upon the number of shares of common
stock, if any, we ultimately sell to CCM under the ChEF Equity Facility.
Under
the Purchase Agreement we may not commence sales of our common stock to CCM until all the conditions to CCM’s obligations
thereunder have been satisfied, including effectiveness of this registration statement of which this prospectus is a part and
required FINRA clearance. CCM is not obligated to (but may, at its option, choose to) purchase an amount of shares of common stock
to the extent such amount purchased exceeds the amount of shares of common stock equal to the least of: (a) a number of shares that
would result in beneficial ownership (as calculated pursuant to Section 13(d) of the Exchange Act and Rule 13d-3 promulgated
thereunder) by CCM, together with its affiliates, of more than 9.9% of the outstanding voting power or shares of common stock, (b) a
number of shares that would cause the aggregate purchase price on the applicable VWAP Purchase Date (as defined in the Purchase
Agreement) for such purchase to exceed $3 million or (c) a number of shares that would equal 20% of the total number of shares of
common stock that would count towards VWAP on the applicable VWAP Purchase Date of such purchase. Our inability to access a portion
or the full amount available under the ChEF Equity Facility, in the absence of any other financing sources, could have a material
adverse effect on our business.
CCM
is an affiliate of CNTQ’s Sponsor. See “Selling Stockholder” on page 100 for more information about CCM and
its affiliates’ beneficial ownership of our shares of common stock. In light of the Beneficial Ownership Limitation set forth above,
the Sponsor has agreed that the Private Warrants may not be exercised to the extent the Sponsor and its affiliates are deemed to beneficially
own, or it would cause the Sponsor and such affiliates to be deemed to beneficially own, more than 7.5% of our common stock.
The
issuance and sale of shares of our common stock to CCM will cause dilution to other holders of shares of our common stock, and the sale
of the shares of our common stock acquired by CCM, or the perception that such sales may occur, could cause the price of the shares our
common stock to fall.
The
purchase price for the shares that we may sell to CCM under the Purchase Agreement will fluctuate based on the price of our common stock.
Depending on market liquidity at the time, sales of such shares may cause the trading price of shares of our common stock to fall.
If
and when we do sell shares to CCM, after CCM has acquired the shares, CCM may resell all, some, or none of those shares at any time or
from time to time in its discretion, subject to the terms of the Purchase Agreement and compliance with securities laws. Therefore, the
sales of our common stock to CCM could result in substantial dilution to the interests of other holders of their shares of our common
stock. Additionally, the sale of a substantial number of shares of our common stock to CCM, or the anticipation of such sales, could
make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise
wish to effect sales.
We
are obligated to register for sale or resale certain shares of our common stock and/or warrants issued in conjunction with the Business
Combination, and the perception that such sales may occur may cause the trading price for our common stock to fall.
In
addition to the registration pursuant to this prospectus of the common stock to be issued and sold to CCM under the ChEF Equity Facility,
under various registration rights agreements, we are required to file and keep effective one or more separate registration statements
registering the issuance to and resale by certain third parties of certain shares of common stock and/or warrants issued prior to, or
in connection with, the Business Combination. These third parties include CNTQ’s Sponsor, members of our senior management, other
large historic Legacy Dragonfly shareholders and our Term Loan Lenders (as defined herein). The shares being registered for resale into
the public markets represent a substantial majority of our outstanding common stock as of May 13, 2024. Once such separate registration
statements are effective, including this registration statement, the shareholders selling
pursuant to such separate registration statements will determine the timing, pricing and rate at which they sell such shares into
the public market and such sales could have a significant negative impact on the trading price of our common stock. Certain
of the investors/lenders who have resale rights under such separate registration statements may have an incentive to sell
because they purchased shares and/or warrants at prices below the CNTQ IPO offering price. As such, while sales by the
shareholders selling pursuant to such registration statements may experience a positive rate of return based on the trading price
at the time they sell their shares, public securityholders may not experience a similar rate of return on the securities they purchased
due to differences in the prices at which such public securityholders purchased their shares and the trading price. Given the substantial
number of shares of common stock being registered for potential resale by the shareholders selling pursuant to such registration
statements, the sale of shares by such shareholders, or the perception in the market that the shareholders of a large
number of shares intend to sell shares, may increase the volatility of the market price of our common stock, may prevent the trading
price of our securities from exceeding the CNTQ IPO offering price and may cause the trading prices of our securities to experience a
further decline. Further, the 21,512,027 shares that may be resold and/or issued into the public markets pursuant to this prospectus
represent approximately 36% of the shares of our common stock outstanding as of May 13, 2024. Any sales of such shares into the
public market could have a significant negative impact on the trading price of our common stock. This impact may be heightened by the
fact that sales to CCM will generally be at prices below the then current trading price of our common stock. If the trading price of
our common stock does not recover or experiences a further decline, sales of shares of common stock to CCM pursuant to the Purchase Agreement
may be a less attractive source of capital and/or may not allow us to raise capital at rates that would be possible if the trading price
of our common stock were higher. Our management team may invest or spend the proceeds from sales of our common stock made pursuant to
the Purchase Agreement in ways with which you may not agree or in ways which may not yield a significant return.
Our
management will have broad discretion over the use of proceeds from the sale of shares to CCM pursuant to the Purchase Agreement, if
any. We intend to use the net proceeds from the sale of shares to CCM pursuant to the Purchase Agreement, if any, for the repayment
of all or a portion of our outstanding debt and for working capital and general corporate purposes. You will not have the
opportunity, as part of your investment decision, to assess whether such proceeds are being used appropriately. The proceeds from
the sale of shares to CCM pursuant to the Purchase Agreement, if any, may be used for corporate purposes that do not increase our
operating results or enhance the value of our common stock.
Investors
who buy common stock from CCM at different times will likely pay different prices.
Pursuant
to the Purchase Agreement, the timing, price and number of shares sold to CCM will vary depending on when we choose to sell shares, if
any, to CCM. If and when we elect to sell common stock to CCM pursuant to the Purchase Agreement, after CCM has acquired such common
stock, CCM may resell all, some or none of such shares at any time or from time to time in its sole discretion and at different prices.
As a result, investors who purchase shares from CCM in this offering at different times will likely pay different prices for those shares.
Investors may experience a decline in the value of the shares they purchase from CCM in this offering as a result of future sales made
by us to CCM pursuant to the Purchase Agreement or for other reasons.
Risks
Related to Our Existing Lithium-Ion Battery Operations
Our
business and future growth depends on the needs and success of our OEM’s and similar customers.
The
demand for our products, including sales to OEMs, ultimately depends on consumers in our current end markets (primarily
owners of RVs, marine vessels and off-grid residences). The performance and growth of these markets is impacted by numerous factors,
including macro-economic conditions, consumer spending, travel restrictions, fuel costs and energy demands (including an increasing trend
towards the use of green energy). Increases or decreases in these variables may significantly impact the demand for our products. If
we fail to accurately predict demand, we may be unable to meet our customers’ needs, resulting in the loss of potential sales,
or we may produce excess products, resulting in increased inventory and overcapacity in our production facilities, increasing our unit
production cost and decreasing our operating margins.
An
increasing proportion of our revenue has been and is expected to continue to be derived from sales to RV OEMs. Our RV OEM sales have
been on a purchase order basis, without firm revenue commitments, and we expect that this will likely continue to be the case. For example,
under our Supply Agreement with Keystone RV Company, or Keystone, the largest manufacturer of towable RVs in North America, Keystone
has agreed to fulfill certain of its LFP battery requirements exclusively through us for at least one year, with automatic annual renewals.
However, although in time we expect Keystone to be significant contributor to our projected growth in RV OEM battery sales, this arrangement
may not deliver the anticipated benefits, as there are no firm purchase commitments, sales will continue to be made on a purchase order
basis, Keystone is permitted to purchase other LFP batteries from third parties and this arrangement may not be renewed. In addition,
in July 2022, we agreed to a strategic investment by THOR Industries, or THOR, which, among other things, contemplates a future,
mutually agreed exclusive distribution agreement with THOR in North America. Although we expect that THOR will be a be significant contributor
to our projected growth in RV OEM battery sales, this arrangement may not deliver the anticipated benefits and this distribution agreement
may, in the future, preclude us from dealing with other large RV OEMs and their associated brands in North America or otherwise could
negatively impact our relationships with those RV OEMs to whom we may be permitted to supply our batteries. In July 2023, we were
notified by Keystone that, due to weaker demand for its products and their subsequent focus on reducing costs, it would no longer install
our storage solutions as standard equipment, but rather return to offering those solutions as an option to dealers and consumers. While
Keystone has not moved to a different solution or competitor, as a result in this change in strategy there was a material limiting effect
on our revenue in 2023. Increased overall RV OEM sales in the future may not materialize as expected or at all and we may fail to
achieve our targeted sales levels. Future RV OEM sales are subject to a number of risks and uncertainties, including the number of RVs
that these OEMs manufacture and sell (which can be impacted by a variety of events including those disrupting our OEM customers’
operations due to supply chain disruptions or labor constraints); the degree to which our OEM customers incorporate/design-in our batteries
into their RV product lines and renew our supply agreements; the extent to which RV owners, if applicable, opt to purchase our
batteries upon initial purchase of their RV or in the aftermarket; and our continued ability to successfully develop and introduce reliable
and cost-effective batteries meeting evolving industry standards and customer specifications and preferences. Our failure to adequately
address any of these risks may result in lost sales which could have a material adverse effect on our business, financial condition and
results of operations.
In
addition, our near-term growth depends, in part, on the continued growth of the end markets in which we currently operate. Although the
total addressable market for RVs, marine vessels and off-grid residences is estimated to reach $12 billion by 2025, these markets may
not grow as expected or at all, and we may be unable to maintain existing customers and/or attract new customers in these markets. Our
failure to maintain or expand our share of these growing markets could have a material adverse effect on our business, financial condition
and results of operations.
We
may not be able to engage target customers successfully and convert these customers into meaningful orders in the future.
Our
success, and our ability to increase sales and operate profitably, depends on our ability to identify target customers and convert these
customers into meaningful orders, as well as our continued development of existing customer relationships. Although we have developed
a multi-pronged sales and marketing strategy to penetrate our end markets and reach a range of customers, this strategy may not continue
to be effective in reaching or converting target customers into orders, or as we expand into additional markets. Recently, we have also
dedicated more resources to developing relationships with certain key RV OEMs, such as Keystone, which we aim to convert into collaborations
on custom designs and/or long-term contractual arrangements. We may be unable to convert these relationships into meaningful orders or
renew these arrangements going forward, which may require us to expend additional cost and management resources to engage other target
customers. However, in July 2023, we were notified by Keystone that, due to weaker demand for its products and their subsequent focus
on reducing costs, it would no longer install our storage solutions as standard equipment, but rather return to offering those solutions
as an option to dealers and consumers. While Keystone has not moved to a different solution or competitor, as a result in this change
in strategy there was a material limiting effect on our revenue in 2023. We may be unable to convert these relationships into meaningful orders or renew these arrangements going forward,
which may require us to expend additional cost and management resources to engage other target customers.
Our
sales to any future or current customers may decrease for reasons outside our control, including loss of market share by customers to
whom we supply products, reduced or delayed customer requirements, supply and/or manufacturing issues affecting production, reputational
harm or continued price reductions. Furthermore, in order to attract and convert customers we must continue to develop batteries that
address our current and future customers’ needs. Our failure to achieve any of the foregoing could have a material adverse effect
on our business, financial condition and results of operations.
We
operate in a competitive industry. We expect that the level of competition will increase and the nature of our competitors will change
as we develop new LFP battery products for, and enter into, new markets, and as the competitive landscape evolves. These competitive
and other factors could result in lost potential sales and lower average selling prices and profitability for our products.
We
compete with traditional lead-acid battery manufacturers and lithium-ion battery manufacturers, who primarily either import their products
or components or manufacture products under a private label. As we continue to expand into new markets, develop new products and move
towards production of our solid-state cells, we will experience competition with a wider range of companies. These include companies
focused on solid-state cell production, vertically integrated energy companies and other technology-focused energy storage companies.
We believe our main competitive advantage in displacing incumbent lead-acid batteries is that we produce a lighter, safer, higher performing,
cost-effective battery with a longer lifespan. We believe our go-to-market strategy, established brands, proven reliability and
relationships with OEMs and end consumers both (i) enable us to compete effectively against other battery manufacturers and (ii) position
us favorably to expand into new addressable markets. However, OEM sales typically result in lower average selling prices and related
margins, which could result in overall margin erosion, affect our growth or require us to raise our prices. As a result, we may be unable
to maintain this competitive advantage given the rapidly developing nature of the industry in which we operate.
Our
current competitors have, and future competitors may have, greater resources than we do. Our competitors may be able to devote greater
resources to the development of their current and future technologies. These competitors may also be able to devote greater resources
to sales and marketing efforts, affording them greater access to customers, and may be able to establish cooperative or strategic relationships
amongst themselves or with third parties that may further enhance their competitive positioning. In addition, foreign producers may be
able to employ labor at significantly lower costs than producers in the United States, expand their export capacity and increase their
marketing presence in our major end markets. We expect actual and potential competitors to continue their efforts to develop alternative
battery technologies and introduce new products with more desirable, attractive features. These new technologies and products may be
introduced sooner than our offerings and could gain greater market acceptance. Although we believe we are a leader in developing solid-state
battery technology (particularly for energy storage applications) new competitors may emerge, alternative approaches to solid-state battery
technology may be developed and competitors may seek to market solid-state battery technologies better suited for other applications
such as EVs to our target markets.
Additional
competitive and other factors may result in lost sales opportunities and declines in average sales prices and overall product profitability.
These include rapidly evolving technologies, industry standards, economic conditions and end-customer preferences. Our failure to adapt
to or address these factors as they arise could have a material adverse effect on our business, financial condition and results of operations.
We
may not succeed in our medium- and long-term strategy of entering into new end markets for LFP batteries and our success depends, in
part, on our ability to successfully develop and manufacture new products for, and acquire customers in, these new markets and successfully
grow our operations and production capabilities (including, in time, our ability to manufacture solid-state cells in-house).
Our
future success depends, in part, upon our ability to expand into additional end markets identified by us as opportunities for our LFP
batteries. These markets include medium and heavy-duty trucking, specialty and work vehicles, solar integration, oil and gas, material handling, industrial, rail, and emergency and standby power in the medium term,
and data centers, telecom and distributed on-grid storage in the longer term. Our ability to expand into these markets depends on a number
of factors, including the continued growth of these markets, having sufficient capital to expand our product offerings (including in
the longer term batteries incorporating, once developed, our solid-state cells) and manufacturing capacity, developing products adapted
to customer needs and preferences in these markets, our successful expansion of our manufacturing capabilities in order to meet customer
demand, our ability to identify and convert potential customers within these markets and our ability to attract and retain qualified
personnel to assist in these efforts. Although we intend to devote resources and management time to understanding these new markets,
we may face difficulties in understanding and accurately predicting the demographics, preferences and purchasing habits of customers
and consumers in these markets. If we fail to execute on our growth strategies in accordance with our expectations, our sales growth
would be limited to the growth of existing products and existing end markets, and this could have a material adverse effect on our business,
financial condition and results of operations.
Further,
if we are unable to manage the growth of our operations effectively to match the growth in sales, we may incur unexpected expenses and
be unable to meet our customers’ requirements, which could materially adversely affect our business, financial condition and results
of operations. A key component of our growth strategy is the expansion and automation of our manufacturing sales capacity to address
expected growing product demand and to accommodate our production of solid-state cells at scale. We have experienced supply delays in
obtaining the necessary components to implement our automated adhesive application systems, as well as our pilot production line for
our solid-state cells, and we may continue to experience component shortages in the future, which may negatively impact our ability to
achieve these aspects of our growth strategy on time or at all. The costs of our expansion and automation efforts may be greater than
expected, and we may fail to achieve anticipated cost efficiencies, which could have a material adverse effect on our business, financial
condition and results of operations. We must also attract, train and retain a significant number of skilled employees, including engineers,
sales and marketing personnel, customer support personnel and management, and the availability of such personnel may be constrained.
Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations; result in weaknesses
in our infrastructure, systems or controls; give rise to operational mistakes, financial losses, loss of productivity or business opportunities;
and result in loss of employees and reduced productivity of remaining employees, any of which could have a material adverse effect on
our business, financial condition and results of operations.
We
currently rely on two suppliers to provide our LFP cells and a single supplier for the manufacture of our battery management system.
Any disruption in the operations of these key suppliers could adversely affect our business and results of operations.
We
currently rely on two carefully selected cell manufacturers located in China, and a single supplier, also located in China, to manufacture
our proprietary battery management system, and we intend to continue to rely on these suppliers going forward.
Our
dependence on a limited number of key third-party suppliers exposes us to challenges and risks in ensuring that we maintain adequate
supplies required to produce our LFP batteries. Although we carefully manage our inventory and lead-times, we may experience a delay
or disruption in our supply chain and/or our current suppliers may not continue to provide us with LFP cells or our battery management
systems in our required quantities or to our required specifications and quality levels or at attractive prices. Our close working relationships
with our China-based LFP cell suppliers to-date, reflected in our ability to increase our purchase order volumes (qualifying us for related
volume-based discounts) and to order and receive delivery of cells in advance of required demand, has helped us moderate or offset increased
supply-related costs associated with inflation, currency fluctuations and tariffs imposed on our battery cell imports by the U.S. government
and avoid potential shipment delays. If we are unable to enter into or maintain commercial agreements with these suppliers on favorable
terms, or if any of these suppliers experience unanticipated delays, disruptions or shutdowns or other difficulties ramping up their
supply of products or materials to meet our requirements, our manufacturing operations and customer deliveries would be seriously impacted,
potentially resulting in liquidated damages and harm to our customer relationships. Although we believe we could locate alternative suppliers
to fulfill our needs, we may be unable to find a sufficient alternative supply in a reasonable time or on commercially reasonable terms.
Further,
our dependence on these third-party suppliers entails additional risks, including:
|
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inability, failure or unwillingness
of third-party suppliers to comply with regulatory requirements; |
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breach
of supply agreements by the third-party suppliers; |
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misappropriation
or disclosure of our proprietary information, including our trade secrets and know-how; |
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● |
relationships
that third-party suppliers may have with others, which may include our competitors, and failure of third-party suppliers to adequately
fulfill contractual duties, resulting in the need to enter into alternative arrangements, which may not be available, desirable or
cost-effective; and |
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termination
or nonrenewal of agreements by third-party suppliers at times that are costly or inconvenient for us. |
We
may not be able to accurately estimate future demand for our LFP batteries, and our failure to accurately predict our production requirements
could result in additional costs or delays.
We
seek to maintain approximately a five-month supply of LFP cells and other critical components by pre-ordering in advance
of expected demand. However, our business and customer product demand is impacted by trends and factors that may be outside our control.
Therefore, our ability to predict our manufacturing requirements is subject to inherent uncertainty. Lead times for materials and components
that our suppliers order may vary significantly and depend on factors such as the specific supplier, contract terms and demand for each
component at a given time. If we fail to order sufficient quantities of product components in a timely manner, the delivery of our batteries
to our customers could be delayed, would harm our business, financial condition and results of operations.
To
meet our delivery deadlines, we generally make significant decisions on our production level and timing, procurement, facility requirements,
personnel needs and other resources requirements based on our estimate of demand, our past dealings with such customers, economic conditions
and other relevant factors. Although we monitor our slow-moving inventory, if customer demand declines significantly, we may have excess
inventory which could result in unprofitable sales or write-offs. Expediting additional material to make up for any shortages
within a short time frame could result in increased costs and a delay in meeting orders, which would result in lower profits and negatively
impact our reputation. In either case, our results of operations would fluctuate from period to period.
In
addition, certain of our competitors may have long-standing relationships with suppliers, which may provide them with a competitive pricing
advantage for components and reduce their exposure to volatile raw material costs, including due to inflation. As a result, we may face
market-driven downward pricing pressures in the future, which may run counter to the cost of the components required to produce our products.
During 2022 in particular, we experienced rising materials costs due to inflation, which we partially mitigated through
increases in our product prices, where we thought it to be prudent. Our customers may not view this favorably and expect
us to cut our costs further and/or to lower the price of our products. We may be unable to increase our sales volumes to offset lower
prices (if we choose to implement lower prices), develop new or enhanced products with higher selling prices or margins, or reduce our
costs to levels enabling us to remain competitive. Our failure to accomplish any of the foregoing could have a negative impact on our
profitability and our business, financial condition and results of operations may ultimately be materially adversely affected.
We
are currently, and will likely continue to be, dependent on two manufacturing facilities until the construction of our new facility is
completed, if at all. If our facilities become inoperable for any reason, or our automation and expansion plans do not
yield the desired effects, our ability to produce our products could be negatively impacted.
All
of our battery assembly currently takes place at our 99,000 square foot headquarters and manufacturing facility located in Reno, Nevada.
We also entered into the Fernley Lease Agreement in April 2024 for use of an approximately 64,000 square foot facility to further
increase our capacity to produce our patented dry electrode process. We currently operate three LFP battery production lines, which
has been sufficient to meet customer demand. If one or several production lines were to become inoperable for any period
of time, we would face delays in meeting orders, which could prevent us from meeting demand or require us to incur unplanned costs, including
capital expenditures.
Our
facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, flooding, fire and power
outages, utility and transportation infrastructure disruptions, acts of war or terrorism, or by public health crises, which may render
it difficult or impossible for us to manufacture our products for an extended period of time. The inability to produce our products or
the backlog that could develop if our manufacturing facility is inoperable for even a short period of time may result in increased costs,
harm to our reputation, a loss of customers or a material adverse effect on our business, financial condition or results of operations.
Although we maintain property damage and business interruption insurance , this insurance may not be sufficient to cover all of our potential
losses and may not continue to be available to us on acceptable terms, if at all.
Over
the next several years we plan to automate additional aspects of existing LFP battery production lines, add additional LFP battery production
lines (as required) and construct and operate a pilot production line for our solid-state cells, all designed to maximize the capacity
of our manufacturing facility. We have entered a lease for a 390,240 square foot facility that is currently under construction, but
is expected to be completed in the second half of 2024; however, there is no guarantee this will be completed or that we will be able
to effectively utilize the new space. Our plans for automation and expansion may experience delays, incur additional costs or cause
disruption to our existing production lines. For example, we have experienced supply delays in obtaining the necessary components to
implement our automated adhesive application systems, as well as our pilot production line for our solid-state cells, and we may continue
to experience component shortages in the future. The costs to successfully achieve our expansion and automation goals may be greater
than we expect, and we may fail to achieve our anticipated cost efficiencies, which could have a material adverse effect on our business,
financial condition and results of operations. Furthermore, while we are generally responsible for delivering products to the customer,
we do not maintain our own fleet of delivery vehicles and outsource this function to third parties. Any shortages in trucking capacity,
any increase in the cost thereof or any other disruption to the highway systems could limit our ability to deliver our products in a
timely manner or at all.
Lithium-ion
battery cells have been observed to catch fire or release smoke and flame, which may have a negative impact on our reputation and business.
Our
LFP batteries use lithium iron phosphate (“LiFePO4”) as the cathode material for lithium-ion cells. LFP is
intrinsically safer than other battery technologies due to its thermal and chemical stability and LFP batteries are less flammable than
lead-acid batteries or lithium-ion batteries using different chemistries. On rare occasions, however, lithium-ion cells can rapidly release
the energy they contain by releasing smoke and flames in a manner that can ignite nearby materials and other lithium-ion cells. This
faulty result could subject us to lawsuits, product recalls, or redesign efforts, all of which would be time consuming and expensive.
Further, negative public perceptions regarding the suitability or safety of lithium-ion cells or any future incident involving lithium-ion
cells, such as a vehicle or other fire, even if such incident does not involve our products, could seriously harm our business and reputation.
To
facilitate an uninterrupted supply of battery cells, we store a significant number of lithium-ion cells at our facilities. While
we have implemented enhanced safety procedures related to the handling of the cells, any mishandling, other safety issue or fire related
to the cells could disrupt our operations. In addition, any accident, whether occurring at our manufacturing facility or from the use
of our batteries, may result in significant production interruption, delays or claims for substantial damages caused by personal injuries
or property damage. Such damage or injury could lead to adverse publicity and potentially a product recall, which could have a material
adverse effect on our brand, business, financial condition and results of operations.
We
may be subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully
defend or insure against such claims.
Product
liability claims, even those without merit or that do not involve our products, could result in adverse publicity or damage to our brand,
decreased partner and end-customer demand, and could have a material adverse effect on our business, financial condition and results
of operations. The occurrence of any defects in our products could make us liable for damages and legal claims. In addition, we could
incur significant costs to correct such issues, potentially including product recalls. We face an inherent risk of exposure to claims
in the event that our products do not perform or are claimed not to have performed as expected. We also face risk of exposure to claims
because our products may be installed on vehicles (including RVs and marine vessels) that may be involved in crashes or may not perform
as expected resulting in death, personal injury or property damage. Liability claims may result in litigation, the occurrence of which
could be costly, lengthy and distracting and could have a material adverse effect on our business, financial condition and results of
operations.
In
the future, we may voluntarily or involuntarily initiate a recall if any products prove to be defective or non-compliant with then-applicable
safety standards. Such recalls may involve significant expense and diversion of management attention and other resources, which could
damage our brand image in our target end markets, as well as have a material adverse effect on our business, financial condition and
results of operations.
A
successful product liability claim against us could require us to pay a substantial monetary award. While we maintain product liability
insurance, the insurance that we carry may not be sufficient or it may not apply to all situations. Moreover, a product liability claim
against us or our competitors could generate substantial negative publicity about our products and business and could have a material
adverse effect on our brand, business, financial condition and results of operations.
We
currently rely on software and hardware that is complex and technical, and we expect that our reliance will increase in the future with
the introduction of future products. If we are unable to manage the risks inherent in these complex technologies, or if we are unable
to address or mitigate technical limitations in our systems, our business could be adversely affected.
Each
of our batteries include our proprietary battery management system, which relies on software and hardware manufactured by third parties
that is complex and technical. In addition, Dragonfly IntelLigence, our battery communications system which we recently launched
in the first quarter 2023, utilizes third-party software and hardware to store, retrieve, process and manage data.
The software and hardware utilized in these systems may contain errors, bugs, vulnerabilities or defects, which may be difficult to detect
and/or manage. Although we attempt to remedy any issues that we observe in our products as effectively and rapidly as possible, such
efforts may not be timely, may hamper production, or may not be to the satisfaction of our customers. If we are unable to prevent or
effectively remedy errors, bugs, vulnerabilities or defects in the software and hardware that we use, we may suffer damage to our brand,
loss of customers, loss of revenue or liability for damages, any of which could adversely affect our business, financial condition and
results of operations.
Risks
Related to Our Solid-State Technology Development
We
face significant engineering challenges in our attempts to develop and manufacture solid-state battery cells and these efforts may be
delayed or fail which could reduce consumer spending which could negatively impact our business.
Our
solid-state battery development efforts are still ongoing, and we may fail to meet our goal of commercially selling LFP batteries incorporating
our manufactured solid-state cells, or at all. We may encounter delays in the design, manufacture and launch of our solid-state
battery cells, and in increasing production to scale.
Development
and engineering challenges could delay or prevent our production of solid-state battery cells. These difficulties may arise in connection
with current and future efforts to optimize the chemistry or physical structure of our solid-state batteries with the goal of enhancing
conductivity and power; maximizing cycling capabilities and power results; reducing costs; and developing related mass production manufacturing
processes. If we are unable to overcome developmental and engineering challenges, our solid-state battery efforts could fail.
We
currently purchase the battery cells incorporated into our LFP batteries and have limited experience in manufacturing battery
cells at a commercial scale. To cost-effectively and rapidly manufacture our solid-state cells at scale for incorporation into
our LFP batteries, we plan to utilize currently available spray powder deposition equipment and other commercially available equipment
modified to utilize our proprietary dry spray deposition and other technologies and processes. We may experience delays or additional
costs in adapting our facilities, existing production equipment and LFP battery manufacturing processes (for example, designing
a dry room to accommodate our dry spraying processes) to manufacture solid-state cells. Even if we achieve the development and volume
production of our solid-state battery that we anticipate, if the cost, cycling and power results or other technology or performance characteristics
of the solid-state battery fall short of our targets, our business and results of operations would likely be materially adversely affected.
We
expect to make significant investments in our continued research and development of solid-state battery technology development, and we
may be unable to adequately control the costs associated with manufacturing our solid-state battery cells.
We
will require significant capital to fund our solid-state cell research and development activities, pilot line construction and expansion
of our manufacturing capabilities to accommodate large-scale production of solid-state cells. We have not yet produced any solid-state
battery cells at volume and our forecasted cost advantage for the production of these cells at scale, compared to conventional lithium-ion
cells, will require us to achieve rates of throughput, use of electricity and consumables, yield, and rate of automation demonstrated
for mature battery, battery material, and ceramic manufacturing processes, that we have not yet achieved. We may not be able to achieve
our desired cost benefits and, in turn, we may not be able to provide our solid-state cells at a cost that is attractive to customers.
If we are unable to cost-efficiently design, manufacture, market, sell and distribute our solid-state batteries and services, our margins,
profitability and prospects would be materially and adversely affected.
If
our solid-state batteries fail to perform as expected, our ability to further develop, market and sell our solid-state batteries could
be harmed.
Our
solid-state battery cells may contain defects in design and manufacture that may cause them to not perform as expected or that may require
repairs, recalls and design changes. Our solid-state batteries will incorporate components that have not been used individually or in
combination in the same manner as the design of our solid-state cells, and that may result in defects and errors, particularly when produced
at scale. We may be unable to detect and fix any defects in our solid-state battery cells prior to their incorporation into our solid-state
LFP batteries and sale to potential consumers. If our solid-state batteries fail to perform as expected, we could lose customers, or
be forced to delay deliveries, terminate orders or initiate product recalls, each of which could adversely affect our sales and brand
and would have a material adverse effect on our business, financial condition and results of operations.
We
expect to rely on machinery used in other large-scale commercial applications, modified to incorporate our proprietary technologies and
processes, in order to mass produce solid-state battery cells, which exposes us to a significant degree of risk and uncertainty in terms
of scaling production, operational performance and costs.
We
expect to rely on machinery used in other large-scale commercial applications to mass produce our solid-state battery cells. Doing so
will require us to work closely with the equipment provider to modify this machinery to effectively integrate our proprietary solid-state
technology and processes in order to create the equipment we need for the production of solid-state cells. This integration work will
involve a significant degree of uncertainty and risk and may result in delays in scaling up production of our solid-state cells or result
in additional cost to us.
Such
machinery is likely to suffer unexpected malfunctions from time to time and will require repairs and spare parts to resume operations,
which may not be available when needed. Unexpected malfunctions may significantly affect the intended operational efficiency of, and
therefore expected cost-efficiency associated with, our production equipment. In addition, because this machinery has not been used to
manufacture and assemble solid-state battery cells, the operational performance and costs associated with repairing and maintaining this
equipment can be difficult to predict and may be influenced by factors outside of our control, including failures by suppliers to deliver
necessary components of our products in a timely manner and at prices acceptable to us, the risk of environmental hazards and the cost
of any required remediation and damages or defects already present in the machinery.
Operational
problems with our manufacturing equipment could result in personal injury to or death of workers, the loss of production equipment or
damage to our manufacturing facility, which could result in monetary losses, delays and unanticipated fluctuations in production. In
addition, we may be subject to administrative fines, increased insurance costs or potential legal liabilities. Any of these operational
problems could have a material adverse effect on our business, financial condition and results of operations.
Risks
Related to Supply Chain and Third-Party Vendors
We
face risks associated with vendors from whom our products are sourced.
The
products we sell rely on components and other inputs that are sourced from a variety of domestic and international vendors. We rely on
long-term relationships with our suppliers but have no significant long-term contracts with such suppliers. Our future success will depend
in large measure upon our ability to maintain our existing supplier relationships and/or to develop new ones. This reliance exposes us
to the risk of inadequate and untimely supplies of various products due to political, economic, social, health, or environmental conditions,
transportation delays, or changes in laws and regulations affecting distribution. Our vendors may be forced to reduce their production,
shut down their operations or file for bankruptcy protection, which could make it difficult for us to serve the market needs and could
have a material adverse effect on our business.
While
we select these third-party vendors carefully, we do not control their actions or the manufacture of their products. Any problems caused
by these third-parties, or issues associated with their products or workforce, including customer or governmental complaints, breakdowns
or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, and cyber-attacks
or security breaches at a vendor could subject us to litigation and adversely affect our ability to deliver products and services to
its customers and have a material adverse effect on our results of operations and financial condition.
We
rely on foreign manufacturers for various products that are incorporated into the products we sell. In addition, many of our domestic
suppliers purchase a portion of their products from foreign sources. As an importer, our business is subject to the risks generally associated
with doing business internationally, such as domestic and foreign governmental regulations, economic disruptions, global or regional
health epidemics, delays in shipments, transportation capacity and costs, currency exchange rates, and changes in political or economic
conditions in countries from which we purchase products. If any such factors were to render the conduct of business in particular countries
undesirable or impractical or if additional U.S. quotas, duties, tariffs, taxes, or other charges or restrictions were imposed upon the
importation of our products in the future, our financial condition and results of operations could be materially adversely affected.
The
political landscape in the U.S. contains uncertainty with respect to tax and trade policies, tariffs and regulations affecting trade
between the U.S. and other countries. We source a portion of our merchandise from manufacturers located outside the U.S., primarily in
Asia. Major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the
imposition of tariffs on imported products, could have a material adverse effect on our business, results of operations, and financial
condition.
We
rely on manufacturers located in foreign countries, including China, for merchandise. Additionally, a portion of our domestically purchased
merchandise is manufactured abroad. Our business may be materially adversely affected by risks associated with international trade, including
the impact of current or potential tariffs by the U.S. with respect to certain consumer goods imported from China.
We
source a portion of our merchandise from manufacturers located outside the U.S., primarily in Asia, and many of our domestic vendors
have a global supply chain. The U.S. has imposed tariffs on certain products imported into the U.S. from China and could propose additional
tariffs. The imposition of tariffs on imported products could result in reduced sales and profits. It remains unclear how tax or trade
policies, tariffs or trade relations may change under the current U.S. administration, which could adversely affect our business, results
of operations, effective income tax rate, liquidity, and net income.
In
addition, the imposition of tariffs by the U.S. has resulted in the adoption of tariffs by China on U.S. exports and could result in
the adoption of tariffs by other countries as well. A resulting trade war could have a significant adverse effect on world trade and
the global economy.
We
continue to evaluate the impact of the effective and potential tariffs on our supply chain, costs, sales, and profitability as well as
our strategies to mitigate any negative impact, including negotiating with our vendors, and seeking alternative sourcing options. Given
the uncertainty regarding the scope and duration of the current and potential tariffs, as well as the potential for additional trade
actions by the U.S. or other countries, the impact on our business, results of operations, and financial condition is uncertain but could
be significant. Thus, we can provide no assurance that any strategies we implement to mitigate the impact of such tariffs or other trade
actions will be successful in whole or in part. To the extent that our supply chain, costs, sales, or profitability are negatively affected
by the tariffs or other trade actions, our business, financial condition, and results of operations may be materially adversely affected.
In 2024, we identified an underpayment of tariffs to U.S. Customs and Border Protection (“CBP”) in the amount of
approximately $1.58 million in the aggregate, related to the improper classification and valuation of certain of the products used in
our batteries. We have reported the underpayment to CBP. In the event CBP determines that we owe additional amounts or any penalties
or determines in the future that we have not paid the correct duties, our results of operations could be materially impacted.
Changes
in geopolitical conditions, U.S.-China trade relations and other factors beyond our control may adversely impact our business and operating
results.
Our
operations and performance depend, in part, on global and regional economic and geopolitical conditions, given that we have suppliers
located in China. Changes in U.S.-China trade policies, and a number of other economic and geopolitical factors both in China and abroad
could have a material adverse effect on our business, financial condition, results of operations or prospects. Such factors may include:
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instability
in political or economic conditions, such as inflation, recession, foreign currency exchange restrictions and devaluations, restrictive
governmental controls on the movement and repatriation of earnings and capital, and actual or anticipated military or political conflicts,
particularly in emerging markets; |
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expanded
jurisdiction of the Committee for Foreign Investment in the U.S.; and |
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intergovernmental
conflicts or actions, such as armed conflict, trade wars, retaliatory tariffs, and acts of terrorism or war. |
As
a result of these events, our ability to obtain supplies from our China-based suppliers may be limited or adversely affected, and we
may incur operational constraints.
A
significant disruption to the timely receipt of inventory could adversely impact sales or increase our transportation costs, which would
decrease our profits.
We
rely on our distribution and transportation network, including third-party logistics providers, to provide goods in a timely and cost-effective
manner through deliveries to our distribution facilities from vendors and then from the distribution facilities or direct ship vendors
to our stores or customers by various means of transportation, including shipments by sea, air, rail, and truck. Any disruption, unanticipated
expense, or operational failure related to this process could negatively affect our operations. For example, unexpected delivery delays
(including delays due to weather, fuel shortages, work stoppages, global or regional health epidemics, product shortages from vendors,
or other reasons) or increases in transportation costs (including increased fuel costs or a decrease in transportation capacity for overseas
shipments) could significantly decrease our ability to provide adequate products to meet increased customer demand. In addition, labor
shortages or work stoppages in the transportation industry or long-term disruptions to the national and international transportation
infrastructure that lead to delays or interruptions of deliveries could negatively affect our business. Also, a fire, tornado, or other
disaster at one of our distribution facilities could disrupt our timely receiving, processing, and shipment of merchandise to our stores
which could adversely affect our business. While we believe there are adequate reserve quantities and alternative suppliers available,
shortages or interruptions in the receipt or supply of products caused by unanticipated demand, problems in production or distribution,
financial or other difficulties of supplies, inclement weather or other economic conditions, including the availability of qualified
drivers and distribution center team members, could adversely affect the availability, quality and cost of products, and our operating
results.
Risks
Related to Our Intellectual Property
We
rely heavily upon our intellectual property portfolio. If we are unable to protect our intellectual property rights, our business and
competitive position would be harmed.
We
may not be able to prevent unauthorized use of our intellectual property, which could harm our business and competitive position. We
rely upon a combination of the intellectual property protections afforded by patent, copyright, trademark and trade secret laws in the
United States and other jurisdictions to establish, maintain and enforce rights in our proprietary technologies. In addition, we seek
to protect our intellectual property rights through non-disclosure and invention assignment agreements with our employees and consultants,
and through non-disclosure and joint development agreements with business partners and other third parties. Despite our efforts
to protect our proprietary rights, third parties may attempt to copy or otherwise obtain and use our intellectual property. Monitoring
unauthorized use of our intellectual property is difficult and costly, and the steps we have taken or will take to prevent unauthorized
use may not be sufficient. Any enforcement efforts we undertake, including litigation, could be time-consuming and expensive and could
divert management’s attention, which could harm our business, results of operations and financial condition.
In
addition, available intellectual property laws and contractual remedies in some jurisdictions may afford less protection than needed
to safeguard our intellectual property portfolio. Intellectual property laws vary significantly throughout the world. The laws of a number
of foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States. Therefore, our
intellectual property rights may not be as strong, or as easily enforced, outside of the United States, and efforts to protect against
the unauthorized use of our intellectual property rights, technology and other proprietary rights may be more expensive and difficult
to undertake outside of the United States. In addition, while we have filed for and obtained certain intellectual property rights in
commercially relevant jurisdictions, we have not sought protection for our intellectual property rights in every possible jurisdiction.
Failure to adequately protect our intellectual property rights could result in competitors using our intellectual property to make, have
made, use, import, develop, have developed, sell or have sold their own products, potentially resulting in the loss of some of our competitive
advantage and a decrease in our revenue, which would adversely affect our business, prospects, financial condition and operating results.
We
may need to defend ourselves against intellectual property infringement claims, which may be time-consuming and could cause us to incur
substantial costs.
Companies,
organizations or individuals, including our current and future competitors, may hold or obtain intellectual property rights that would
prevent, limit or interfere with our ability to make, have made, use, import, develop, have developed, sell or have sold our products,
which could make it more difficult for us to operate our business. From time to time, we may receive inquiries from holders of intellectual
property rights inquiring whether we are infringing their rights and/or seek court declarations that they do not infringe upon our intellectual
property rights. Entities holding intellectual property rights relating to our technology, including, but not limited to, batteries,
battery materials, encapsulated powders, spray deposition of battery materials, and alternator regulators, may bring suits alleging infringement
of such rights or otherwise asserting their rights and seeking licenses. For example, patents and patent applications owned by third
parties may present freedom to operate (“FTO”) questions with regards to the precoated feedstock materials for the
spray deposition process depending on the final material selections that are used, although we own a patent application that pre-dates
their patents and patent applications of interest such that our patent application may act as a basis for an invalidity position. However,
it is possible that a court may not agree that our patent application invalidates the patents and patent applications of interest. Any
such litigation or claims, whether or not valid or successful, could result in substantial costs and diversion of resources and our management’s
attention. In addition, if we are determined to have infringed upon a third party’s intellectual property rights, we may be required
to do one or more of the following:
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cease using, making, having
made, selling, having sold, developing, having developed or importing products that incorporate the infringed intellectual property
rights; |
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pay
substantial damages; |
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obtain
a license from the holder of the infringed intellectual property rights, which license may not be available on reasonable terms or
at all; or |
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redesign
our processes or products, which may result in inferior products or processes. |
In
the event of a successful claim of infringement against us and our failure or inability to obtain a license to or design around the infringed
intellectual property rights, our business, prospects, operating results and financial condition could be materially adversely affected.
Our
current and future patent applications may not result in issued patents or our patent rights may be contested, circumvented, invalidated
or limited in scope, any of which could have a material adverse effect on our ability to prevent others from commercially exploiting
products similar to ours.
Our
current and future patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent
others from commercially exploiting products or technology similar to ours. The outcome of patent applications involves complex legal
and factual questions and the breadth of claims that will be allowed is uncertain. As a result, we cannot be certain that the patent
applications that we file will result in patents being issued, or that our current issued patents, and any patents that may be issued
to us in the future, will afford protection that covers our commercial processes, systems and products or that will afford protection
against competitors with similar products or technology. Numerous prior art patents and pending patent applications owned by others,
as well as prior art non-patent literature, exist in the fields in which we have developed and are developing our technology, which may
preclude our ability to obtain a desired scope of protection in the desired fields. In addition to potential prior art concerns, any
of our existing patents, pending patent applications, or future issued patents or patent applications may also be challenged on the basis
that they are invalid or unenforceable. Furthermore, patent applications filed in foreign countries are subject to laws, rules, and procedures
that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to issued U.S. patents
will be issued.
Even
if our current or future patent applications succeed and patents are issued, it is still uncertain whether our current or future patents
will be contested, circumvented, invalidated or limited in scope in the future. The rights granted under any issued patents may not provide
us with meaningful protection or competitive advantages, and some foreign countries provide significantly less effective patent enforcement
than the United States. In addition, the claims under our current or future patents may not be broad enough to prevent others from developing
technologies that are similar or that achieve results similar to ours. The intellectual property rights of others could also bar us from
licensing and exploiting our current or future patents. In addition, our current or future patents may be infringed upon or designed
around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may
adversely affect our business, prospects, financial condition and operating results.
General
Risk Factors
The
uncertainty in global economic conditions, including the Russia-Ukraine conflict and Hamas’ attack on Israel, could reduce
consumer spending and disrupt our supply chain which could negatively affect our results of operations.
Our
results of operations are directly affected by the general global economic conditions that impact our main end markets. The uncertainty
in global economic conditions can result in substantial volatility, which can affect our business by reducing customer spending and the
prices that our customers may be able or willing to pay for our products, which in turn could negatively impact our sales and result
in a material adverse effect on our business financial condition and results of operations.
The
global macroeconomic environment could be negatively affected by, among other things, the resurgence of COVID-19 or other pandemics or
epidemics, instability in global economic markets, increased U.S. trade tariffs and trade disputes with other countries, instability
in the global credit markets, supply chain weaknesses, instability in the geopolitical environment as a result of the withdrawal of the
United Kingdom from the European Union, the Russian invasion of Ukraine, Hamas’ attack on Israel, and other political tensions,
and foreign governmental debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local
economies and in global financial markets.
As
a result of sanctions imposed in relation to the Russia-Ukraine conflict, gas prices in the United States have become much more volatile
and, in some cases, risen to historic levels. This rise in price may cause a decrease in RV travel, which could ultimately negatively
impact sales of our batteries for RVs. Further escalation of the Russia-Ukraine conflict and the subsequent response, including further
sanctions or other restrictive actions, by the United States and/or other countries could also adversely impact our supply chain, partners
or customers. The extent and duration of the situation in Ukraine, resulting sanctions and resulting future market disruptions are impossible
to predict but could be significant. Any such disruptions caused by Russian military action or other actions (including cyberattacks
and espionage) or resulting actual and threatened responses to such activity, boycotts or changes in consumer or purchaser preferences,
sanctions, tariffs or cyberattacks, may impact the global economy and adversely affect commodity prices.
Furthermore,
the cost of our components is a key element in the cost of our products. Increases in the prices of our components, including if our
suppliers choose to pass through their increased costs to us, would result in increased production costs, which may result in a decrease
in our margins and may have a material adverse effect on our business financial condition and results of operations. We have historically
offset cost increases through careful management of our inventory of supplies, ordering six months to a year in advance, and increasing
our purchase order volumes to qualify for volume-based discounts, rather than increase prices to customers. However, we may increase
prices from time to time, which may not be sufficient to offset material price inflation and which may result in loss of customers if
they believe our products are no longer competitively priced. In addition, if we are required to spend a prolonged period of time negotiating
price increases with our suppliers, we may be further delayed in receiving the components necessary to manufacture our products and/or
implement aspects of our growth strategy.
Adverse
global conditions, including economic uncertainty, may negatively impact our financial results.
Global
conditions, dislocations in the financial markets, any negative financial impacts affecting U.S. as a result of tax reform or changes
to existing trade agreements or tax conventions, may adversely impact our business.
In
addition, the global macroeconomic environment could be negatively affected by, among other things, pandemics or epidemics, instability
in global economic markets, increased U.S. trade tariffs and trade disputes with other countries, instability in the global credit markets,
supply chain weaknesses, instability in the geopolitical environment as a result of the withdrawal of the United Kingdom from the European
Union, the Russian invasion of Ukraine and other political tensions, and foreign governmental debt concerns. Such challenges have caused,
and may continue to cause, uncertainty and instability in local economies and in global financial markets.
The
loss of one or more members of our senior management team, other key personnel or our failure to attract additional qualified personnel
may adversely affect our business and our ability to achieve our anticipated level of growth.
We
are highly dependent on the talent and services of Denis Phares, our Chief Executive Officer and Interim Chief Financial Officer,
and other senior technical and management personnel, including our executive officers, who would be difficult to replace. The loss of
Dr. Phares or other key personnel could disrupt our business and harm our results of operations, and we may not be able to successfully
attract and retain senior leadership necessary to grow our business.
Our
future success also depends on our ability to attract and retain other key employees and qualified personnel, and our operations may
be severely disrupted if we lost their services. As we become more well known, there is increased risk that competitors or other companies
will seek to hire our personnel. The failure to attract, integrate, train, motivate, and retain these personnel could impact our ability
to successfully grow our operations and execute our strategy.
Our
website, systems, and the data we maintain may be subject to intentional disruption, security incidents, or alleged violations of laws,
regulations, or other obligations relating to data handling that could result in liability and adversely impact our reputation and future
sales.
We
expect to face significant challenges with respect to information security and maintaining the security and integrity of our systems,
as well as with respect to the data stored on or processed by these systems. Advances in technology, and an increase in the level of
sophistication, expertise and resources of hackers, could result in a compromise or breach of our systems or of security measures used
in our business to protect confidential information, personal information, and other data.
The
availability and effectiveness of our batteries, and our ability to conduct our business and operations, depend on the continued operation
of information technology and communications systems, some of which we have yet to develop or otherwise obtain the ability to use. Systems
used in our business (including third-party data centers and other information technology systems provided by third parties) are and
will be vulnerable to damage or interruption. Such systems could also be subject to break-ins, sabotage and intentional acts of vandalism,
as well as disruptions and security incidents as a result of non-technical issues, including intentional or inadvertent acts or omissions
by employees, service providers, or others. Some of the systems used in our business will not be fully redundant, and our disaster recovery
planning cannot account for all eventualities. Any data security incidents or other disruptions to any data centers or other systems
used in our business could result in lengthy interruptions in our service.
If
we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of customer service, or
adequately address competitive challenges.
We
have experienced significant growth in our business, and our future success depends, in part, on our ability to manage our business as
it continues to expand. We have dedicated resources to expanding our manufacturing capabilities, exploring adjacent addressable markets
and our solid-state cell research and development. If not managed effectively, this growth could result in the over-extension of our
operating infrastructure, management systems and information technology systems. Internal controls and procedures may not be adequate
to support this growth. Failure to adequately manage growth in our business may cause damage to our brand or otherwise have a material
adverse effect on our business, financial condition and results of operations.
We
may expand our business through acquisitions in the future, and any future acquisition may not be accretive and may negatively affect
our business.
As
part of our growth strategy, we may make future investments in businesses, new technologies, services and other assets that complement
our business. We could fail to realize the anticipated benefits from these activities or experience delays or inefficiencies in realizing
such benefits. Moreover, an acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures,
including disruption to our ongoing operations, management distraction, exposure to additional liabilities and increased expenses, any
of which could adversely impact our business, financial condition and results of operations. Our ability to make these acquisitions and
investments could be restricted by the terms of our current and future indebtedness and to pay for these investments we may use cash
on hand, incur additional debt or issue equity securities, each of which may affect our financial condition or the value of our stock
and could result in dilution to our stockholders. Additional debt would result in increased fixed obligations and could also subject
us to covenants or other restrictions that would impede our ability to manage our operations.
Our
operations are subject to a variety of environmental, health and safety rules that can bring scrutiny from regulatory agencies and increase
our costs.
Our
operations are subject to environmental, health and safety rules, laws and regulations and we may be subject to additional regulations
as our operations develop and expand. There are significant capital, operating and other costs associated with compliance with these
environmental laws and regulations. While we believe that the policies and programs we have in place are reasonably designed and implemented
to assure compliance with these requirements and to avoid hazardous substance release liability with respect to our manufacturing facility,
we may be faced with new or more stringent compliance obligations that could impose substantial costs.
We
are subject to anti-corruption, anti-bribery, anti-money laundering, financial and economic sanctions and similar laws, and non-compliance
with such laws can subject us to administrative, civil and criminal fines and penalties, collateral consequences, remedial measures and
legal expenses, all of which could adversely affect our business, results of operations, financial condition and reputation.
We
are subject to anti-corruption, anti-bribery, anti-money laundering, financial and economic sanctions and similar laws and regulations
in various jurisdictions in which we conduct or in the future may conduct activities, including the U.S. Foreign Corrupt Practices Act
(“FCPA”). The FCPA prohibits us and our officers, directors, employees and business partners acting on our behalf,
including agents, from corruptly offering, promising, authorizing or providing anything of value to a “foreign official”
for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. The
FCPA also requires companies to make and keep books, records, and accounts that accurately reflect transactions and dispositions of assets
and to maintain a system of adequate internal accounting controls. A violation of these laws or regulations could adversely affect our
business, results of operations, financial condition and reputation. Our policies and procedures designed to ensure compliance with these
regulations may not be sufficient and our directors, officers, employees, representatives, consultants, agents and business partners
could engage in improper conduct for which we may be held responsible.
Non-compliance
with anti-corruption, anti-bribery, anti-money laundering or financial and economic sanctions laws could subject us to whistleblower
complaints, adverse media coverage, investigations, and severe administrative, civil and criminal sanctions, collateral consequences,
remedial measures and legal expenses, all of which could materially and adversely affect our reputation, business, financial condition
and results of operations.
From
time to time, we may be involved in legal proceedings and commercial or contractual disputes, which could have an adverse impact on our
profitability and consolidated financial position.
We
may be involved in legal proceedings and commercial or contractual disputes that, from time to time, are significant and which may harm
our reputation. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual
disputes, including warranty claims and other disputes with customers and suppliers; intellectual property matters; personal injury claims;
environmental issues; tax matters; and employment matters. It is difficult to predict the outcome or ultimate financial exposure, if
any, represented by these matters, and any such exposure may be material. Regardless of outcome, legal proceedings can have an adverse
impact on us because of defense and settlement costs, diversion of management resources and other factors.
Environmental,
social and governance matters may cause us to incur additional costs.
Some
legislatures, government agencies and listing exchanges have mandated or proposed, and others may in the future further mandate, certain
environmental, social and governance (“ESG”) disclosure or performance. For example, the Securities and Exchange Commission
has enacted rules that will mandate certain companies to provide certain climate-related disclosures. In addition,
we may face reputational damage in the event our corporate responsibility initiatives or objectives do not meet the standards or expectations
of shareholders, prospective investors, lawmakers, listing exchanges or other stakeholders. Failure to comply with ESG-related laws,
exchange policies or stakeholder expectations could materially and adversely impact the value of our stock and related cost of capital,
and limit our ability to fund future growth, or result in increased investigations and litigation.
Risks
Related to Being a Public Company
We
have faced significant increased expenses and administrative burdens as a public company, which could have an adverse effect on
our business, financial condition and operating results.
We
have faced increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur
as a private company and these expenses may increase even more after we are no longer an “emerging growth company.” The Sarbanes-Oxley
Act, including the requirements of Section 404, as well as rules and regulations subsequently implemented by the SEC, the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations promulgated and to be promulgated thereunder, the
Public Company Accounting Oversight Board (United States) (“PCAOB”) and the securities exchanges and the listing
standards of the Nasdaq Stock Market, LLC (“Nasdaq”), impose additional reporting and other obligations
on public companies. Compliance with public company requirements has increased costs and made certain activities more time-consuming.
A number of those requirements have required and will continue to require us to carry out activities we have not done previously.
For example, we have created new standing committees of our board of directors (the “Board”), entered
into new insurance policies and adopted new internal controls and disclosure controls and procedures. In addition, expenses
associated with SEC reporting requirements continue to be incurred. Furthermore, if any issues in complying with those requirements
are identified (for example, if management or our independent registered public accounting firm identifies additional material weaknesses
in the internal control over financial reporting), we could incur additional costs rectifying those issues, the existence of those issues
could adversely affect our reputation or investor perceptions of it and it may be more expensive to obtain director and officer liability
insurance. Risks associated with our status as a public company may make it more difficult to attract and retain qualified persons to
serve on our Board or as executive officers. In addition, as a public company, we may be subject to stockholder activism, which
can lead to substantial costs, distract management and impact the manner in which we operate our business in ways we cannot currently
anticipate. As a result of disclosure of information in this Registration Statement and filings required of a public company,
our business and financial condition have become more visible, which may result in threatened or actual litigation, including
by competitors and other third parties. If such claims are successful, our business and results of operations could be materially adversely
affected and even if the claims do not result in litigation or are resolved in our favor, these claims and the time and resources necessary
to resolve them could divert the resources of our management and adversely affect our business and results of operations. The additional
reporting and other obligations imposed by these rules and regulations will increase legal and financial compliance costs and the costs
of related legal, accounting and administrative activities. These increased costs will require us to divert a significant amount of money
that could otherwise be used to expand the business and achieve strategic objectives. Advocacy efforts by stockholders and third parties
may also prompt additional changes in governance and reporting requirements, which could further increase costs.
Our
management team has limited experience managing a public company.
Most
of the members of our management team have limited experience managing a publicly traded company, interacting with public company
investors and complying with the increasingly complex laws pertaining to public companies. Our management team has limited experience
operating a public company. Our management team may not successfully or efficiently manage their new roles and responsibilities.
Our
transition to a public company subjects us to significant regulatory oversight and reporting obligations under the federal securities
laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant
attention from our senior management and could divert their attention away from the day-to-day management of our business, which could
adversely affect our business, financial condition, and operating results.
Risks
Related to Our Financial Position and Capital Requirements
Our
business is capital intensive, and we may not be able to raise additional capital on attractive terms, if at all. Any further indebtedness
we incur may limit our operational flexibility in the future.
As
of March 31, 2024 we had cash totaling $8.5 million. Our net loss for the quarter ended March 31, 2024 was $10.4 million compared to a net income of $4.8 million for the quarter ended March
31, 2023. We will need to raise additional
funds, including through the issuance of equity, equity-related or debt securities or by obtaining credit from financial institutions
to fund, together with our principal sources of liquidity, ongoing costs, such as research and development relating to our solid-state
batteries, expansion of our facilities, and new strategic investments. We cannot be certain that additional capital will be available
on attractive terms, if at all, when needed, which could be dilutive to stockholders. If we raise additional funds through the issuance
of equity or convertible debt or other equity-linked securities, our existing stockholders could experience significant dilution. Any
equity securities issued may provide for rights, preferences, or privileges senior to those of common stockholders. If we raise funds
by issuing debt securities, these debt securities would have rights, preferences, and privileges senior to those of common stockholders.
We intend to use the ChEF Equity Facility and Term Loan (as defined herein) to provide additional capital to us. However, market
conditions and certain restrictions contained in the agreements governing the ChEF Equity Facility and the Term Loan may limit our ability
to access capital under such agreements.
The
incurrence of additional debt could adversely impact our business, including limiting our operational flexibility by:
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making it difficult for
us to pay other obligations; |
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increasing
our cost of borrowing from other sources; |
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making
it difficult to obtain favorable terms for any necessary future financing for working capital, capital expenditures, investments,
acquisitions, debt service requirements, or other purposes; |
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restricting
us from making acquisitions or causing us to make divestitures or similar transactions; |
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requiring
us to dedicate a substantial portion of our cash flow from operations to service and repay our indebtedness, reducing the amount
of cash flow available for other purposes; |
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placing
us at a competitive disadvantage compared to our less leveraged competitors; and |
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limiting
our flexibility in planning for and reacting to changes in our business. |
Failure
to comply with the financial covenants in our loan agreement could allow our lenders to accelerate payment under our loan agreement,
which would have a material adverse effect on our results of obligations and financial position and raise substantial doubt about our
ability to continue as a going concern.
For
the quarter ended March 31, 2024, we incurred losses and had a negative cash flow from operations. As of March 31, 2024, we
had approximately $8.5 million in cash and cash equivalents and working capital of $4.2 million. As of March
31, 2024, the principal amount outstanding under the Term Loan (as defined herein) was $69.7 million. Our ability to achieve profitability
and positive cash flow depends on our ability to increase revenue, contain our expenses and maintain compliance with the financial
covenants in our outstanding indebtedness agreements.
Under
the Term Loan Agreement, we are obligated to comply with certain financial covenants, which include maintaining a maximum senior leverage
ratio, minimum liquidity, a springing fixed charge coverage ratio, and maximum capital expenditures. On March 29, 2023, September
29, 2023, December 29, 2023 and May 13, 2024, we obtained waivers from our Administrative Agent and Term Loan Lenders of our
failures to satisfy the fixed charge coverage ratio and maximum senior leverage ratio with respect to the minimum cash requirements under
the Term Loan for the quarters ended, March 31, 2023, September 30, 2023, December 31, 2024 and March 31, 2024, respectively. On March 31, 2024 and April 29, 2024, we received additional waivers from our Administrative
Agent and Term Loan Lenders in regard to our compliance with our liquidity requirement under the Term Loan as
of the last day of the fiscal quarter ended March 31, 2024 and as of the last day of the fiscal month ended April 30, 2024, respectively.
It is probable that we will fail to meet these covenants again within the next twelve months. If we are unable to comply with
the financial covenants in our loan agreement, the Term Loan Lenders have the right to accelerate the maturity of the Term Loan. These
conditions raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting
firm included an explanatory paragraph in its report on our 2023 consolidated financial statements, with respect to this uncertainty.
In
addition, we may need to raise additional debt and/or equity financing to fund our operations and strategic plans and meet our financial
covenants. We have historically been able to raise additional capital through issuance of equity and/or debt financing and we intend
to use the ChEF Equity Facility and raise additional capital as needed. However, we cannot guarantee that we will be able to raise additional
equity, contain expenses, or increase revenue, and comply with the financial covenants under the Term Loan. If such financings are not
available, or if the terms of such financings are less desirable than we expect, we may be forced to take actions to reduce our capital
or operating expenditures, including by not seeking potential acquisition opportunities, eliminating redundancies, or reducing or delaying
our production facility expansions, which may adversely affect our business, operating results, financial condition and prospects. Further,
any future debt or equity financings may adversely affect us, including the market price of our common stock and may be dilutive to our
current stockholders. Additionally, any convertible or exchangeable securities as well as preferred stock that we issue in the future
may have rights, preferences and privileges more favorable than those of our common stock. Absent additional financing, if we are unable
to meet these covenants, we plan to work with the Term Loan Lenders to cure any future breaches. However, there can be no guarantee that
we will be able to do so.
Substantial
doubt about our ability to continue as a going concern may materially and adversely affect the price per share of our common stock and
warrants and we may have a more difficult time obtaining financing. Further, the perception that we may be unable to continue as a going
concern may impede our ability to raise additional funds or operate our business due to concerns regarding our ability to discharge our
contractual obligations. If we are unable to continue as a going concern, we may be forced to liquidate our assets and the values we
receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.
Restrictions
imposed by our outstanding indebtedness and any future indebtedness may limit our ability to operate our business and to finance our
future operations or capital needs or to engage in acquisitions or other business activities necessary to achieve growth.
The
agreements governing our indebtedness restrict us from engaging in specified types of transactions. These restrictive covenants restrict
our ability to, among other things:
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incur additional indebtedness;
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create
or incur encumbrances or liens; |
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engage
in consolidations, amalgamations, mergers, acquisitions, liquidations, dissolutions or dispositions; |
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sell,
transfer or otherwise dispose of assets; and |
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pay
dividends and distributions on, or purchase, redeem, defease, or otherwise acquire or retire for value, our stock. |
Under
the agreements governing our indebtedness, we are also subject to certain financial covenants, including maintaining minimum levels of
Adjusted EBITDA, minimum liquidity, maximum capital expenditure levels and a minimum fixed charge coverage ratio. We cannot guarantee
that we will be able to maintain compliance with these covenants or, if we fail to do so, that we will be able to obtain waivers from
the applicable lender(s) and/or amend the covenants. Even if we comply with all of the applicable covenants, the restrictions on the
conduct of our business could adversely affect our business by, among other things, limiting our ability to take advantage of financing
opportunities, mergers, acquisitions, investments, and other corporate opportunities that may be beneficial to our business.
A
breach of any of the covenants in the agreements governing our existing or future indebtedness could result in an event of default, which,
if not cured or waived, could trigger acceleration of our indebtedness, and may result in the acceleration of or default under any other
debt we may incur in the future to which a cross- acceleration or cross-default provision applies, which could have a material adverse
effect on our business, financial condition and results of operations. In the event of any default under our existing or future credit
facilities, the applicable lenders could elect to terminate borrowing commitments and declare all borrowings and loans outstanding, together
with accrued and unpaid interest and any fees and other obligations, to be immediately due and payable. In addition, our obligations
under our indebtedness are secured by, among other things, a security interest in our intellectual property. During the existence of
an event of default under our credit agreements, the applicable lender could exercise its rights and remedies thereunder, including by
way of initiating foreclosure proceedings against any assets constituting collateral for our obligations under such credit facility.
We
have identified material weaknesses in our internal control over financial reporting. These material weaknesses could continue to adversely
affect our ability to report our results of operations and financial condition accurately and in a timely manner.
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with the generally accepted accounting principles generally accepted in the United States of America (“U.S. GAAP”).
As a public company, we are required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose
any changes and material weaknesses identified through such evaluation in those internal controls. A material weakness is a deficiency,
or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As
described in our Annual Report on Form 10-K for the year ended December 31, 2023, our management identified material weaknesses
in our internal control over financial reporting as a result of our failure to capture, and record, and pay tariffs correctly
related to the imported merchandise on previously filed 2022 and 2021 financial statements. We are in the process of developing
a plan to remediate these material weaknesses.
Our
efforts to remediate these material weaknesses in internal controls over financial reporting may not be successful, and
may not prevent additional material weaknesses from being identified in the future. Failure to implement and maintain effective internal
control over financial reporting could result in errors in our consolidated financial statements that could result in a restatement of
our consolidated financial statements, and could cause it to fail to meet our reporting obligations, any of which could diminish investor
confidence in us and cause a decline in our equity value. Additionally, ineffective internal controls could expose us to an increased
risk of financial reporting fraud and the misappropriation of assets, and may further subject us to potential delisting from Nasdaq,
or to other regulatory investigations and civil or criminal sanctions.
As
a public company, we are required pursuant to Section 404(a) of the Sarbanes-Oxley Act to furnish a report by management on, among other
things, the effectiveness of our internal control over financial reporting for each annual report on Form 10-K to be filed with the SEC.
This assessment will need to include disclosure of any material weaknesses identified by our management in internal control over financial
reporting. If in the future we are no longer classified under the definition of an “emerging growth company,” and/or a
“non-accelerated filer”, our independent registered public accounting firm will also be required, pursuant to Section
404(b) of the Sarbanes-Oxley Act, to attest to the effectiveness of our internal control over financial reporting in each annual report
on Form 10-K to be filed with the SEC. We will be required to disclose material changes made in our internal control over financial reporting
on a quarterly basis. Failure to comply with the Sarbanes-Oxley Act could potentially subject us to sanctions or investigations by the
SEC, Nasdaq, or other regulatory authorities, which would require additional financial and management resources.
We
are not currently in compliance with the continued listing requirements for the Nasdaq Global Market. If we do not regain compliance
and continue to meet the continued listing requirements, our common stock may be delisted, which could affect the market price and liquidity
for our common stock and reduce our ability to raise additional capital.
Our
common stock and Public Warrants are currently listed on the Nasdaq Global Market and the Nasdaq Capital Market, respectively. On
December 12, 2023, we received a letter (the “Notice”) from the Listing Qualifications Staff of Nasdaq indicating
that, based upon the closing bid price of its common stock for the 30 consecutive business days preceding the date of the Notice, we
are not in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on the Nasdaq Global
Market, as set forth in Nasdaq Listing Rule 5450(a)(1). We were provided a compliance period of 180 calendar days from the date of the
Notice, or until June 10, 2024, to regain compliance with the minimum closing bid requirement, pursuant to Nasdaq Listing Rule 5810(c)(3)(A).
We
will continue to monitor the closing bid price of our common stock and seek to regain compliance with all applicable Nasdaq requirements
within the allotted compliance periods and may, if appropriate, consider available options, including implementation of a reverse stock
split, to regain compliance with the minimum closing bid requirement. If we seek to implement a reverse stock split in order to remain
listed on the Nasdaq Global Market, the announcement or implementation of such a reverse stock split could negatively affect the price
of its common stock. If we do not regain compliance within the allotted compliance periods, including any extensions that may be granted
by Nasdaq, Nasdaq will provide notice that our common stock will be subject to delisting. We would then be entitled to appeal that determination
to a Nasdaq hearings panel. There can be no assurance that we will regain compliance with the minimum bid price requirement during the
180-day compliance period or maintain compliance with the other Nasdaq listing requirements. A delisting could substantially decrease
trading in our common stock, adversely affect the market liquidity of our common stock as a result of the loss of market efficiencies
associated with Nasdaq and the loss of federal preemption of state securities laws, adversely affect its ability to obtain financing
on acceptable terms, if at all, and may result in the potential loss of confidence by investors, suppliers, customers and employees and
fewer business development opportunities. Additionally, the market price of our common stock may decline further and stockholders may
lose some or all of their investment.
There
can be no assurance that we will be able to regain compliance with the minimum bid price requirement or comply with the other continued
listing standards of Nasdaq.
Future
resales of our outstanding securities may cause the market price of our securities to drop significantly, even if our business is doing
well.
We
are registering 21,512,027 shares of common stock to be issued and sold to CCM in connection with the ChEF Equity Facility under this
prospectus. The 21,512,027 shares that may be resold and/or issued into the public markets pursuant to the ChEF Equity Facility represent
approximately 36% of the shares of our common stock outstanding as of May 13, 2024. Any sales of such shares into the public market
could have a significant negative impact on the trading price of our common stock. This impact may be heightened by the fact that sales
to CCM will generally be at prices below the then current trading price of our common stock. If the trading price of our common stock
does not recover or experiences a further decline, sales of shares of common stock to CCM pursuant to the Purchase Agreement may be a
less attractive source of capital and/or may not allow us to raise capital at rates that would be possible if the trading price of our
common stock were higher.
We
have also filed registration statements registering
the resale of up to 47,428,544 shares and 12,266,971 warrants to purchase common stock that may be resold and/or issued into the public
markets by certain securityholders. The shares registered for resale into the public markets represent approximately 82% of
our outstanding common stock as of May 13, 2024. The securityholders selling pursuant to the registration statements will determine
the timing, pricing and rate at which they sell such shares into the public market and such sales could have a significant negative impact
on the trading price of our common stock. Certain of the investors/lenders who have resale rights under such registration statements
may have an incentive to sell because they purchased shares and/or warrants at prices below the CNTQ IPO offering price. As such, while
sales by the securityholders selling pursuant to such registration statements may experience a positive rate of return based on the trading
price at the time they sell their shares, public securityholders may not experience a similar rate of return on the securities they purchased
due to differences in the prices at which such public securityholders purchased their shares and the trading price. Given the substantial
number of shares of common stock being registered for potential resale by the securityholders selling pursuant to such registration statements,
the sale of shares by such securityholders, or the perception in the market that the securityholders of a large number of shares intend
to sell shares, may increase the volatility of the market price of our common stock, may prevent the trading price of our securities
from exceeding the CNTQ IPO offering price and may cause the trading prices of our securities to experience a further decline.
Risks
Related to Ownership of Our Common Stock
If
securities or industry analysts do not publish research or reports about us, or publish negative reports, our stock price and trading
volume could decline.
The
trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about
us. We will not have any control over these analysts. If our financial performance fails to meet analyst estimates or one or more of
the analysts who cover us downgrade our common stock or change their opinion, our stock price would likely decline. If one or more of
these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which
could cause our stock price or trading volume to decline.
If
we do not meet the expectations of investors, stockholders or securities analysts, the market price of our securities may decline. In
addition, fluctuations in the price of our securities could contribute to the loss of all or part of your investment.
The
trading price of our common stock may fluctuate substantially and may be lower than its current price. This may be especially true for
companies like ours with a small public float. If an active market for our securities develops and continues, the trading price of our
securities could be volatile and subject to wide fluctuations. The trading price of our common stock depends on many factors,
including those described in this “Risk Factors” section, many of which are beyond our control and may not be related
to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Any
of the factors listed below could have a material adverse effect on your investment in our securities and our securities may trade at
prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not recover and
may experience a further decline.
Factors
affecting the trading price of our securities may include:
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actual or anticipated fluctuations
in our quarterly financial results or the quarterly financial results of companies perceived to be similar to ours; |
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changes
in the market’s expectations about our operating results; |
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the
public’s reaction to our press releases, other public announcements and filings with the SEC; |
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speculation
in the press or investment community; |
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actual
or anticipated developments in our business, competitors’ businesses or the competitive landscape generally; |
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innovations
or new products developed by us or our competitors; |
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manufacturing,
supply or distribution delays or shortages; |
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any
changes to our relationship with any manufacturers, suppliers, licensors, future collaborators, or other strategic partners; |
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the
operating results failing to meet the expectation of securities analysts or investors in a particular period; |
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changes
in financial estimates and recommendations by securities analysts concerning us or the market in general; |
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operating
and stock price performance of other companies that investors deem comparable to ours; |
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changes
in laws and regulations affecting our business; |
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commencement
of, or involvement in, litigation involving us; |
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changes
in our capital structure, such as future issuances of securities or the incurrence of additional debt; |
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the
volume of our common stock available for public sale; |
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any
major change in our Board or management; |
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sales
of substantial amounts of our common stock by our directors, officers or significant stockholders or the perception that such sales
could occur; and |
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general
economic and political conditions such as recessions, interest rates, “trade wars,” pandemics (such as COVID-19) and
acts of war or terrorism (including the Russia-Ukraine conflict and Hamas’ attack on Israel). |
Broad
market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock
market in general and Nasdaq have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities,
may not be predictable. A loss of investor confidence in the market for the stocks of other companies which investors perceive to be
similar to us could depress our stock price regardless of our business, prospects, financial conditions or results of operations. Broad
market and industry factors, including the impact of global pandemics, as well as general economic, political and market conditions such
as recessions or interest rate changes, may seriously affect the market price of our common stock, regardless of our actual operating
performance. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and
our ability to obtain additional financing in the future.
In
addition, in the past, following periods of volatility in the overall market and the market prices of particular companies’ securities,
securities class action litigations have often been instituted against these companies. Litigation of this type, if instituted against
us, could result in substantial costs and a diversion of our management’s attention and resources. Any adverse determination in
any such litigation or any amounts paid to settle any such actual or threatened litigation could require that we make significant payments.
Furthermore, our predecessor, CNTQ, was a SPAC. SPACs have been subject to increased regulatory oversight and scrutiny, including
from the SEC. Any governmental or regulatory investigation or inquiry related to the Business Combination or otherwise could have a material
adverse effect on our business and negatively affect our reputation.
An
active trading market for our securities may not be available on a consistent basis to provide stockholders with adequate liquidity.
We
cannot assure you that an active trading market for our common stock will be sustained. Accordingly, we cannot assure you of the liquidity
of any trading market, your ability to sell your shares of our common stock when desired or the prices that you may obtain for your shares.
The
exercise of outstanding warrants to acquire our common stock would increase the number of shares eligible for future resale in
the public market and result in dilution to our stockholders.
The
exercise of outstanding warrants to acquire our common stock will increase the number of shares eligible for future resale in the public
market and result in dilution to our stockholders. As of May 13, 2024, there are currently (i) 9,422,529 shares of common
stock issuable upon the exercise of outstanding public warrants at an exercise price of $11.50 per share (the “Public
Warrants”); (ii) 1,501,386 shares of common stock issuable upon the exercise of outstanding private warrants at
an exercise price of $11.50 per share (the “Private Warrants”); (iii) 4,434,510 shares of common stock
issuable upon exercise of outstanding Penny Warrants at an exercise price of $0.01 per share; (iv) 11,131,900 shares of common stock
issuable upon exercise of outstanding Investor Warrants at an exercise price of $2.00 per share; and (v) 570,250 shares of common stock
issuable upon the exercise of the Underwriters’ Warrants at an exercise price of $2.50 per share. The $10 Warrants were
exercised in full in 2022 and are no longer outstanding.
In
addition, the Penny Warrants have price-based anti-dilution protection against subsequent equity sales or distributions at below $10.00
per share of common stock, subject to exclusions including for issuances upon conversion exercise or exchange of securities outstanding
as of October 7, 2022, the closing date of the Business Combination, issuances pursuant to agreements in effect as of the closing date
of the Business Combination, issuances pursuant to employee benefit plans and similar arrangements, issuances in joint ventures, strategic
arrangements or other non-financing type transactions and issuances pursuant to any public equity offerings. Depending on the nature
and price of any equity issuances by us, the number of shares issuable upon the exercise of such Penny Warrants could be increased and
the exercise price of the Penny Warrants could be adjusted down. Under the terms of the Penny Warrants, no adjustment will be made in
connection with any sale of shares of up to $150.0 million in gross proceeds under the Purchase Agreement (or any replacement thereof)
if the sales price is higher than $5.00 (appropriately adjusted for stock splits, combinations and the like). The Sponsor has agreed
that the Private Warrants may not be exercised to the extent the Sponsor and any affiliate of the Sponsor is deemed to beneficially own,
or it would cause the Sponsor and such affiliates to be deemed to beneficially own, more than 7.5% of our common stock. Under the
terms of the Investor Warrants and in the event of certain fundamental transactions, holders of the Investor Warrants will have the right
to receive the Black Scholes Value (as defined in the Investor Warrants) of their Investor Warrants calculated pursuant to the formula
set forth in the Investor Warrants, payable either in cash or in the same type or form of consideration that is being offered and being
paid to the holders of common stock in such fundamental transaction.
Our
operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating
results to fall below expectations or any guidance we may provide.
Our
quarterly and annual operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results.
These fluctuations may occur due to a variety of factors, many of which are outside of our control, including, but not limited to:
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our ability to engage target
customers and successfully convert these customers into meaningful orders in the future; |
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our
reliance on two suppliers for LFP cells and a single supplier for the manufacture of our battery management system; |
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the
size and growth of the potential markets for our batteries and its ability to serve those markets; |
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challenges
in our attempts to develop and produce solid state battery cells; |
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the
level of demand for any products, which may vary significantly; |
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future
accounting pronouncements or changes in our accounting policies; |
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macroeconomic
conditions, both nationally and locally; and |
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any
other change in the competitive landscape of our industry, including consolidation among our competitors or partners. |
The
cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results.
As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on its
past results as an indication of our future performance.
This
variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or
investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts
we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price
of our common stock could decline substantially. Such a stock price decline could occur even when it has met any previously publicly
stated revenue or earnings guidance it may provide.
Changes
in laws, regulations or rules, or a failure to comply with any laws, regulations or rules, may adversely affect our business, investments
and results of operations.
We
are subject to laws, regulations and rules enacted by national, regional and local governments and Nasdaq. In particular, we are required
to comply with certain SEC, Nasdaq and other legal or regulatory requirements. Compliance with, and monitoring of, applicable laws, regulations
and rules may be difficult, time consuming and costly. Those laws, regulations or rules and their interpretation and application may
also change from time to time and those changes could have a material adverse effect on our business, investments and results of operations.
In addition, a failure to comply with applicable laws, regulations or rules, as interpreted and applied, could have a material adverse
effect on our business and results of operations.
Our
Articles of Incorporation designates
specific courts as the exclusive forum for substantially all stockholder litigation matters, which could limit the ability of our stockholders
to obtain a favorable forum for disputes with us or our directors, officers or employees.
Our
Articles of Incorporation provide that, unless we consent in writing to the selection of an alternative forum, to the fullest extent
permitted by applicable law the Second Judicial District Court of Washoe County, Nevada is the sole and exclusive forum for any or all
actions, suits or proceedings, whether civil, administrative or investigative or that asserts any claim or counterclaim: (a) brought
in our name or right or on our behalf; (b) asserting a claim for breach of any fiduciary duty owed by any of our directors, officers,
employees or agents to us or our stockholders; (c) arising or asserting a claim arising pursuant to any provision of the Nevada Revised
Statutes (the “NRS”) Chapters 78 or 92A or any provision of our Articles of Incorporation or our Bylaws; (d) to
interpret, apply, enforce or determine the validity of our Articles of Incorporation or our Bylaws; or (e) asserting a claim governed
by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial
forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits
against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained
in our Articles of Incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving
such action in other jurisdictions, which could adversely affect our business, financial condition and results of operations.
Our
Articles of Incorporation also provides that, unless we consent
in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for
the resolution of any complaint asserting a cause of action arising under the Securities Act. This provision may limit a stockholder’s
ability to bring a claim in a judicial forum that it finds favorable for disputes with us and our directors, officers or other employees
and may have the effect of discouraging lawsuits against our directors, officers and other employees. Furthermore, stockholders may be
subject to increased costs to bring these claims, and the exclusive forum provision could have the effect of discouraging claims or limiting
investors’ ability to bring claims in a judicial forum that they find favorable.
Our
Articles of Incorporation could discourage
another company from acquiring us and may prevent attempts by our stockholders to replace or remove our management.
Provisions
in our Articles of Incorporation and our Bylaws may discourage, delay, or prevent, a merger, acquisition or other change in control that
stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares.
These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby
depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders
to replace or remove our current management by making it more difficult for stockholders to replace members of our Board. As our
Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our
stockholders to replace current members of our management team. These provisions provide, among other things, that:
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our
Board is divided into three classes, with each class serving staggered three-year terms, which may delay the ability of stockholders
to change the membership of a majority of our Board; |
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our
Board has the exclusive right to expand the size of our Board and to elect directors to fill a vacancy created by the
expansion of the Board or the resignation, death or removal of a director, which prevents stockholders from being able to
fill vacancies on our Board; |
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our
stockholders may not act by written consent, which forces stockholder action to be taken at an annual or special meeting of stockholders; |
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a
special meeting of stockholders may be called only by a majority of our Board, which may delay the ability of our stockholders
to force consideration of a proposal or to take action, including the removal of directors; |
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our
Articles of Incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders
to elect director candidates; |
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our
Board may alter certain provisions of our Bylaws without obtaining stockholder approval; |
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the
approval of the holders of at least sixty-six and two-thirds percent (66 2∕3%) of our common shares entitled to vote
at an election of our Board is required to adopt, amend, alter or repeal our Bylaws or amend, alter, change or repeal or adopt
any provision of our Articles of Incorporation inconsistent with the provisions of our Articles of Incorporation regarding the election
and removal of directors; |
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stockholders
must provide advance notice and additional disclosures to nominate individuals for election to our Board or to propose matters
that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation
of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain voting control of our common stock;
and |
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our
Board is authorized to issue shares of preferred stock and to determine the terms of those shares, including preferences and
voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer. |
We
are an emerging growth company and any decision to comply only with certain reduced reporting and disclosure requirements applicable
to emerging growth companies could make our common stock less attractive to investors.
We
are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company,
we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging
growth companies,” including:
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not being required to have
an independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley
Act; |
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reduced
disclosure obligations regarding executive compensation in our periodic reports and annual report on Form 10-K; and |
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exemptions
from the requirements of holding non-binding advisory votes on executive compensation and stockholder approval of any golden parachute
payments not previously approved. |
As
a result, the stockholders may not have access to certain information that they may deem important. Our status as an emerging growth
company will end as soon as any of the following takes place:
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the last day of the fiscal
year in which we have at least $1.235 billion in annual revenue; |
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the
date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; |
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the
date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or |
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the
last day of the fiscal year ending after the fifth anniversary of our IPO. |
Under
the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We may elect to take advantage of this extended transition period and as a result, our financial statements
may not be comparable with similarly situated public companies.
We
cannot predict if investors will find our common stock less attractive if we choose to rely on any of the exemptions afforded emerging
growth companies. If some investors find our common stock less attractive because we rely on any of these exemptions, there may be a
less active trading market for our common stock and the market price of our common stock may be more volatile and may decline.
If
we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce
timely and accurate financial statements or comply with applicable regulations could be impaired, which may adversely affect investor
confidence in us and, as a result, the market price of our common stock.
As
a public company, we are required to comply with the requirements of the Sarbanes-Oxley Act, including, among other things, that
we maintain effective disclosure controls and procedures and internal control over financial reporting. See “We have identified
material weaknesses in our internal control over financial reporting. These material weaknesses could continue to adversely affect our
ability to report our results of operations and financial condition accurately and in a timely manner”. We are continuing to develop and refine our disclosure controls and other procedures that
are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports
under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers.
We
must continue to improve our internal control over financial reporting. We will be required to make a formal assessment of the effectiveness
of our internal control over financial reporting and once we cease to be an emerging growth company, we will be required to include an
attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve
compliance with these requirements within the prescribed time period, we will be engaging in a process to document and evaluate our internal
control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal
resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our internal
control over financial reporting, validate through testing that controls are functioning as documented and implement a continuous reporting
and improvement process for internal control over financial reporting. There is a risk that we will not be able to conclude, within the
prescribed time period or at all, that our internal control over financial reporting is effective as required by Section 404 of the Sarbanes-Oxley
Act. Moreover, our testing, or the subsequent testing by our independent registered public accounting firm, may reveal additional deficiencies
in our internal control over financial reporting that are deemed to be material weaknesses.
Any
failure to implement and maintain effective disclosure controls and procedures and internal control over financial reporting, including
the identification of one or more material weaknesses, could cause investors to lose confidence in the accuracy and completeness of our
financial statements and reports, which would likely adversely affect the market price of our common stock. In addition, we could be
subject to sanctions or investigations by Nasdaq, the SEC and other regulatory authorities.
Unanticipated
changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect
our financial condition and results of operations.
We
will be subject to income taxes in the United States, and our tax liabilities will be subject to the allocation of expenses in differing
jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
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changes in the valuation
of our deferred tax assets and liabilities; |
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expected
timing and amount of the release of any tax valuation allowances; |
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tax
effects of stock-based compensation; |
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costs
related to intercompany restructurings; |
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changes
in tax laws, regulations or interpretations thereof; or |
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lower
than anticipated future earnings in jurisdictions where we have lower statutory tax rates and higher than anticipated future earnings
in jurisdictions where we have higher statutory tax rates. |
In
addition, we may be subject to audits of our income, sales and other transaction taxes by taxing authorities. Outcomes from these audits
could have an adverse effect on our financial condition and results of operations.
USE
OF PROCEEDS
We
will not receive any proceeds from the sale of shares of common stock by CCM in this offering. We estimate that the gross proceeds to
us from the sale of shares of our common stock to CCM pursuant to the Purchase Agreement will be up to $150 million over the term of
the Purchase Agreement, assuming that we sell the full amount of shares of our common stock that we have the right, but not the obligation,
to sell to CCM under the Purchase Agreement, and before other estimated fees and expenses. We may sell fewer than all of the shares of
our common stock offered by this prospectus, in which case our net offering proceeds may be less. Because we are not obligated to sell
any shares of our common stock under the Purchase Agreement, the actual total offering amount and proceeds to us, if any, are not determinable
at this time. See “Plan of Distribution” elsewhere in this prospectus for more information.
We
intend to use the net proceeds from CCM pursuant to the Purchase Agreement for the repayment of all or a portion of our outstanding debt
and for working capital and general corporate purposes.
The
amounts and timing of our actual expenditures will depend on numerous factors, including the factors described under “Risk Factors”
in this prospectus and in any accompanying prospectus supplements, as well as the amount of cash used in our operations. We may find
it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net
proceeds. Pending the uses described above, we plan to invest the net proceeds from the sale of shares of our common stock to CCM, if
any, in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or
guaranteed obligations of the U.S. government.
DILUTION
The
sale of our common stock to CCM pursuant to the Purchase Agreement will have a dilutive impact on our shareholders. In addition, the
lower our stock price is at the time we exercise our right to sell shares to CCM, the more shares of common stock we will have to issue
to CCM pursuant to the Purchase Agreement to receive up to $150 million of gross proceeds and our existing shareholders would experience
greater dilution.
The
price that CCM will pay for the shares to be resold pursuant to this prospectus will depend upon the timing of sales and will fluctuate
based on the trading price of our common stock.
As
of March 31, 2024, we had 60,260,282 outstanding shares of common stock. This total excludes:
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40,000,000
Earnout Shares reserved for issuance; |
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1,501,386
Private Warrants Shares; |
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9,422,529
Public Warrants Shares; |
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1,884,510
Penny Warrant Shares; |
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11,131,900
Investor Warrant Shares; |
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570,250
Underwriters’ Warrant Shares; |
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2,315,299
shares underlying outstanding options; and |
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262,125
shares underlying outstanding RSUs. |
To
the extent that additional shares are issued pursuant to the foregoing, investors purchasing our shares in this offering will experience
further dilution. In addition, the Penny Warrants contain price-based anti-dilution provisions. Depending on the nature and price of
any equity issuances by us, the number of shares issuable upon the exercise of such warrants could be increased. In addition, we may
offer other securities in other offerings due to market conditions or strategic considerations. To the extent we issue such securities,
investors may experience further dilution.
MARKET
PRICE AND DIVIDEND INFORMATION
Market
Information
Our
common stock is currently listed on the Nasdaq Global Market under the symbol “DFLI” and our Public Warrants
are currently listed on the Nasdaq Capital Market under the symbol “DFLIW.” As of May 17, 2024, the closing
price of our common stock was $1.12. As of May 16, 2024, the closing price of our public warrants was $0.0498.
As of May 17, 2024, there were 89 holders of record of our common stock and 2 holders of record of our Public Warrants.
Dividend
Policy
We
currently intend to retain all available funds and any future earnings to fund the growth and development of our business. We have never
declared or paid any cash dividends on our capital stock. We do not intend to pay cash dividends to our stockholders in the foreseeable
future. Investors should not purchase our common stock with the expectation of receiving cash dividends.
Any
future determination to declare dividends will be made at the discretion of our Board and will depend on our financial condition,
operating results, capital requirements, general business conditions, and other factors that our Board may deem relevant.
BUSINESS
All
references in this Registration Statement to “Dragonfly,” the “Company,” “we,” “us,”
or “our” mean Dragonfly Energy Holdings Corp. and its subsidiaries unless stated otherwise or the context otherwise indicates.
Overview
We
are a manufacturer of non-toxic deep cycle lithium-ion batteries that caters to customers in the consumer industry (including
the RV, marine vessel, solar, oil and gas and off-grid industries, with disruptive
solid-state cell technology currently under development. Our goal is to develop technology to deliver environmentally impactful solutions
for energy storage to everyone globally. We believe that the innovative design of our lithium-ion batteries is ideally suited for the
demands of modern customers who rely on consumer electronics, connected devices and smart appliances that require continuous, reliable
electricity, regardless of location.
Our
deep cycle lithium iron phosphate LFP batteries provide numerous advantages compared to incumbent products, such as lead-acid
batteries. LFP batteries are non-toxic and environmentally friendly, do not rely on scarce or controversial metals and are a highly cost-effective
storage solution. LFP batteries use LiFePO4 as the cathode material for lithium-ion cells
rather than nickel or cobalt. Although the energy density of LFP batteries is lower, they have a longer cycle life and experience a slower
rate of capacity loss. LFP is also intrinsically safer than sulfide gases due to its thermal and chemical stability, meaning our LFP
batteries are less flammable than alternative products. As we develop our proprietary solid-state cell technology, we believe our use
of LFP will continue to provide significant advantages over the lithium-ion technology in development by most other companies that still
incorporate less stable components in their chemistries (such as sulfide gases, which are chemically unstable and form hydrogen
sulfide when exposed to air).
We
have a dual-brand strategy for battery products, Dragonfly Energy and Battle Born. Battle Born
branded products are primarily sold DTC, while the Dragonfly Energy brand is primarily sold
to OEMs. However, with the growing popularity and brand recognition of Battle
Born, these batteries have become increasingly popular with our OEM customers. Based on the extensive research and optimization undertaken
by our team, we have developed a line of products with features including a proprietary battery management system and an internal battery
heating feature for cold temperatures, and we have recently launched our unique battery communication system. We currently source the
LFP cells incorporated into our batteries from a limited number of carefully selected suppliers that can meet our demanding quality standards
and with whom we have developed long-term relationships.
We
began as an aftermarket-focused business initially targeting DTC sales in the RV market. Since 2020, we have sold over 300,000
batteries. For the quarters ended March 31, 2024, and March 31, 2023, we sold 11,098 and 20,331 batteries,
respectively, and had $12.5 million and $18.8 million in net sales, respectively. Historically, we have increased
total sales through a combination of: increasing DTC sales of batteries for RV applications; expanding into the marine vessels
and off-grid storage markets with related DTC sales; selling batteries to RV OEMs; increasing sales to distributors; and reselling
accessories for battery systems. Our RV OEM customers currently include Keystone, who fulfills certain of its LFP battery requirements
through our Supply Agreement (as defined herein), THOR Industries (“THOR”), who has made a strategic
investment in our business and with whom we intend to enter into a future, mutually agreed exclusive North American distribution agreement
with an initial term of two years (with potential annual renewals), Airstream, and REV, and we are in ongoing discussions with a number
of additional RV OEMS to further increase adoption of our products. For the year ended December 31, 2023, we faced a number of demand
headwinds associated with increased inflation and rising interest rates, which caused a significant year-over-year decline in units produced
for North American RV OEMs. The impact of these unit declines combined with the associated lower demand in the direct-to-consumer business
caused total revenue to decline for the year ended December 31, 2023 compared to the same period last year. Based on our discussions
with customers and current unit forecast projections, we expect our revenue in the RV market to increase in the second quarter of 2024.
In May 2024, we announced that we achieved full certification for our energy
storage products to be deployed for use in oil & gas operations in North America. As a result of this certification, we are working
Connexa Energy Company (“Connexa”) to deliver a power product to Alegacy Equipment, a market leading natural gas compressor
package company, and their affiliate Agnes Systems. The power system, which Connexa expects to integrate, are expected to be used in natural
gas compression equipment to reduce methane emissions across the oilfield. We expect the first of these systems to be deployed in the
third quarter of 2024 and this business line to begin contributing to net sales by the fourth quarter of 2024.
We
currently offer several lines of batteries across our two brands, each differentiated by size, power and capacity, consisting
of seven different models, four of which come with a heated option. To supplement our battery offerings, we are also a reseller of accessories
for battery systems. These include chargers, inverters, monitors, controllers and other system accessories from brands such as Victron
Energy, Progressive Dynamics, Magnum Energy and Sterling Power. Pursuant to the Asset Purchase Agreement dated April 22, 2022 by and
among us and Thomason Jones and the other parties thereto, we also acquired the assets, including the Wakespeed of Thomason Jones,
allowing us to include our own alternator regulator in systems that we sell.
Our
battery packs are designed and assembled in-house in the United States. In April 2021, we opened our current 99,000 square foot
facility in Reno, Nevada, which has allowed us to increase our production capacity and gave us the ability to increase
sales to existing customers and penetrate new markets. Our 99,000 square foot facility provides a streamlined, partially autonomous
production process for our current batteries, which comprises module assembly and battery assembly, with the availability to expand the
number of lines to handle increased volumes and the additional battery modules we intend to introduce in the near future. We also
entered into a lease for use of an approximately 64,000 square foot facility to further increase our capacity to produce our patented
dry electrode process (the “Fernley Lease Agreement”). We plan to continue to expand our production capacity as needed
and have entered into a lease for a 390,240 square foot facility in Reno, Nevada that is currently under construction which is expected
to be completed in the second half of 2024. The commencement date for the lease for this facility was March 25, 2024, based on the construction
project being identified as “substantially complete”. This facility will enable us to consolidate various operations in Reno,
NV and will allow for expected expansion for new markets.
Through
our Battle Born Batteries and Wakespeed brands, we operate in
three primary consumer end markets: RVs, marine vessels, and off-grid storage systems. We are strategically expanding
into additional markets, with a focus on heavy-duty trucks, work trucks, and industrial solar integration. Within our core
markets, we focus on displacing lead-acid batteries with our technologically advanced and greener lithium-ion solutions.
Our Battle Born Batteries portfolio is designed to provide customers with a reliable, long-lasting, and
highly efficient off-grid power source for powering appliances, air conditioning, lighting, and other devices commonly
found in these applications.
We
continue to leverage our proven sales and marketing strategy to efficiently penetrate our target end markets. We prioritize customer
education through various channels, highlighting the distinct advantages of lithium-ion batteries over traditional lead-acid alternatives.
Tradeshows, rallies, and industry events serve as key platforms for direct customer engagement, featuring product demonstrations, educational
seminars, and opportunities for interaction with knowledgeable sales and technical experts. We further amplify our reach through a robust
social media program, strategically partnering with content creators and industry influencers to disseminate product benefits to targeted
audiences. Additionally, we cultivate relationships with industry publications to secure editorial coverage that informs and educates
potential customers. We also employ a targeted pay-per-click (“PPC”) advertising campaigns across various platforms,
including search engines, social media, and connected TV to efficiently convert high-intent customers at the bottom of the purchase funnel.
Drawing
upon our success in collaborating with RV and marine OEMs, we have begun expanding into the heavy-duty trucking market. We are leveraging
our expertise in designing and supporting lithium-ion storage systems to tailor solutions meeting specific OEM requirements. These solutions
have been adopted as factory-installed features, demonstrating their value proposition for truck fleets seeking to:
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Reduce
diesel fuel costs: our technology delivers significant fuel savings, offering a rapid return on investment. |
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Comply
with anti-idling regulations: Lithium-ion batteries enable efficient power management eliminating the need for long haul truck drivers
to idle, thus aligning with increasingly stringent regulations. |
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Enhance
sustainability efforts: Transitioning to long lasting and greener lithium-ion solutions contributes to improved environmental impact. |
This
strategic approach has resulted in successful pilot programs with fleets representing over 15% of the North American heavy-duty trucking
market.
In addition, we have successfully developed innovative manufacturing processes for dry-electrode manufacturing of lithium-ion cells,
and continues development efforts relating to next-generation solid-state technology. Since our inception, we have built a
comprehensive patent portfolio around our proprietary dry-electrode battery manufacturing process, which eliminates the use of
harmful solvents and energy-intensive drying ovens compared to traditional methods. This translates to significant environmental and
cost benefits, including reduced energy consumption, smaller space requirements, and a lower carbon footprint.
Moreover,
our solid-state technology in development removes the need for a liquid electrolyte, thereby addressing safety concerns related to flammability.
Our unique competitive edge lies in the combination of solid-state technology with its scalable dry-electrode manufacturing process.
This enables the rapid production of cells having an intercalation anode (like graphite or silicon), unlike many competitors reliant
on less stable lithium metal anodes. We believe this design offers superior cyclability and safety, serving as a key differentiator in
the energy storage market. Furthermore, internal production of both conventional and solid-state cells streamlines our supply chain and
enables vertical integration, ultimately driving down production costs.
Industry
Background
For
decades, lead-acid batteries have been the dominant player in power and energy markets worldwide. Since the introduction of the absorbed
glass mat (“AGM”) lead-acid battery in the mid-1970s, the technological advancements in lead-acid battery technology
have been limited. LFP batteries have numerous advantages over the incumbent lead-acid batteries used in today’s markets:
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Environmentally
Friendly, Socially Responsible and Safer. Lead-acid batteries that are not recycled or disposed of properly are extremely
toxic and can cause areas of poisonous groundwater and lead buildups, impacting both humans and the environment. Research by EcoMENA
shows that a single lead-acid battery disposed of incorrectly into a municipal solid waste collection system could contaminate 25
tonnes of municipal solid waste and prevent recovery of organic resources due to high lead levels. Lithium-ion batteries, specifically
LFP batteries, have no toxic elements, offering a much safer environmental alternative to lead-acid batteries. LFP batteries also
do not rely on controversial elements such as cobalt as part of their chemistry. Compared to lead-acid batteries, there is no concern
of “off-gassing,” or the emission of noxious gases, for lithium-ion batteries, and therefore no need to take into consideration
required ventilation or off-gas related fire risk when installing or recharging our LFP batteries. |
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Longer
Lifespan. Lithium-ion batteries have longer lifecycles compared to lead-acid batteries. LFP batteries are able to cycle (i.e.,
discharge and charge) 3,000 to 5,000 times before hitting the 80% capacity mark. Comparatively, lead-acid batteries degrade quickly,
only cycling 300-500 times before hitting 50% of their original capacity. Our third-party validated internal research suggests that
if a typical AGM lead-acid battery and our LFP battery were cycled once every day, the AGM battery and our LFP battery would have
a respective lifespan of 1.98 years and 19.18 years before reaching 80% depth of discharge (i.e., 80% of our battery would have been
discharged relative to the overall capacity of the battery in that lifespan). In many storage applications, lithium-ion batteries
have a lifespan exceeding the lifetime of the project with very limited maintenance requirements, compared to lead-acid batteries,
which have a one- to two-year useful life in most applications. |
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Power
and Performance. As new technologies evolve and people consume more electricity, the importance of battery power and performance
increases. Compared to lead-acid batteries, lithium-ion batteries can discharge power at a higher voltage and more consistently through
the discharge cycle (i.e., until they are 100% discharged) while utilizing a smaller physical space and weighing less. In addition,
unlike lead-acid batteries, lithium-ion batteries can be discharged below 50% capacity without causing irreparable harm to the battery.
Lithium-ion batteries also provide the same energy capacity with one-fifth the weight of a standard lead-acid battery. Lithium-ion
batteries are also significantly more reliable and efficient, especially in cold temperatures, allowing for year-round all-climate
usage. |
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Charging.
Lead-acid batteries were the first rechargeable batteries on the market. However, due to new advancements in energy density
(i.e., the amount of energy stored by mass volume) and charge/discharge rates, lithium-ion batteries now significantly outperform
traditional lead-acid batteries. LFP batteries currently charge five times faster than their lead-acid counterparts, with even faster
charging rates expected for the next generation of lithium-ion cells. With the appropriate battery management system, lithium-ion
batteries can be charged in cold temperatures, something lead-acid batteries are unable to do, resulting in two to three times more
power delivered. |
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Maintenance-Free.
LFP batteries provide the benefit of being a maintenance-free option compared to lead-acid batteries. Unlike lead-acid batteries
which have no battery management system to regulate current flow and charging rates, all our LFP battery packs include a proprietary
battery management system that regulates current and provides temperature, short circuit and cold charging protection. Our LFP batteries
also do not require cleaning or water, eliminating the need for periodic maintenance found in today’s lead-acid batteries.
While our LFP batteries are generally designed to replace and physically fit into racks made for existing lead-acid batteries, our
batteries can be installed in any position and without the need for venting. |
End
Markets
Current
Markets
According
to a Frost and Sullivan report commissioned by us in 2021 (“Frost & Sullivan”), the total addressable market
(“TAM”) of our three current end markets is estimated to be approximately $12 billion by 2025.
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Recreational
Vehicles. The growth of the RV market is expected to continue to drive demand for LFP storage batteries. According to the
2022 RV Industry Association (“RVIA”) Annual Report, 22% of RV buyers are between the ages of 18 and 34. In addition,
nearly a third of the respondents in the study (31%) are first-time owners, underscoring the growth of the industry in the past decade.
RV interiors are becoming more modern as customers adopt the full-time RV lifestyle, with additional appliances and electronics being
installed, increasing the need for reliable power. According to the RVIA and THOR Industries, North American RV shipments have had
an estimated 10-year compound annual growth rate (“CAGR”) of 5.6% from 2012 to 2022. The need for greater
power and power storage capabilities to power interiors is driving a shift towards the use of LFP batteries. Incumbent lead-acid
batteries are heavy, take up a lot of space, have inefficient power discharge and require ventilation. Our product addresses all
of these problems by allowing for shorter charge times, weighing one-fifth of a standard lead-acid battery, providing a reliable
and consistent source of power and being maintenance-free. Our market focus has traditionally been on motorized RVs (i.e., drivable
RVs), however, OEMs have begun to introduce batteries into towable units (i.e., RVs that require another vehicle to drive them),
which has created a growing subsector in the RV market for LFP batteries. According to the RVIA’s 2021 RV Market Report, approximately
91% of wholesale RV units shipped in 2021 were towable units, representing a significant growth opportunity for LFP batteries. |
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Marine
Vessels. As boating becomes more popular in North America, the need for a reliable, non-flammable energy storage system is
becoming increasingly apparent. According to the 2020 Recreational Boating Statistics and the 2020 National Recreational Boating
Safety Survey, in 2018 over 84 million Americans participated in some form of boating activity, with a total of over 11.8 million
boats on the water as of 2020, of which 93% are power boats. We believe that the marine vessel market will grow to approximately
$8 billion by 2025. Similar to the RV market, customers are becoming more technologically advanced and are adding more electronics
to their vessels, in turn driving demand for larger and more reliable energy storage, such as LFP batteries. Tightening marina regulations
are also driving the need for electric docking motors on more vessels and increasing the focus on safety, which LFP batteries are
well-suited to address. |
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Off-Grid
Residences. Many people are turning to off-grid housing and, as individuals and governments become more conscious of their
carbon footprint, a shift towards renewable energy sources for off-grid housing will be increasingly popular. Solar installations
continue to see an increase globally, with global PV installations projected to rise from 144 GW (DC) in 2020 to 334 GW (DC) in 2030
according to Bloomberg. According to the Solar Energy Industries Association (“SEIA”), approximately 11% of solar
installations in 2021 were supplemented with a battery system for efficient storing of excess energy generated during daylight hours.
However, the number of new behind-the-meter solar systems with supporting battery systems is projected to rise to over 29%
by 2025. LFP batteries are able to solve the weakest part of renewable energy adoption, which is the lack of consistent, reliable
and efficient energy storage that is safer than alternative energy storage options currently on the market. As this shift towards
clean energy becomes more prominent and cost-effective, the LFP battery market will be able to penetrate the largely untapped off-grid
markets. |
Addressable
Adjacent Markets
Our
addressable markets are areas with significant growth potential that we will be positioned to penetrate as customers turn towards LFP
and other lithium-ion batteries as replacements for traditional lead-acid batteries. As these medium- and long-term markets mature, we
intend to deploy our solid-state technology, once developed, while concurrently continuing to further displace the incumbent lead-acid
technology. According to Frost & Sullivan, our TAM is estimated to be $85 billion by 2025.
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Heavy
Duty Truck. The heavy-duty truck market encompasses a broad range of vehicles designed for extensive commercial and industrial
use, such as long-haul transport, construction, and logistics. With more than 250,000 Class 8 units sold in 2023, the market demonstrates
a robust demand for vehicles that are integral to the backbone of global commerce and infrastructure projects. As the demand for
more efficient, sustainable, and reliable transportation solutions grows, the use of Auxiliary Power Units (“APUs”)
in heavy duty trucks is becoming increasingly significant. APUs provide an alternative energy source for powering onboard systems
and maintaining cabin comfort during rest periods, without the need for the main engine to run—thereby reducing fuel consumption
and emissions. Additionally, the market opportunity extends to the electrification of Transport Refrigeration Units (“TRUs”)
on trailers and smaller class refrigerated vehicles, which are crucial for the cold chain logistics sector. This shift towards electrification
is driven by the need for more sustainable and efficient cooling solutions, reducing the carbon footprint of refrigerated transport.
The expansion of global trade and the continuous push for lower emissions standards are driving the demand for heavy duty trucks
equipped with APUs, as well as for the electrification of TRUs, highlighting a considerable market opportunity. This trend emphasizes
the potential for advanced battery technologies not only as an environmental solution but also as a competitive advantage in the
heavy-duty truck and refrigerated transport markets, offering a substantial retrofitting and market penetration opportunity for battery
manufacturers and suppliers with the requisite expertise and product offerings. |
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Industrial
/ Material Handlings / Work Truck. The industrial vehicle market includes work trucks, material handling and warehousing
equipment and compact construction equipment. As industrial vehicles increase in terms of automation and incorporate more onboard
tools, the need for a long-lasting, reliable and environmentally friendly energy source grows. The continuous growth of e-commerce
is increasing the demand for warehousing and automated equipment. According to material handling equipment manufacturer Hyster-Yale
Materials Handling, in 2021 the global market volume in units for lift trucks was approximately 2.3 million, most of which were powered
by traditional lead-acid batteries, presenting a large retrofitting opportunity for LFP batteries. |
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Specialty
Vehicles. According to Mordor Intelligence, as of 2019, approximately 40% of the specialty vehicle market in the United States
consists of medical and healthcare vehicles and approximately 30% consists of law enforcement and public safety vehicles. The market
for emergency vehicles has grown as the baby boomer generation continues to age, and there has been increased demand for electrified
devices and equipment onboard these emergency vehicles. Our LFP batteries are well-suited to capture this market as they offer a
more reliable power source with longer lifecycles compared to lead-acid batteries. In addition, LFP batteries are safer, lighter
and modular, allowing for more tools to be stored on-board emergency vehicles without sacrificing the performance of the battery
system. |
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Emergency
and Standby Power. Demand for reliable emergency and standby power sources is expected to continue to drive demand for effective
power storage for residential, commercial and industrial uses. Power outages in the United States cost an estimated $150 billion
per year, according to the Department of Energy, increasing the demand for uninterrupted power sources. The need for reliable emergency
and standby power exists in both hazardous and non-hazardous environments and is particularly acute in areas where the existing grid
service is subject to intermittencies or is otherwise inefficient (including as a result high peak electricity usage, grid and related
equipment age or severe weather and other environmental factors). LFP batteries are able to offset grid-related intermittencies and
inefficiencies and assist in providing grid stabilization. Importantly, LFP batteries achieve these benefits in a clean, reliable
and safe manner by supplanting or reducing the use of fossil fuel backup generators. |
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Telecom.
Demand for mobile data continues to increase and network providers are investing heavily in 5G networks, particularly in
unserved and underserved regions, to support this demand. According to the CTIA’s 2021 annual survey, there were 417,215 cell
sites in the United States in 2020. Batteries provide backup power to these sites when external power is interrupted. While lead-acid
batteries are commonly used as backup batteries today, the compact nature of lithium-ion batteries, together with the fact that they
are safer and more environmentally friendly, make them ideal alternatives as new wireless sites are built and the older wireless
sites require upgrades. LFP batteries are maintenance free and have a longer lifespan, allowing for a more efficient and reliable
power source for large wireless sites. The ability to monitor the battery systems remotely enables telecom operators to reduce onsite
maintenance checks, thereby reducing overall operational costs while ensuring network uptime. |
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Rail.
Rail transportation is a large potential market, with an estimated U.S. market size of $110.1 billion in 2023,
according to IBISWorld. Many railroad operators have invested in infrastructure and equipment upgrades in recent years, in an
attempt to boost capacity and productivity. As noted in a study conducted by the International Energy Analysis Department and the
Lawrence Berkeley National Laboratory, a shift from fossil fuel-based rail cars to emission-free power sources will greatly affect
the economic and environmental impact from the rail industry. Two suggested pathways from this study were (1) electrifying railway
tracks and using emission-free electricity which requires significant storage combined with renewable electricity on the grid, and
(2) adding battery storage cars to diesel-electric trains. A battery-electric rail sector would provide more than 200GWh of modular
and mobile storage, which could in turn provide grid services and improve the resilience of the power system. |
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Data Centers. Data
centers have seen strong growth in recent years, with over 5,000 data centers in the United
States as of March 2024 according to Statista. Constant technological advancements and
larger amounts of data generated and stored by companies for increasingly longer periods
of time are driving growth in the importance, and the amount, of physical space dedicated
to data centers. As software companies, such as Google and Oracle, continue to develop new
technologies, such as artificial intelligence, data centers where the computer and storage
functions are co-located also continue to grow. As the industry seeks to cut operating costs,
become more efficient and minimize dedicated physical space, we expect there to be a shift
towards light, compact lithium-ion batteries that can reduce overall costs and provide a
reliable power supply without sacrificing performance. Lithium-ion batteries are designed
to operate in environments with higher ambient temperatures than incumbent energy storage
methods (such as lead-acid batteries). This ability for lithium-ion batteries to withstand
and operate at higher temperatures can also reduce cooling costs. |
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On-grid
Storage. On-grid energy storage is used on a large-scale platform within an electrical power grid in conjunction with variable
renewable energy sources such as solar and wind projects. These storage units (including large-scale stationary batteries) store
energy when electricity is plentiful, and discharge energy at peak times when electricity is scarce. Because of the low cost of fossil
fuels, the adoption of large-scale batteries has been slow. However, according to the U.S. Energy Information Administration 2021
report on battery storage in the United States, lithium-ion battery installations in large-scale storage grew from less than 50 MWh
of energy capacity annual additions in 2010 to approximately 400 MWh in 2019. As lithium-ion battery production scales, the related
cost of storage for all lithium-ion batteries will decline and the cost of renewable energy (including associated storage costs)
is expected to approach $0.05 per kWh, which is the amount required to be cost competitive with the price of power from the electrical
grid. We believe our ability to cost-effectively develop and manufacture LFP solid-state batteries will position renewable energy
projects deploying these batteries to reach “grid parity” sooner. |
Our
Competitive Strengths
We
believe that we possess the largest share in the markets we operate in due to our following business strengths, which distinguish us
in this competitive landscape and position us to capitalize on the anticipated continued growth in the energy storage market:
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Premier
Lithium-Ion Battery Technology. Each of our innovative batteries features custom designed components to enhance power and
performance in any application or setting. Our batteries feature LFP chemistry that is environmentally friendly, does not heat up
or swell when charging or discharging, and generates more power in less physical space than competing lead-acid batteries. Unlike
our competitors, our internal heating technology keeps our batteries within optimal internal conditions without drawing unnecessary
energy and sustaining minimal energy drain. To protect our products, our batteries possess a proprietary battery management system
that shuts off the ability to charge at 24 degrees Fahrenheit. This technology increases performance in cold weather conditions while
possessing a unique heating solution that does not require an external energy source. |
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Extensive,
Growing Patent Portfolio. We have developed and filed patent applications on commercially relevant aspects of our business
including chemical compositions systems and production processes. To date, we have owned 44 issued patents, with an additional
48 patent applications pending, in the United States, Canada, Australia, Korea, Japan, India, China, and Europe
(with individual patents in Germany, France and the United Kingdom). |
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Proven
Go-To-Market Strategy. We have successfully established a DTC platform and have developed strong working relationships
with major OEMs and fleets in the RV, marine and heavy trucking markets. We custom design and engineer storage systems
for new and existing applications. We see opportunities to continue to leverage our success in the aftermarket to expand our
relationships to other leading OEMs, fleets, and distributors while further enhancing our DTC offerings. Extensive
informational videos and exceptional customer service provide sales, technical and hands-on service support to facilitate consumer
transition from traditional lead-acid or incumbent lithium-ion batteries to our products. |
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Established
Customer Base with Brand Recognition. We have a growing customer base of more than 25,000 customers featuring OEMs,
distributors, upfitters and end consumers across diverse end markets and applications including RV, marine vessels and off-grid residences.
Customer demand and brand recognition of Battle Born batteries from an aftermarket sales perspective have helped drive significant
adoption from OEMs and fleets with visibility for future growth through further expansion of our existing relationships. |
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High
Quality Manufacturing Process. Unlike competitors that outsource their manufacturing processes, our batteries are designed,
assembled and tested in the United States, ensuring that our manufacturing process is thoroughly tested and our batteries are of
the highest quality as a result of governmental regulations for performance and safety. |
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Drop-in
Replacement. Our battery modules are largely designed to be “drop-in replacements” for traditional lead-acid
batteries, which means that they are designed to fit standard RV or marine vessel configurations without any adjustments. Our target
applications are powering devices and appliances in larger vehicles and low speed industrial vehicles. We offer a full line of compatible
components and accessories to simplify the replacement process and provide consumers with customer service to ensure a seamless transition
to our significantly safer and environmentally friendly battery. Over their lifetime, our batteries are significantly cheaper from
both an absolute cost and a cost per energy perspective. These lifetime costs, at current costs and capacity, will naturally drop
as we continue to take advantage of economies of scale. |
Our
Growth Strategy
We
intend to leverage our competitive strengths, technology leadership and market share position to pursue our growth strategy through the
following:
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Expand
Product Offerings. In the short-term, our aim is to further diversify our product offerings to give consumers, as well as
OEMs and distributors, more options for additional applications. We intend to launch and scale production of additional 12 voltage
and 24 voltage batteries and we have recently introduced 48 voltage battery systems, which we believe will extend our market reach
in each of our targeted end markets. Additionally, in January 2023, we launched Dragonfly IntelLigence, a proprietary
monitoring and communication system that allows us to monitor, optimize, and in some cases compile data on battery banks. We believe
the natural evolution of our product offering is to become a system integrator for solar and other energy storage solutions. |
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Expand
End Markets. We have identified additional end markets that we believe in the medium- to longer-term will increasingly look
to alternative energy solutions, such as LFP batteries. Markets, such as long-haul trucking, standby power, industrial vehicles,
specialty vehicles and utility-grade storage, are in the early stages of adoption of lithium-ion batteries (including LFP batteries),
and we aim to be at the forefront of this movement by continuing to develop and produce products with these end users in mind. |
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Commercialize our Dry Electrode
Cell Manufacturing Technology. In
July 2023, we completed the construction of our proprietary and patented cell manufacturing
pilot line. Our patented dry deposition process is chemistry agnostic – meaning it
can produce battery cells across a variety of chemistries – and is less capital intensive,
uses less energy, and can produce cells in a smaller manufacturing footprint, leading to
a lower total cost of manufacturing. In August 2023, we successfully demonstrated the ability
to produce anode material at scale using this manufacturing process and did the same with
cathode material in October 2023. We are currently producing sample cells for prospective
customers across a variety of chemistries and end-markets and expect to begin scaling production
in the second half of 2024. |
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Develop
and Commercialize Solid-State Technology. We believe solid-state technology presents a significant advantage to all products
currently on the market, with the potential to be lighter, smaller, safer and cheaper. Once we have optimized the chemistry of our
LFP solid-state batteries to enhance conductivity and power, we intend to scale up for mass production of separate solid-state batteries
for various applications and use cases. |
Our
Products and Technology
Chemistry
Comparison
Lead-acid
batteries were the first form of rechargeable battery to be developed and modified across different platforms for a variety of uses,
from powering small electronics to use for energy storage in back-up power supplies in cell phone towers. Since the development in the
1970s of AGM lead-acid batteries, a form of sealed lead-acid battery that enables operation in any position, there has been limited innovation
in lead-acid battery technology. The push to develop longer-lasting, lower-cost, more environmentally-friendly and faster-charging batteries
has led to the development of lithium-ion batteries and, within the lithium-ion battery market, different chemistries.
There
are several dominant battery chemistries in the lithium-ion market that can be used for different purposes. Two widely adopted chemistries
found in the market today are nickel manganese cobalt (“NMC”), and nickel cobalt aluminum (“NCA”).
The higher energy density and shorter cycle life found in NMC and NCA batteries are suitable for markets where fast charging and high
energy density are required, such as electric vehicle (“EV”) powertrains and consumer electronics. LFP batteries
are best suited for energy storage markets where long life and affordability are paramount, such as RV, marine vessel, off-grid storage,
onboard tools, material handling, utility-grade storage, telecom, rail and data center markets.
NMC
batteries are highly dependent on two metals that present significant constraints — nickel, which is facing an industry-wide
shortage, and cobalt, a large percentage of which comes from conflict-ridden countries. According to an article by McKinsey & Company
titled “Lithium and Cobalt: A tale of two commodities”, global forecasts for cobalt show supply shortages arising
as early as 2022, slowing down NMC battery growth. Both of these elements are also subject to commodity price fluctuations, making NMC
and NCA batteries less cost-effective than LFP batteries. LFP batteries do not contain these elements and materials can be sourced domestically,
and are therefore not subject to these shortages, geopolitical concerns or commodity price fluctuations. In fact, LFP batteries have
no toxic elements, offering a much safer environmental alternative. The temperature threshold for thermal runaway (i.e., lithium-ion
battery overheating that can result in an internal chemical reaction) is higher for LFP batteries as compared to NMC and NCA batteries, making LFP batteries less flammable and safer.
LFP
batteries have a useful life of approximately 10 to 15 years compared to one to two years for lead-acid batteries, and typically charge
up to five times faster. LFP batteries are also not constrained by weight (having the same energy capacity at one-fifth of the weight)
or temperature (having the ability to generate power even in low temperatures and to not swell or heat up when charging or discharging)
and are generally maintenance free.
In
the electric vehicle market, the race to provide the highest energy density facilitating frequent, rapid acceleration, greatest range
and fastest charging battery — all while competing on cost — is where many new battery companies
are prioritizing their efforts. Success in the electric vehicle market requires use of chemistries capable of optimization to these requirements.
In our targeted stationary storage markets, the ideal solution requires a safe, long-lasting battery in terms of discharge/charge cycles
with a focus on providing a steady power stream. LFP batteries are better suited for the stationary storage market compared to NMC and
NCA batteries, as LFP batteries are safer and have a significantly longer life cycle making them more cost-effective. The market for
utility grade storage, particularly for clean energy projects, and the related adoption of lithium-ion batteries (including LFP batteries)
is expected to increase as the fully-loaded cost of energy (production and storage) approaches cost parity with inexpensive fossil fuel
energy provided through the electric grid. Compared to NMC and NCA batteries, LFP batteries are at or much closer to grid parity.
Dry
Electrode Cell Manufacturing Technology
Since
our inception, we have been developing proprietary dry-electrode manufacturing processes for which we have issued patents and pending
patent applications, where appropriate. Dry-electrode manufacturing eliminates the use of toxic and expensive solvents and energy-intensive
drying ovens in the cell manufacturing process. This in turn reduces the energy usage, space requirements, carbon footprint, and overall
cost as compared to conventional slurry-based methods. Furthermore, the manufacturing technology is chemistry agnostic – meaning
it can produce battery cells across a variety of different chemistries and application use cases. In July 2023, we completed the construction
of our dry-electrode manufacturing pilot line. In August 2023, we successfully demonstrated the ability to produce Anode material at
scale using this manufacturing process and did the same with cathode material in October 2023. We are currently producing sample cells
for prospective customers across a variety of chemistries and end-markets and expect to begin scaling production in the second half of
2024.
Solid-State
Cells
LFP
batteries are not without their disadvantages. While less flammable than other chemistries, the existence of a flammable liquid electrolyte
still poses safety risks. Like all liquid-based lithium-ion batteries, LFP batteries have a potential to produce solid lithium dendrites,
icicle-like formations which can pierce the physical separators in LFP batteries, which are necessary in LFP batteries to separate the
positively charged liquid electrolyte from the negatively charged liquid electrolyte, and which, over time, will degrade the performance
of LFP batteries and potentially result in fire-related risks. The next phase in the development of lithium-ion batteries is solid-state
cell development, which contains a solid, rather than a liquid, electrolyte, eliminating many of the current disadvantages to LFP batteries
while increasing the safety of the battery cells. We believe that the development of our solid-state technology will provide us with
a unique competitive advantage.
Compared
to current lithium-ion technology, where lithium-ions cross a liquid electrolyte barrier between a battery’s anode (negative electrode)
and cathode (positive electrode), solid-state batteries aim to use a solid electrolyte to regulate the lithium-ions. As a battery charges
and discharges, an electrochemical reaction occurs creating a flow of electrical energy between the cathode, electrolyte and anode as
the electrodes lose and reacquire electrons. In addition to the use of non-toxic electrode components, the removal of a liquid electrolyte
will eliminate the risk of fire, making solid-state cells inherently safe. The move to a non-liquid electrolyte also means that solid-state
batteries will be, on average, smaller and lighter than existing lithium-ion batteries. The process for manufacturing our solid-state
cells is described below under “— Research and Development”.
Our
Products
We
provide various industries with clean, reliable, and efficient power solutions through our comprehensive product portfolio. These products
and solutions are sold to both OEMs and retail customers.
Our
lead product line is Battle Born Batteries product line, respected for its exceptional performance and durability. When compared to traditional
lead-acid options, Battle Born Batteries deliver two to three times the power in the same physical space, one-fifth the weight for equal
usable power, and up to five times faster charging. Additionally, these batteries have extended lifespans of 3,000-5,000 cycles, translating
to ten to fifteen years of reliable use under typical conditions. This longevity is backed by our 10-year warranty, showcasing our commitment
to quality. The Battle Born Batteries product line currently features various sizes and configurations including models with proprietary
built-in heating for cold weather charging and Dragonfly IntelLigence™, a communication technology that unlocks real-time monitoring,
instant notifications, various protocol integration and superior battery protection. A focus on safety is central to our products, and
all Battle Born Battery products utilize LiFePO4 chemistry, the safest lithium-ion chemistry available on the market. Additionally, our
battery products undergo rigorous testing under stringent industry standards like UL Standard 2054, IEC 62133, UN 38.3 and IP65 to ensure
safety and reliability.
Looking
beyond batteries, we also offer a diverse range of power products.
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Our
Wakespeed Advanced Alternator Regulator, WS500, utilizes current, voltage, and temperature to deliver precise and effective charging
of battery banks via an alternator. Its intelligent control leverages advanced multi-PID engine technology to ensure the most accurate
charging available, simplifying installation, configuration, and operation. The WS500 offers superior protection for both lead-acid
and lithium battery chemistries, making it a valuable investment for optimizing power management and extending battery life. |
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The
Battle Born Batteries Lithium Power Pack Series features all-in-one power solutions for RVs, vans, and other mobile, off-grid, and
industrial applications. These pre-wired, ready-to-go systems make the upgrade to lithium simple with easy installation into RVs
or other applications. Designed with the dimensions and mounting points of traditional generators in mind, Lithium Power Packs are
made to be quiet, sustainable, and simple drop-in replacements, allowing customers to eliminate generator fuel and noise. Custom
configurations of Lithium Power Pack products are available for dealers and OEMs to size these all-in-one solutions to their specific
needs. |
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Designed
for the demanding world of heavy-duty trucking, our Battle Born All-Electric APU leverages a lithium battery system to empower drivers
with long lasting power for their hotel loads. This upgrade eliminates the need for idling and its associated fuel costs and emissions—this
APU provides power to run a truck’s HVAC, appliances, and electronics during mandatory rest periods. The Battle Born All Electric
APU is pre-assembled and pre-wired, seamlessly integrating into a truck’s frame rails. |
Additionally,
as a distributor of leading brands like Victron, Schneider, and REDARC, we act as a one-stop shop for full system integration, catering
to both OEMs and retail customers. Our complete offering allows customers to benefit from clean and sustainable power, extended lifespans,
reduced costs, increased efficiency, and seamless integration – all backed by expert service and support.
Battery
Management System
Our
proprietary battery management system is developed and tested in-house. It offers a complete solution for monitoring and controlling
our complex battery systems and is designed to protect battery cells from damage in various scenarios. We believe our battery management
system is industry-leading for a number of reasons:
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it
enables batteries to draw power under 135 degrees Fahrenheit, and is designed to cut off charging at 24 degrees Fahrenheit to protect
cells; |
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it
actively monitors the rate of change of currents to detect and prevent short circuiting, and also protects against potential ground
faults; |
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it
allows for up to an average of 300 amps continuously, 500 amp surges for 30 seconds, and momentary, half second maximum capacity
surges; |
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it
enables batteries to recharge even if completely drained; |
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utilizes larger resistors to ensure balanced loads to improve performance and extend useful life; and |
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facilitates scalability by enabling batteries to be combined in parallel and in series. |
Battery
Communication System
We
have developed a complete communication system branded Dragonfly IntelLigence, for which a U.S. non-provisional patent application and
an international PCT patent application have been filed, to be used with Dragonfly Energy OEM systems and Battle Born batteries and bundles.
This communication system will enable end customers to monitor each battery in real time, providing information on energy input and output
and current or voltage imbalances. The communication system will be able to communicate with up to 24 batteries in a bank at one time
and aggregate the data received from these batteries into a central system such as a phone or tablet. We expect to begin offering the
Dragonfly IntelLigence product line to OEMs in the second quarter of 2024 as an adjacent component and in our product bundles.
Alternator
Regulation
Charging
batteries in a vehicle, such as a boat or RV, often requires pulling electrical current off of the vehicle’s alternator. Alternator
regulation is important to ensure that the alternator does not get unduly stressed during the current delivery to the batteries, and
that the current delivery remains within the operating limits of the onboard battery bank. The acquisition of the assets of Wakespeed
has allowed us to deliver our own proprietary solution to alternator regulation while also leveraging an established brand name.
Wakespeed is especially popular in the marine industry, and our ability to offer this complete solution sets the stage for further penetration
into marine markets.
Product
Pipeline
Beyond
our current battery modules, we have several LFP products in development that will enable us to access additional end markets.
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New
Products. Our current offerings feature battery products that serve the RV, marine vessel and off-grid markets. Although
manufacturing operations were previously capacity constrained the expansion into our new manufacturing facility will allow
us to add production capacity and increase product offerings and scale based on demand. |
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The
majority of our current batteries are 12 volt batteries, which provide 100 amp hours of energy
and are an affordable solution to customers utilizing smaller or lower power applications.
The smaller stature and drop-in replacement nature of these batteries have made these popular
within the RV and marine vessel markets. Through the expansion of our 12 voltage battery
product offerings, we will be able to penetrate further into additional applications including
towable RVs, truck campers and trolling motors for small boats. |
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We
also offer 24 voltage batteries, which currently deliver 50 amp hours, and plan to further expand our 24 voltage battery offerings
to provide additional drop-in replacements for AGM batteries. A single 24 voltage battery is more efficient than two 12 voltage batteries
due to the ability to power directly from the source without sacrificing power through cables and connectors. This attractive power
source is ideal for off-grid housing, telecommunication, solar, marine and motorized home markets, providing enhanced power to larger
scale applications. A vast majority of telecommunication cell sites utilize 24 voltage batteries, greatly expanding our addressable
market. |
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We
intend to offer 48 voltage batteries at 100 amp hours that utilize the Dragonfly IntelLigence system to maintain balance and full
visibility into the status of all cells. The 48 voltage batteries provide further efficiency gains with higher voltage. These higher
voltage batteries are currently more suitable for luxury mobile homes, larger off-grid uses, and high-end marine applications. We
aim to further expand our 48 voltage batteries’ end market exposure into other highly attractive industries including standby
power for data center and utility grade energy storage. |
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System
Integrator. A natural evolution of our business is to offer customers a system integration solution providing more efficient
power solutions at a cost-effective price point. We currently offer components and accessories necessary to build out complete lithium
power systems, including solar panels, chargers and inverters, system monitoring, Wakespeed’s alternator regulators, accessories,
and more. We have an in-house expert customer service team that assists customers in fully integrating their applications to our
technologies for a seamless transition to lithium-based energy storage systems. Through our evolving technology and the customized
architecture and application of our products, we are able to offer customers a seamless transition to creating a centralized coordinated
system. |
Research
and Development
Our
research and development team has built up its efforts to support two main initiatives – (1) scale up of our patented dry electrode
process for cell manufacturing and (2) the advanced manufacturing of solid-state lithium-ion batteries. We believe the dry electrode
process can be leveraged to help us vertically integrate from a pack supplier to a cell supplier – positioning ourselves for long-term
competitiveness in the given geopolitical, economic, and technological landscapes. Our innovations in dry electrode processing result
in reduced manufacturing costs, CO2 equivalents, and factory footprint while eliminating the need for solvents like N-Methyl-2-pyrrolidone
(“NMP”). A third-party assessment conducted by Sphere Energy confirming these benefits has been completed in the first
quarter of 2024 relating to cost effectiveness and sustainability of our dry electrode battery manufacturing process (the “Sphere
Energy Assessment”).
The
Sphere Energy Assessment concluded that our dry electrode battery manufacturing process resulted in a 9% reduced carbon footprint of
cell manufacturing with no toxic NMP solvent required, resulting in a significantly more sustainable process. This sustainability advantage
is further augmented by a 71% reduction in energy usage during electrode manufacturing using our process (spray drying, coating, calendaring)
compared to standard cell manufacturing operations (slurry casting, drying, calendaring). By removing the need for large and expensive
drying ovens, our manufacturing process requires 22% less square footage. The culmination of these advantages results in a 25% reduction
in emissions from energy use, making our manufacturing process more sustainable and much more environmentally friendly as compared to
conventional manufacturing methods.
In
addition to the energy savings, the cost assessment found our process to be highly cost-effective with an estimated 5% savings (depending
on cell chemistry) on process-related costs compared to conventional methods. Importantly, these savings were calculated without the
additional cost benefits provided by domestically manufacturing battery cells such as Inflation Reduction Act tax credits (issued by
the IRS), tariffs, and shipping.
The
dry electrode battery manufacturing process we employ uses a patented spray coating technology to adhere the anode and cathode electrodes,
eliminating the need for large, energy-intensive equipment such as slurry coaters, conveyor dryers, and NMP processing equipment. This
process is chemistry agnostic, allowing for the various applications, such as electric vehicles, consumer electronics, and energy storage,
which is expected to enable us to expand into new markets and to achieve our goal of domestically producing nonflammable all-solid-state
battery cells.
We
have successfully produced anode and cathode electrode reels at scale using the dry electrode process and are now qualifying prototype
cells for the core business and potential partners. When compared to slurry cast electrode tapes, which is the conventional manufacturing
method, electrode tapes produced using the dry electrode process match or surpass mechanical integrity and electrochemical performance.
We are considering joint development agreements, licensing agreements, and offtake agreements as instruments of partnership with interested
parties.
In
comparison with traditional manufacturing methods, our patented process leverages two off-the-shelf technologies to deliver the stated
cell manufacturing benefits – spray drying and electrostatic powder coating. Technical risk is reduced by using off-the-shelf equipment
and both unit operations are being optimized in 2024. A new set of spray dryers will arrive at our facilities in the second quarter of
2024, enabling us to produce larger volumes of material for the electrode coating lines.
We
have developed our patented to be chemistry agnostic and capable of producing current cell chemistries (graphite, LCO, LFP, LTO, NCA,
NMC, LTO, silicon, etc.) and next generation cell chemistries (sodium-ion, solid-state, ionic liquid electrolytes, etc.). We believe
this flexibility and our robust intellectual property protection internationally positions us well for potential partnerships with cell
manufacturers, EV companies, and other pack suppliers in need of cell capacity. The next stage in technical development is to produce
larger volumes of sample cells for qualification. These production runs will be completed with partners in the United States and at our
own facilities once the new headquarters facility is completed, which is expected to occur in the second half of 2024. We have invested
significant resources into developing an in-house comprehensive understanding of cell manufacturing – raw material qualification,
quality control such as, cell failure diagnostics, aging, and formation processes. Our research and development Lab is equipped with
over $20 million in research infrastructure to support the development of new cell chemistries, process quality control, failure diagnostics,
and more. This equipment includes quality control instruments (ex. moisture analysis, particle size analysis, peel testing and titrations)
and cutting-edge research instrumentation such as en operando nuclear magnetic resonance (“NMR”), electron microscopes
with lithium-tracking capabilities, and en operando x-ray diffraction. This infrastructure has allowed us to optimize the dry-electrode
process, allowing our team to match or surpass traditional electrode tape performance and mechanical integrity. Because our process is
dry and the active material is coated directly onto the current collector, interfacial and composite resistivity of the electrode tapes
often surpass the quality of slurry cast equivalents.
Our
solid-state technology continues to progress as we qualify new chemistries and refine the dry electrode process for solid-state applications.
Currently, we are cycling solid-state coin cells with the aim of producing prototype pouch cells by the end of 2024. These cell chemistries
are nonflammable, solid-state, and an LFP/graphite cell chemistry. We believe these cells will be a pivotal technology in grid storage
applications once fully deployed. We intend to integrate our conventional and solid-state cells produced using our dry-electrode process
into the existing Dragonfly Energy and Battle Born Batteries product portfolios.
Headquarters,
Manufacturing, and Production
Our
headquarters is located in our 99,000 square foot manufacturing facility in Reno, Nevada. The lease for this building was entered into
on March 1, 2021, and expires on April 30, 2026. We do not own any real estate property. This facility leverages a semi-automated
production process for battery module and pack assembly. We currently have two production lines with another line currently in construction.
We continue to have the capability to expand our production volumes and line quantities to support increased volumes of new products
we intend to introduce soon. On February 8, 2022, we entered into a 124-month lease for an additional 390,240 square foot warehouse,
which is scheduled to complete construction in the second half of 2024 in Reno, Nevada. We intend to utilize this facility for the existing
pack assembly business and new cell manufacturing business.
On
April 12, 2024, we entered into the Fernley Lease Agreement pursuant to which we agreed to lease an approximately 64,000 square foot
facility (the “Premises”) in Fernley, Nevada, to be used for general, warehousing, assembly/light manufacturing, painting
of products, storage fulfillment, distribution of our products, and other uses as permitted under in the Fernley Lease Agreement.
Our
manufacturing process is divided into two aspects – (1) module assembly and (2) battery assembly. We use a combination
of trained employees and automated processes to increase production capacity and lower costs while maintaining the same level of quality
our customers expect from our products. Module assembly is a significantly automated process, implementing custom-designed equipment
and systems to suit our production needs. This includes cycling of individual cells to detect faulty components and to enable sorting
by capacity. Our custom-designed automated welders spot weld individual cells that are assembled into specified module jigs based on
the desired amp hour. Completed modules are then fully discharged, recharged fully, and sorted by capacity. Battery assembly
is performed largely by hand by our trained employees, although we continue to look for innovative ways to integrate automation into
this process. Our proprietary battery management system is thoroughly tested for quality cutoffs, then mounted onto individual modules,
before the modules are bolted into its casing. We aim to automate the battery management system testing and installation process, which
we expect could increase production capacity fourfold. We are currently implementing an automated process for the gluing and sealing
process, which would incorporate a two-robot system for gluing and epoxying, as well as a glue pallet system to move finished batteries.
After the assembled batteries are tested and sealed, they are processed for outbound distribution.
Supplier
Relationships
We
have a well-established, global supply chain that underlies the sourcing of the components for our products, although we source domestically
wherever possible. We aim to maintain approximately six months’ worth of all components, other than cells, which we pre-order in
advance for the year to ensure adequate supply. For nearly all of our components, other than our battery management system, we ensure
that we have alternative suppliers available. Our battery management system is sourced from a single supplier based in China who we have
a nearly 10-year relationship with and who manufactures this component exclusively for us based on our proprietary design. Our cells
are sourced from two different, carefully selected cell manufacturers in China who are able to meet our demanding quality standards.
As a result of our long-standing relationships with these suppliers, we are able to source LFP cells on favorable terms and within reasonable
lead-times.
As
we look toward the production of our traditional and solid-state cells, we have signed a Commercial Offtake Agreement with
a lithium mining company and a lithium recycling company, both located in Nevada for the supply of lithium.
Customers;
RV OEM Strategic Arrangements
We
currently serve more than 25,000 customers in North America. Our existing customers consist of leading OEMs (such as Keystone,
THOR, REV Group and Airstream); distributors (who purchase large quantities of batteries from us and sell to consumers); upfitters
(who augment or customize vehicles for specific needs); and retail customers (who purchase from us directly). For the years ended December
31, 2023 and 2022, OEM sales represented 42.7% and 39.2% of our total revenues, respectively. For the quarters ended March 31, 2024 and March 31, 2023, OEM sales represented 58.4% and 46.6% of our total revenues,
respectively.
We
have deep, long-standing relationships with many of our customers. We also have a diverse customer base, with our top 10 customers accounting
for 37.8% of our revenue for the year ended December 31, 2023, in which only one customer accounted for more than 10% of our
revenue. Our customers primarily utilize our products for RVs, marine vessels and off-grid residences. We work directly with OEMs
to ensure compatibility with existing designs and also collaborate on custom designs for new applications.
The
RV market is characterized by low barriers to entry. In North America, there are two large publicly traded RV companies, THOR Industries
and REV Group, in addition to a number of independent RV OEMs. THOR and REV each own a number well-known RV OEM brands and their related
companies. These brands compete on a number of factors such as format (e.g., motorized or towable), price, design, value, quality and
service. On November 19, 2021, we entered into a long-term Manufacturing Supply Agreement with Keystone, a member of the THOR group and
the largest towable RV OEM in North America (the “Supply Agreement”). In July 2023, we were notified by Keystone
that, due to weaker demand for its products and their subsequent focus on reducing costs, it would no longer install our storage solutions
as standard equipment, but rather return to offering those solutions as an option to dealers and consumers. While Keystone has not moved
to a different solution or competitor, as a result in this change in strategy there was a material limiting effect on our revenue in
2023.
In
July 2022, we strengthened our ties with the THOR group of RV OEMs when (i) THOR Industries made a $15,000,000 strategic investment in
us and (ii) we agreed to enter into a future, mutually agreed distribution arrangement and joint IP development arrangement. This arrangement
helps facilitate our ongoing efforts to drive adoption of our products (leveraging the trend of LFP batteries increasingly replacing
lead-acid batteries) by, among other things, increasing the number of RV OEMs that “design in” our batteries as original
equipment and entering into arrangements with members of the various OEM dealer networks to stock our batteries for service and for aftermarket
replacement sales. Once the distribution agreement has been negotiated and signed, during a to-be-agreed transition period, we will use
commercially reasonable efforts to cease marketing and selling our products to other RV OEMs and suppliers to RV OEMs in North America.
Although the full distribution agreement with THOR has not been executed and is subject to negotiation in the future, its terms are expected
to include: (i) an initial term of 24 months, which THOR may renew for successive one-year periods; (ii) a requirement that we be the
sole provider of lithium-ion batteries to the US-based THOR family of companies for THOR sales in the United States, subject to agreed
exceptions; (iii) favored pricing for products and negotiated rebates or other incentives; (iv) a requirement that THOR and its North
American OEMs be our exclusive RV OEM customers for our products in North America, subject to agreed exceptions; and (v) agreeable terms
with respect to registered and unregistered intellectual property rights and technology rights (which do not include our existing intellectual
property, including our solid-state battery technologies and related IP rights), including necessary licenses between the parties, third
party licenses, and allocation of ownership of any intellectual property rights and/or technology rights developed as a result of development
efforts jointly undertaken between THOR and us, subject to certain limitations.
We
continue to seek to grow our customer base within our existing segments; however, we also believe that our products are well suited to
address the needs in additional segments, including residential, commercial and/or industrial standby power, long-haul trucking,
industrial vehicles (such as forklifts, material handling equipment and compact construction equipment) and specialty vehicles (such
as emergency vehicles, utility vehicles and municipal vehicles) and we will seek to expand our market share in these segments in the
future.
Sales
and Marketing
Our
proven sales and marketing strategy has allowed us to penetrate our current end markets efficiently. We have established a highly
efficient sales and marketing strategy, to penetrate targeted end markets and ensuring prominent visibility for our Battle Born
Batteries and Wakespeed brands. We prioritize educating our customer base about the benefits of LFP batteries as a superior
investment compared to traditional lead-acid options. Informational videos published on our website and social
media platforms highlight these advantages, complemented by written guides that assist customers in configuring, installing,
and utilizing battery systems and accessories. This messaging is further reinforced through our active presence at tradeshows,
live webinars, and other in-person training events with dealers and customers, fostering direct engagement and ensuring comprehensive
product understanding. Participation in these events fosters strong relationships with both OEMs and retail customers, keeping us attuned
to evolving preferences. By leveraging this customer feedback, we collaborate with major OEMs to design solutions tailored to new and
existing applications.
In
addition to traditional print and digital advertising, we harness the significant influence of social media platforms
like YouTube, Instagram, and Facebook, through affiliate marketing. We partner with established content creators and
influencers to cultivate lasting relationships that showcase product performance organically, beyond mere
one-off promotions. Organic integration of our products in television shows, podcasts and other similar sponsorships
further amplifies brand awareness. Additionally, we foster relationships with key industry publications, securing valuable editorial
coverage that showcases our innovative power solutions and how they are used. We believe these strategic collaborations position our
brands as industry leaders within our markets and to the general public as a whole, further strengthening brand awareness and consumer
confidence.
We
also leverage targeted pay-per-click advertising campaigns across various platforms, including search engines, social media, and connected
TV. This data-driven approach ensures efficient conversion of high-intent customers at the bottom of the purchase funnel, maximizing
return on investment and driving targeted brand awareness among potential buyers.
Direct
relationships with retail customers remain a core value. Our user-friendly website facilitates direct purchases of Battle Born Batteries
and Wakespeed products, along with well-known third-party components, allowing customers to explore and acquire complete system solutions
in one convenient location. Furthermore, a dedicated team of in-house experts provides comprehensive sales, technical, and service support
to ensure our valued customers receive exceptional care and expertise.
Competition
Our
key competitors are principally traditional lead-acid battery and lithium-ion battery manufacturers, such as Samsung, CATL and Enovix,
in North America. We also compete against smaller LFP companies, who primarily either import their products or manufacture products under
a private label. Of these companies, there is no other company that has penetrated our core end markets to the same extent as we have,
and we believe that this is in large part due to the technological advantages that our products offer compared to other products in the
market. Our batteries are purpose-built to enhance the power and performance in any application or setting. We have specifically designed
our battery cases to fit into existing AGM battery racks and cabinets and offer a suite of compatible components and accessories in order
to make the replacement process simple enough for customers to do it themselves. We have optimized our technology to produce a lighter,
yet higher performing battery with a longer lifespan than incumbent lead-acid batteries. Our propriety battery management system and
internal heat technology enables our batteries to outperform not only traditional lead-acid batteries, but other lithium-ion products.
With
regard to solid-state technology, we have two main competitors, QuantumScape and Solid Power. While both of these competitors are focused
on the development of solid-state technology for use in the propulsion of electric vehicles, we are focused on power storage applications,
which has different requirements. We believe that our proprietary processes, systems and materials provide us with a significant competitive
advantage in developing a fully solid-state, non-toxic and highly cost-effective energy solution.
As
our solid-state technology comes to fruition and we begin to commercialize this product, we intend to become a vertically integrated
battery company, internalizing all aspects of the manufacturing and assembly process. This is comparable to companies such as Tesla,
BYD Limited and Li-Cycle. Our solid-state technology will also enable us to further penetrate the energy storage market, and we expect
to compete with technology-focused energy storage companies such as EOS Energy, ESS and STEM.
Intellectual
Property
The
success of our business and our technology leadership is supported by our proprietary battery technology. We have received patents and
filed patent applications in the United States and other jurisdictions to provide protection for our technology. We rely upon a combination
of patent, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements and other contractual
protections, to establish, maintain and enforce rights in our proprietary technologies. In addition, we seek to protect our intellectual
property rights through non-disclosure and invention assignment agreements with our employees and consultants and through non-disclosure
agreements with business partners and other third parties.
As
of December 31, 2023, we owned 44 issued patents and 48 pending patent applications. The patents and patent applications
cover the United States, Canada, Australia, Korea, Japan, India, China, and Europe (with individual patents in Germany, France
and the United Kingdom). We periodically review and update our patent portfolio to protect our products and newly developed technologies.
Currently, we have a combination of issued patents and pending patent applications covering the ornamental design of our GC2 and GC3
batteries, a device and method for monitoring battery systems, pre-coated solid-state electrolyte and electroactive powders and their
methods of manufacture, methods and systems for the dry spray deposition of materials in an electrochemical cell; a thermal fuse; battery
systems implementing a mesh network communication protocol; a power charging system for use during towing of a vehicle; and a power charging
system with temperature based charging control. These patents are expected to have expired or expire between May 2033 and 2043,
absent any patent term adjustments or extensions.
We
periodically review our development efforts to assess the existence and patentability of new intellectual property. We pursue the registration
of our domain names and trademarks and service marks in the United States and other jurisdictions. In an effort to protect our brand,
as of December 31, 2023, we own 21 trademark registrations to cover our house marks in the United States and we have 7
pending trademark applications relating to our design logos and slogans in the United States and we have 4 pending trademark applications
internationally.
Government
Regulation and Compliance
We
currently operate from a dedicated leased manufacturing facility, a leased warehouse and a podcast studio, each located in Reno, Nevada
as well as a leased R&D facility in Sparks, Nevada. We have never owned any facility at which we operated. Operations at our facilities
are subject to a variety of environmental, health and safety regulations, including those governing the generation, handling, storage,
use, transportation, and disposal of hazardous materials. To conduct our operations, we have to obtain environmental, health, and safety
permits and registrations and prepare plans. We are subject to inspections and possible citations by federal, state, and local environmental,
health, and safety regulators. In transit, lithium-ion batteries are subject to rules governing the transportation of “dangerous
goods.” We have policies and programs in place to assure compliance with our obligations, such as policies relating to workplace
safety, fire prevention, hazardous material management and other emergency action plans. We train our employees and conduct audits of
our operations to assess our fulfillment of these policies.
We
are also subject to laws imposing liability for the cleanup of releases of hazardous substances. Under the law, we can be liable even
if we did not cause a release on real property that we lease. We believe we have taken commercially reasonable steps to avoid such liability
with respect to our current leased facilities.
Employees
and Human Capital Resources
As
of March 31, 2024, we had 152 employees; 143 full-time, 2 part-time and 7 interns. We have
adopted our Code of Ethics to support and protect our culture, and we strive to create a workplace culture in line with our values: “Tell
the Truth,” “Be Fair,” “Keep Your Promises,” “Respect Individuals,” and “Encourage Intellectual
Curiosity.” As part of our initiative to retain and develop our talent, we focus on these key areas:
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Safety — Employees
are regularly educated in safety around their workspaces, and employees participate in volunteer roles on a safety committee, and
in emergency readiness roles. We have a dedicated safety coordinator who tracks and measures our performance, and helps us benchmark
our safety programs against our peers. |
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Diversity,
Equity & Inclusion — Our culture has benefitted from the diversity of our workforce from the very beginning.
Inclusion and equity are “baked into the bricks” of our values, which our employees demonstrate every day. Our human
resources department and all our corporate officers and directors have an open door policy, and are able to constructively communicate
with employees to resolve issues when they arise. |
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Collaboration — As
we grow, opportunities for cross-functional collaboration are not as organic as they used to be. We have responded to that change
by staying mindful and acting intentionally to gather cross-functional input on new initiatives and continuous improvement efforts. |
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Continuous
Improvement — We apply continuous improvement measures to processes as well as people. We encourage professional
development of our employees, through ongoing learning, credentialing, and collaboration with their industry peers. |
Attracting
and retaining high quality talent at every level of our business is crucial to our continuing success. We have developed relationships
with the University of Nevada Reno and the Nevada System of Higher Education to further our recruitment reach. We provide competitive
compensation and benefits packages, including performance-based compensation that rewards individual and organizational achievements.
The
Business Combination
On
October 7, 2022 (the “Closing Date”), CNTQ and Legacy Dragonfly consummated the merger (the “Closing”)
pursuant to the Agreement and Plan of Merger, dated as of May 15, 2022 (as amended, the “Business Combination Agreement”),
by and among CNTQ, Bronco Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of CNTQ (“Merger
Sub”), and Legacy Dragonfly. Pursuant to the Business Combination Agreement, Merger Sub merged with and into Legacy Dragonfly
(the “Merger” and, together with the other transactions contemplated by the Business Combination Agreement, the “Business
Combination”), with Legacy Dragonfly continuing as the surviving corporation in the Merger and as our wholly owned subsidiary.
In connection with the Business Combination, CNTQ changed its name to Dragonfly Energy Holdings Corp.
Prior
to the completion of the Business Combination, CNTQ was a shell company. CNTQ was incorporated in the state of Delaware
on June 23, 2020. CNTQ consummated its initial public offering at a price of $10 per unit on August 13, 2021 (the “CNTQ
IPO”). Legacy Dragonfly was incorporated as a limited liability company in the State of Nevada on October 15, 2012
and reorganized as a corporation under the laws of the State of Nevada on April 11, 2016. Following the Business Combination, our business
is the business of Legacy Dragonfly.
Merger
Consideration
At
the Closing, by virtue of the Merger and without any action on the part of CNTQ, Merger Sub, Legacy Dragonfly or the holders
of any of the following securities:
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(a) |
Each outstanding share of Legacy Dragonfly’s common stock,
par value $0.001 per share (“Legacy Dragonfly Common Stock”), converted into (i) a certain number of shares of our
common stock, totaling 41,500,000 shares (including the conversion and assumption of the options to purchase shares of Legacy Dragonfly
Common Stock described below), which is equal to (x) $415,000,000 divided by (y) $10.00 (the “Merger Consideration”)
and (ii) the contingent right to receive Earnout Shares (as defined below) (which may be zero) following the Closing. |
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(b) |
Each option to purchase shares of Legacy Dragonfly Common Stock,
was assumed and converted into options to acquire shares of our common stock. The portion of the Merger Consideration reflecting the
conversion of the Legacy Dragonfly options was calculated assuming that all of our options are net-settled. With respect to Company options
received in respect of Legacy Dragonfly options that are outstanding immediately prior to the Closing and cash exercised after the Closing,
up to 627,498 additional shares of our common stock may be issued. At the Closing, approximately 38,576,648 shares of the Merger Consideration
was allocated to holders of outstanding shares of Legacy Dragonfly Common Stock and 3,664,975 shares of the Merger Consideration was
allocated to holders of the assumed Legacy Dragonfly options. |
Earnout
Merger Consideration
In
addition to the Merger Consideration set forth above, additional contingent shares (“Earnout Shares”) may be payable
to each holder of shares of Legacy Dragonfly Common Stock in the Merger, subject to achieving specified milestones, up to an aggregate
of 40,000,000 additional shares of our common stock
in three tranches.
The
first tranche of 15,000,000 shares was issuable if our 2023 total audited revenue was equal to or greater than $250 million
and our 2023 audited operating income was equal to or greater than $35 million. The second tranche of 12,500,000 shares is issuable
upon achieving a volume-weighted average trading price threshold of our common stock over any 20 trading days (which may or may not be
consecutive) within any 30 consecutive trading day period of at least $22.50 on or prior to December 31, 2026, and the third tranche
of 12,500,000 shares is issuable upon achieving a volume-weighted average trading price threshold of common stock over any 20 trading
days (which may or may not be consecutive) within any 30 consecutive trading day period of at least $32.50 on or prior to December 31,
2028. To the extent not previously earned, the second tranche is issuable if the $32.50 price target is achieved by December 31, 2028.
Upon
the consummation of a change of control transaction during either the second milestone earnout period or the third milestone earnout
period, any earnout milestone with respect to such earnout period that has not yet been achieved shall automatically be deemed to have
been achieved if a change of control transaction is announced with an imputed share price of common stock of at least $22.50 on or prior
to the end of second earnout period or $32.50 on prior to the third earnout period.
The first tranche milestone was not achieved for
the year ended December 31, 2023.
PIPE
Investment
Pursuant
to the subscription agreement, dated as of May 15, 2022 (the “Subscription Agreement”), by and between CNTQ
and Chardan NexTech Investments 2 LLC (or an affiliate thereof if assigned pursuant to the Subscription Agreement, the “Sponsor”),
the Sponsor agreed to purchase, and CNTQ agreed to sell to the Sponsor, an aggregate of 500,000 shares of CNTQ Common Stock
for gross proceeds to CNTQ of $5 million in a private placement (the “PIPE Investment”). On September
28, 2022, the Sponsor and CCM entered into an assignment, assumption and joinder agreement, pursuant to which the Sponsor assigned
all of the Sponsor’s rights, benefits and obligations under the Subscription Agreement to CCM.
Under
the Subscription Agreement, the number of shares of CNTQ Common Stock that CCM was obligated to purchase was to be reduced by
the number of shares of CNTQ Common Stock that CCM purchased in the open market, provided that such purchased shares were
not redeemed, and the aggregate price to be paid under the Subscription Agreement was to be reduced by the amount of proceeds received
by us because such shares are not redeemed (the “Offset”). During the week of September 26, 2022 CCM acquired
in the open market in total 485,000 shares of our common stock at purchase prices per share ranging from $10.33 to $10.38 (such shares,
the “Purchased Shares”). The Purchased Shares were not redeemed, resulting in (i) our receipt of $5,016,547 from the
trust account that held the proceeds from the CNTQ IPO (based on a per share redemption price of $10.34) and (ii) a reduction
in CCM’s purchase commitment under the Subscription Agreement to zero in accordance with the Offset.
Debt
Financing
Consistent
with the commitment letter (the “Debt Commitment Letter”) dated May 15, 2022 by and between CNTQ and Legacy
Dragonfly, CCM Investments 5 LLC, an affiliate of CCM (“CCM 5”, and in connection with the Term Loan, the “Chardan
Lender”), and EICF Agent LLC (“EIP” and, collectively with the Chardan Lender, the “Initial
Term Loan Lenders”), in connection with the Closing, CNTQ, Legacy Dragonfly and the Initial Term Loan Lenders entered
into the Term Loan, Guarantee and Security Agreement (the “Term Loan Agreement”) setting forth the terms of a senior
secured term loan facility in an aggregate principal amount of $75 million (the “Term Loan”). The Chardan Lender
backstopped its commitment under the Debt Commitment Letter by entering into a backstop commitment letter, dated as of May 20, 2022 (the
“Backstop Commitment Letter”), with a certain third-party financing source (the “Backstop Lender”
and collectively with EIP, the “Term Loan Lenders”), pursuant to which the Backstop Lender committed to purchase from
the Chardan Lender the aggregate amount of the Term Loan held by the Chardan Lender (the “Backstopped Loans”)
immediately following the issuance of the Term Loan on the Closing Date. Pursuant to an assignment agreement, the Backstopped Loans were
assigned by CCM 5 to the Backstop Lender on the Closing Date.
Pursuant
to the terms of the Term Loan Agreement, the Term Loan was advanced in one tranche on the Closing Date. The proceeds of the Term Loan
were used (i) to refinance on the Closing Date prior indebtedness, (ii) to support the Business Combination under the Business Combination
Agreement, (iii) for working capital purposes and other corporate purposes, and (iv) to pay any fees associated with transactions contemplated
under the Term Loan Agreement and the other loan documents entered into in connection therewith, including the transactions described
in the foregoing clauses (i) and (ii) and fees and expenses related to the business combination. The Term Loan amortizes in the amount
of 5% per annum beginning 24 months after the Closing Date and matures on the fourth anniversary of the Closing Date (“Maturity
Date”). The Term Loan accrues interest (i) until April 1, 2023, at a per annum rate equal to the adjusted Secured Overnight
Financing Rate (“SOFR”) plus a margin equal to 13.5%, of which 7% will be payable in cash and 6.5% will be paid in-kind,
(ii) thereafter until October 1, 2024, at a per annum rate equal to adjusted SOFR plus 7% payable in cash plus an amount ranging from
4.5% to 6.5%, depending on the senior leverage ratio of the consolidated company, which will be paid-in-kind and (iii) at all times thereafter,
at a per annum rate equal to adjusted SOFR plus a margin ranging from 11.5% to 13.5% payable in cash, depending on the senior leverage
ratio of the consolidated company. In each of the foregoing cases, adjusted SOFR will be no less than 1%.
We
may elect to prepay all or any portion of the amounts owed prior to the Maturity Date; provided that we provide notice to Alter Domus
(US) LLC, as administrative agent for the lenders (the “Administrative Agent”), and the amount is accompanied by the
applicable prepayment premium, if any. Prepayments of the Term Loan are required to be accompanied by a premium of 5% of the principal
amount so prepaid if made prior to the first anniversary of the Closing Date, 3% if made on and after the first anniversary but prior
to the second anniversary of the Closing Date, 1% if made after the second anniversary of the Closing Date but prior to the third anniversary
of the Closing Date, and 0% if made on or after the third anniversary of the Closing Date. If the Term Loan is accelerated following
the occurrence of an event of default, Legacy Dragonfly is required to immediately pay to lenders the sum of all obligations for principal,
accrued interest, and the applicable prepayment premium.
In
addition to the foregoing, Legacy Dragonfly is required to prepay the Term Loan with the net cash proceeds of certain asset sales and
casualty events (subject to certain customary exceptions), with the net cash proceeds of the issuance of indebtedness that is not otherwise
permitted to be incurred under the Term Loan Agreement, upon the receipt of net cash proceeds from an equity issuance in an amount equal
to 25% of such net cash proceeds, and commencing with the fiscal year ending December 31, 2023, with the excess cash flow for each such
fiscal year in an amount equal to either 25% or 50% of such excess cash flow depending on the senior leverage ratio of the consolidated
company less the amount of any voluntary prepayments made during such fiscal year.
Pursuant
to the Term Loan Agreement, the obligations of Legacy Dragonfly are guaranteed by us and will be guaranteed by any of Legacy Dragonfly’s
subsidiaries that are party thereto as guarantors. Pursuant to the Term Loan Agreement, the Administrative Agent was granted a security
interest in substantially all of the personal property, rights and assets of us and Legacy Dragonfly to secure the payment of all amounts
owed to lenders under the Term Loan Agreement. In addition, we entered into a Pledge Agreement (the “Pledge Agreement”)
pursuant to which we pledged to the Administrative Agent our equity interests in Legacy Dragonfly as further collateral security for
the obligations under the Term Loan Agreement.
The
Term Loan Agreement contains affirmative and restrictive covenants and representations and warranties. We and our subsidiaries are bound
by certain affirmative covenants setting forth actions that are required during the term of the Term Loan Agreement, including, without
limitation, certain information delivery requirements, obligations to maintain certain insurance, and certain notice requirements. Additionally,
we, Legacy Dragonfly and each of our subsidiaries that are guarantors will be bound by certain restrictive covenants setting forth actions
that are not permitted to be taken during the term of the Term Loan Agreement without prior written consent, including, without limitation,
incurring certain additional indebtedness, consummating certain mergers, acquisitions or other business combination transactions, and
incurring any non-permitted lien or other encumbrance on assets. The Term Loan Agreement also contains other customary provisions, such
as confidentiality obligations and indemnification rights for the benefit of the administrative agent and lenders. The Term Loan Agreement
contains financial covenants requiring the credit parties to (a) maintain minimum liquidity (generally, the balance of unrestricted cash
and cash equivalents in our account that is subject to a control agreement in favor of the Administrative Agent) of at least $10,000,000
as of the last day of each fiscal month commencing with the fiscal month ending December 31, 2022, (b) if the daily average liquidity
for any fiscal quarter ending on December 31, 2022, March 31, 2023, June 30, 2023, or September 30, 2023 is less than $17,500,000 and
for each fiscal quarter thereafter (commencing with the fiscal quarter ending December 31, 2023), maintain a senior leverage ratio (generally,
aggregate debt minus up to $500,000 of unrestricted cash of CNTQ and its subsidiaries divided by consolidated EBITDA for the trailing
twelve month period just ended) of not more than 6.75 to 1.00 for fiscal quarters ending December 31, 2022 to March 31, 2023, 6.00 to
1.00 for fiscal quarters ending June 30, 2023 to September 30, 2023, 5.00 to 1.00 for fiscal quarters ending December 1, 2023 to March
31, 2024, 4.00 to 1.00 for fiscal quarters ending June 30, 2024 to September 30, 2024, 3.25 to 1.00 for fiscal quarters ending December
31, 2024 to March 31, 2025, and 3.00 to 1.00 for fiscal quarters ending June 30, 2025 and thereafter, (c) if liquidity is less than $15,000,000
as of the last day of any fiscal quarter (commencing with the fiscal quarter ending December 31, 2022), maintain a fixed charge coverage
ratio for the trailing four fiscal quarter period of no less than 1.15:1.00 as of the last day of such fiscal quarter, and (d) if consolidated
EBITDA is less than $15,000,000 for any trailing twelve month period ending on the last day of the most recently completed fiscal quarter,
cause capital expenditures to not exceed $500,000 for the immediately succeeding fiscal quarter (subject to certain exceptions set forth
in the Term Loan Agreement).
On
March 29, 2023, September 29, 2023, December 29, 2023 and May 13, 2024, we obtained waivers from our Administrative Agent and Term
Loan Lenders relating to our failures to satisfy the Senior Leverage Ratio and Fixed Charge Coverage Ratio tests (the
“Tests”) under the Term Loan during the quarters ended March 31, 2023, September 30, 2023, December 31, 2023 and March 31, 2024, respectively. On
March 31, 2024 and April 29, 2024, we received additional waivers from the Administrative Agent and the Term Loan Lenders in regard
to our compliance with the liquidity requirement under the Term Loan as of the last day of the fiscal quarter ended March 31, 2024
and as of the last fiscal day for the month ended April 30, 2024, respectively.
In
July 2023, upon a request from our Term Loan Lenders under the term loan agreement, we repaid $5,274,575 of principal to satisfy a portion
of our outstanding principal under the Term Loan Agreement.
Warrant
Agreements
In
connection with the entry into the Term Loan Agreement, and as a required term and condition thereof, we issued (i) penny warrants
to the Term Loan Lenders under the Term Loan exercisable to purchase 2,593,056 shares at an exercise price of $0.01 per share, which
was equal to approximately 5.6% of common stock calculated on an agreed fully diluted outstanding basis on the issuance date (the “Original Penny
Warrants”) and (ii) warrants to the Term Loan Lenders under the Term Loan exercisable to purchase 1,600,000 shares of our
common stock at an exercise price of $10.00 per share (the “$10 Warrants”). During the year ended December 31,
2023 we issued additional Penny Warrants to purchase 4,783 shares of common stock to the Term Loan Lenders in accordance with the
anti-dilution provisions of the penny warrants with respect to certain sales made by us under the ChEF Equity Facility (the
“Anti-Dilution Penny Warrants” and, together with the Waiver Penny Warrants (as defined below), the Original
Penny Warrants, the “Penny Warrants”, and collectively with the $10 Warrants, the Underwriters’ Warrants
and the Investor Warrants (as defined below), the “Warrants”).
The
Penny Warrants have an exercise period of 10 years from the date of issuance. As of May 13, 2024, 1,996,323 shares of common
stock have been issued upon the exercise of Penny Warrants.
The
$10 Warrants had an exercise period of five years from the date of issuance and had customary cashless exercise provisions. As of December
31, 2022, the $10 Warrants have been exercised
in full and are no longer outstanding.
The
Penny Warrants have, and the $10 Warrants had, specified anti-dilution protection against subsequent equity sales or distributions at
or below $10 per share of common stock, subject to exclusions including for issuances upon conversion exercise or exchange of securities
outstanding as of the Closing Date, issuances pursuant to agreements in effect as of the Closing Date, issuances pursuant to employee
benefit plans and similar arrangements, issuances in joint ventures, strategic arrangements or other non-financing type transactions
and issuances pursuant to any public equity offerings. In addition, no anti-dilution adjustment will be made with respect to issuances
of common stock pursuant to the ChEF Equity Facility (or replacement thereof) sold at a per share price above $5.00.
The
shares issued or issuable upon exercise of the Warrants have customary registration rights, which are contained in the respective forms
of the Warrants, requiring us to file and keep effective a resale registration statement registering the resale of the shares of common
stock underlying the Warrants.
ChEF
Equity Facility
Consistent
with the equity facility letter agreement dated May 15, 2022 between Legacy Dragonfly and CCM 5, we entered into the Original Purchase
Agreement and the Registration Rights Agreement (the “ChEF RRA”) with CCM in connection with the Closing.
On May 20, 2024, we entered into the A&R Purchase Agreement with CCM to update the VWAP Purchase mechanics to include Intraday
VWAP Purchases (as defined in the Purchase Agreement). Pursuant to and on the terms of the Purchase Agreement, we have the right
to sell and direct CCM to purchase an amount of shares of our common stock, up to a maximum aggregate purchase price of $150 million,
from time to time, over the term of the ChEF Equity Facility. In addition, we appointed LifeSci Capital, LLC as a “qualified
independent underwriter” with respect to the transactions contemplated by the Purchase Agreement.
Under
the terms of the Purchase Agreement, CCM will not be obligated to (but may, at its option, choose to) purchase shares of common stock
to the extent the number of shares to be purchased would exceed the lowest of the number of shares of common stock (i) which would result
in beneficial ownership (as calculated pursuant to Section 13(d) of the Exchange Act and Rule 13d-3 promulgated thereunder) by CCM, together
with its affiliates, of more than 9.9%, (ii) which would cause the aggregate purchase price on the applicable VWAP Purchase Date (as
defined in the Purchase Agreement) for such purchases to exceed $3 million and (iii) equal to 20% of the total number of shares of common
stock that would count towards VWAP on the applicable VWAP Purchase Date of such purchase. As of May 13, 2024, 588,500 shares
have been issued pursuant to the Purchase Agreement with CCM for aggregate net proceeds to us of $1,278,566.
The
net proceeds from any sales under the Purchase Agreement will depend on the frequency with, and prices at, which shares of common stock
are sold to CCM. To the extent we sell shares of our common stock under the Purchase Agreement, we currently plan to use any proceeds
therefrom for working capital and other general corporate purposes.
CCM
is an affiliate of the Sponsor. In light of the beneficial ownership limitation set forth above, the Sponsor has agreed that the private
placement warrants held by Warrant Holdings, also an affiliate of the Sponsor, may not be exercised to the extent an affiliate of the
Sponsor (including CCM) is deemed to beneficially own, or it would cause such affiliate to be deemed to beneficially own, more than
7.5% of our common stock.
In
addition, pursuant to the ChEF RRA, we have agreed to provide CCM with certain registration rights with respect to the shares of
common stock issued subject to the Purchase Agreement.
Unless
earlier terminated, the Purchase Agreement will
automatically terminate on the earliest to occur of (i) the 36-month anniversary of the later of (x) the closing of the Business Combination
and (y) effective date of the Initial Registration Statement (as defined in the Purchase Agreement), (ii) the date on which CCM shall have purchased $150 million of shares of our common stock pursuant to the Purchase Agreement, (iii) the date on which our common
stock shall have failed to be listed or quoted on Nasdaq or any successor principal market and (iv) the commencement of certain bankruptcy
proceedings or similar transactions with respect to us or all or substantially all of our property.
Related
Agreements
Concurrently
with the execution of the Business Combination Agreement, CNTQ, Legacy Dragonfly and the Sponsor entered into a sponsor support agreement.
Indemnification
of Directors and Officers
On
the Closing Date, in connection with the consummation of the Business Combination, we entered into indemnification agreements with each
of our directors and executive officers. These agreements, among other things, require us to indemnify our directors and executive officers
for certain expenses, including attorneys’ fees, judgments and fines incurred by a director or executive officer in any action
or proceeding arising out of their services as one of our directors or executive officers or any other company or enterprise to which
the person provides services at our request.
Registration
Rights Agreement
On
the Closing Date, in connection with the consummation of the Business Combination Agreement, we entered into the Amended and Restated
Registration Rights Agreement (the “Insider Registration Rights Agreement”) with the Sponsor, CNTQ’s
officers, directors, initial stockholders, CCM and Warrant Holdings, an affiliate of the Sponsor (collectively, the “Insiders”)
and certain Legacy Dragonfly stockholders for the registration of certain securities held by the Insiders.
Other
Agreements
On
April 4, 2022, we entered into an asset purchase agreement (“APA”) with Thomason Jones, pursuant to which we acquired
intellectual property rights relating to Wakespeed, including all trademarks and certain patents, and inventory for a purchase
price of approximately $444,000 which was the approximated fair market value. William Thomason and Richard Jones, our engineer and sales
representatives, each of whom was hired in connection with the entry into the Thomason Jones APA, are the managing members of
Thomason Jones.
Separation Agreements
On
November 4, 2022, we announced that Sean Nichols, our former Chief Operating Officer, would be leaving the Company to pursue other interests.
His last day of employment was November 7, 2022 (the “Separation Date”). On October 25, 2022, we entered into a separation
and release agreement with Mr. Nichols that became effective and fully irrevocable on November 2, 2022, which was subsequently amended
on November 14, 2022 (as amended, the “Separation Agreement”). Pursuant to the Separation Agreement, Mr. Nichols received
a cash payment of $100,000 in one installment in December 2022 and is entitled to receive a cash payment of $1,000,000 in 24 monthly
installments commencing in December 2022. Mr. Nichols’ outstanding equity awards granted by us will fully vest and, in the case
of options, will be exercisable for 12 months following the Separation Date. The Separation Agreement also provides that we will pay
a portion of Mr. Nichols’ premiums to continue participation in our health insurance plans for up to 18 months following the Separation
Date. The Separation Agreement includes a general release of claims by Mr. Nichols and certain restrictive covenants in favor of us,
including non-competition and non-solicitation covenants for 12 months following the Separation Date.
On April 26, 2023, we entered into a separation
and release of claims agreement with our former Chief Legal Officer (the “CLO”). As consideration for the CLO’s
execution of the agreement, we agreed to pay the employee payments equivalent to $720,000 for wages and benefits divided into 24 monthly
payments commencing on June 1, 2023, and all outstanding equity-based compensation awards to become fully vested. The CLO had three (3)
months from the termination date to exercise the outstanding options. The three (3) month period ended on July 26, 2023 in which the
options were not exercised and the options were forfeited as a result.
June 2023 Offering
On June 20, 2023, we entered into an underwriting
agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC, as representative of the several underwriters
(the “Underwriters”), pursuant to which we sold to the Underwriters, in a firm commitment underwritten public offering
(the “June 2023 Offering”), an aggregate of (i) 10,000,000 shares of our common stock, par value $0.0001, and (ii)
accompanying warrants to purchase up to 10,000,000 shares of common stock (the “Investor Warrants”), at the combined
public offering price of $2.00 per share and accompanying Investor Warrant, less underwriting discounts and commissions, and (iii) warrants
to purchase up to an aggregate of 570,250 shares of common stock (the “Underwriters’ Warrants”). In addition,
we granted the Underwriters a 45-day over-allotment option to purchase up to an additional 1,500,000 shares of common stock and/or Investor
Warrants to purchase up to an aggregate of 1,500,000 shares of common stock at the public offering price per security, less underwriting
discounts and commissions.
The Investor Warrants are exercisable for five
years from the closing date of the June 2023 Offering, have an exercise price of $2.00 per share and are immediately exercisable. In
the event of certain fundamental transactions, holders of the Investor Warrants will have the right to receive the Black Scholes Value
(as defined in the Investor Warrants) of their Investor Warrants calculated pursuant to the formula set forth in the Investor Warrants,
payable either in cash or in the same type or form of consideration that is being offered and being paid to the holders of common stock.
The Underwriters’ Warrants are exercisable upon issuance and will expire on June 20, 2028. The initial exercise price of the Underwriters’
Warrants is $2.50 per share, which equals 125% of the per share public offering price in the June 2023 Offering. As part of the June
2023 Offering, the Underwriters partially exercised their over-allotment option in the amount of 1,405,000 shares of common stock and
Investor Warrants to purchase 1,405,000 shares of common stock. The June 2023 Offering closed on June 22, 2023. The aggregate net proceeds
from this offering, including the partial overallotment option, was approximately $20.7 million.
December 2023 Private Placement
On December 29, 2023, we obtained a waiver
from our Administrative Agent and Term Loan Lenders (the “December 2023 Waiver”) in regards to our compliance
with the Tests as of the last day of the quarter ended December 31, 2023. The December 2023 Waiver provided for a one-time issuance
of penny warrants (the “December 2023 Penny Warrants”) to purchase up to 1,286,671 shares of our common stock (the “December 2023 Penny Warrant Shares”), at an exercise price of $0.01 per share, in connection
with the Term Loan Lenders’ agreement to waive the Tests under the Term Loan for the quarter ended December 31, 2023. The
December 2023 Penny Warrants were immediately exercisable upon issuance and will expire ten years from the date of issuance.
May 2024 Private Placement
On May 13, 2024, we received a waiver (the
“May 2024 Waiver”) from the Term Loan Lenders in regards to our compliance with the Tests as of the last day of
the quarter ended March 31, 2024. The May 2024 Waiver provided for a one-time issuance of penny warrants (the “May 2024
Penny Warrants” and, together with the December 2024 Penny Warrants, the “Waiver Penny Warrants”) to
purchase up to 2,550,000 shares of our common stock (the “May 2024 Penny Warrant Shares” and, together with the December 2023 Penny Warrant Shares, the “Waiver Penny Warrant Shares”), at an exercise price
of $0.01 per share, in connection with the Term Loan Lender’s agreement to waive the Tests under the Term Loan for the quarter
ended March 31, 2024. The May 2024 Penny Warrants were immediately exercisable upon issuance and will expire ten years from the date
of issuance.
Nevada Reincorporation
On
March 31, 2023 (the “Effective Date”), we changed our state of incorporation from the State of Delaware to the State
of Nevada (the “Reincorporation”) pursuant to a plan of conversion dated March 30, 2023 (the “Plan of Conversion”).
The Reincorporation was accomplished by filing: (i) a certificate of conversion with the Secretary of State of the State of Delaware;
(ii) articles of conversion with the Secretary of State of the State of Nevada; and (iii) articles of incorporation (the “Articles
of Incorporation”) with the Secretary of State of the State of Nevada. In connection with the Reincorporation, our Board
adopted new bylaws in the form attached to the Plan of Conversion (the “Bylaws”).
The
Reincorporation was previously submitted to a vote of, and approved by, our stockholders at a special meeting of stockholders
held on February 28, 2023 (the “Special Meeting”). The Reincorporation did not affect any of our material contracts
with any third parties, and our rights and obligations under those material contractual arrangements continue to be rights and obligations
of us after the Reincorporation. The Reincorporation did not result in any change in our business, jobs, management, number of employees,
assets, liabilities or net worth (other than as a result of the costs incident to the Reincorporation). Pursuant to the Plan of Conversion,
our issued and outstanding shares of common stock were automatically converted and certificates representing shares of common stock automatically
represented shares of common stock of the reincorporated company as of the Effective Date.
Recent
Developments
Effective
April 12, 2024, we entered into amendments to the employment agreements with our Chief Executive Officer, our Chief Revenue Officer
and our Chief Marketing Officer to amend the terms of their annual equity compensation (the “Amended Employee
Agreements”). The Amended Employee Agreements allow us to issue a combination of cash and equity awards on an annual basis
up to a specified amount ($1,532,000 for our Chief Executive Officer, $490,000 for our Chief Revenue Officer and $236,000 for our
Chief Marketing Officer), subject to approval and such other terms and conditions imposed by the Compensation Committee (the
“Compensation Committee”) of the Board.
On
April 12, 2024, we issued a total of 836,295 RSUs under Dragonfly Energy Holdings 2022
Equity Incentive Plan (the “2022 Plan”) to the following employees pursuant to their Amended Employee Agreements:
(i) 567,407 RSUs to our Chief Executive Officer; (ii) 181,481 RSUs to our Chief Revenue Officer; and (iii) 87,407 RSUs to our Chief Marketing
Officer. In addition to the RSU awards, our Board also approved the following cash awards to the above referenced employees: (i) $510,667
to our Chief Executive Officer; (ii) $163,333 to our Chief Revenue Officer; and (iii) $78,668 to our Chief Marketing Officer. Each
of the approved cash awards will not be paid out to the employees until we have achieved a minimum cash balance of $30,000,000, and are
subject to each employee’s continued employment on the date of payment.
On
April 12, 2024, our Board issued each of our non-employee directors 222,222 RSUs in connection with their service as directors for the
year ended December 31, 2023. The RSUs will vest in three equal annual installments, with the first vesting date on the one (1) year
anniversary date of their issuance, subject to the directors continued service on our Board on each vesting date.
On
April 15, 2024, our Board approved an amendment to our Director Compensation Policy offering directors long-term incentive awards that
are issuable subject to the sole discretion of our Compensation Committee. Each such long-term incentive award is payable in the form
of cash and or equity awards. Each such award shall be determined each fiscal year and are subject to the director’s continued
service with us and other conditions as our Compensation Committee deems appropriate. Where equity awards are issued, such awards are
subject to the terms and conditions of the 2022 Plan.
On
April 12, 2024, we entered into the Fernley Lease Agreement for the approximately 64,000 square foot Premises to be used for warehousing,
assembly and light manufacturing, painting, storage fulfillment, and distribution of our products.
Corporate
Information
The
mailing address of our principal executive office is 1190 Trademark Dr. #108, Reno, Nevada 89521, and our telephone number is (775) 622-3448.
On March 31, 2023, we effected the Reincorporation from the State of Delaware into the State of Nevada.
We
file periodic reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may
be obtained, free of charge, by visiting the SEC’s website at www.sec.gov that contains all of the reports, proxy and information
statements, and other information that we electronically file or furnish to the SEC. We also maintain a website at www.dragonflyenergy.com
where we make available the proxy statements, press releases, registration statements and reports on Forms 3, 4, 8-K, 10-K and 10-Q that
we (and in the case of Section 16 reports, our insiders) file with the SEC. These forms are made available as soon as reasonably practicable
after such material is electronically filed with or furnished to the SEC. Press releases are also issued via electronic transmission
to provide access to our financial and product news, and we provide notification of and access to voice and internet broadcasts of our
quarterly and annual results. Our website also includes investor presentations and corporate governance materials.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As
a result of the completion of the Business
Combination, the financial statements of Legacy Dragonfly are now the financial statements of us. Prior to the Business Combination,
we had no operating assets but, upon consummation of the Business Combination, the business and operating assets of Legacy Dragonfly
acquired by us became our sole business and operating assets. Accordingly, the financial statements of Legacy Dragonfly and
their respective subsidiaries as they existed prior to the Business Combination and reflecting the sole business and operating
assets of the Company going forward, are now the financial statements of us.
All
statements other than statements of historical fact included in this section regarding our financial position, business strategy and
the plans and objectives of management for future operations, are forward- looking statements. When used in this section, words such
as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions,
as they relate to our management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management,
as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those
contemplated by the forward- looking statements as a result of certain factors detailed herein. All subsequent written or oral forward-looking
statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph.
Some
of the information contained in this discussion and analysis or set forth elsewhere, including information with respect to our plans
and strategy for our business include forward-looking statements that involve risks, uncertainties and assumptions. You should read the
sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of
important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis.
Overview
We
are a manufacturer of non-toxic deep cycle lithium-ion batteries that are designed to displace lead acid batteries in a number of different
storage applications and end markets including RV, marine vessel, solar, oil and gas, and off-grid industries, with disruptive cell manufacturing
and solid-state cell technology currently under development.
Since
2020, we have sold over 300,000 batteries. For the quarters ended March 31, 2024, and March 31, 2023, we
sold 11,098 and 20,331 batteries, respectively, and had $12.5 million and $18.8 million in net sales, respectively. We currently
offer a line of batteries across our “Battle Born” and “Dragonfly” brands, each differentiated by size, power
and capacity, consisting of seven different models, four of which come with a heated option. We primarily sell “Battle Born”
branded batteries directly to consumers and “Dragonfly” branded batteries to OEMs.
Our
decrease in sales is a reflection of weaker demand from both OEM and DTC customers in our core
RV and marine markets due to rising interest rates and inflation. Our RV OEM customers currently include Keystone, THOR, Airstream,
and REV, and we are in ongoing discussions with a number of additional RV OEMs to further increase adoption of our products. Related
efforts include seeking to have RV OEMs “design in” our batteries as original equipment and entering into arrangements with
members of the various OEM dealer networks to stock our batteries for service and for aftermarket replacement sales.
We
currently source the lithium iron phosphate cells incorporated into our batteries from a limited number of carefully selected suppliers
that can meet our demanding quality standards and with whom we have developed long-term relationships.
In May 2024, we announced that we achieved full
certification for our energy storage products to be deployed for use in oil & gas operations in North America. As a result of this
certification, we are working Connexa to deliver a power product to Alegacy Equipment, a market leading natural gas compressor package
company, and their affiliate Agnes Systems. The power system, which Connexa expects to integrate, are expected to be used in natural
gas compression equipment to reduce methane emissions across the oilfield. We expect the first of these systems to be deployed in the
third quarter of 2024 and this business line to begin contributing to net sales by the fourth quarter of 2024.
To
supplement our battery offerings, we are also a reseller of accessories for battery systems. These include chargers, inverters, monitors,
controllers, solar panels, and other system accessories from brands such as Victron Energy, Progressive Dynamics, Magnum Energy
and Sterling Power. Pursuant to the Asset Purchase Agreement dated April 22, 2022 by and among us and Thomason Jones and the other parties
thereto, we also acquired the assets, including Wakespeed of Thomason Jones, allowing us to include our own alternator regulator in systems
that we sell.
In
addition to our conventional LFP batteries, we have been developing proprietary dry electrode cell manufacturing processes and
solid-state cell technology. We believe that our solid-state technology design allows for a much safer, more efficient battery
cell that we believe will be a key differentiator in the energy storage market.
The Business Combination
On
October 7, 2022, or the Closing Date, we consummated the Business Combination. Pursuant to the Business Combination Agreement, Merger
Sub merged with and into Legacy Dragonfly, with Legacy Dragonfly surviving the merger and becoming a wholly-owned direct subsidiary of
CNTQ. Thereafter, Merger Sub ceased to exist and CNTQ was renamed Dragonfly Energy Holdings Corp. Legacy Dragonfly
is deemed the accounting acquirer, which means that Legacy Dragonfly’s financial statements for previous periods will be disclosed
in our future periodic reports filed with the SEC. Following the Business Combination, our business is the business of Legacy Dragonfly.
The
Business Combination was accounted for as a reverse recapitalization. Under this method of accounting, CNTQ was treated as
the acquired company for financial statement reporting purposes.
ChEF Equity Facility
We
intend to opportunistically market more heavily to institutions and expect the trading volume to increase and the stock price
to stabilize. Under these conditions, we intend to use the ChEF Equity Facility to help maintain minimum cash balances required by the
lenders as we continue to execute on growing the business through product releases, customer/market expansion, and R&D milestones.
We expect to use the ChEF Equity Facility as a regular source of funds over the next twelve months as the lock-up on shares expires and
our available share balance increases, allowing for more consistent purchases under the ChEF Equity Facility. Use of the ChEF Equity
Facility may adversely affect us, including the market price of our common stock and future issuances may be dilutive to existing stockholders.
June
2023 Offering
On
June 20, 2023, we entered into the Underwriting Agreement with the Underwriters, pursuant to which we sold to the Underwriters, in a
firm commitment underwritten public offering, or the June 2023 Offering, an aggregate of (i) 10,000,000 shares of common stock, par value
$0.0001 and (ii) Investor Warrants to purchase up to 10,000,000 shares of common Stock, at the combined public offering price of $2.00
per share and accompanying Investor Warrant, less underwriting discounts and commissions, and (iii) Underwriters’ Warrants to purchase
up to an aggregate of 570,250 shares of common stock. In addition, we granted the Underwriters a 45-day over-allotment option to purchase
up to an additional 1,500,000 shares of common stock and/or Investor Warrants to purchase up to an aggregate of 1,500,000 shares of Common
Stock at the public offering price per security, less underwriting discounts and commissions.
The
Investor Warrants are exercisable for five years from the closing date of the Offering, have an exercise price of $2.00 per share and
are immediately exercisable. In the event of certain fundamental transactions, holders of the Investor Warrants will have the right to
receive the Black Scholes Value (as defined in the Investor Warrants) of their Investor Warrants calculated pursuant to the formula set
forth in the Investor Warrants, payable either in cash or in the same type or form of consideration that is being offered and being paid
to the holders of common stock. The Underwriters’ Warrants are exercisable upon issuance and will expire on June 20, 2028. The
initial exercise price of the Underwriters’ Warrants is $2.50 per share, which equals 125% of the per share public offering price
in the Offering. As part of the June 2023 Offering, the Underwriters partially exercised their over-allotment option in the amount of
1,405,000 shares of Common Stock and Investor Warrants to purchase 1,405,000 shares of common stock. The June 2023 Offering closed on
June 22, 2023. The aggregate net proceeds from the June 2023 Offering, including the partial overallotment option, was approximately
$20.7 million.
December
2023 Private Placement
On
December 29, 2023, we received the December 2023 Waiver from the Term Loan Lenders in regards to our compliance with the Tests as of
the last day of the quarter ended December 31, 2023. The December 2023 Waiver provided for a one-time issuance of the Waiver Penny Warrants
to purchase up to 1,286,671 Waiver Penny Warrant Shares, at an exercise price of $0.01 per share, in connection with the Term Loan Lender’s
agreement to waive the Tests under the Term Loan for the quarter ended December 31, 2023. The Waiver Penny Warrants were immediately
exercisable upon issuance and will expire ten years from the date of issuance.
May 2024 Private Placement
On May 13, 2024, we received a waiver (the “May
2024 Waiver”) from the Term Loan Lenders in regards to our compliance with the Tests as of the last day of the quarter ended
March 31, 2024. The May 2024 Waiver provided for a one-time issuance of penny warrants (the “May 2024 Penny Warrants”)
to purchase up to 2,550,000 shares of our common stock (the “May 2024 Penny Warrant Shares”), at an exercise price
of $0.01 per share, in connection with the Term Loan Lender’s agreement to waive the Tests under the Term Loan for the quarter
ended March 31, 2024. The May 2024 Penny Warrants were immediately exercisable upon issuance and will expire ten years from the date
of issuance.
As of March 31, 2024, we had cash totaling $8.5 million. Our net loss for the quarter ended March 31, 2024 was $10.4
million and our net income for the quarter ended March 31, 2023 was $4.8 million. As of December 31, 2023, we had cash totaling
$12.7 million. Our net loss for the years ended December 31, 2023 and December 31, 2022, were $13.8 million and $40.0 million, respectively.
As a result of being a publicly traded company, we continue to need to hire additional personnel and implement procedures and processes
to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public
company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and
external accounting and legal and administrative resources, including increased audit and legal fees. As discussed under “—Liquidity
and Capital Resources” below we expect that we will need to raise additional funds, including through the use of the ChEF Equity
Facility and the issuance of equity, equity-related or debt securities or by obtaining additional credit from financial institutions
to fund, together with our principal sources of liquidity, ongoing costs, such as research and development relating to our solid-state
batteries, expansion of our facilities, and new strategic investments. If such financings are not available, or if the terms of such
financings are less desirable than we expect, we may be forced to take actions to reduce our capital or operating expenditures, including
not seeking potential acquisition opportunities, eliminating redundancies, or reducing or delaying our production facility expansions,
which may adversely affect our business, operating results, financial condition and prospects.
Key
Factors Affecting Our Operating Results
Our
financial position and results of operations depend to a significant extent on the following factors:
End
Market Consumers
The
demand for our products ultimately depends on demand from consumers in our current end markets. We generate sales through (1) DTC
and (2) through OEMs, particularly in the RV market.
An
increasing proportion of our sales has been and is expected to continue to be derived from sales to RV OEMs, driven by continued
efforts to develop and expand sales to RV OEMs with whom we have longstanding relationships. Our RV OEM sales have been on a purchase order basis, without firm
revenue commitments, and we expect that this will likely continue to be the case. Therefore, future RV OEM sales will be subject to risks
and uncertainties, including the number of RVs these OEMs manufacture and sell, which in turn may be driven by the expectations these
OEMs have around end market consumer demand.
Demand
from end market consumers is impacted by a number of factors, including fuel costs and energy demands (including an increasing trend
towards the use of green energy), as well as overall macro-economic conditions, such as interest rates, and inflation. Sales of our batteries have
benefited from the increased adoption of the RV lifestyle, the demand for and inclusion of additional appliances and electronics in RVs,
and the accelerating trend of solar power adoption among RV customers. However, rising fuel costs and other macro-economic
conditions have caused a downward shift in decisions taken by end market consumers around spending in the RV market and in July 2023,
we were notified by our largest RV OEM customer that, due to weaker demand for its products and their subsequent focus on reducing costs,
it would no longer install our storage solutions as standard equipment, but rather return to offering those solutions as an option to
dealers and consumers. While this customer is not moving to a different solution or competitor, as a result in this change in strategy
there was a material limiting effect on our revenue in 2023. Based on our discussions with customers and current forecast projections,
we expect our revenue in the RV market to increase in the second half of 2024.
While a significant portion of our sales come
from the RV market, we also offer targeted solutions using the same products for the marine market. These solutions cater to OEMs and
consumers alike, addressing the power needs of various vessels like sailboats, powerboats, and fishing boats (center console and bass).
We have worked closely to follow ABYC (American Boat & Yacht Council) Standards to develop systems that adhere to the recent ABYC
E-13 Guidelines (Standards for Lithium Batteries).
Our
strategy includes plans to expand into new end markets that we have identified as opportunities for our LFP batteries, including medium
and heavy-duty trucking, specialty and work vehicles, solar integration, oil and gas, industrial, rail, material handling, and emergency and standby power, in the medium term,
and data centers, telecom and distributed on-grid storage in the longer term. We believe that our current LFP batteries and, eventually,
our solid-state batteries, will be well-suited to supplant traditional lead-acid batteries as a reliable power source for the variety
of low power density uses required in these markets (such as powering the increasing number of on-board tools needed in emergency vehicles).
The success of this strategy requires (1) continued growth of these addressable markets in line with our expectations and (2) our ability
to successfully enter these markets. We expect to incur significant marketing costs understanding these new markets, and researching
and targeting customers in these end markets, which may not result in sales. If we fail to execute on this growth strategy in accordance
with our expectations, our sales growth would be limited to the growth of existing products and existing end markets.
Supply
We
currently rely on two carefully selected cell manufacturers located in China, and a single supplier, also located in China, to manufacture
our proprietary battery management system, and we intend to continue to rely on these suppliers going forward. Our close working relationships
with our China-based LFP cell suppliers, reflected in our ability to increase our purchase order volumes (qualifying us for related volume-based
discounts) and order and receive delivery of cells in anticipation of required demand, has helped us moderate increased supply-related
costs associated with inflation, currency fluctuations and U.S. government tariffs imposed on our imported battery cells and to avoid
potential shipment delays. To mitigate against potential adverse production events, we opted to build our inventory of key components,
such as battery cells. However, as many of the supply chain challenges and delays that were prevalent over the last several years
have eased, we are actively working down our inventory to more appropriate safety stock levels.
As
a result of our battery chemistry and active steps we have taken to manage our inventory levels, we have not been subject to the shortages
or price impacts that have been present for manufacturers of nickel manganese cobalt and nickel cobalt aluminum batteries. As we look
toward the production of our solid-state cells, we have signed a Commercial Offtake Agreement with a lithium mining company located
in Nevada for the supply of lithium, which we expect will enable us to further manage our cost of goods over time.
Product
and Customer Mix
Our
product sales consist of sales of seven different models of LFP batteries, along with accessories for battery systems (individually or
bundled). These products are sold to different customer types (e.g., consumers, OEMs and distributors) and at different prices and involve
varying levels of costs. In any particular period, changes in the mix and volume of particular products sold and the prices of those
products relative to other products will impact our average selling price and our cost of goods sold. Despite our work to moderate increased
supply-related costs, the price of our products may also increase as a result of increases in the cost of components due to inflation,
currency fluctuations and tariffs. OEM sales typically result in lower average selling prices and related margins, which could result
in margin erosion, negatively impact our growth or require us to raise our prices. However, this reduction is typically offset by the
benefits of increased sales volumes. Sales of third-party sourced accessories typically have lower related margin. We expect accessory
sales to increase as we further develop full-system design expertise and product offerings and consumers increasingly demand more sophisticated
systems, rather than simple drop-in replacements. In addition to the impacts attributable to the general sales mix across our products
and accessories, our results of operations are impacted by the relative margins of products sold. As we continue to introduce new products
at varying price points, our overall gross margin may vary from period to period as a result of changes in product and customer mix.
Production
Capacity
All
of our battery assembly currently takes place at our 99,000 square foot headquarters and manufacturing facility located in Reno, Nevada.
We currently operate three LFP battery production lines. Consistent with our operating history, we plan to continue to automate additional
aspects of our battery production lines. Our existing facility has the capacity to add up to four additional LFP battery production lines
and construct and operate a pilot production line for our solid-state cells, all designed to maximize the capacity of our manufacturing
facility. Although our automation efforts are expected to reduce our costs of goods, we may not fully recognize the anticipated savings
when planned and could experience additional costs or disruptions to our production activities.
In
addition, we have entered into a lease for an additional 390,240 square foot warehouse in Reno, Nevada, which is expected to be completed
in the second half of 2024. This facility, combined with our existing facility, will allow further scaling of our increasingly
automated battery pack assembly capabilities, expand our warehousing space, and allow for deployment of our solid-state cell manufacturing.
Competition
We
compete with traditional lead-acid battery manufacturers and lithium-ion battery manufacturers, who primarily either import their products
or components or manufacture products under a private label. As we continue to expand into new markets, develop new products and move
towards production of our solid-state cells, we will experience competition with a wider range of companies. These competitors may have
greater resources than we do, and may be able to devote greater resources to the development of their current and future technologies.
Our competitors may be able to source materials and components at lower costs, which may require us to evaluate measures to reduce our
own costs, lower the price of our products or increase sales volumes in order to maintain our expected levels of profitability.
Research
and Development
Our
research and development is primarily focused on the advanced manufacturing of solid-state lithium-ion batteries using an LFP catholyte,
a solid electrolyte and an intercalation-based anolyte (intercalation being the reversible inclusion of a molecule or ion into layered
solids). The next stage in our technical development is to construct the battery to optimize performance and longevity to meet and exceed
industry standards for our target storage markets. Ongoing testing and optimizing of more complicated batteries incorporating layered
pouch cells will assist us in determining the optimal cell chemistry to enhance conductivity and increase the number of cycles (charge
and discharge) in the cell lifecycle. This is expected to require significant additional expense, and we may need to raise additional
funds to continue these research and development efforts.
Components
of Results of Operations
Net
Sales
Net
sales is primarily generated from the sale of our LFP batteries to OEMs and consumers, as well as chargers and other accessories, either
individually or bundled.
Cost
of Goods Sold
Cost
of goods sold includes the cost of cells and other components of our LFP batteries, labor and overhead, logistics and freight costs,
and depreciation of manufacturing equipment.
Gross
Profit
Gross
profit, calculated as net sales less cost of goods sold, may vary between periods and is primarily affected by various factors including
average selling prices, product costs, product mix and customer mix.
Operating
Expenses
Research
and development
Research
and development costs include personnel-related expenses for scientists, experienced engineers and technicians as well as the material
and supplies to support the development of new products and our solid-state technology. As we work towards completing the development
of our solid-state lithium-ion cells and the manufacturing of batteries that incorporate this technology, we anticipate that research
and development expenses will increase significantly for the foreseeable future as we continue to invest in product development and optimizing
and producing solid-state cells.
General
and administrative
General
and administrative costs include personnel-related expenses attributable to our executive, finance, human resources, and information
technology organizations, certain facility costs, and fees for professional services.
Selling
and marketing
Selling
and marketing costs include outbound freight, personnel-related expenses, as well as trade show, industry event, marketing, customer
support, and other indirect costs. We expect to continue to make the necessary sales and marketing investments to enable the execution
of our strategy, which includes expanding into additional end markets.
Total
Other Income (Expense)
Other
income (expense) consists primarily of interest expense, the change in fair value of the warrant liability and amortization of debt issuance
costs.
Results
of Operations
Comparisons for the Three months ended March
31, 2024, and March 31, 2023
The following table sets forth our results of
operations for the three months ended March 31, 2024 and March 31, 2023. This data should be read together with our financial statements
and related notes included elsewhere in this Registration Statement, and is qualified in its entirety by reference to such financial
statements and related notes.
| |
Three months ended March 31, | |
| |
2024 | | |
% Net Sales | | |
2023 | | |
% Net Sales | |
| |
(in thousands) | |
Net Sales | |
$ | 12,505 | | |
| 100.0 | | |
$ | 18,791 | | |
| 100.0 | |
Cost of Goods Sold | |
| 9,454 | | |
| 75.6 | | |
| 14,124 | | |
| 75.2 | |
Gross profit | |
| 3,051 | | |
| 24.4 | | |
| 4,667 | | |
| 24.8 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Research and development | |
| 1,333 | | |
| 10.7 | | |
| 880 | | |
| 4.7 | |
General and administrative | |
| 4,813 | | |
| 38.5 | | |
| 9,495 | | |
| 50.5 | |
Sales and marketing | |
| 2,744 | | |
| 21.9 | | |
| 4,184 | | |
| 22.3 | |
Total Operating expenses | |
| 8,890 | | |
| 71.1 | | |
| 14,559 | | |
| 77.5 | |
Loss From Operations | |
| (5,839 | ) | |
| (46.7 | ) | |
| (9,892 | ) | |
| (52.6 | ) |
Other Income (Expense) | |
| | | |
| | | |
| | | |
| | |
Interest expense, net | |
| (4,760 | ) | |
| (38.1 | ) | |
| (3,856 | ) | |
| (20.5 | ) |
Other expense | |
| (4 | ) | |
| 0.0 | | |
| - | | |
| - | |
Change in fair market value of warrant liability | |
| 236 | | |
| 1.9 | | |
| 18,523 | | |
| 98.6 | |
Total Other Income (Expense) | |
| (4,528 | ) | |
| (36.2 | ) | |
| 14,667 | | |
| 78.1 | |
Loss Before Taxes | |
| (10,367 | ) | |
| (82.9 | ) | |
| 4,775 | | |
| 25.4 | |
Income Tax Benefit | |
| - | | |
| - | | |
| | | |
| - | |
Net (Loss) Income | |
$ | (10,367 | ) | |
| (82.9 | ) | |
$ | 4,775 | | |
| 25.4 | |
| |
Three months ended March 31, | |
| |
2024 | | |
2023 | |
| |
(in thousands) | |
DTC | |
| 5,203 | | |
| 10,038 | |
% Net Sales | |
| 41.6 | | |
| 53.4 | |
OEM | |
| 7,302 | | |
| 8,753 | |
% Net Sales | |
| 58.4 | | |
| 46.6 | |
Net Sales | |
$ | 12,505 | | |
| 18,791 | |
Net Sales
Net sales decreased by $6.3 million, or 33.5%,
to $12.5 million for the quarter ended March 31, 2024, as compared to $18.8 million for the quarter ended March 31, 2023. This decrease
was primarily due to lower DTC and OEM battery and accessory sales offset by a higher average sales price. For the quarter ended March
31, 2024, DTC revenue decreased by $4.8 million due to decreased customer demand for our products related to rising interest rates and
inflation. OEM revenue decreased by $1.5 million primarily due to our largest Recreation Vehicle (RV) customers changing our product
from a standard offering to an option. Excluding this customer our RV OEM sales were up 69% year over year. We expect our sales to increase
as the cyclical recovery of the RV market gains momentum in the second half of 2024. We expect our deployment of products for use in
oil and gas operations in North America to begin contributing to net sales by the fourth quarter of 2024.
Cost of Goods Sold
Cost of revenue decreased by $4.7 million, or
33.1%, to $9.5 million for the quarter ended March 31, 2024, as compared to $14.1 million for the quarter ended March 31, 2023. This
decrease was primarily due to lower unit volume and lower material costs associated with consuming lower-priced inventory resulting in
a $4.6 million decrease of product cost and $0.1 million decrease in overhead expense associated with lower labor costs due to reduced
headcount. We expect our Cost of Goods Sold to increase in conjunction with the anticipated increase in revenue over the next 12 months.
Gross Profit
Gross profit decreased by $1.6 million, or 34.6%,
to $3.1 million for the quarter ended March 31, 2024, as compared to $4.7 million for the quarter ended March 31, 2023. The decrease
in gross profit was primarily due to a lower unit volume of sales.
Research and Development Expenses
Research and development expenses increased by
$0.4 million, or 51.5%, to $1.3 million for the quarter ended March 31, 2024, as compared to $0.9 million for the quarter ended March
31, 2023. The increase was primarily due to higher wage expense in the amount of $0.3 million and $0.1 million for increased patent and
material expenses. While we expect to continue to grow the Research and Development headcount, we expect to do so at a slower rate than
in prior years.
General and Administrative Expenses
General and administrative expenses decreased
by $4.7 million, or 49.3%, to $4.8 million for the quarter ended March 31, 2024, as compared to $9.5 million for the quarter ended March
31, 2023. This decrease was primarily due to the issuance of stock-based compensation in the prior year in the amount of $3.5 million
along with lower employee related costs in the amount of $0.5 million due to decreased headcount. In addition, legal and compliance costs
decreased by $0.6 million due to reduced support required for Exchange Act reporting and compliance, including the preparation of our
Annual Report. Travel expenses in General and Administrative decreased by $0.2 million due to allocation to the other functional areas
in 2024. We expect General and Administrative Expenses, as a percentage of revenue, to decline over the next 12 months.
Selling and Marketing Expenses
Sales and marketing expenses decreased by $1.4
million, or 34.4%, to $2.7 million for the quarter ended March 31, 2024, as compared to $4.2 million for the quarter ended March 31,
2023. This decrease was primarily due to lower employee-related costs in the amount of $1.3 million of which $0.8 million is due to the
prior year stock- based compensation. Lower shipping costs in the amount of $0.4 million is related to a reduction in units sold is offset
by $0.3 million other marketing expense which includes travel expenses allocated from general and administrative to selling and marketing
in 2024. We expect our Selling and Marketing Expenses to be relatively stable over the next 12 months.
Total Other (Expense) Income
Other expense totaled $4.5 million for the quarter
ended March 31, 2024 as compared to total other income of $14.7 million for the quarter ended March 31, 2023. Other expense of $4.5 million
in quarter ended March 31, 2024 was 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. The $14.8 million of other income in quarter ended
March 31, 2023 is comprised of the change in fair market value of warrant liability of $18.5 million offset by interest expense of $3.9
million related to our debt securities.
Income Tax (Benefit) Expense
There was no tax expense recorded for the three
months ended March 31, 2024 or March 31, 2023. Based on available evidence as of March 31, 2024 and March 31, 2023, management believes
it is more likely than not that some or all the deferred tax assets will not be realized. Accordingly, we established a 100% valuation
allowance. As a result of the full valuation allowance, we did not record a tax benefit during the quarter ended March 31, 2023 or 2024.
Net (Loss) Income
We experienced a net loss of $10.4 million for
the quarter ended March 31, 2024, as compared to net income of $4.8 million for the quarter ended March 31, 2023. As described above,
this result was driven by lower sales partially offset by lower cost of goods sold, and lower operating expenses, and a decrease in other
income (due to the change in fair market value of our warrants).
Comparisons
for the Years Ended December 31, 2023 and 2022
The
following table sets forth our results of operations for the years ended December 31, 2023 and 2022. This data should be
read together with our financial statements and related notes included elsewhere in this Registration Statement, and is qualified in
its entirety by reference to such financial statements and related notes.
| |
Years ended December 31, | |
| |
2023 | | |
% Net Sales | | |
2022 | | |
% Net Sales | |
| |
(in thousands) | |
Net Sales | |
$ | 64,392 | | |
| 100.0 | | |
$ | 86,251 | | |
| 100.0 | |
Cost of Goods Sold | |
| 48,946 | | |
| 76.0 | | |
| 62,633 | | |
| 72.6 | |
Gross profit | |
| 15,446 | | |
| 24.0 | | |
| 23,618 | | |
| 27.4 | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Research and development | |
| 3,863 | | |
| 6.0 | | |
| 2,764 | | |
| 3.2 | |
General and administrative | |
| 26,389 | | |
| 41.0 | | |
| 41,566 | | |
| 48.2 | |
Sales and marketing | |
| 12,623 | | |
| 19.6 | | |
| 13,671 | | |
| 15.9 | |
Total Operating expenses | |
| 42,875 | | |
| 66.6 | | |
| 58,001 | | |
| 67.2 | |
Loss From Operations | |
| (27,429 | ) | |
| (42.6 | ) | |
| (34,383 | ) | |
| (39.9 | ) |
Other Income (Expense) | |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| 19 | | |
| 0.0 | | |
| 40 | | |
| 0.0 | |
Interest expense, net | |
| (16,015 | ) | |
| (24.9 | ) | |
| (6,979 | ) | |
| (8.1 | ) |
Change in fair market value of warrant liability | |
| 29,582 | | |
| 45.9 | | |
| 5,446 | | |
| 6.3 | |
Debt extinguishment | |
| - | | |
| - | | |
| (4,824 | ) | |
| (5.6 | ) |
Total Other Income (Expense) | |
| 13,586 | | |
| 21.1 | | |
| (6,317 | ) | |
| (7.3 | ) |
Loss Before Taxes | |
| (13,843 | ) | |
| (21.5 | ) | |
| (40,700 | ) | |
| (47.2 | ) |
Income Tax Benefit | |
| (26 | ) | |
| 0.0 | | |
| (709 | ) | |
| (0.8 | ) |
Net Loss | |
$ | (13,817 | ) | |
| (21.5 | ) | |
$ | (39,991 | ) | |
| (46.4 | ) |
| |
Years ended December 31, | |
| |
2023 | | |
2022 | |
| |
(in thousands) | |
DTC | |
| 36,875 | | |
| 52,446 | |
% Net Sales | |
| 57.3 | | |
| 60.8 | |
OEM | |
| 27,517 | | |
| 33,805 | |
% Net Sales | |
| 42.7 | | |
| 39.2 | |
Net Sales | |
$ | 64,392 | | |
$ | 86,251 | |
Net
Sales
Net
sales decreased by $21.9 million, or 25.3%, to $64.4 million for the year ended December 31, 2023, as compared
to $86.3 million for the year ended December 31, 2022. This decrease was primarily due to lower DTC and OEM battery
and accessory sales due to a decline in demand in our core RV markets, and a slight decrease in average sale prices for our batteries.
For the year ended December 31, 2023, OEM revenue decreased by $6.3 million as a result of weaker overall demand in the
RV market. DTC revenue decreased by $15.6 million as a result of decreased customer demand for our products due to rising
interest rates and inflation. We expect our sales to increase as the cyclical recovery of the RV market gains momentum in the coming
quarters.
Cost
of Goods Sold
Cost
of revenue decreased by $13.7 million, or 21.9%, to $48.9 million for the year ended December 31, 2023,
as compared to $62.6 million for the year ended December 31, 2022. This decrease was primarily due to a $13.1
million decrease in product cost due to lower unit volume, partially offset by higher material cost associated with consuming
higher priced inventory and an adjustment to customs due to tariff correction of $0.3 million, and a $0.6 million decrease in overhead
expense associated with lower labor cost due to reduced headcount. We expect our Cost of Goods Sold to increase
in conjunction with the anticipated increase in revenue over the next 12 months.
Gross
Profit
Gross
profit decreased by $8.2 million, or 34.6%, to $15.4 million for the year ended December 31, 2023, as compared
to $23.6 million for the year ended December 31, 2022. The decrease in gross profit was primarily due to lower unit
volumes and a change in revenue mix that included a larger percentage of lower margin OEM sales and a lower percentage of higher
margin DTC sales, together with higher material costs as noted above. Gross Profit percentage decreased by 4.3% from 27.4% in 2022
to 23.1% in 2023. Lower volume caused a reduction in absorption of labor and overhead impacting gross profit by 2.3% along with an increase
in material costs reducing gross profit by 1.1%. We expect our Gross Profit, as a percentage of revenue, to remain relatively stable
over the next 12 months.
Research
and Development Expenses
Research
and development expenses increased by $1.1 million, or 39.8%, to $3.9 million for the year ended December 31, 2023,
as compared to $2.8 million for the year ended December 31, 2022. The increase was primarily due $0.8 million in higher material
and patent expense along with increased wages and depreciation expense associated with cell manufacturing development
work. While we expect to continue to grow its Research and Development headcount, it expects to do so at a slower rate than in prior
years.
General
and Administrative Expenses
General
and administrative expenses decreased by $15.2 million, or 36.5%, to $26.4 million for the year ended December
31, 2023, as compared to $41.6 million for the year ended December 31, 2022. This decrease was primarily due to the absence
of $23.4 million of fiscal year 2022 expenses associated with the Business Combination and professional fees and a decrease
in employee-related costs in the amount of $2.5 million offset by an increase in stock-based compensation costs
of $4.5 million. We also incurred higher compliance, insurance, and professional fees related to public company costs in the
amount of $4.5 million, and a $1.7 million increase in investor relations expenses. We expect General and Administrative Expenses, as
a percentage of revenue, to decline over the next 12 months.
Selling
and Marketing Expenses
Sales
and marketing expenses decreased by $1.1 million, or 7.7%, to $12.6 million for the year ended December 31, 2023,
as compared to $13.7 million for the year ended December 31, 2022. This decrease was primarily due to a $2.0 million reduction
in shipping costs due to lower unit volumes, partially offset by higher employee related costs of $0.8 million due
to increased headcount and higher stock-based compensation. We expect our Selling and Marketing Expenses to be relatively stable over
the next 12 months.
Total
Other Income (Expense)
Other
income totaled $13.6 million for the year ended December 31, 2023 as compared to total other expense of $6.3 million for
the year ended December 31, 2022. Other income in 2023 is comprised primarily of a change in fair market value of warrant liability
in the amount of $29.6 million, partially offset by interest expense of $16.0 million related to our debt securities. Other expense
in 2022 is comprised primarily of interest expense of $6.9 million related to senior secured note of $45 million combined
with debt securities of $75 million, debt extinguishment expense of $4.8 million due to the retirement of the $45 million
in senior secured notes as a result of the Business Combination, partially offset by $5.4 million in the change of the fair market value
of our warrants.
Income
Tax Benefit
The
income tax benefit for the year ended December
31, 2023, was minimal as compared to a $0.7 million benefit for the year ended December 31, 2022. The income tax benefit
reflects our expected use of losses in the period against future tax obligations. Management evaluated the positive and negative evidence
bearing upon the realizability of its deferred tax assets and determined that it is more likely than not that we will not recognize the
benefits of the deferred tax assets primarily due to us entering into a 3-year cumulative loss position. As a result, a full valuation
allowance totaling $19.7 million was recorded as of December 31, 2023.
Net
Loss
We
experienced a net loss of $13.8 million for the year ended December 31, 2023, as compared to a net loss of $40.0 million for the
year ended December 31, 2022. As described above, this result was driven by lower sales due to reduced demand in the RV market,
partially offset by lower cost of goods sold, lower operating expenses and increased other income.
Critical
Accounting Estimates
Our
consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States.
The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts
of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We
base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
On a recurring basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects
of material revisions in an estimate, if any, will be reflected in the consolidated financial statements prospectively from the date
of the change in the estimate.
We
consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were
highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from
period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact
on our financial condition or results of operations.
Management
has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board (the “Audit Committee”).
In addition, there are other items within our financial statements that require estimation but are not deemed critical as defined above.
Changes in estimates used in these and other items could have a material impact on our financial statements.
We
believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our
financial statements.
Inventory
Valuation
We periodically review physical inventory
for excess, obsolete, and potentially impaired items and reserves. Any such inventory is written down to net realizable value. The reserve
estimate for excess and obsolete inventory is dependent on expected future use and requires management judgement. The level of the
estimate is assessed by considering the recent sales experience, the aging of inventories, and other factors that affect inventory obsolescence.
Warrants
We
apply relevant accounting guidance for warrants to purchase our stock based on the nature of the relationship with the counterparty.
For warrants issued to investors or lenders in exchange for cash or other financial assets, we follow guidance issued within ASC 480,
Distinguishing Liabilities from Equity (“ASC 480”), and ASC 815, Derivatives and Hedging (“ASC 815”),
to assist in the determination of whether the warrants should be classified as liabilities or equity. Warrants that are determined to
require liability classifications are measured at fair value upon issuance and are subsequently remeasured to their then fair value at
each subsequent reporting period with changes in fair value recorded in current earnings. Warrants that are determined to require equity
classifications are measured at fair value upon issuance and are not subsequently remeasured unless they are required to be reclassified.
See “Note 10—Warrants” in our accompanying consolidated financial statements for information on the warrants.
Changes in assumptions used to estimate fair value could occur from stock pricing volatility depending on our performance and our position
in the industry and changes in market interest rates which can result in materially different results.
Equity-Based
Compensation
We
use the Black-Scholes option-pricing model to determine
the fair value of option grants. In estimating fair value, management is required to make certain assumptions and estimates such as the
expected life of units, volatility of our future share price, risk-free rates, future dividend yields and estimated forfeitures
at the initial grant date. Restricted stock unit awards are valued based on the closing trading price of our common stock
on the date of grant. Changes in assumptions used to estimate fair value could occur from stock pricing volatility depending on our
performance and our position in the industry and changes in market interest rates which can result in materially different results.
Income
Taxes
We
account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted
rates. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date.
We
recognize the financial statement effect of an uncertain income tax position when it is more likely than not, based on the technical
merits, that the position will be sustained upon examination. Recognized income tax positions are measured at the largest amount that
is greater than 50% likely to be realized. A valuation allowance is recorded to reduce deferred income tax assets to an amount, which
in the opinion of management is more likely than not to be realized.
Management
judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance
recorded against our deferred tax assets. We consider factors such as the cumulative income or loss in recent years; reversal of deferred
tax liabilities; projected future taxable income exclusive of temporary differences; the character of the income tax asset, including
income tax positions; tax planning strategies and the period over which we expect the deferred tax assets to be recovered in the determination
of the valuation allowance. In the event that actual results differ from these estimates or we adjust our estimates in the future, we
may need to adjust our valuation allowance, which could materially impact our financial position and results of operations.
Leases
Acquired right-of-use assets and assumed lease
liabilities are measured based on the remaining lease payments over the remaining portion of the lease term. As our leases do not provide
an implicit rate, our incremental borrowing rate is used as a discount rate in determining the present value of lease payments.
Our incremental borrowing rate was determined by comparing current low- and high-end mortgage loan rates and calculating an average.
For our new Damonte lease, to be conservative in our estimate, we chose to use the high-end average as our incremental borrowing rate.
Non-GAAP
Financial Measures
This
Registration Statement includes a non-GAAP measure that we use to supplement our results presented in accordance with U.S. GAAP. EBITDA
is defined as earnings before interest and other income (expenses), income taxes, and depreciation and amortization. Adjusted EBITDA
is calculated as EBITDA adjusted for stock-based compensation, employee separation expenses, costs associated with the June 2023 Offering, promissory note forgiveness, and change
in the fair market value of warrant liabilities. Adjusted EBITDA is a performance measure that we believe is useful to investors and analysts because it illustrates the
underlying financial and business trends relating to our core, recurring results of operations and enhances comparability between periods.
Adjusted
EBITDA is not a recognized measure under U.S. GAAP and is not intended to be a substitute for any U.S. GAAP financial measure and, as
calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within
the same industry. Investors should exercise caution in comparing our non-GAAP measure to any similarly titled measure used by other
companies. This non-GAAP measure excludes certain items required by U.S. GAAP and should not be considered as an alternative to information
reported in accordance with U.S. GAAP.
The table below presents our adjusted EBITDA, reconciled to net loss
for the three months ended March 31, 2024, and March 31, 2023.
| |
Three months ended March 31, | |
| |
2024 | | |
2023 | |
| |
(in thousands) | |
Net income (loss) | |
$ | (10,367 | ) | |
$ | 4,775 | |
Interest Expense | |
| 4,760 | | |
| 3,856 | |
Depreciation and Amortization | |
| 332 | | |
| 297 | |
EBITDA | |
| (5,275 | ) | |
| 8,928 | |
Adjusted for: | |
| | | |
| | |
Stock-Based Compensation(1) | |
| 266 | | |
| 4,487 | |
Change
in fair market value of warrant liability (2) | |
| (236 | ) | |
| (18,523 | ) |
Adjusted EBITDA | |
$ | (5,245 | ) | |
$ | (5,108 | ) |
(1) |
Stock-Based
Compensation is comprised of costs associated with option and RSU grants made to our employees, consultants and Board members. |
|
|
(2) |
Change
in fair market value of warrant liabilities represents the change in fair value for the three months ended March 31, 2024 and March
31, 2023. |
The
table below presents our adjusted EBITDA, reconciled to net (loss) income for the years ended December 31, 2023 and 2022.
|
|
Years
ended December 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in
thousands) |
|
Net
(loss) |
|
$ |
(13,817 |
) |
|
$ |
(39,991 |
) |
Interest
Expense |
|
|
16,015 |
|
|
|
6,979 |
|
Taxes |
|
|
(26 |
) |
|
|
(709 |
) |
Depreciation |
|
|
1,237 |
|
|
|
891 |
|
EBITDA |
|
|
3,409 |
|
|
|
(32,830 |
) |
Adjusted
for: |
|
|
|
|
|
|
|
|
Stock-Based
Compensation(1) |
|
|
6,710 |
|
|
|
2,467 |
|
June
2023 Offering Costs (2) |
|
|
904 |
|
|
|
- |
|
Promissory
Note Forgiveness(3) |
|
|
- |
|
|
|
469 |
|
Loss
on Disposal of Assets |
|
|
712 |
|
|
|
56 |
|
Separation
Agreement(4) |
|
|
720 |
|
|
|
1,197 |
|
Business
Combination Expenses(5) |
|
|
- |
|
|
|
21,337 |
|
Debt
extinguishment (6) |
|
|
- |
|
|
|
4,824 |
|
Change
in fair market value of warrant liability (7) |
|
|
(29,582 |
) |
|
|
(5,446 |
) |
Adjusted
EBITDA |
|
$ |
(17,127 |
) |
|
$ |
(7,926 |
) |
(1) |
Stock-Based
Compensation is comprised of costs associated with option and RSU grants made to our employees, consultants and Board members. |
|
|
(2) |
June
2023 Offering Costs related to the warrant liability are
comprised of fees and expenses, including legal, accounting, and other expenses associated with this offering. |
|
|
(3) |
Promissory
Note Forgiveness is comprised of the loan that was forgiven, prior to the Business Combination, in connection with the promissory
note, with a maturity date of March 1, 2026, between us and John Marchetti, our Senior Vice President of Operations and our former
Chief Financial Officer. |
|
|
(4) |
Separation
Agreement in 2022 is comprised of $1.2 million in cash severance associated with the Separation Agreement, dated October 25,
2022, as amended on November 14, 2022, between us and Sean Nichols, our former Chief Operating Officer. Separation Agreement in
2023 is comprised of $720 in cash severance associated with separation agreement dated April 26, 2023, between us and our former
Chief Legal Officer. |
|
|
(5) |
Business
Combination Expenses is comprised of fees and expenses, including legal, accounting, and others associated with the Business Combination. |
|
|
(6) |
Debt
extinguishment expenses are comprised of expenses incurred in connection with the early debt repayment of the Series 2021-6 Notes
that occurred in conjunction with the Business Combination. |
|
|
(7) |
Change
in fair market value of warrant liabilities represents the change in fair value from the date the warrants were issued through December
31, 2023. |
Liquidity
and Capital Resources
Liquidity
describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including
working capital needs, debt service, acquisitions, contractual obligations and other commitments. We assess liquidity in terms of our
cash flows from operations and their sufficiency to fund our operating and investing activities. As of March 31, 2024,
we had cash totaling $8.5 million.
We
expect our capital expenditures and working capital requirements to increase materially in the near future, as we continue our research
and development efforts (particularly those related to solid-state lithium-ion battery development), expand our production lines, scale
up production operations and look to enter into adjacent markets for our batteries (with operating expenses expected to increase across
all major expense categories). We expect to deploy a significant amount of capital to continue our optimization and commercialization
efforts dedicated to our solid-state technology development, as well as continued investment to automate and increase the production
capacity of our existing assembly operation, expansion of our facilities and new strategic investments. To date, our focus has been on
seeking to prove the fundamental soundness of our manufacturing techniques and our solid-state chemistry. Moving forward, our solid-state
related investments will focus on chemistry optimization and establishing a pilot line for pouch cell production. Over the next two to
three years, we expect to spend in excess of $50 million on solid-state development and cell manufacturing technologies. In connection
with the contraction of our business and uncertainty around the timing of future needs, we reduced our purchase
activities in 2023. As a result, our inventory balance at March 31, 2024 decreased by $5.2 million to $33.6
million, compared to $38.8 million at December 31, 2023.
We
expect that we will need to raise additional funds, including through the use of the ChEF Equity Facility and the issuance of equity,
equity-related or debt securities or by obtaining additional credit from financial institutions to fund, together with our principal
sources of liquidity, ongoing costs, such as research and development relating to our solid-state batteries, expansion of our facilities,
and new strategic investments. If such financings are not available, or if the terms of such financings are less desirable than we expect,
we may be forced to take actions to reduce our capital or operating expenditures, including by not seeking potential acquisition opportunities,
eliminating redundancies, or reducing or delaying our production facility expansions, which may adversely affect our business, operating
results, financial condition and prospects. Further, any future debt or equity financings may be dilutive to our current stockholders.
Financing
Obligations and Requirements
On
November 24, 2021, we issued $45 million of fixed rate senior notes, secured by among other things, a security interest in our intellectual
property. As part of the Business Combination, we entered into the Term Loan, the proceeds of which were used, in part, to repay
the $45 million fixed rate senior notes, and ChEF Equity Facility. As of December 31, 2023, we had $76 million outstanding under the
Term Loan.
The
Term Loan proceeds were used to: (i) support the Business Combination, (ii) prepay the fixed rate senior notes at closing of the Business
Combination, (iii) pay fees and expenses in connection with the foregoing, (iv) to provide additional growth capital and (v) for other
general/corporate purposes. The Term Loan will mature on October 7, 2026, or the Maturity Date, and will be subject to quarterly amortization
of 5% per annum beginning 24 months after issuance. The definitive documents for the Term Loan incorporate certain mandatory prepayment
events and certain affirmative and negative covenants and exceptions hereto. The financial covenants for the Term Loan include a maximum
senior leverage ratio covenant, a minimum liquidity covenant, a springing fixed charge coverage ratio covenant, and a maximum capital
expenditures covenant. On March 29, 2023, September 29, 2023, December 29, 2023 and May 13, 2024, we obtained waivers from
Administrative Agent and EICF Agent LLC and certain third-party financing source of our failure to satisfy the Tests
under the Term Loan during the quarters ended March 31, 2023, September 30, 2023, December 31, 2023 and March 31, 2024,
respectively. On March 31, 2024 and April 29, 2024, we received additional waivers from the Administrative Agent and the Term Loan Lenders
in regard to our compliance with the liquidity requirement under the Term Loan as of the last day of the fiscal quarter ended March 31,
2024 and as of the last fiscal day for the month ended April 30, 2024, respectively. However, it is probable that we will fail to meet
these covenants within the next twelve months. In accordance with U.S. GAAP, we reclassified our notes payable from a long-term liability
to a current liability. The Term Loan accrues interest (i) until April 1, 2023 at a per annum rate equal to adjusted SOFR is a margin
equal to 13.5%, of which 7% will be payable in cash and 6.5% will be paid in-kind, (ii) thereafter until October 1, 2024, at a per annum
rate equal to adjusted SOFR plus 7% payable in cash plus an amount ranging from 4.5% to 6.5%, depending on the senior leverage ratio
of the consolidated company. In each of the foregoing case, adjusted SOFR will be no less than 1%.
We
may elect to prepay all or any portion of the amounts owed prior to the Maturity Date, provided that we provide notice to the Administrative
Agent and the amount is accompanied by the applicable prepayment premium, if any. Prepayments of the Term Loan are required to be accompanied
by a premium of 5% of the principal amount so prepaid if made prior to the October 7, 2023, 3% if made on and after October 7, 2023 but
prior to October 7, 2024, 1% if made after October 7, 2024 but prior to October 7, 2025, and 0% if made on or after October 7, 2025.
If the Term Loan is accelerated following the occurrence of an event of default, Legacy Dragonfly is required to immediately pay to lenders
the sum of all obligations for principal, accrued interest, and the applicable prepayment premium.
Pursuant
to the Term Loan Agreement, we have guaranteed the obligations of Legacy Dragonfly and such obligations will be guaranteed by any of
Legacy Dragonfly’s subsidiaries that are party thereto from time to time as guarantors. Also pursuant to the Term Loan Agreement,
the Administrative Agent was granted a security interest in substantially all of the personal property, rights and assets of us as and
Legacy Dragonfly to secure the payment of all amounts owed to lenders under the Term Loan Agreement. In addition, we entered into a Pledge
Agreement pursuant to which we pledged to the Administrative Agent our equity interests in Legacy Dragonfly as further collateral security
for the obligations under the Term Loan Agreement. At the closing of the Business Combination, we issued to the Term Loan Lenders (i)
the Penny Warrants and (ii) the $10 Warrants.
Pursuant
to the Purchase Agreement, on the terms of and subject to the satisfaction of the conditions in the Purchase Agreement, including the
filing and effectiveness of a registration statement registering the resale by CCM of the shares of common stock issued to it under the
Purchase Agreement, we will have the right from time to time at our option to direct CCM to purchase up to a specified maximum amount
of shares of common stock, up to a maximum aggregate purchase price of $150 million over the term of the ChEF Equity Facility. In connection
with the ChEF Equity Facility, we have filed a registration statement registering the resale of up to 21,512,027 shares that may
be resold into the public markets by CCM, which represented approximately 36% of the shares of our common stock outstanding
as of December 31, 2023. During the year ended December 31, 2022, we did not sell any shares of our common stock under
the ChEF Equity Facility. During the year ended December 31, 2023, we issued and sold approximately 588,500 shares of our
common stock under this facility, resulting in net cash proceeds of $1,278,566. From January 1, 2024 through May 13, 2024, we did
not issue any shares of common stock under the ChEF Equity Facility. Any sales of such shares into the public market could have a
significant negative impact on the trading price of our common stock. This impact may be heightened by the fact that sales to CCM will
generally be at prices below the current trading price of our common stock. If the trading price of our common stock does not recover
or experiences a further decline, sales of shares of common stock to CCM pursuant to the Purchase Agreement may be a less attractive
source of capital and/or may not allow us to raise capital at rates that would be possible if the trading price of our common stock were
higher.
On
January 24, 2024, we issued the January Note in the Principal Amount of $1.0 million to Brian Nelson, one of our directors,
in a private placement in exchange for cash in an equal amount. The January Note became due and payable in full on February
5, 2024. We were also obligated to pay the January Loan Fee in the amount of $50,000 to Mr. Nelson on February 5,
2024. The January Principal Amount of the January Note and the January Loan Fee were paid in full on February 1,
2024. On February 27, 2024, we issued the February Note to Brian Nelson in the February Principal Amount of $1.7 million in a private
placement in exchange for cash in an equal amount. The February Note became due and payable in full on March 1, 2024. We were also obligated
to pay the February Loan Fee in the amount of $85,000 to Mr. Nelson on March 1, 2024. The February Principal Amount of the February Note
and the February Loan Fee were paid in full on March 1, 2024.
We
have also filed a registration statement registering the resale of up to 47,428,544 shares and 12,266,971 warrants to purchase
common stock that may be resold and/or issued into the public markets, which represents approximately 82% of the shares of
our common stock outstanding as of March 31, 2024. The selling securityholders will determine the timing, pricing and
rate at which they sell such shares into the public market. Although the current trading price of our common stock is below $10.00 per
share, which was the sales price for units in the CNTQ IPO, certain of the selling security holders have an incentive to sell
because they purchased shares and/or warrants at prices below the initial public offering price and/or below the recent trading prices
of our securities. Additionally, while sales by such investors may experience a positive rate of return based on the trading price at
the time they sell their shares, the public securityholders may not experience a similar rate of return on the securities they purchased
due to differences in the prices at which such public securityholders purchased their shares and the trading price. Given the substantial
number of shares of common stock being registered for potential resale by the selling securityholders pursuant to such prospectus, the
sale of shares by the selling securityholders, or the perception in the market that the selling securityholders of a large number of
shares intend to sell shares, may increase the volatility of the market price of our common stock, may prevent the trading price of our
securities from exceeding the CNTQ IPO offering price and may cause the trading prices of our securities to experience a further
decline.
In June 2023, we completed the June 2023 Offering,
which provided net proceeds to us, including the partial over-allotment option exercise, of approximately $20.7 million. In July 2023,
upon a request from our lenders under the Term Loan Agreement, we repaid $5.3 million to satisfy a portion of its outstanding principal.
In 2024, we identified an underpayment of tariffs
to CBP in the amount of approximately $1.58 million in the aggregate, related to the improper classification and valuation of certain
of the products used in our batteries. We have reported the underpayment to CBP.
Going
Concern
For
the year ended December 31, 2023, we incurred losses and had a negative cash flow from operations. As of December 31, 2023,
we had approximately $12.7 million in cash and cash equivalents and working capital of $15.5 million. For the quarter ended March 31, 2024, we generated a net loss of $10.4 million and had a negative cash flow from
operations. As of March 31, 2024, we had approximately $8.5 million in cash and cash equivalents and working capital of $4.2 million.
Under
the Term Loan Agreement, we are obligated to comply with certain financial covenants, which include maintaining a maximum senior leverage
ratio, minimum liquidity, a springing fixed charge coverage ratio, and maximum capital expenditures. On March 29, 2023,
September 29, 2023, December 29, 2023 and May 13, 2024, we obtained waivers from our Administrative Agent and Term Loan Lenders of our failures to satisfy the
fixed charge coverage ratio and maximum senior leverage ratio with respect to the minimum cash requirements under the Term Loan for
the quarters ended, March 31, 2023, September 30, 2023, December 31, 2024 and March 31, 2024, respectively. On
March 31, 2024 and April 29, 2024, we received additional waivers from our Administrative Agent and Term Loan Lenders in regard to
our compliance with our liquidity requirement under the Term Loan as of the last day of the fiscal quarter ended March 31, 2024 and as
of the last day of the fiscal month ended April 30, 2024, respectively. It is probable that we will fail to meet these covenants
within the next twelve months. If we are unable to comply with the financial covenants in our loan agreement, the Term Loan Lenders have
the right to accelerate the maturity of the Term Loan. These conditions raise substantial doubt about our ability to continue as a going
concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our 2023
consolidated financial statements, with respect to this uncertainty
In
addition, we may need to raise additional debt and/or equity financing to fund our operations and strategic plans and meet our financial
covenants. We have historically been able to raise additional capital through issuance of equity and/or debt financing and we intend
to use the ChEF Equity Facility and raise additional capital as needed. However, we cannot guarantee that we will be able to raise additional
equity, contain expenses, or increase revenue, and comply with the financial covenants under the Term Loan. If such financings are not
available, or if the terms of such financings are
less desirable than we expect, we may be forced to take actions to reduce our capital or operating expenditures, including by not seeking
potential acquisition opportunities, eliminating redundancies, or reducing or delaying our production facility expansions, which may
adversely affect our business, operating results, financial condition and prospects. Further, future debt or equity financings may
be dilutive to our current stockholders.
Cash
Flows for the Three months ended March 31, 2024, and March 31, 2023
| |
Three months ended March 31, | |
| |
2024 | | |
2023 | |
| |
(in thousands) | |
Net Cash (used in)/provided by: | |
| | | |
| | |
Operating Activities | |
$ | (3,395 | ) | |
$ | (3,838 | ) |
Investing activities | |
$ | (817 | ) | |
$ | (589 | ) |
Financing activities | |
$ | - | | |
$ | 2,437 | |
Operating
Activities
Net cash used in operating activities was $3.4
million for the three months ended March 31, 2024, primarily due to a net loss of $10.4 million partially offset by $1.3 million of payment
in-kind interest accrued on the term loan and $5.2 million decrease in inventory as a result of management’s decision to lower
overall stocking levels to adjust for more modest demand.
Net cash used in operating activities was $3.8
million for the three months ended March 31, 2023. Net income of $4.8 million was offset by $11.8 million in operating adjustments, primarily
due to a $18.5 million change in the fair market value of warrant liability and an increase in working capital of $3.2 million as a result
of an increase accounts payable offset by an increase in inventory and accounts receivable.
Investing
Activities
Net cash used in investing activities was $0.8
million for the three months ended March 31, 2024, as compared to net cash used in investing activities of $0.6 million for the three
months ended March 31, 2023. The increase in cash used in investing activities was primarily due to an increase in capital equipment
expenses to support our core battery business and ongoing efforts to develop solid-state battery technology and manufacturing process.
Financing
Activities
There was zero net cash provided in financing
activities, proceeds of $2.7 million note payable was subsequently repaid for the three months ended March 31, 2024, as compared to net
cash provided by financing activities of $2.4 million for the three months ended March 31, 2023 which consisted of $1.0 million note
payable and proceeds related to public warrants.
Cash
Flows for the Years ended December 31, 2023 and 2022
| |
Years ended December 31, | |
| |
2023 | | |
2022 | |
Net Cash provided by/(used in): | |
(in thousands) | |
Operating Activities | |
$ | (17,706 | ) | |
$ | (45,696 | ) |
Investing activities | |
$ | (6,885 | ) | |
$ | (6,827 | ) |
Financing activities | |
$ | 19,523 | | |
$ | 41,674 | |
Operating
Activities
Net cash used in operating activities was $17.7
million for the year ended December 31, 2023, primarily due to a net loss during the period and the change in fair market value of the
warrant liability, partially offset by a decrease in inventory as a result of management’s decision to lower overall stocking levels
to adjust for more modest demand.
Net
cash used in operating activities was $45.7 million
for the year ended December 31, 2022 primarily due to a net loss during the period, largely driven by Business Combination expenses,
and an increase in purchased inventory to support future growth and to protect against potential supply disruptions.
Investing
Activities
Net
cash used in investing activities was $6.9 million for the year ended December 31, 2023, as compared to $6.8 million for the year
ended December 31, 2022. The cash used in investing activities was primarily driven by capital expenditures to support our core
battery business and our ongoing efforts to develop solid-state battery technology and manufacturing processes.
Financing
Activities
Net cash provided by financing activities was
$19.5 million for the year ended December 31, 2023, primarily as a result of proceeds $20.7 million from the June 2023 Offering.
Net
cash provided by financing activities was $41.7 million for the year ended December 31, 2022, primarily as a result of proceeds from
the $75.0 million term loan as part of the Business Combination, and $15.0 million from the strategic investment made by THOR,
partially offset by a $45.0 million expense for the repayment of the senior secured notes.
Contractual
Obligations
Our
estimated future obligations consist of short-term and long-term operating and financing lease liabilities. As of March 31,
2024, we had $1.7 million in short-term operating lease liabilities and $22.8 million in long-term
operating lease liabilities.
As disclosed above, we have a Term Loan and as of March 31, 2024, the principal
amount outstanding under the Term Loan was $69.7 million.
As
disclosed above, consistent with the Debt Commitment Letter dated May 15, 2022 by and between CCM 5, and EICF EIP, in connection with
the Closing, CNTQ, Legacy Dragonfly and the Initial Term Loan Lenders entered into the Term Loan Agreement setting forth the
terms of a senior secured term loan facility in an aggregate principal amount of $75 million. The Chardan Lender backstopped its
commitment under the Debt Commitment Letter by entering into a Backstop Commitment Letter, with the Backstop Lender, pursuant to which
the Backstop Lender committed to purchase from the Chardan Lender the Backstopped Loans immediately following the issuance of
the Term Loan on the Closing Date. Pursuant to an assignment agreement, the Backstopped Loans were assigned by CCM 5 to the Backstop
Lender on the Closing Date.
Pursuant
to the terms of the Term Loan Agreement, the Term Loan was advanced in one tranche on the Closing Date. The proceeds of the Term Loan
were used (i) to refinance on the Closing Date prior indebtedness, (ii) to support thine Business Combination under the Business Combination
Agreement, (iii) for working capital purposes and other corporate purposes, and (iv) to pay any fees associated with transactions contemplated
under the Term Loan Agreement and the other loan documents entered into in connection therewith, including the transactions described
in the foregoing clauses (i) and (ii) and fees and expenses related to the business combination. The Term Loan amortizes in the amount
of 5% per annum beginning 24 months after the Closing Date and matures on the fourth anniversary of the Closing Date (“Maturity
Date”). The Term Loan accrues interest (i) until April 1, 2023, at a per annum rate equal to the adjusted SOFR plus a margin equal
to 13.5%, of which 7% will be payable in cash and 6.5% will be paid in-kind, (ii) thereafter until October 1, 2024, at a per annum rate
equal to adjusted SOFR plus 7% payable in cash plus an amount ranging from 4.5% to 6.5%, depending on the senior leverage ratio of the
consolidated company, which will be paid-in-kind and (iii) at all times thereafter, at a per annum rate equal to adjusted SOFR plus a
margin ranging from 11.5% to 13.5% payable in cash, depending on the senior leverage ratio of the consolidated company. In each of the
foregoing cases, adjusted SOFR will be no less than 1%.
JOBS
Act Accounting Election
As
an emerging growth company under the JOBS Act, we are eligible to take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies that are not emerging growth companies. We have elected not to opt out of
such extended transition period. Accordingly, when an accounting standard is issued or revised and it has different application
dates for public or private companies, we, as an emerging growth company, will adopt the new or revised accounting standard
at the time private companies adopt the new or revised accounting standard, unless early adoption is permitted by the
accounting standard, and we elect early adoption. This may make comparison of our financial statements with another public
company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended
transition period difficult or impossible because of the potential differences in accounting standards used.
MANAGEMENT
The
following table sets forth certain information regarding our executive officers and directors as of the date of this prospectus.
Name |
|
Age |
|
Position(s)
Held With Dragonfly |
Denis
Phares |
|
51 |
|
President,
Chief Executive Officer, Interim Chief Financial
Officer and Chairman of the Board |
Wade
Seaburg |
|
44 |
|
Chief
Revenue Officer |
Tyler
Bourns |
|
35 |
|
Chief
Marketing Officer |
Luisa
Ingargiola |
|
56 |
|
Lead
Independent Director |
Rick
Parod |
|
70 |
|
Director |
Karina
Montilla Edmonds |
|
53 |
|
Director |
Brian
Nelson |
|
53 |
|
Director |
Jonathan
Bellows |
|
48 |
|
Director |
Perry
Boyle |
|
60 |
|
Director |
Executive
Officers
Dr.
Denis Phares has served as our Chief Executive Officer and Chairman of our Board since October 2022. Dr. Phares is the
co-founder of Legacy Dragonfly and has served as Legacy Dragonfly’s
Chief Executive Officer and Chairman of the board of directors since 2012. From 2005 until 2012, Dr. Phares served as a faculty member
of the Aerospace & Mechanical Engineering Department at the University of Southern California, where he worked extensively on renewable
energy technologies and received tenure in 2010. Dr. Phares holds an M.B.A. from the University of Nevada — Reno,
an M.S. and a Ph.D. in Environmental Engineering Science from the California Institute of Technology and a B.S.
in Physics from Villanova University. Dr. Phares is qualified to serve on our Board based on his substantial business, leadership,
and management experience as the Chief Executive Officer and Chairman of our Board.
Wade Seaburg has served as our Chief Revenue
Officer since November 2022. Prior to the Business Combination, Mr. Seaburg served as an outside contractor for Legacy Dragonfly from
December 2018 through May 2021 and as the Director of Outside Sales and Business Development of Legacy Dragonfly from June 2021 through
October 2022. Previously, Mr. Seaburg served as a senior account representative within the Distribution Manufactured Structures Division
at WESCO International, Inc. (“WESCO”) (NYSE: WCC) from February 2004 to April 2016. After Mr. Seaburg’s time
with WESCO, he served as the founder and president of Structure Sales, a company focused on representing industry-leading suppliers to
OEMs in the RV and Marine markets, from May 2016 to May 2021. Mr. Seaburg graduated from Purdue University in May 2002 with a B.A. in
Industrial Engineering. After graduating from Purdue, Mr. Seaburg completed the Eaton Corporation’s (NYSE: ETN) distinguished Technical
Sales Training Program.
Tyler
Bourns has served as our Chief Marketing Officer since November 2022. Prior to the Business Combination, Mr. Bourns served as
the Senior Vice President of Marketing of Legacy Dragonfly from December 2021 through October 2022. Previously, Mr. Bourns was
the owner and served as the President of Bourns Productions Inc., a video production and marketing company focused on content
creation, messaging and strategy for various brands across multiple industries, for twelve years. During his time at Bourns Productions Inc.,
he oversaw the day-to-day business of the company, worked closely with clients and provided hands on service in the creation of video,
photography and graphic content, including for Legacy Dragonfly for the marketing of our Battle Born Batteries brand. In 2018, he was
awarded the AAF Reno Ad Person of the Year. A three-time Emmy Award Winner, he has produced and filmed thought-leading content for companies
such as Panasonic, GE Energy and Terrasmart. Mr. Bourns has also served on the Board of Directors for the Cordillera International Film
Festival since its inception in 2018.
Non-Employee
Directors
Luisa
Ingargiola has served as a member of our Board since October 2022. Prior to the Business Combination, Ms. Ingargiola served
on the board of directors of Legacy Dragonfly from August 2021 to October 2022. Since February 2017, Ms. Ingargiola has served as Chief
Financial Officer of Avalon GloboCare Corp. (NASDAQ: ALBT), a publicly listed bio-tech health care company. Prior to joining Avalon
GloboCare Corp., Ms. Ingargiola served as the Chief Financial Officer and Co-Founder of MagneGas Corporation from 2007 to 2018.
Ms. Ingargiola has also served as a director and Audit Committee Chair for various over-the-counter and Nasdaq companies. Ms.
Ingargiola has served as a member of the board of directors and as Audit Committee Chair for Progress Acquisition Corporation from
November 2020 to February 2023, as a member of the board of directors and as Audit Committee Chair for AgEagle Aerial Systems
Inc. (NYSE American: UAVS) from May 2018 to November 2022, as the Audit Committee Chair of Siyata Mobile (NASDAQ: SYTA) from December
2020 to December 2021, as a member of the board of directors and as Audit Committee Chair for Electrameccanica Vehicles Corp.
(Nasdaq: SOLO) (“Electrameccanica”) since March 2018 to March 2024, and following the sale of Electrameccanica to
XOS, Inc. (“XOS”) in March 2024, commenced as a director of XOS,, as a member of the board and Audit Committee Chair
for BioCorRx Inc. (OTC: BICX) since April 2018, and as a member of the board and Audit Committee Chair of Vision Marine Technologies,
Inc. (NASDAQ: VMAR) since December 2020. Ms. Ingargiola holds a M.B.A. in Health Administration from the University
of South Florida and a B.S. in Finance from Boston University. Ms. Ingargiola is qualified to serve on our Board based on her
previous roles serving as Chief Financial Officer for multiple companies and extensive experience serving on multiple boards of directors
for Nasdaq companies.
Rick
Parod has served as a member of our Board since October 2022. Mr. Parod currently serves as the CEO of AdeptAg, a company that serves
the controlled environment agriculture market. Prior to AdeptAg, Mr. Parod was the President and CEO and a director of the Lindsay Corporation,
a leading global manufacturer and distributor of irrigation and infrastructure equipment and technology, from 2000 to 2017. From 1997
to 2000, Mr. Parod served as the Vice President and General Manager of the Irrigation Division of The Toro Company, a leading worldwide
provider of outdoor turf, landscape, underground utility construction, irrigation and related equipment. Mr. Parod has also served as
a director and as a member of the audit committee, compensation committee and nominating and corporate governance committee of Alamo
Group Inc., a publicly listed company focusing on design, manufacturing, distribution, and service of equipment for infrastructure maintenance
and agriculture, since December 2017 as well as a director of Raven Industries, Inc. from December 2017 until its acquisition by CNH
Industrial N.V. in June 2022. Mr. Parod received a B.S. in accounting from Northern Illinois University and an M.B.A from Pepperdine
University. Mr. Parod is qualified to serve on our Board based on his experience in manufacturing operations, product development and
sales and marketing.
Karina
Montilla Edmonds, Ph.D. has served as a member of our Board since October 2022. Dr. Edmonds currently serves as the Senior Vice President
and Global Head of Academies and University Alliances at SAP SE, a leading producer of enterprise software for the management of business
operations. Prior to joining SAP SE in April 2020, Dr. Edmonds served as the University Relations Lead for Google Cloud at Google from
May 2017 through March 2020, where she facilitated research collaborations in AI. Before her time at Google, Dr. Edmonds served at the
California Institute of Technology as Executive Director for Institute Corporate Relations from April 2013 through April 2016. In April
2010, Dr. Edmonds was appointed as the U.S. Department of Energy’s first Technology Transfer Coordinator, and she served in that
position until April 2013. She has also held positions at the Jet Propulsion Laboratory, a NASA field center and leader in robotic space
exploration, as Director for Jet Propulsion Laboratory Technology Transfer and at TRW, Inc. (now Northrop Grumman Corporation, a publicly
listed multinational aerospace and defense technology company), as a Principal Investigator. Dr. Edmonds holds a B.S. in Mechanical Engineering
from the University of Rhode Island and an M.S. and Ph.D. in Aeronautical Engineering, with a minor in Material Science, from the California
Institute of Technology. Dr. Edmonds is also a registered patent agent with the U.S. Patent and Trademark Office. Dr. Edmonds serves
on the boards of the University of Rhode Island and the National Science Foundation’s Directorate for Engineering Advisory Committee,
and has previously served on the boards of the Institute for Pure and Applied Mathematics at the University of California, Los Angeles,
ConnectED California and the University of Rhode Island Foundation. Dr. Edmonds is qualified to serve on our Board based on her industry
leadership and expertise in technology transfer and commercialization.
Brian
Nelson has served as a member of our Board since October 2022. Prior to the Business Combination, Mr. Nelson served on
the board of directors of Legacy Dragonfly from April 2022 to October 2022. Mr. Nelson has served as the Chief Executive Officer of Precision
Surfacing Solutions Group (formerly known as the Lapmaster Group) since 2003 and as the President since 2002. Mr. Nelson was hired in
the sales department of Lapmaster in 1996 and he purchased the company in 2003. In 1996, Mr. Nelson served as a Sales Engineer for TII
Technical Education Systems, and from 1993 to 1995, he served as a Staff Engineer for Rust Environment & Infrastructure. Mr. Nelson
holds an M.B.A. in Entrepreneurship from the DePaul University Charles H. Kellstadt School of Business and a B.S. in Civil & Environmental
Engineering from Marquette University. He is a member of the Association of Manufacturing Technology and Young President’s Organization.
Mr. Nelson is qualified to serve on our Board based on his years of business experience as President and Chief Executive Officer
of Precision Surfacing Solutions Group and Lapmaster.
Jonathan Bellows has served as a member
of our Board since October 2022. Mr. Bellows currently serves as President of KORE Power, which acquired Northern Reliability in March
2022. He has served as President and Chief Executive Officer of Northern Reliability since April 2015. KORE Power is a publicly-traded
fully integrated energy storage manufacturing company, combining Northern Reliability’s energy storage technology with KORE Power’s
cell manufacturing capabilities. Mr. Bellows is also President and Chief Executive Officer of Nomad Transportable Power Systems, a provider
of commercial and industrial-scale mobile energy storage units, which was founded by affiliates of KORE Power and Northern Reliability.
Previously, Mr. Bellows was Vice President of Business and Sales at Sovernet Communications, a fiber-optic bandwidth infrastructure services
provider, from 2005 to 2015. Mr. Bellows graduated Northern Vermont University - Johnson in 1998, where he earned his B.A. in History.
Mr. Bellows is qualified to serve on our Board based on his energy storage industry expertise and operating and leadership experience.
Perry
Boyle has served as a member of our Board since October 2022. Prior to the Business Combination, he served on the board
of directors of CNTQ from August 2021 to October 2022. Previously, Mr. Boyle was with Point72 and its affiliates and predecessors from
2004 through his retirement in March 2020. He helped lead Point72’s launch as a registered investment advisor, raising over $6
billion in external capital. He originally joined S.A.C. Capital Advisors (“S.A.C.”) in 2004 as the firm’s
first director of research. In January 2013 he became head of equities and, in January 2015, he became head of discretionary investing
at Point72. From June 2016 through December 2017 he served as the President and Chief Investment Officer of Stamford Harbor Capital,
L.P., a company owned by businessman Steven A. Cohen. He returned to Point72 in January 2018. Prior to joining S.A.C., Mr. Boyle was
a founding partner of Thomas Weisel Partners from 1999 until 2004, and a managing director at Alex Brown & Sons from 1992 – 1999.
He began his career as an investment banker with Salomon Brothers Inc. Mr. Boyle is a member of the advisory board of the Center for
a New American Security, and a director of The US Friends of the International Institute for Strategic Studies (“IISS”).
He was a 2018 and 2019 delegate from the IISS to the Shangri-La Dialogue in Singapore. He is a council member of the Hoover Institution
and a Lionel Curtis member of Chatham House. Mr. Boyle currently serves as the Chairman of the BOMA Project, a poverty graduation program
for women, youth, and displaced persons in sub-Saharan Africa. He is also the President of the Affordable Housing Coalition of Ketchum,
an advocacy organization for workforce housing in Ketchum, Idaho. He received his B.A. in Economics from Stanford University, his M.B.A.
from Dartmouth College and a M.A. from the Fletcher School of Law and Diplomacy at Tufts University. Mr. Boyle is qualified to serve
on our Board based on his industry leadership and capital markets experience from research to fundraising.
Board
Composition
Our
Board currently consists of three classes of a total of seven directors. Our directors each serve staggered three-year
terms with one class being elected at each year’s annual meeting of stockholders, as follows:
|
● |
Class
A, which consists of Rick Parod and Karina Edmonds, whose terms will expire at the 2026 annual meeting of stockholders; |
|
|
|
|
● |
Class
B, which consists of Brian Nelson and Jonathan Bellows, whose terms will expire at the 2024 annual meeting of stockholders; and |
|
|
|
|
● |
Class
C, which consists of Denis Phares, Luisa Ingargiola and Perry Boyle, whose terms will expire at the 2025 annual meeting of stockholders. |
We
have no formal policy regarding board diversity. Our priority in selecting our Board members is the identification of members who will
further the interests of our stockholders through their established record of professional accomplishment, the ability to contribute
positively to the collaborative culture among Board members, knowledge of our business and understanding of the competitive landscape.
The
Board oversees our business and monitors the performance of our management. In accordance with our corporate governance procedures, the
Board does not involve itself in our day-to-day operations. Our executive officers and management oversee our day-to-day operations.
Our directors fulfill their duties and responsibilities by attending meetings of the Board, which are usually held on at least a quarterly
basis. Our directors also discuss business and other matters with other key executives and our principal external advisers (legal counsel,
auditors, financial advisors and other consultants).
Board
Leadership Structure and Role in Risk Oversight
Periodically, our Board will assess the roles
of Chairman and Chief Executive Officer, and the Board leadership structure to ensure the interests of Dragonfly and our stockholders
are best served. Our Board believes the current combination of the two roles is satisfactory at present. Dr. Phares, as our President,
Chief Executive Officer and Chairman, has extensive knowledge of all aspects of Dragonfly and our business. Our Board has appointed Ms.
Ingargiola as Lead Independent Director. We have no policy requiring the combination or separation of leadership roles and our governing
documents do not mandate a particular structure. This has allowed, and will continue to allow, our Board the flexibility to establish
the most appropriate structure for us at any given time.
Our Board is primarily responsible for overseeing
our risk management processes. The Board receives and reviews periodic reports from management, auditors, legal counsel, and others,
as considered appropriate regarding our assessment of risks. The Board focuses on the most significant risks we face and our general
risk management strategy, and also ensures that risks undertaken by us are consistent with the Board’s risk strategy. While the
Board oversees our risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities
is the most effective approach for addressing the risks we face and that our Board leadership structure supports this approach.
Director
Independence
Our common stock is listed on Nasdaq. Under the
rules of Nasdaq, a director will only qualify as an “independent director” if, in the opinion of that company’s board
of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out
the responsibilities of a director. In order to be considered independent for purposes of Rule 10A-3 of the Exchange Act, a member of
an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors,
or any other board committee, accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company
or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries.
Our Board has determined that Rick
Parod, Perry Boyle, Jonathan Bellows, Karina Montilla Edmonds, Brian Nelson, and Luisa Ingargiola are
an “independent directors” as such term is defined under the applicable rules of Nasdaq.
We have established an Audit Committee, a Compensation
Committee and a Nominating and Corporate Governance Committee. Our Board has determined that Ms. Ingargiola is an “audit
committee financial expert,” as defined under the applicable rules of the SEC, and that all members of the Audit Committee are
“independent” within the meaning of the applicable Nasdaq rule and the independence standards of Rule 10A-3 of the Exchange
Act. Each of the members of the Audit Committee meets the requirements for financial literacy under the applicable rules and regulations
of the SEC and Nasdaq.
Role
of the Board of Directors in Risk Oversight/Risk Committee
One
of the key functions of our Board is informed oversight of our risk management process. Our Board does not anticipate having
a standing risk management committee, but rather anticipates administering this oversight function directly through our Board
as a whole, as well as through various standing committees of our Board that address risks inherent in their respective areas
of oversight. In particular, our Board is responsible for monitoring and assessing strategic risk exposure and our Audit Committee
has the responsibility to consider and discuss our major financial risk exposures and the steps our management will take to monitor
and control such exposures, including guidelines and policies to govern the process by which risk assessment and management is undertaken.
The
Audit Committee also monitors compliance with legal and regulatory requirements. Our Compensation Committee also assess
and monitors whether our compensation plans, policies and programs comply with applicable legal and regulatory requirements.
Board
Committees
Our
Board has three standing committees — an Audit Committee, a Compensation Committee, and a Nominating
and Corporate Governance Committee. Copies of the charters for each committee are posted under the “Investors”
tab on our website, which is located at https://dragonflyenergy.com/.
Audit
Committee
The
Board has formed an Audit Committee, which currently consists
of Luisa Ingargiola, Rick Parod, and Perry Boyle. Each member of the Audit Committee is “independent” as that term is
defined under the applicable rules of the SEC and Nasdaq. The Board has determined that each Audit Committee member has sufficient
knowledge in financial and auditing matters to serve on the Audit Committee. In addition, our Board has determined that Ms. Ingargiola
qualifies as an audit committee financial expert within the meaning of SEC regulations and the Nasdaq Marketplace Rules.
Luisa
Ingargiola serves as the chair of the Audit Committee. The Audit Committee oversees and monitors our financial reporting process and
internal control system, reviews and evaluates the audit performed by our registered independent public accountants and reports to our
Board any substantive issues found during the audit. The Audit Committee will be directly responsible for the appointment, compensation
and oversight of the work of our registered independent public accountants. The Audit Committee reviews and approves all transactions
with affiliated parties. The Board has adopted a written charter for the Audit Committee.
Compensation
Committee
The
Board has formed a Compensation Committee which
consists of Luisa Ingargiola, Brian Nelson, and Rick Parod, all of whom are independent (as that term is defined under the Nasdaq
Marketplace Rules). Brian Nelson serves as the chair of the Compensation Committee. The Compensation Committee assists the Board
in fulfilling its oversight responsibilities relating to (i) corporate governance practices and policies and (ii) compensation matters,
including our directors and senior management’s compensation and the administration of our compensation plans. Our Board determined
that each of the members of the Compensation Committee are a non-employee director, as defined in Rule 16b-3 promulgated under
the Exchange Act and satisfies the independence requirements of Nasdaq.
Nominating
and Corporate Governance Committee
The Board has formed a Nominating and Corporate
Governance Committee, which currently consists of Karina Montilla Edmonds, Brian Nelson and Jonathan Bellows, all
of whom are independent (as that term is defined under the Nasdaq Marketplace Rules). Karina Montilla Edmonds serves as the chair
of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee assesses potential
candidates to fill perceived needs on the Board for required, skills, expertise, independence and other factors.
Nomination of Directors
The Nominating and Corporate Governance Committee
of the Board assesses potential candidates to fill perceived needs on the Board of Directors for required skills, expertise, independence
and other factors. A director candidate recommended by our stockholders will be considered in the same manner as a nominee recommended
by a Board member, management or other sources. Stockholders wishing to recommend a candidate for nomination should contact our Secretary
in writing at the Secretary of Dragonfly at 1190 Trademark Drive, #108, Reno, Nevada 89521. Our Nominating and Corporate Governance Committee
has discretion to decide which individuals to recommend for nomination as directors.
Code
of Conduct and Ethics
We have adopted a Code of Business
Conduct and Ethics that applies to all of our executive officers, financial and accounting officers, our directors, our financial
managers and all of our employees. The Board is committed to a high standard of corporate governance practices and, through its
oversight role, encourages and promotes a culture of ethical business conduct. A copy of our Code of Business Conduct and Ethics
is posted under the “Investors” tab on our website, which is located at https://dragonflyenergy.com/.
We will disclose any amendments to our Code of Conduct
and Ethics, or waivers of its requirements on our website identified above, or in filings under the Exchange Act.
Limitation
on Liability and Indemnification of Directors and Officers
Section
78.138 of the NRS provides that,
unless the corporation’s articles of incorporation provide otherwise, a director or officer will not be individually
liable unless the presumption that it is acting in good faith and on an informed basis with a view to the interests of the
corporation has been rebutted, and it is proven that (i) the director’s or officer’s acts or omissions constituted a
breach of his or her fiduciary duties, and (ii) such breach involved intentional misconduct, fraud, or a knowing violation
of the law.
Section 78.7502 of the NRS provides that a corporation
may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason
of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses,
including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with
the action, suit or proceeding if he:(a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person is liable pursuant
to NRS 78.138 or did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests
of the corporation, or that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was
unlawful.
Section
78.7502 of the NRS provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason
of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses,
including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him in connection with the defense or settlement
of the action or suit if he: (a) as not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter
as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action
or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.
Section
78.751 of the NRS provides that to the extent that a director, officer, employee or agent of a corporation has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to above, or in defense of any claim, issue or matter therein,
the corporation shall indemnify him against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection
with the defense.
Unless
otherwise restricted by the articles of incorporation, bylaws, or other agreement, Section 78.751 of the NRS permits a Nevada company
to indemnify its officers and directors against expenses incurred by them in defending a civil or criminal action, suit, or proceeding
as they are incurred and in advance of final disposition thereof upon receipt of an undertaking by or on behalf of the director or officer
to repay the amount if it is ultimately determined by a court of competent jurisdiction that the director or officer is not entitled
to be indemnified by the corporation. The articles of incorporation, bylaws, or other agreement may require a corporation to advance
such expenses upon receipt of such an undertaking. Section 78.751 of the NRS further permits a Nevada company to grant its directors
and officers additional rights of indemnification under its articles of incorporation, bylaws, or other agreement; provided, however,
that unless advanced or otherwise ordered by a court, indemnification may not be made to or on behalf of any director or officer finally
adjudged by a court, after exhaustion of appeals, to be liable for intentional misconduct, fraud, or a knowing violation of law that
was material to the cause of action.
Section
78.752 of the NRS provides that a Nevada company may purchase and maintain insurance or make other financial arrangements on behalf of
any person who is or was a director, officer, employee, or agent of the company, or is or was serving at the request of the company as
a director, officer, employee, or agent of another company, partnership, joint venture, trust, or other enterprise, for any liability
asserted against him and liability and expenses incurred by him in his capacity as a director, officer, employee, or agent, or arising
out of his status as such, whether or not the company has the authority to indemnify him against such liability and expenses.
Our
Charter provides that the Company shall to the fullest extent not prohibited by applicable law pay the expenses (including
attorneys’ fees) incurred by an indemnitee in defending or otherwise participating in any proceeding in advance of its final disposition;
provided, however, that, to the extent required by applicable law, such payment of expenses in advance of the final disposition of the
proceeding shall be made only upon receipt of an undertaking, by or on behalf of the indemnitee, to repay all amounts so advanced, without
interest, if it shall ultimately be determined by final adjudication from which there is no further right to appeal that the indemnitee
is not entitled to be indemnified.
In
addition, we have entered into indemnification agreements
with each of our directors and executive officers. These agreements, among other things, require us to indemnify our directors
and executive officers for certain expenses, including attorneys’ fees, judgments and fines incurred by a director or executive
officer in any action or proceeding arising out of their services as one of our directors or executive officers or any
other company or enterprise to which the person provides services at our request.
We
maintain a directors’ and officers’ insurance policy pursuant to which our directors and officers are insured against liability
for actions taken in their capacities as directors and officers. We believe these provisions in the Charter and the Bylaws and these
indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or control persons, in the
opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
EXECUTIVE
AND DIRECTOR COMPENSATION
This
section describes the material components of the executive compensation program for certain of our executive officers listed in the Summary
Compensation Table below (the “NEOs”) and directors. This discussion may contain forward-looking statements that are
based on our current plans, considerations, expectations and determinations regarding future compensation programs.
Our
compensation program is designed to align executives’ compensation with our business objectives and the creation of stockholder
value, while helping us to continue to attract, motivate and retain individuals who contribute to our long-term success. Compensation
for our executive officers has three primary components: base salary, an annual cash incentive bonus opportunity, and long-term equity-based
incentive compensation.
Summary Compensation Table – Fiscal Year
2023
The following table presents information regarding
the total compensation awarded to, earned by, or paid to each person serving as our Chief Executive Officer during the fiscal year ended
December 31, 2023, the two most highly-compensated executive officers (other than the Chief Executive Officer) who were serving as executive
officers during the fiscal years ended December 31, 2023 and December 31, 2022, and up to two additional individuals for whom disclosure
would have been provided but for the fact that such individuals were not serving as an executive officer as of December 31, 2023 for
services rendered in all capacities to us for the fiscal year ended December 31, 2023. These individuals are our named executive officers
(“NEOs”) for fiscal 2023.
| |
| | |
| | |
| | |
| | |
| | |
Non-Equity | | |
Non-Qualified | | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| | |
Incentive | | |
Deferred | | |
| | |
| |
Name and | |
| | |
| | |
| | |
Stock | | |
Option | | |
Plan | | |
Compensation | | |
All Other | | |
| |
Principal | |
| | |
Salary | | |
Bonus | | |
Awards | | |
Awards | | |
Compensation | | |
Earnings | | |
Compensation | | |
Total | |
Position | |
Year | | |
($) | | |
($)(1) | | |
($)(2) | | |
($)(3) | | |
($) | | |
($) | | |
($) | | |
($) | |
Dr. Denis Phares | |
2023 | | |
| 622,000 | | |
| — | | |
| 255,333 | | |
| — | | |
| — | (4) | |
| — | | |
| — | | |
| 877,333 | |
Chief Executive Officer, Interim Chief Financial Officer,
President | |
2022 | | |
| 682,000 | | |
| 806,207 | | |
| 1,531,545 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,019,7524 | |
Sean Nichols(5) | |
2023 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 615,891 | (6) | |
| 615,891 | |
Former Chief Operating Officer | |
2022 | | |
| 598,462 | | |
| 655,587 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 157,693 | (7) | |
| 1,411,742 | |
Wade Seaburg | |
2023 | | |
| 340,000 | | |
| — | | |
| 81,666 | | |
| — | | |
| — | (8) | |
| — | | |
| — | | |
| 421,666 | |
Chief Revenue Officer | |
2022 | | |
| 262,115 | | |
| 300,000 | | |
| 489,978 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,052,093 | |
Tyler Bourns | |
2023 | | |
| 280,000 | | |
| — | | |
| 39,333 | | |
| — | | |
| — | (9) | |
| — | | |
| — | | |
| 319,333 | |
Chief Marketing Officer | |
2022 | | |
| 167,500 | | |
| 90,000 | | |
| 235,995 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 493,495 | |
John Marchetti (10) | |
2023 | | |
| 227,692 | | |
| 175,000 | | |
| 107,667 | (10) | |
| — | | |
| — | (11) | |
| — | | |
| — | | |
| 510,359 | |
Former Senior Vice President, Operations, Former Chief
Financial Officer | |
2022 | | |
| 316,153 | | |
| 769,366 | | |
| 645,998 | | |
| — | | |
| — | | |
| — | | |
| 11,057 | (7) | |
| 1,742,574 | |
|
(1) |
The
amounts reported in this column represent discretionary bonuses awarded to each executive for performance during the fiscal years
ended December 31, 2023 and December 31, 2022. |
|
|
|
|
(2) |
The
amounts reported in this column reflect the grant date fair value of restricted stock awards granted to the NEOs for performance
during the fiscal years ended December 31, 2023 and December 31, 2022 under the 2022 Plan (as defined below)
and are accounted for in accordance with FASB ASC Topic 718. Please see the section titled “Stock-Based Compensation”
beginning on page F-11 of our Notes to Consolidated Financial Statements included elsewhere in this prospectus for
a discussion of the relevant assumptions used in calculating these amounts. |
|
|
|
|
(3) |
The
amounts reported in this column reflect the grant date fair value of stock option awards granted to the NEOs during the fiscal
years ended December 31, 2023 and December 31, 2022 under our stock incentive plans and are accounted for in accordance with
FASB ASC Topic 718. Please see the section titled “Stock-Based Compensation” beginning on page F-11 of our Notes
to Consolidated Financial Statements included elsewhere in this prospectus for a discussion of the relevant assumptions
used in calculating these amounts. |
|
|
|
|
(4) |
On
April 12, 2024, Dr. Phares received a contingent cash award in the amount of $510,667 for services performed in December 31, 2023,
which will not be paid out to Dr. Phares until we have achieved a minimum cash balance of $30,000,000, subject to his continued employment
on the date of payment. |
|
|
|
|
(5) |
On
November 4, 2022, we announced that Mr. Nichols would be stepping down as our Chief Operating Officer on November 7, 2022 |
|
|
|
|
(6) |
The
amount reported comprises of payments made to Mr. Nichols under his Separation Agreement (as defined below) and the transfer of the
title of a Company van during the year ended December 31, 2023. |
|
|
|
|
(7) |
The
amount reported comprises of payments made to Mr. Nichols under his Separation Agreement during the year ended December 31, 2022. |
|
|
|
|
(8) |
On
April 12, 2024, Mr. Seaburg received a contingent cash award in the amount of $163,333 for services performed in December 31, 2023,
which will not be paid out to Mr. Seaburg until we have achieved a minimum cash balance of $30,000,000, subject to his continued
employment on the date of payment. |
|
|
|
|
(9) |
On
April 12, 2024, Mr. Bourns received a contingent cash award in the amount of $78,668 for services performed in December 31, 2023,
which will not be paid out to Mr. Bourns until we have achieved a minimum cash balance of $30,000,000, subject to his continued employment
on the date of payment. |
|
|
|
|
(10) |
Mr.
Marchetti commenced employment as Legacy Dragonfly’s Chief Financial Officer on September 6, 2021. On August 20, 2023, upon
mutual agreement between us and Mr. Marchetti, Mr. Marchetti resigned from his position as our Chief Financial Officer. Mr. Marchetti
continued in the role of Senior Vice President, Operations until his employment was terminated on April 19, 2024. As a result, Mr.
Marchetti’s 239,259 RSUs were forfeited. |
|
|
|
|
(11) |
On
April 12, 2024, Mr. Marchetti received a contingent cash award in the amount of $215,333.33 for services performed in December 31,
2023, which was not to be paid out to Mr. Marchetti until we had achieved a minimum cash balance of $30,000,000, subject to his continued
employment on the date of payment. As a result of the termination of Mr. Marchetti’s employment, his contingent cash award
was forfeited. |
Outstanding
Equity Awards at Fiscal Year-End
The
following table provides information regarding outstanding options to acquire our common stock held by each of the NEOs as of December
31, 2023, including the vesting dates for the portions of these awards that had not vested as of that date. The NEOs did not hold
any other outstanding equity awards as of that date.
| |
Option Awards | |
| |
| | |
| | |
Equity | | |
| | |
|
| |
| | |
| | |
Incentive | | |
| | |
|
| |
| | |
| | |
Plan Awards: | | |
| | |
|
| |
Number of | | |
Number of | | |
Number of | | |
| | |
|
| |
Securities | | |
Securities | | |
Securities | | |
| | |
|
| |
Underlying | | |
Underlying | | |
Underlying | | |
| | |
|
| |
Unexercised | | |
Unexercised | | |
Unexercised | | |
Option | | |
Option |
| |
Options (#) | | |
Options (#) | | |
Unearned | | |
Exercise | | |
Expiration |
Name | |
Exercisable | | |
Unexercisable | | |
Options (#) | | |
Price ($) | | |
Date |
Dr. Denis Phares | |
| 177,316 | | |
| — | | |
| — | | |
| 0.32 | | |
12/5/2029 |
John Marchetti | |
| 132,995 | (1) | |
| 103,423 | | |
| — | | |
| 2.89 | | |
09/13/2031 |
Wade Seaburg | |
| 7,399 | | |
| — | | |
| — | | |
| 0.59 | | |
06/09/2030 |
| |
| 3,965 | (2) | |
| 2,443 | | |
| — | | |
| 0.59 | | |
10/19/2030 |
| |
| 51,716 | (3) | |
| 36,940 | | |
| — | | |
| 2.89 | | |
08/04/2031 |
| |
| 13,918 | (4) | |
| 16,989 | | |
| — | | |
| 2.89 | | |
12/06/2031 |
| |
| 4,555 | | |
| — | | |
| — | | |
| 2.89 | | |
12/06/2031 |
Tyler Bourns | |
| 27,716 | (5) | |
| 25,478 | | |
| — | | |
| 2.89 | | |
12/06/2031 |
|
(1) |
Stock
options vest as to 1/4th on September 10, 2022, with the remaining shares vesting in equal monthly installments over a
period of 36 months commencing on October 23641810, 2022. Mr. Marchetti’s employment with us ended on April 19, 2024. As a
result, Mr. Marchetti’s vested options were terminated and his unvested options were forfeited on April 19, 2024. |
|
(2) |
Stock
options vest as to 1/4th on October 14, 2021, with the remaining shares vesting in equal monthly installments over a period
of 36 months commencing on November 14, 2021. |
|
(3) |
Stock
options vest as to 1/4th on August 4, 2022, with the remaining shares vesting in equal monthly installments over a period
of 36 months commencing on September 4, 2022. |
|
(4) |
Stock
options vest as to 1/4th on December 6, 2021, with the remaining shares vesting in equal monthly installments over a period
of 36 months commencing on January 6, 2022. |
|
(5) |
Stock
options vest as to 1/4th on November 23, 2022, with the remaining shares vesting in equal monthly installments over a
period of 36 months commencing on December 23, 2022. |
Equity Grants
For services performed during the year ended December
31, 2023, on April 12, 2024, Dr. Phares was granted 567,407 restricted stock units (“RSUs”), Mr. Marchetti
was granted 239,259 RSUs, Mr. Seaburg was granted 181,481 RSUs, and Mr. Bourns was granted 87,407 RSUs. Each
of the RSUs granted will vest in three equal annual installments, with the first vesting date on the one (1) year anniversary of the
date of issuance and the following two vesting dates on each subsequent anniversary of the date of issuance, subject to
each employees’ continued employment as of each vesting date. In addition to the RSU awards, our Board also approved the following
cash awards to the above referenced employees: (i) $510,667 to Dr. Phares; (ii) $215,333 to Mr. Marchetti, (iii) $163,333 to Mr. Seaburg;
and (iv) $78,668 to Mr. Bourns. Each of the approved cash awards will not be paid out to the employees until we have achieved a minimum
cash balance of $30,000,000, and are subject to each employee’s continued employment on the date of payment.
As a result of the termination of Mr. Marchetti’s
employment, his 239,259 RSUs and cash award of $215,333.33 were forfeited.
Equity
Incentive Plans
As
of the Closing, our employees, consultants and directors held outstanding stock options for the purchase of up to 4,436,283 shares
of our common stock. Those options were granted under the Dragonfly Energy Corp. 2019 Stock Incentive Plan (the “2019 Plan”),
the Dragonfly Energy Corp. 2021 Stock Incentive Plan (the “2021 Plan”) and the 2022 Plan. As of the Closing,
these options were vested with respect to 1,623,990 shares and were unvested with respect to 2,812,293 shares. The exercise
prices of these options ranged from $0.37 per share to $4.08 per share and each of those options had a maximum term of 10 years from
the applicable date of grant.
The
following sections provide more detailed information concerning our benefit plans and, with respect to our equity compensation plans,
the shares that are available for future awards under these plans. Each summary below is qualified in its entirety by the full text of
the relevant plan document, which has been filed with the Securities and Exchange Commission as an exhibit to the Form S-1 Registration
Statement of which this prospectus is a part and is available through the Securities and Exchange Commission’s internet site at
http://www.sec.gov.
2019
Plan and 2021 Plan
Prior
to the Business Combination, we maintained the 2019 Plan and the 2021 Plan. Under the 2019 Plan and 2021 Plan, we were generally
authorized to grant options and other equity awards to our employees, directors, officers and consultants and those of our subsidiaries.
Options under these plans are either incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, or nonqualified
stock options. All options granted under the plans expire no later than ten years from their date of grant. No new awards may be granted
under the 2019 Plan or the 2021 Plan following the Business Combination.
Our
Compensation Committee administers the 2019 Plan and the 2021 Plan. As is customary in incentive plans of this nature, the number
of shares subject to outstanding awards under these plans and the exercise prices of those awards, are subject to adjustment in the event
of changes in our capital structure, reorganizations and other extraordinary events. In the event of a change in control, the plan administrator
may provide for outstanding options to either be assumed by the acquirer or successor entity or, if not assumed, to be cancelled upon
the transaction. Such adjustments were made to each of the then-outstanding options under the 2019 Plan and the 2021 Plan upon the Closing.
Our
Board may amend or terminate the 2019 Plan and the 2021 Plan at any time. The plans require that certain amendments specified
in the plan be submitted to stockholders for their approval.
2022
Equity Incentive Plan
We
maintain the 2022 Plan for purposes of granting equity-based awards to attract, motivate, retain and reward selected employees and other
eligible persons. Our Compensation Committee of the Board administers the 2022 Plan. The plan administrator has broad authority
to (without limitation):
|
● |
select
participants and determine the types of awards that they are to receive; |
|
● |
determine
the number of shares that are to be subject to awards and the terms and conditions of awards, including the price (if any) to be
paid for the shares or the award and establish the vesting conditions (if applicable) of such shares or awards; |
|
● |
cancel,
modify or waive our rights with respect to, or modify, discontinue, suspend or terminate any or all outstanding awards, subject to
any required consents; |
|
● |
construe
and interpret the terms of the 2022 Plan and any agreements relating to the plan; |
|
● |
accelerate
or extend the vesting or exercisability or extend the term of any or all outstanding awards subject to any required consent; |
|
● |
subject
to the other provisions of the 2022 Plan, make certain adjustments to an outstanding award and authorize the termination, conversion,
substitution or succession of an award; and |
|
● |
allow
the purchase price of an award or shares of our common stock to be paid in the form of cash, check or electronic funds transfer,
by the delivery of previously-owned shares of our common stock or by a reduction of the number of shares deliverable pursuant to
the award, by services rendered by the recipient of the award, by notice and third party payment or cashless exercise on such terms
as the administrator may authorize or any other form permitted by law. |
A
total of 2,785,950 shares of our common stock have been initially authorized for issuance with respect to awards granted under the 2022
Plan. To the extent awards granted under the 2019 Plan and 2021 Plan are terminated or forfeited after the Business Combination without
shares being issued, the shares subject to such terminated or forfeited awards will be available for issuance under the 2022 Plan. The
share limit will also automatically increase on the first trading day in January of each year by an amount equal to lesser of (1) 4%
of the total number of outstanding shares of our common stock on December 31 in the prior year, or (2) such number as determined by our
Board. The total number of shares that may be issued pursuant to incentive stock options granted under the 2022 Plan is 84,212
shares. Any shares subject to awards that are not paid, delivered or exercised before they expire or are canceled or terminated,
or otherwise fail to vest, will become available for other award grants under the 2022 Plan. As of May 13, 2024, 3,554,985 awards
have been granted under the 2022 Plan, and 8,872,021 shares authorized under the 2022 Plan are available for award purposes.
Awards
under the 2022 Plan may be in the form of incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted
stock, stock units and other forms of awards including cash awards. Awards under the plan generally will not be transferable other than
by will or the laws of descent and distribution, except that the plan administrator may authorize certain transfers.
Nonqualified
and incentive stock options may not be granted at prices below the fair market value of the common stock on the date of grant. Incentive
stock options must have an exercise price that is at least equal to the fair market value of our common stock, or 110% of fair market
value of our common stock or incentive stock option grants to any 10% owner of our common stock, on the date of grant. The maximum term
of options and stock appreciation rights granted under the plan is 10 years. These and other awards may also be issued solely or in part
for services. Awards are generally paid in cash or shares of our common stock. The plan administrator may provide for the deferred payment
of awards and may determine the terms applicable to deferrals.
As
is customary in incentive plans of this nature, the number and type of shares available under the 2022 Plan and any outstanding awards,
as well as the exercise or purchase prices of awards, will be subject to adjustment in the event of certain reorganizations, mergers,
combinations, recapitalizations, stock splits, stock dividends or other similar events that change the number or kind of shares outstanding,
and extraordinary dividends or distributions of property to the stockholders. In no case (except due to an adjustment referred to above
or any repricing that may be approved by our stockholders) will any adjustment be made to a stock option or stock appreciation right
award under the 2022 Plan (by amendment, cancellation and regrant, exchange or other means) that would constitute a repricing of the
per-share exercise or base price of the award.
Generally,
and subject to limited exceptions set forth in the 2022 Plan, if we dissolve or undergo certain corporate transactions such as a merger,
business combination or other reorganization, or a sale of all or substantially all of its assets, all awards then-outstanding under
the 2022 Plan will become fully vested or paid, as applicable, and will terminate or be terminated in such circumstances, unless the
plan administrator provides for the assumption, substitution or other continuation of the award. The plan administrator also has the
discretion to establish other change in control provisions with respect to awards granted under the 2022 Plan. For example, the administrator
could provide for the acceleration of vesting or payment of an award in connection with a corporate event that is not described above
and provide that any such acceleration shall be automatic upon the occurrence of any such event.
Our
Board may amend or terminate the 2022 Plan at any time, but no such action will affect any outstanding award in any manner materially
adverse to a participant without the consent of the participant. Plan amendments will be submitted to stockholders for their approval
as required by applicable law or any applicable listing agency. The 2022 Plan is not exclusive - our Board and Compensation
Committee may grant stock and performance incentives or other compensation, in stock or cash, under other plans or authority.
The
2022 Plan will terminate on May 13, 2032. However, the plan administrator will retain its authority until all outstanding awards
are exercised or terminated.
Employee
Stock Purchase Plan
We
maintain the Employee Stock Purchase Plan (the “ESPP”) to provide an additional means to attract, motivate, retain
and reward employees and other eligible persons by allowing them to purchase additional shares of our common stock. The ESPP is designed
to allow our eligible employees and the eligible employees of our participating subsidiaries to purchase shares of our common stock,
at semi-annual intervals, with their accumulated payroll deductions.
Share
Reserve. A total of 2,464,400 shares of our common stock have been initially authorized for issuance under the ESPP. The share limit
will automatically increase on the first trading day in January of each year by an amount equal to lesser of (1) 1% of the total number
of outstanding shares of our common stock on December 31 in the prior year, (2) 1,500,000 shares, and (3) such number as determined by
our Board.
Offering
Periods. We currently expect the ESPP will have a series of successive six-month offering periods. However, the ESPP provides flexibility
for the plan administrator to establish, in advance of a particular offering period, a different duration for that offering period (not
less than three months nor greater than 27 months) or for that offering period to consist of one or more purchase periods.
Eligible
Employees. Individuals scheduled to work more than 20 hours per week for more than five calendar months per year may join an offering
period on the start date of that period. Employees may participate in only one offering period at a time.
Payroll
deductions. A participant may contribute up to 15% of his or her cash earnings through payroll deductions, and the accumulated deductions
will be applied to the purchase of shares on each semi-annual purchase date. Unless otherwise provided in advance by the plan administrator,
the purchase price per share will be equal to 85% of the fair market value per share on the start date of the offering period or, if
lower, 85% of the fair market value per share on the semi-annual purchase date. In no event may any participant purchase more than 10,000
shares on any purchase date. Change in Control. If we are acquired by merger or sale of all or substantially all of our assets or
more than 50% of our voting securities, then all outstanding purchase rights will automatically be exercised on or prior to the effective
date of the acquisition, unless the plan administrator provides for the rights to be settled in cash or exchanged or substituted on the
transaction. Unless otherwise provided in advance by the plan administrator, the purchase price will be equal to 85% of the market value
per share on the start date of the offering period in which the acquisition occurs or, if lower, 85% of the fair market value per share
on the purchase date.
Other
plan provisions. No new offering periods will commence on or after May 13, 2032. The Board may at any time amend, suspend
or discontinue the ESPP. However, certain amendments may require stockholder approval.
Named
Executive Officer Employment Agreements
We
have entered into employment agreements, dated as of October 11, 2022 with each of Dr. Phares and Mr. Marchetti. On November 7, 2022,
we entered into an employment agreement with each of Mr. Seaburg and Mr. Bourns.
Each
agreement provides for a three-year initial employment term, with automatic three-year renewal terms thereafter, subject to 90 days’
notice of non-renewal by either party. Each agreement also provides for the executive to receive an annual base salary (Dr. Phares — $622,000;
Mr. Marchetti — $370,000; Mr. Seaburg — $340,000; Mr. Bourns — $280,000)
and to be eligible for an annual bonus of up to a specified percentage of the executive’s base salary (Dr. Phares — 100%;
Mr. Marchetti — 63%; Mr. Seburg – 92%; Mr. Bourns – 30%). The executive is generally eligible
for an annual bonus only if he remains employed with us through the date the bonus is paid (or if the executive’s employment terminates
due to his death or disability during the year). The executive is also eligible to receive a long-term incentive award each fiscal year
with a grant-date value not less than a dollar amount specified in the agreement (Dr. Phares — $1,532,000; Mr. Marchetti — $646,000;
Mr. Seaburg — $490,000; Mr. Bourns — $236,000), with the terms and conditions of each
such award to be determined by the Compensation Committee. Each agreement also includes non-competition and non-solicitation covenants
that apply for 12 months following the executive’s termination of employment, and certain confidentiality and other covenants.
If
the executive’s employment is terminated by us without “cause” or by the executive for “good reason” (as
such terms are defined in the employment agreement) and other than a termination in connection with a change in control as described
below, the executive would be entitled to receive (i) cash severance equal to 1.5 times the executive’s annual base salary (in
the case of Dr. Phares) or 1.0 times the executive’s annual base salary (in the case of Mr. Marchetti, Mr. Seaburg and Mr. Bourns),
payable in installments over two years following the termination date, (ii) reimbursement of monthly COBRA premiums for the executive
and his dependents for up to 18 months (in the case of Dr. Phares) or 12 months (in the case of Mr. Marchetti, Mr. Seaburg and
Mr. Bourns), and (iii) vesting in full of any time-based equity awards granted by us to the executive (with any performance-based
awards to remain eligible to vest following termination if the applicable performance conditions are satisfied). In such circumstances,
Dr. Phares would also be entitled to receive payment of 1.5 times the annual bonus he would have received for the fiscal year in which
his termination occurs, pro-rated to reflect the portion of the fiscal year he was employed prior to his termination.
If,
during the period commencing three months before a change in control and ending 12 months after a change in control, the executive’s
employment is terminated by us without cause (or as a result of us not renewing the term of the agreement) or by the executive for good
reason, the executive would be entitled to receive the severance benefits described in the preceding paragraph (except that the cash
severance would be 1.5 times the executive’s base salary for Mr. Marchetti, Mr. Seaburg and Mr. Bourns, the severance
in each case would be payable in a lump sum rather than installments, and the pro-rated bonus provision for Dr. Phares described above
would not apply). In addition, the executive’s outstanding stock options granted by us would fully vest and be exercisable for
the remainder of the term of the option. In the event any of the executive’s benefits under the agreement would be subject to an
excise tax as a “parachute payment” under U.S. tax laws, the executive would be entitled to an additional payment equal to
the sum of the excise tax and any additional amount necessary to put the executive in the same after-tax position as if no excise tax
has been imposed.
In
each case, the executive’s right to receive the severance benefits described above is subject to him providing a release
of claims to us and his continued compliance with the restrictive covenants in favor of us in the agreement.
On
November 4, 2022, we announced that Sean Nichols, our Chief Operating Officer, would be stepping down to pursue other interests. His
last day of employment was November 7, 2022. We have entered into a separation and release agreement (the “Separation Agreement”)
with Mr. Nichols that became effective and fully irrevocable on November 2, 2022. Pursuant to the Separation Agreement, Mr. Nichols received
a cash payment of $100,000 in one installment in December 2022 and received a cash payment of $1,000,000 in 24 monthly installments
commencing in December 2022. Mr. Nichols’ outstanding equity awards granted by us fully vested and, in the case of options,
was exercisable for 12 months following his termination date. The Separation Agreement also provides we will pay a portion of
Mr. Nichols’ premiums to continue participation in our health insurance plans for up to 18 months following his termination. The
Separation Agreement includes a general release of claims by Mr. Nichols and certain restrictive covenants in favor of us, including
non-competition and non-solicitation covenants for 12 months following his termination date.
On
February 24, 2023, we entered into an amended and restated employment agreement with Mr. Marchetti to provide that Mr. Marchetti will
receive a minimum annual bonus of $175,000 for the fiscal year ended December 31, 2023. All other terms of the amended and restated
Agreement remain the same as the original agreement.
On
August 20, 2023, upon mutual agreement between us and Mr. Marchetti, Mr. Marchetti resigned from his position as our Chief Financial
Officer and continued in the role of Senior Vice President, Operations. In connection with Mr. Marchetti’s resignation, on August
20, 2023, the Board appointed Dr. Phares to succeed Mr. Marchetti as our Interim Chief Financial Officer.
Effective
April 12, 2024, we entered into amendments to the employment agreements with Dr. Phares, Mr. Marchetti, Mr. Seaburg and Mr. Bourns to
amend the terms of their annual equity compensation (the “Amended Employee Agreements”). The Amended Employee Agreements
allow us to issue a combination of cash and equity awards on an annual basis up to a specified amount ($1,532,000 for Dr. Phares, $646,000
for Mr. Marchetti, $490,000 for Mr. Seaburg, and $236,000 for Mr. Bourns), subject to approval and such other terms and conditions imposed
by the Compensation Committee.
Defined
Contribution Plans
As
part of our overall compensation program, we provide all full-time employees, including each of the NEOs, with the opportunity
to participate in a defined contribution 401(k) plan. The plan is intended to qualify under Section 401 of the Internal Revenue Code
so that employee contributions and income earned on such contributions are not taxable to employees until withdrawn. Employees may elect
to defer a percentage of their eligible compensation (not to exceed the statutorily prescribed annual limit) in the form of elective
deferral contributions to the plan. The 401(k) plan also has a “catch-up contribution” feature for employees aged 50 or older
(including those who qualify as “highly compensated” employees) who can defer amounts over the statutory limit that applies
to all other employees. Our current practice is to match 100% of an employee’s contributions to the plan up to 4% of the
employee’s compensation.
Director
Compensation
We
have adopted a policy that provides for cash and
equity compensation for members of our Board of directors who are not employed by us or any of our subsidiaries (our “Non-Employee
Directors”). The policy provides that each Non-Employee Director is entitled to receive the following cash compensation for
Board service, as applicable:
|
● |
$58,800
annual retainer for service as a Board member; |
|
● |
$20,000
additional annual retainer for service as Lead Independent Director; and |
|
● |
$20,000
additional annual retainer for service as Chair of the Audit Committee, $15,000 additional annual retainer for service as Chair of
the Compensation Committee, and $10,000 additional annual retainer for service as Chair of the Nominating and Corporate Governance
Committee. |
Under
the policy, directors are not paid fees for service as members on any of our standing committees, apart from the Chair fees discussed
above. Further, directors must attend at least 75% of all meetings of the Board and all meetings of each committee on which the
director sits to be eligible to receive any of the retainers specified above. These annual retainers are paid on a quarterly basis and
pro-rated if the director commences service in the applicable position after the start of a fiscal quarter.
Our
Compensation Committee also has discretion under the director compensation policy to grant Non-Employee Directors equity-based
awards under our 2022 Plan (or any successor equity compensation plan approved by our stockholders). It is currently expected
that Non-Employee Directors will receive an award of options, RSUs and/or cash with a value of $300,000 upon their initial appointment
to the Board and an award of options, RSUs and/or cash with a value of $100,000 on an annual basis thereafter. For each
award, the Compensation Committee will determine at the time of grant the methodology for converting the foregoing dollar amounts
to shares and the vesting schedule. The Compensation Committee may approve other grants of equity-based awards to Non-Employee
Directors from time to time, on such terms as the Compensation Committee may determine and subject to the applicable provisions
of our equity compensation plan then in effect.
Under
the policy, Non-Employee Directors are entitled to reimbursement from us for their reasonable travel (including airfare and ground transportation),
lodging and meal expenses incident to meetings of the Board or committees thereof or in connection with other Board-related
business.
Our
Board may change the terms of our director compensation policy from time to time.
Effective
on the October 7, 2022, we granted each of our Non-Employee Directors then serving of the Board (i.e. Jonathan Bellows,
Perry Boyle, Karina Montilla Edmonds, Luisa Ingargiola, Brian Nelson, and Rick Parod) an award of 30,000 RSUs under the
2022 Plan that are eligible to vest on the first anniversary of the grant date, subject to the director’s continued service on
the Board through the vesting date.
On
April 12, 2024, we granted each of our Non-Employee Directors then serving on the Board (i.e. Jonathan Bellows, Perry Boyle, Karina Montilla
Edmonds, Luisa Ingargiola, Brian Nelson, and Rick Parod) an award of 222,222 RSUs units under the 2022 Plan that are eligible to vest
in three equal annual installments, beginning on the first anniversary of the grant date, subject to the director’s continued service
on the Board through each vesting date.
Director
Compensation Table — Fiscal 2023
The
following table sets forth certain information concerning compensation awarded to, earned by, or paid to our Non-Employee Directors
for services on our Board during the year ended December 31, 2023. Dr. Phares did not receive any additional compensation
for his service on the Board during the year ended December 31, 2023.
Name | |
Fees Earned or Paid in Cash ($) | | |
Stock Awards ($)(1) | | |
Option Awards ($)(2) | | |
All Other Compensation ($) | | |
Total ($) | |
Jonathan Bellows | |
| 58,800 | | |
| 100,000 | | |
| — | | |
| — | | |
| 158,800 | |
Perry Boyle | |
| 58,800 | | |
| 100,000 | | |
| — | | |
| — | | |
| 158,800 | |
Karina Montilla Edmonds, Ph.D. | |
| 68,800 | | |
| 100,000 | | |
| — | | |
| — | | |
| 168,800 | |
Luisa Ingargiola | |
| 98,800 | | |
| 100,000 | | |
| — | | |
| — | | |
| 198,800 | |
Brian Nelson | |
| 73,800 | | |
| 100,000 | | |
| — | | |
| — | | |
| 173,800 | |
Rick Parod | |
| 58,800 | | |
| 100,000 | | |
| — | | |
| — | | |
| 158,800 | |
(1) |
|
The
amount reported in this column reflects the grant date fair value of the stock option and/or RSUs granted to the Non-Employee Directors
for services performed during the year ended December 31, 2023 under the 2022 Plan as described above and is accounted
for in accordance with FASB ASC Topic 718. Please see the section titled “Stock-Based Compensation” beginning
on page F-33 of our Notes to Consolidated Financial Statements included this prospectus. As of May 13,
2024, each Non-Employee Director held 222,222 unvested RSUs. |
|
|
|
(2) |
|
As
of December 31, 2023, the following options remained outstanding: (i) Luisa Ingargiola held options exercisable for 75,852 shares
of common stock; and (ii) Brian Nelson held options exercisable for 39,420 shares of common stock. |
CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Other
than compensation arrangements for our named executive officers and directors, we describe below each transaction or series of similar
transactions, since January 1, 2022, to which we were a party or will be a party, in which:
|
● |
the
amounts involved exceeded or will exceed $120,000; and |
|
● |
any
of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of the
foregoing persons, had or will have a direct or indirect material interest. |
Compensation
arrangements for our named executive officers and directors are described in the section entitled “Executive Compensation.”
Agreements
with Directors and Officers
Arrangement
with John Marchetti
As
an inducement to hire Mr. John Marchetti as our former Chief Financial Officer in September 2021, we loaned Mr. Marchetti $350,000
to repay amounts owed by him to his former employer and entered into a related promissory note with a maturity of March 1, 2026. In connection
with the Business Combination and our obligations as a publicly traded company, we forgave all amounts owed under the promissory
note effective March 2022. On April 19, 2024, Mr. Marchetti’s employment with us was terminated.
Separation
Agreements
On
November 4, 2022, we announced that Sean Nichols, our former Chief Operating Officer, would be leaving the Company to pursue other
interests. His last day of employment was November 7, 2022 (the “Separation Date”). On October 25, 2022, we entered
into the Separation Agreement with Mr. Nichols that became effective and fully irrevocable on November 2, 2022, which was subsequently
amended on November 14, 2022. Pursuant to the Separation Agreement, Mr. Nichols received a cash payment of $100,000 in one installment
in December 2022 and was entitled to receive a cash payment of $1,000,000 in 24 monthly installments commencing in December
2022. Mr. Nichols’ outstanding equity awards granted by us fully vested and, in the case of options, were exercisable
for 12 months following the Separation Date. The Separation Agreement also provides that we will pay a portion of Mr. Nichols’
premiums to continue participation in our health insurance plans for up to 18 months following the Separation Date. The Separation
Agreement includes a general release of claims by Mr. Nichols and certain restrictive covenants in favor of us, including non-competition
and non-solicitation covenants for 12 months following the Separation Date.
On April 26, 2023, we entered into a separation
and release of claims agreement with Nicole Harvey, our former Chief Legal Officer. As consideration for Ms. Harvey’s execution
of the agreement, we agreed to pay the employee payments equivalent to $720,000 for wages and benefits divided into 24 monthly payments
commencing on June 1, 2023, and all outstanding equity-based compensation awards to become fully vested. Ms. Harvey had three (3) months
from the termination date to exercise the outstanding options. The three (3) month period ended on July 26, 2023 in which the options
were not exercised and the options were forfeited as a result.
Promissory
Notes with Brian Nelson
On
March 5, 2023, we issued the unsecured promissory note (the “March 2023 Note”) in the principal amount
of $1.0 million to Brian Nelson, one of our directors, in a private placement in exchange for cash in an equal amount. The March 2023
Note became due and payable in full on April 1, 2023. We were also obligated to pay a loan fee of $100,000 to Mr. Nelson on
April 4, 2023. We paid the principal amount and the loan fee in full on April 1, 2023 and April 4, 2023, respectively.
On January 30, 2024, we issued an unsecured convertible
promissory note (the “January Note”) in the principal amount of $1.0 million (the “January Principal Amount”)
to Brian Nelson, one of our directors, in a private placement in exchange for cash in an equal amount. The January Note became due and
payable in full on February 2, 2024. We were also obligated to pay $50,000 (the “January Loan Fee”) to Mr. Nelson
on February 2, 2024. We paid the January Principal Amount and the January Loan Fee in full on February 2, 2024.
On February 27, 2024 we issued a convertible promissory
(the “February Note”) in the amount of $1.7 million (the “February Principal Amount”) to Mr. Nelson,
in a private placement in exchange for cash in an equal amount. The February Note became due and payable in full on March 1, 2024. We
were also obligated to pay a $85,000 loan fee (the “February Loan Fee”) to Mr. Nelson on March 1, 2024. We paid the
February Principal Amount and the February Loan Fee on March 1, 2024.
Indemnification
Agreements
We
entered into separate indemnification agreements with our directors and executive officers, in addition to the indemnification provided
for in our Articles of Incorporation and our Bylaws. These agreements, among other things, require us to indemnify our directors
and executive officers for certain expenses, including reasonable attorneys’ fees, incurred by a director or executive officer
in generally any action or proceeding arising out of their services as one of our directors or executive officers or as a director or
executive officer of any other company or enterprise to which the person provides services at our request. We believe that these charter
provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
The
limitation of liability and indemnification provisions in the Charter and the Bylaws may discourage stockholders from bringing
a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against
directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment
may decline in value to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these
indemnification provisions.
Business
Combination Agreements
This
section describes the material provisions of certain additional agreements entered into pursuant to the Business Combination Agreement, but does not purport to describe all of the terms thereof.
Insider
Registration Rights Agreement
In
connection with the closing of the Business Combination, CNTQ, the Insiders, Legacy Dragonfly, and certain Legacy Dragonfly stockholders
entered into and the Insider Restated Registration Rights Agreement. Pursuant to the Insider Registration Rights Agreement,
the Insiders and the undersigned parties listed thereto were provided the right to demand registrations, piggy-back registrations
and shelf registrations with respect to Registrable Securities (as defined in the Insider Registration Rights Agreement).
Private
Placement
Pursuant
to the Subscription Agreement, the Sponsor agreed to purchase, and CNTQ agreed to sell to the Sponsor, an aggregate of
500,000 shares of CNTQ Common Stock for gross proceeds to CNTQ of $5 million in the PIPE Investment. On September
28, 2022, the Sponsor and CCM entered into an assignment, assumption and joinder agreement, pursuant to which the Sponsor assigned
all of the Sponsor’s rights, benefits and obligations under the Subscription Agreement to CCM.
Under
the Subscription Agreement, the number of shares of CNTQ Common Stock that CCM was obligated to purchase was to be reduced by the number
of shares of CNTQ Common Stock that CCM purchased in the open market, provided that such purchased shares were not redeemed, and the
aggregate price to be paid under the Subscription Agreement was to be reduced by the amount of proceeds received by us because such shares
are not redeemed. During the week of September 26, 2022, CCM acquired in the open market 485,000 shares of common stock, at purchase
prices per share ranging from $10.33 to $10.38 (such shares, the “Purchased Shares”). In accordance with the aforementioned
offset provision provided in the Subscription Agreement, the aggregate purchase price that CCM was obligated to pay under the Subscription
Agreement was reduced from $5 million to zero and the aggregate number of shares of common stock that CCM was obligated to purchase
under the Subscription Agreement was reduced from 500,000 shares to an aggregate of 15,000 shares of common stock. The Purchased
Shares were not redeemed, resulting in (i) our receipt of $5,016,547 from the Trust Account (based on a per share redemption price of
$10.34) and (ii) a reduction in CCM’s purchase commitment under the Subscription Agreement to zero in accordance with the Offset.
At the Closing, we issued an additional 15,000 shares to CCM pursuant to the terms of the Subscription Agreement.
Debt
Financing
Term
Loan Agreement
Consistent
with the Debt Commitment Letter, in connection with the Closing, CNTQ, Legacy Dragonfly and the Initial Term Loan Lenders
entered into the Term Loan, Guarantee and Security Agreement (the “Term Loan Agreement”) setting forth
the terms of a senior secured term loan facility in an aggregate principal amount of $75 million (the “Term Loan”).
The Chardan Lender backstopped its commitment under the Debt Commitment Letter by entering into a backstop commitment letter, dated as
of May 20, 2022 (the “Backstop Commitment Letter”), with a certain third-party financing source (the “Backstop
Lender” and collectively with EIP, the “Term Loan Lenders”), pursuant to which the Backstop Lender committed
to purchase from the Chardan Lender the aggregate amount of the Term Loan held by the Chardan Lender (the “Backstopped Loans”)
immediately following the issuance of the Term Loan on the Closing Date. Pursuant to an assignment agreement, the Backstopped Loans were
assigned by CCM 5 to the Backstop Lender on the Closing Date.
The proceeds of the Term Loan were used (i) to
refinance on the Closing Date prior indebtedness, (ii) to support the Business Combination under the Business Combination Agreement,
(iii) for working capital purposes and other corporate purposes, and (iv) to pay any fees associated with transactions contemplated under
the Term Loan Agreement and the other loan documents entered into in connection therewith, including the transactions described in the
foregoing clauses (i) and (ii) and fees and expenses related to the business combination. The Term Loan amortizes in the amount of 5%
per annum beginning 24 months after the Closing Date and matures on the fourth anniversary of the Closing Date (“Maturity Date”).
The Term Loan accrues interest (i) until April 1, 2023, at a per annum rate equal to the adjusted Secured Overnight Financing Rate (“SOFR”)
plus a margin equal to 13.5%, of which 7% will be payable in cash and 6.5% will be paid in-kind, (ii) thereafter until October 1, 2024,
at a per annum rate equal to adjusted SOFR plus 7% payable in cash plus an amount ranging from 4.5% to 6.5%, depending on the senior
leverage ratio of the consolidated company, which will be paid-in-kind and (iii) at all times thereafter, at a per annum rate equal to
adjusted SOFR plus a margin ranging from 11.5% to 13.5% payable in cash, depending on the senior leverage ratio of the consolidated company.
In each of the foregoing cases, adjusted SOFR will be no less than 1%.
Pursuant
to the Term Loan Agreement, the obligations of Legacy Dragonfly are guaranteed by us and will be guaranteed by any of Legacy Dragonfly’s
subsidiaries that are party thereto as guarantors. Pursuant to the Term Loan Agreement, the Administrative Agent was granted a security
interest in substantially all of the personal property, rights and assets of us and Legacy Dragonfly to secure the payment of all amounts
owed to lenders under the Term Loan Agreement. In addition, we entered into a Pledge Agreement (the “Pledge Agreement”)
pursuant to which we pledged to the Administrative Agent our equity interests in Legacy Dragonfly as further collateral security
for the obligations under the Term Loan Agreement.
The Term Loan Agreement contains affirmative and
restrictive covenants and representations and warranties. We and our subsidiaries are bound by certain affirmative covenants setting
forth actions that are required during the term of the Term Loan Agreement, including, without limitation, certain information delivery
requirements, obligations to maintain certain insurance, and certain notice requirements. Additionally, we, Legacy Dragonfly and each
of our subsidiaries that are guarantors will be bound by certain restrictive covenants setting forth actions that are not permitted to
be taken during the term of the Term Loan Agreement without prior written consent, including, without limitation, incurring certain additional
indebtedness, consummating certain mergers, acquisitions or other business combination transactions, and incurring any non-permitted
lien or other encumbrance on assets. The Term Loan Agreement also contains other customary provisions, such as confidentiality
obligations and indemnification rights for the benefit of the administrative agent and lenders. The Term Loan Agreement contains
financial covenants requiring the credit parties to (a) maintain minimum liquidity (generally, the balance of unrestricted cash and cash
equivalents in our account that is subject to a control agreement in favor of the Administrative Agent) of at least $10,000,000 as of
the last day of each fiscal month commencing with the fiscal month ending December 31, 2022, (b) if the daily average liquidity for any
fiscal quarter ending on December 31, 2022, March 31, 2023, June 30, 2023, or September 30, 2023 is less than $17,500,000 and for each
fiscal quarter thereafter (commencing with the fiscal quarter ending December 31, 2023), maintain a senior leverage ratio (generally,
aggregate debt minus up to $500,000 of unrestricted cash of CNTQ and its subsidiaries divided by consolidated EBITDA for the
trailing twelve month period just ended) of not more than 6.75 to 1.00 for fiscal quarters ending December 31, 2022 to March 31, 2023,
6.00 to 1.00 for fiscal quarters ending June 30, 2023 to September 30, 2023, 5.00 to 1.00 for fiscal quarters ending December 1, 2023
to March 31, 2024, 4.00 to 1.00 for fiscal quarters ending June 30, 2024 to September 30, 2024, 3.25 to 1.00 for fiscal quarters ending
December 31, 2024 to March 31, 2025, and 3.00 to 1.00 for fiscal quarters ending June 30, 2025 and thereafter, (c) if liquidity is less
than $15,000,000 as of the last day of any fiscal quarter (commencing with the fiscal quarter ending December 31, 2022), maintain a fixed
charge coverage ratio for the trailing four fiscal quarter period of no less than 1.15:1.00 as of the last day of such fiscal quarter,
and (d) if consolidated EBITDA is less than $15,000,000 for any trailing twelve month period ending on the last day of the most recently
completed fiscal quarter, cause capital expenditures to not exceed $500,000 for the immediately succeeding fiscal quarter (subject to
certain exceptions set forth in the Term Loan Agreement).
On
March 29, 2023, September 29, 2023, December 29, 2023 and May 13, 2024, we obtained waivers from our Administrative
Agent and Term Loan Lenders of our failures to satisfy the Senior Leverage Ratio and Fixed Charge Coverage Ratio tests (the
“Tests”) with respect to the minimum cash requirements under the Term Loan during the quarter ended March 31,
2023 September 30, 2023, December 31, 2023 and March 31, 2024, respectively. On March 31, 2024 and April 29, 2024, we received additional waivers from the
Administrative Agent and the Term Loan Lenders in regard to our compliance with the liquidity requirement under the Term Loan as of
the last day of the fiscal quarter ended March 31, 2024 and as of the last day of the fiscal month ended April 30, 2024,
respectively.
June
2023 Offering
In
June 2023, we entered into the June 2023 Offering, an aggregate of (i) 10,000,000 shares of our common stock, par value $0.0001, and
(ii) the Investor Warrants, at the combined public offering price of $2.00 per share and accompanying Investor Warrant, less underwriting
discounts and commissions, and (iii) the Underwriters’ Warrants. In addition, we granted the Underwriters a 45-day over-allotment
option to purchase up to an additional 1,500,000 shares of common stock and/or Investor Warrants to purchase up to an aggregate of 1,500,000
shares of common stock at the public offering price per security, less underwriting discounts and commissions. In addition to the Underwriter,
CCM also participated in the offering as an additional bookrunner.
The
Investor Warrants are exercisable for five years from the closing date of the June 2023 Offering, have an exercise price of $2.00 per
share and are immediately exercisable. In the event of certain fundamental transactions, holders of the Investor Warrants will have the
right to receive the Black Scholes Value (as defined in the Investor Warrants) of their Investor Warrants calculated pursuant to the
formula set forth in the Investor Warrants, payable either in cash or in the same type or form of consideration that is being offered
and being paid to the holders of common stock. The Underwriters’ Warrants are exercisable upon issuance and will expire on June
20, 2028. The initial exercise price of the Underwriters’ Warrants is $2.50 per share, which equals 125% of the per share public
offering price in the June 2023 Offering. As part of the June 2023 Offering, the Underwriters partially exercised their over-allotment
option in the amount of 1,405,000 shares of common stock and Investor Warrants to purchase 1,405,000 shares of common stock. The June
2023 Offering closed on June 22, 2023.
Warrant
Agreements
In
connection with the entry into the Term Loan Agreement, and as a required term and condition thereof, we issued (i) the Original Penny
Warrants to the Term Loan Lenders under the Term Loan to purchase 2,593,056 shares upon the exercise of at an exercise price of $0.01
per share, which was equal to approximately 5.6% of common stock calculated on an agreed fully diluted outstanding basis on the issuance
date and (ii) $10 Warrants to the Term Loan Lenders under the Term Loan exercisable to purchase 1,600,000 shares of our common stock
at an exercise price of $10.00 per share.
The December 2023 Waiver provided for a
one-time issuance of December 2023 Penny Warrants to purchase up to 1,286,671 shares of our common stock at an exercise price of
$0.01 per share, in connection with the Term Loan Lenders’ agreement to waive the Tests under the Term Loan for the quarter
ended December 31, 2023. The December 2023 Penny Warrants were immediately exercisable upon issuance and will expire ten years from
the date of issuance.
The May 2024 Waiver provided for a one-time issuance of May 2024 Penny
Warrants to purchase up to 2,550,000 shares of our common stock at an exercise price of $0.01 per share, in connection with the Term Loan
Lenders’ agreement to waive the Tests under the Term Loan for the quarter ended March 31, 2024. The May 2024 Penny Warrants were
immediately exercisable upon issuance and will expire ten years from the date of issuance.
The Penny Warrants have an exercise period of 10
years from the date of issuance. As of May 13, 2024, 1,996,323 shares of common stock have been issued upon the exercise of
Penny Warrants.
The $10 Warrants had an exercise period of five
years from the date of issuance and had customary cashless exercise provisions. As of December 31, 2022, the $10 Warrants have been
exercised in full and are no longer outstanding.
The
Penny Warrants have, and the $10 Warrants had, specified anti-dilution protection against subsequent equity sales or distributions,
subject to exclusions including for issuances upon conversion exercise or exchange of securities outstanding as of the Closing Date,
issuances pursuant to agreements in effect as of the Closing Date, issuances pursuant to employee benefit plans and similar arrangements,
issuances in joint ventures, strategic arrangements or other non-financing type transactions and issuances pursuant to any public equity
offerings. In addition, no anti-dilution adjustment will be made with respect to issuances of common stock pursuant to the ChEF Equity
Facility (as defined below) (or replacement thereof) sold at a per share price above $5.00.
The
shares issued or issuable upon exercise of the Warrants have customary registration rights, which are contained in the respective
forms of the Warrants, requiring us to file and keep effective a resale registration statement registering the resale of the shares of
common stock underlying the Warrants.
ChEF
Equity Facility
Consistent
with the equity facility letter agreement between Legacy Dragonfly and CCM 5, we and CCM we entered into the Original Purchase
Agreement and the ChEF RRA with CCM in connection with the Closing. In addition, we appointed LifeSci Capital, LLC as “qualified
independent underwriter” with respect to the transactions contemplated by the Purchase Agreement. On May 20, 2024, we
entered into the A&R Purchase Agreement with CCM to update the VWAP mechanics to include Intraday VWAP Purchases (as defined in the
Purchase Agreement).
Pursuant
to, on the terms of, and subject to the satisfaction of the conditions in the Purchase Agreement, including the filing and effectiveness
of a registration statement registering the resale by CCM of the shares of common stock issued to it under the Purchase Agreement,
we have the right from time to time at our option to direct CCM to purchase an amount of shares of common stock, up to a maximum aggregate
purchase price of $150 million, over the term of the ChEF Equity Facility. During the year ended December 31, 2022, we did
not sell any shares of our common stock under the ChEF Equity Facility. During the year ended December 31, 2023, we issued and sold approximately
588,500 shares of our common stock under the ChEF Equity Facility, resulting in net cash proceeds of $1,278,566. From January 1, 2024
through May 13, 2024, we did not issue any shares of common stock under the ChEF Equity Facility.
Related
Person Transactions Policy
Our
Board adopted a written Related Person Transactions Policy on October 7, 2022 (the “Policy”) that sets forth
our policies and procedures regarding the identification, review, consideration and oversight of “related person transactions.”
For purposes of the Policy only, a “related person transaction” is a transaction, arrangement or relationship (or any series
of similar transactions, arrangements or relationships) in which (i) we (including any of our subsidiaries, if any) was, is or will be
a participant, (ii) the aggregate amount involved exceeds or may be expected to exceed $120,000, and (iii) a related person has or will
have a direct or indirect material interest.
Subject
to certain limitations, transactions involving compensation for services provided to us as an employee or director will not be considered
related person transactions under the Policy. A related person is any executive officer, director, nominee to become a director
or a holder of more than 5% of any class of our voting securities (including the common stock), including any of their immediate family
members and affiliates, including entities owned or controlled by such persons. A related person is also someone who has a position or
relationship with any firm, corporation or other entity that engages in the transaction if (i) such person is employed or is a general
partner or principal or in a similar position with significant decision making influence, or (ii) the direct or indirect ownership by
such person and all other foregoing persons, in the aggregate, is 10% or greater in another person which is party to the transaction.
Under
the Policy, any related person, or any director, officer or employee of ours who knows of the transaction, must report the information
regarding the proposed related person transaction to our Chief Financial Officer and chairperson of the Audit Committee for review.
To identify related person transactions in advance, we will rely on information supplied by our executive officers, directors and certain
significant stockholders. In considering related person transactions, our Audit Committee will take into account the relevant
available facts and circumstances, which may include, but are not limited to:
|
● |
the
nature of the related person’s interest in the transaction; |
|
● |
the
impact on a director’s independence in the event the related person is a director, immediate family member of a director or
an entity with which a director is affiliated; |
|
● |
the
terms of the transaction; |
|
● |
the
availability of other sources for comparable services or products; and |
|
● |
the
terms available to or from, as the case may be, unrelated third parties. |
All
related party transactions may be consummated or continued only if approved or ratified by our Audit Committee. No director or
member of our Audit Committee may participate in the review, approval or ratification of a transaction with respect to which he
or she is a related party, except that such member may be counted for purposes of a quorum and shall provide such information with respect
to the transaction as may be reasonably requested by other members of our Audit Committee.
All
of the transactions entered into since the adoption of the Policy have been approved or ratified by our Audit Committee.
DESCRIPTION
OF SECURITIES
The
following summary of the material terms of our securities is not intended to be a complete summary of the rights and preferences
of such securities. You are encouraged to read the applicable provisions of the NRS, the Charter and Bylaws in their entirety
for a complete description of the rights and preferences of our securities.
Authorized
Capitalization
We
have 255,000,000 shares of capital stock authorized under our Charter, which consists of 250,000,000 shares of common stock
with a par value of $0.0001 per share and 5,000,000 shares of preferred stock with par value $0.0001 per share.
As
of May 13, 2024 there were 60,509,476 shares of common stock outstanding and no shares of preferred stock outstanding.
Common
Stock
Holders
of our common stock are entitled to such dividends as may be declared by our Board out of funds legally available for such purposes.
Holders of our common stock are entitled to receive proportionately any dividends as may be declared by our Board, subject to
any preferential dividend rights of any series of preferred stock that we may designate and issue in the future. The shares of common
stock are neither redeemable nor convertible. Holders of common stock have no preemptive or subscription rights to purchase any of our
securities. The rights, preferences and privileges of holders of our common stock are subject to and may be adversely affected by the
rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. Each holder of our common
stock is entitled to one vote for each such share outstanding in the holder’s name. No holder of common stock is entitled to cumulate
votes in voting for directors.
In
the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive a pro rata share of
our assets, which are legally available for distribution, after payments of all debts and other liabilities. All of the outstanding shares
of our common stock are fully paid and non-assessable.
Redeemable
Warrants
Public
Warrants
Each
whole redeemable Public Warrant entitles the registered holder to purchase one share of common stock at a price of $11.50 per share,
subject to adjustment as described below. The Public Warrants will expire on October 7, 2027 at 5:00 p.m., New York City time, or earlier
upon redemption or liquidation. The Public Warrants are exercisable, at the option of each holder, in whole or in part by delivering
to us and the warrant agent a duly executed exercise notice accompanied by payment in full for the number of common stock purchased upon
such exercise price for the Public Warrants is subject to adjustment for stock splits or combinations, stock dividends and distributions,
reclassifications, subdivisions, and other similar transactions. Pursuant to the Warrant Agreement, a Public Warrant holder may exercise
its warrants only for a whole number of shares of common stock. No fractional shares will be issued in connection with the exercise of
a Public Warrant. In lieu of fractional shares, we will, upon exercise, round down to the nearest whole number of shares of common stock
to be issued to the Public Warrant holder.
If
a registration statement registering under the Securities Act the issuance of the shares of common stock underlying the Public Warrants
is not effective or available, the holder may, in its sole discretion, elect to exercise the Public Warrants
for cash or on a cashless basis, and we will not be obligated to issue any shares to registered holders seeking to exercise their Public
Warrants, unless the issuance of the shares upon such exercise is registered or qualified under the securities laws of the state
of the exercising registered holder, or an exemption from registration or qualification is available.
We
may call the Public Warrants for redemption
in accordance with the terms summarized below:
|
● |
in
whole and not in part; |
|
● |
at
a price of $0.01 per Public Warrant; |
|
● |
upon
a minimum of 30 days’ prior written notice of redemption (the “30-day redemption period”) to each warrant
holder; |
|
● |
if,
and only if, the last sales price of our common stock equals or exceeds $16.00 per share for any ten (10) trading days within a 30-trading
day period ending three business days before we send the notice of redemption; and |
|
● |
if,
and only if, there is a current registration statement in effect with respect to the offer and sale of the shares of common stock
underlying such Public Warrants at the time of redemption and for the entire 30-trading day period referred to above and continuing
each day thereafter until the date of redemption. |
We
may not exercise our redemption right if the issuance of shares of common stock upon exercise of the Public Warrants (i) is not exempt
from registration or qualification under applicable state blue sky laws - we will use our best efforts to register or qualify
such shares or (ii) we are unable to effect such registration or qualification. However, there may be instances in which registered holders
of our public warrants may be unable to exercise such public warrants but registered holders of our Private Warrants, described below,
may be able to exercise such Private Warrants.
In
the event that we elect to redeem all of the Public Warrants, we will fix a date for the redemption, and a notice of redemption
will then be mailed by first class mail, postage prepaid, not less than 30 days prior to the date fixed for redemption to the registered
holders of the warrants to be redeemed at their last addresses as they appear on the registration books. Any notice mailed in the foregoing
manner will be conclusively presumed to have been duly given whether or not the registered holder received such notice. Additionally,
while we are required to provide such notice of redemption, we are not separately required to, and do not currently intend to, notify
any holders of when the warrants become eligible for redemption.
A
holder of a Public Warrant may notify us in writing in the event it elects to be subject to a requirement that such holder will
not have the right to exercise such warrant, to the extent that after giving effect to such exercise, such person (together with such
person’s affiliates), to the warrant agent’s actual knowledge, would beneficially own in excess of 9.99% (or such
other amount as a holder may specify) of the shares of common stock outstanding immediately after giving effect to such exercise.
The
Public Warrants contain certain anti-dilution and adjustment rights upon certain events.
The
Public Warrants are issued in registered form under the warrant agreement between American Stock Transfer & Trust Company,
LLC, as warrant agent, and us. The warrant agreement provides that the terms of the warrants may be amended without the consent of any
holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of at least a majority of the
then issued and outstanding Public Warrants to make any change that adversely affects the interests of the registered holders
of Public Warrants.
Public
Warrants may be exercised only for a whole number
of shares of common stock. No fractional shares will be issued upon exercise of the Public Warrants. If, upon exercise of the
warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round down to the nearest whole
number of shares of common stock to be issued to the warrant holder.
Private
Warrants
The
Private Warrants (including the common stock issuable upon their exercise of the Private Warrants) are not redeemable
by us so long as they are held by Sponsor or its permitted transferees. Sponsor, or its permitted transferees, have the
option to exercise the Private Warrants on a cashless basis. Except as described below, the Private Warrants have terms
and provisions that are identical to those of the Public Warrants, including as to exercise price, exercisability and exercise
period. If the Private Warrants are held by holders other than Sponsor or its permitted transferees, the Private Warrants
will be redeemable by us and exercisable by the holders on the same basis as the Public Warrants.
If
holders of the Private Warrants elect to exercise them on a cashless basis, they would pay the exercise price by surrendering
their Private Warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of
the number of shares of common stock underlying the Private Warrants, multiplied by the difference between the exercise price
of the Private Warrant warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair
market value” shall mean the volume weighted average last reported sale price of the common stock for the 10 trading days ending
on the third trading day prior to the date on which the notice of warrant exercise is sent to the warrant agent.
Holders
of our Private Warrants are entitled to certain
registration rights. The Private Warrants purchased by Sponsor will not be exercisable on or after August 10, 2026,
in accordance with FINRA Rule 5110(g), as long as Sponsor or any of its related persons beneficially own the Private Warrants.
Penny
Warrants
The
Penny Warrants have an exercise period of 10 years from the date of issuance. The Penny Warrants
have specified weighted average anti-dilution protection against subsequent equity sales or distributions at below $10 per share, subject
to customary exclusions including for issuances upon conversion exercise or exchange of securities outstanding as of the Closing Date,
issuances pursuant to agreements in effect as of the Closing Date (provided such issuances are taken into account in the calculation
of “on a fully diluted basis” as provided above), issuances pursuant to employee benefit plans and similar arrangements,
issuances in joint ventures, strategic arrangements or other non-financing type transactions, issuances in debt financings as equity
kickers, issuances in public offerings and similar transactions. In addition, no anti-dilution adjustment will be made with respect to
issuances of common stock pursuant to our $150 million ChEF Equity Facility (or replacement thereof) sold at a per share price
above $5.00. The shares issued and issuable upon exercise of the Penny Warrants have customary registration rights requiring us to file
and keep effective a resale registration statement registering the resale of the shares of common stock underlying the Penny Warrants.
Investor Warrants
The Investor Warrants
that were issued in the June 2023 Offering, expire five years from the date of the closing, have an exercise price of $2.00 per share
and are immediately exercisable. In the event of certain fundamental transactions, holders of the Investor Warrants will have the right
to receive the Black Scholes Value (as defined in the Investor Warrants) of their Investor Warrants calculated pursuant to the formula
set forth in the Investor Warrants, payable either in cash or in the same type or form of consideration that is being offered and being
paid to the holders of common stock.
We granted the underwriters
a 45-day over-allotment option to purchase up to an additional 1,500,000 shares of common stock and/or Investor Warrants to purchase
up to an aggregate of 1,500,000 shares of common stock at the public offering price per security, less underwriting discounts and commissions,
of which the Underwriters exercised for 1,405,000 shares of common stock and Investor Warrants to purchase up to 1,405,000 shares of
common stock and the remaining was not exercised within the 45-day window.
Underwriters’ Warrants
The Underwriters’
Warrants that were issued in the June 2023 Offering expire on June 20, 2028, have an exercise price of $2.50 per share, are immediately
exercisable and contain a cashless exercise provision. The cashless exercise of the warrants is calculated pursuant to the formula set
forth in the Underwriters’ Warrants. In addition, the Underwriters’ Warrants contain additional registration rights in the
event of an ineffective registration statement prior to their full exercise.
Dividends
We
have not paid any cash dividends on our shares of common stock to date and do not intend to pay cash dividends prior to the completion
of the Business Combination. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital
requirements and general financial condition. The payment of any dividends will be within the discretion of our then Board. It
is the present intention of our Board to retain all earnings, if any, for use in our business operations and, accordingly, our
Board does not anticipate declaring any dividends in the foreseeable future.
Our
Transfer Agent and Warrant Agent
The
transfer agent for our shares of common stock and warrant agent for our Warrants is Equiniti Trust Company, LLC.
Preferred
Stock
Our
Charter authorizes a total of 5,000,000 shares of
preferred stock, par value $0.0001 per share.
Under
the terms of our Charter, our Board is authorized to issue shares of preferred stock in one or more series without stockholder
approval. Our Board has the discretion to determine the terms, rights, preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.
The
issuance of preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate
purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking
to acquire, a majority of our outstanding voting stock. We have no present plans to issue any shares of preferred stock.
Choice
of Forum Provisions
Our
Charter, in Article XI, includes a mandatory forum provision
that, to the fullest extent permitted by law, and unless we consent in writing, the Second Judicial District Court,
in and for the State of Nevada, located in Washoe County, shall be the sole and exclusive forum for (a) any derivative action or
proceeding brought in the name or right of the Company or on our behalf, (b) any action asserting a claim for breach
of any fiduciary duty owed by any of our current or former directors, officers, employees or stockholders to
the Company or our stockholders, (c) any action arising or asserting a claim arising pursuant to any provision of NRS Chapters
78 or 92A or any provision of the Charter or Bylaws, (d) any action to interpret, apply, enforce or determine the validity of
the Charter or Bylaws or (e) any action asserting a claim governed by the internal affairs doctrine.
These
provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act, or any other claim for which
the federal courts have exclusive jurisdiction. Any person or entity purchasing or otherwise acquiring or holding any interest in our
securities shall be deemed to have notice of and consented to these provisions. Our exclusive forum provision will not relieve us of
our duties to comply with the federal securities laws and the rules and regulations thereunder, and our shareholders will not be deemed
to have waived our compliance with these laws, rules and regulations.
Anti-Takeover
Effects of the Charter, the Bylaws and Nevada Law
We
are a Nevada corporation and are generally governed by the NRS. The following is a brief description of the provisions in our Charter,
Bylaws and the NRS that could have an effect of delaying, deferring, or preventing a change in control of the Company.
The
provisions of the NRS, our Charter, and Bylaws could have the effect of discouraging others from attempting hostile takeovers and, as
a consequence, they may also inhibit temporary fluctuations in the price of our common stock that often result from actual or rumored
hostile takeover attempts. These provisions may also have the effect of preventing changes in our management. It is possible that these
provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.
Combinations
with Interested Stockholders
The
“combinations with interested stockholders” provisions of Sections 78.411 to 78.444, inclusive, prohibit a Nevada corporation
with at least 200 stockholders of record from engaging in various business “combinations” with any person deemed to be an
“interested stockholder” for a period of two years after the date that the person first become an interested stockholder,
unless the business combination or the transaction by which the person first became an interested stockholder is approved by the corporation’s
board of directors before the person first became an interested stockholder, or the business combination is approved by the board of
directors and thereafter is approved at a meeting of the corporation’s stockholders by the affirmative vote of at least 60% of
the outstanding voting power of the corporation not beneficially owned by the interested stockholder, its affiliates, and associates.
Following
the expiration of the two-year period, the corporation is prohibited from engaging in business “combinations” with the
interested stockholder, unless: (i) the business combination or the transaction by which the person first became an interested stockholder
is approved by the corporation’s board of directors before the person first became an interested stockholder; (ii) the business
combination is approved by a majority of the outstanding voting power of the corporation held by disinterested stockholders; or (iii)
the aggregate amount of the consideration to be received in the business combination by all of the holders of outstanding common shares
of the corporation not beneficially owned by the interested stockholder is at least equal to the higher of: (a) the highest price per
share paid by the interested stockholder, at a time when the interested stockholder was the beneficial owner, directly or indirectly,
of 5 percent or more of the outstanding voting shares of the corporation, for any common shares of the same class or series acquired
by the interested stockholder within two years immediately before the date of announcement with respect to the combination or within
two years immediately before, or in, the transaction in which the person became an interested stockholder, whichever is higher, plus,
in either case, interest compounded annually from the earliest date on which the highest price per share was paid through the date of
consummation at the rate for one-year obligations of the United States Treasury in effect on that earliest date, less the aggregate amount
of any dividends paid in cash and the market value of any dividends paid other than in cash, per common share since that earliest date,
and (b) the market value per common share on the date of the announcement of the business combination or on the date that the person
first became an interested stockholder, whichever is higher, plus interest compounded annually from that date through the date of consummation
at the rate for one-year obligations of the United States Treasury in effect on that date, less the aggregate amount of any dividends
paid in cash and the market value of any dividends paid other than in cash, per common share since that date.
In
general, an “interested stockholder” is any person who is (i) the direct or indirect beneficial owner of 10% or more of the
voting power of the outstanding voting shares of the corporation, or (ii) an affiliate or associate of the corporation and at any time
within two years immediately before the date in question was the direct or indirect beneficial owner of 10% or more of the voting power
of the then outstanding shares of the corporation.
Companies
are entitled to opt out of the business combination provisions of the NRS. In our Charter, we have not opted out of the business combination
provisions of NRS 78.411 to 78.444, inclusive.
Acquisition
of Controlling Interests
Nevada
law also protects the corporation and its stockholders from persons acquiring a “controlling interest” in a corporation.
The provisions can be found in NRS 78.378 to 78.3793, inclusive.
The
restriction on acquisition of a controlling interest applies to corporations which have 200 or more stockholders of record (at least
100 of whom have had addresses in Nevada at all times during the 90 days immediately preceding the date of the acquisition) and conducts
business in Nevada, unless the Charter or bylaws of the corporation in effect on the tenth day after the acquisition of a controlling
interest provide otherwise. NRS 78.3785 provides that a “controlling interest” means the ownership of outstanding voting
shares of an issuing corporation sufficient to enable the acquiring person, individually or in association with others, directly or indirectly,
to exercise (i) one fifth or more but less than one third, (ii) one third or more but less than a majority, or (iii) a majority or more
of the voting power of the issuing corporation in the election of directors. Once an acquirer crosses one of these thresholds by acquiring
a controlling interest in the corporation, the shares which the acquirer acquired in the transaction taking it over the threshold and
within the 90 days immediately preceding the date when the acquiring person acquired or offered to acquire a controlling interest in
the corporation become “control shares.” Pursuant to NRS 78.379, any person who acquires a controlling interest in a corporation
may not exercise voting rights on any control shares unless such voting rights are conferred by a majority vote of the disinterested
stockholders of the issuing corporation at an annual meeting or a special meeting of such stockholders held upon the request and at the
expense of the acquiring person, or, if the acquisition would adversely alter or change any preference or any relative or other right
given to any other class or series of outstanding shares, the holders of a majority of each class or series affected. In the event that
the control shares are accorded full voting rights and the acquiring person acquires control shares with a majority or more of all the
voting power, any stockholder, other than the acquiring person, who does not vote in favor of authorizing voting rights for the control
shares is entitled to demand payment for the fair value of such person’s shares, and, provided that the proper procedure is adhered
to, the corporation must comply with the demand.
NRS
78.378(1) provides that the control share statutes of the NRS do not apply to any acquisition of a controlling interest in an issuing
corporation if the Charter or bylaws of the corporation in effect on the 10th day following the acquisition of a controlling interest
by the acquiring person provide that the provisions of those sections do not apply to the corporation or to an acquisition of a controlling
interest specifically by types of existing or future stockholders, whether or not identified. NRS 78.378(2) provides that the corporation
may impose stricter requirements if it so desires. We have not opted out of the control share statutes, and will be subject to these
statutes if we are an “issuing corporation” as defined in such statutes.
The
effect of the Nevada control share statutes is that the acquiring person, and those acting in association with the acquiring person,
will obtain only such voting rights in the control shares as are conferred by a resolution of the stockholders at an annual or special
meeting. The Nevada control share law, if applicable, could have the effect of discouraging takeovers of our Company.
Authorized
Shares
Section
78.207 of the NRS provides that without any action by our shareholders, we may increase or decrease the number of authorized shares
in a class or series of our shares and correspondingly effect a forward or reverse split of any class or series of the our shares
(and change the par value thereof), so long as the action taken does not adversely change or alter any right or preference of our
shareholders and does not include any provision or provisions pursuant to which only money will be paid or scrip issued to
stockholders who hold 10% or more of the outstanding shares of the affected class and series, and who would otherwise be entitled to
receive fractions of shares in exchange for the cancellation of all of their outstanding shares. Common stock and Series A Preferred
Stock have been established, and our board has authority to establish more than one series of preferred stock, and the different
series shall have such relative rights and preferences, with such designations, as our board may by resolution provide. Issuance of
such a new series could, depending upon the terms of the series, delay, defer, or prevent a change of control of our
Company.
Stockholder
Action by Written Consent
Pursuant
to Section 78.320 of the NRS, any action required to be taken at any annual or special meeting of the stockholders may
be taken without a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares of our stock entitled to vote thereon were present and voted, unless the Charter
provides otherwise. The Charter precludes stockholder action by written consent.
Number
of Directors; Vacancies; Removal
Our
Bylaws provide that our Board may fix the number of directors at no less than one. Any vacancy on our Board may be filled
by the affirmative vote of a majority of the remaining directors though less than a quorum of our Board. A director elected to
fill a vacancy shall be elected for the unexpired term of his predecessor in office, and shall hold such office until his successor is
duly elected and qualified. Any directorship to be filled by reason of an increase in the number of directors shall be filled by the
affirmative vote of a majority of the directors then in office, even if less than a quorum. A director chosen to fill a position resulting
from an increase in the number of directors shall hold office for a term that coincides with the remaining term of that class of director.
The
NRS requires the vote of the holders of at least two-thirds of the shares or class or series of shares of the issued and outstanding
stock entitled to vote at an election of directors in order to remove a director or all of the directors. Furthermore, the NRS does not
make a distinction between removals for cause and removals without cause. The articles of incorporation may provide for a higher voting
threshold but not a lower one.
Our
Bylaws provide that any director or directors of the corporation, except those elected by the holders of any series or class of preferred
stock provided for or fixed pursuant to the provisions of Article V of the Charter, may be removed from office at any time, but only
for cause, by the vote or written consent of stockholders representing not less than 66 2/3% of the voting power of all of the then outstanding
shares of stock entitled to vote in the election of directors, voting together as a single class.
Advance
Notice Requirements for Stockholder Proposals and Director Nominations
Our
Bylaws contain advance notice provisions that a stockholder must follow if it intends to bring business proposals or director nominations,
as applicable, before a meeting of stockholders. These provisions may preclude our stockholders from bringing matters before the annual
meeting of stockholders or from making nominations at the annual meeting of stockholders.
Approval
for Amendment of Certificate of Incorporation and Bylaws
Our
Charter further provides that the affirmative vote of holders of at least 66 2∕3% of the voting power of all of the then outstanding
shares of stock entitled to vote in the election of directors, voting as a single class, is required to amend or repeal certain provisions
of our Charter, including provisions relating to the size of the Board, removal of directors, special meetings and actions by
written consent. The affirmative vote of holders of at least 66 2/3% of the voting power of all of the then outstanding shares of stock
entitled to vote in the election of directors, voting as a single class, is required to adopt, amend, alter or repeal our Bylaws, although
our Bylaws may be adopted, amended, altered or repealed by a majority vote of the Board, assuming no vacancies.
Stock
Exchange Listing
Our
common stock is currently listed on the Nasdaq Global Market under the symbol “DFLI” and our Public Warrants
are currently listed on the Nasdaq Capital Market under the symbol “DFLIW”.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information as of May 13, 2024, with respect to the beneficial ownership of common stock
by the following: (i) each of our current directors; (ii) each of our named executive officers; (iii) all of our current executive officers
and directors as a group; and (iv) each other person known by us to own beneficially more than five percent (5%) of the outstanding shares
of common stock.
The
amounts and percentage of shares of common stock beneficially owned are reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner”
of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such
security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. In
computing the number of shares beneficially owned by a person and the percentage ownership of that person, common stock subject to securities
held by that person that are currently exercisable or exercisable within 60 days of May 13, 2024 (“Presently Exercisable
Securities”), if any, are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any
other person. Except as indicated by footnote, the persons named in the table below have sole voting and investment power with respect
to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable.
We
have not deemed any of the shares of common stock issuable pursuant to the ChEF Equity Facility to be outstanding because the issuance
of such shares is solely at our discretion and is subject to certain conditions, the satisfaction of all of which are outside of CCM’s
control.
The
table reflects 60,509,476 shares common stock outstanding as of May 13, 2024 plus any shares issuable upon exercise
of Presently Exercisable Securities held by such person or entity.
Except
as otherwise noted below, the address for
persons listed in the table is c/o Dragonfly Energy Holdings Corp., 1190 Trademark Drive #108, Reno, Nevada 89521.
Name and Address of Beneficial Owner | |
Amount and Nature of Beneficial Ownership | | |
Percent of Class | |
5% Holders: | |
| | | |
| | |
Dynavolt Technology (HK) Ltd. (1) | |
| 11,820,900 | | |
| 19.54 | % |
Li Gong(2) | |
| 3,073,434 | | |
| 5.08 | % |
| |
| | | |
| | |
Named Executive Officers and Directors: | |
| | | |
| | |
Dr. Denis Phares (3)(4) | |
| 16,208,889 | | |
| 26.79 | % |
Sean Nichols(3)(5) | |
| 535,853 | | |
| * | |
John Marchetti (6) | |
| - | | |
| - | |
Wade Seaburg (7) | |
| 225,915 | | |
| | |
Tyler Bourns (8) | |
| 65,167 | | |
| * | |
Luisa Ingargiola (9) | |
| 124,815 | | |
| * | |
Brian Nelson (10) | |
| 83,217 | | |
| * | |
Perry Boyle | |
| 52,000 | | |
| * | |
Jonathan Bellows | |
| 30,000 | | |
| * | |
Rick Parod | |
| 30,000 | | |
| * | |
Karina Montilla Edmonds | |
| 30,300 | | |
| * | |
All Executive Officers and Directors as a group (9 persons): | |
| 16,850,303 | | |
| 27.85 | % |
*
Less than one percent.
(1) |
Based
on the Schedule 13D filed by Dynavolt Technology (HK) Ltd. (“Dynavolt”) on October 12, 2022. The business address
of Dynavolt is Flat/Room 02-03 26/F, Bea Tower Millennium City 5, 418 Kwun Tong Road, Kwun Tong, Hong Kong. |
(2) |
Based on the Schedule
13D filed by Li Gong on October 12, 2022. Includes (i) 147,138 shares of common stock held on behalf of the SAKURA GRAT, dated
February 11, 2021, of which Mr. Gong is a trustee, and (ii) 2,217,042 shares of common stock on behalf of the LML Family Trust,
dated January 14, 2019, of which Mr. Gong is a trustee. The business address of Mr. Gong is 930 Tahoe Blvd. Suite 802,
PMB 860, Incline Village, Nevada 89451. |
|
|
(3) |
Excludes 25,000,000
shares of common stock not yet payable as the earnout contingencies have not yet been met and will not be met within 60 days of May
13, 2024. |
|
|
(4) |
Includes (i) 1,217,906
shares held on behalf of the Phares 2021 GRAT dated July 9, 2021, of which Dr. Phares is the trustee, and (ii) 177,316 shares of
common stock issuable upon exercise of outstanding stock options exercisable within 60 days of May 13, 2024. |
|
|
(5) |
Based on information
provided by Mr. Nichols and information available to us. On November 7, 2022, Mr. Nichols resigned from his position as our Chief
Operating Officer. |
|
|
(6) |
On April 19, 2024, Mr.
Marchetti’s employment with us was terminated. As a result, his vested options were forfeited and his unvested options were
terminated on such date. |
|
|
(7) |
Includes 100,645 shares
of common stock issuable upon exercise of outstanding stock options exercisable within 60 days of May 13, 2024. |
|
|
(8) |
Includes 34,370 shares
of common stock issuable upon exercise of outstanding stock options exercisable within 60 days of May 13, 2024. |
|
|
(9) |
Includes 94,815 shares
of common stock issuable upon exercise of outstanding stock options exercisable within 60 days of May 13, 2024. |
|
|
(10) |
Includes 53,217 shares
of common stock issuable upon exercise of outstanding stock options exercisable within 60 days of May 13, 2024. |
SELLING
STOCKHOLDER
This
prospectus relates to the possible resale by the selling stockholder, CCM, of shares of common stock that may be issued to CCM pursuant
to the Purchase Agreement. We are filing the registration statement of which this prospectus forms a part pursuant to the provisions
of the ChEF RRA, which we entered into with CCM on October 7, 2022, concurrently with our execution of the Purchase Agreement, in which
we agreed to provide certain registration rights with respect to sales by CCM of the shares that may be issued to CCM under the Purchase
Agreement.
CCM,
as the selling stockholder, may from time to time offer and sell pursuant to this prospectus any or all of the shares that we may sell
to CCM under the Purchase Agreement. The selling stockholder may sell some, all, or none of its shares. We do not know how long the selling
stockholder will hold the shares before selling them, and we currently have no agreements, arrangements, or understandings with the selling
stockholder regarding the sale of any of the shares by CCM.
The
following table provides, as of the date of this prospectus, information regarding the selling stockholder and the shares that it may
offer and sell from time to time under this prospectus. The percentage of ownership in the table below is based on 60,509,476 shares
of common stock outstanding as of May 13, 2024. The table is prepared based on information supplied to us by the selling stockholder,
and reflects its holdings as of May 13, 2024. Beneficial ownership is determined in accordance with Section 13(d) of the Exchange
Act and Rule 13d-3 thereunder.
Selling Stockholder | |
Shares Beneficially Owned
Before this Offering | | |
Percentage of Outstanding
Shares Beneficially Owned Before this Offering | | |
Shares to be Sold in this
Offering Assuming the Company issues the Maximum Number of Shares Under the Purchase Agreement | | |
Percentage of Outstanding
Shares Beneficially Owned After this Offering | |
Chardan Capital Markets LLC(1) | |
| 15,000 | (2) | |
| * | | |
| 21,512,027 | (3) | |
| * | |
*Represents
less than 1% of the outstanding shares and/or assumes all shares registered hereunder have been resold by CCM.
|
(1) |
The
business address of CCM is 17 State Street, Suite 2130, New York, NY 10004. CCM, an affiliate of the Sponsor, is a broker-dealer
and a member of the Financial Industry Regulatory Authority, Inc. Mr. Kerry Propper, Mr. Steven Urbach and Mr. Jonas Grossman, are
CCM’S Chairman, Chief Executive Officer and President, respectively, and are each Members and Managers of Chardan Securities
LLC, which holds a controlling interest in CCM. |
|
(2) |
Represents
15,000 shares issued pursuant to the Subscription Agreement, for which shares Mr. Urbach has all investment and voting power. In
accordance with Rule 13d-3(d) under the Exchange Act, we have excluded from the number of shares beneficially owned prior to the
offering all of the shares that CCM may be required to purchase upon the terms and subject to the conditions and limitations of the
Purchase Agreement, because the issuance of such shares of common stock is solely at our discretion and is subject to conditions
and limitations contained in the Purchase Agreement, the satisfaction of which are entirely outside of CCM’s control, including
the registration statement that includes this prospectus becoming and remaining effective. Furthermore, the Purchase Agreement prohibits
us from issuing and selling any shares of common stock to CCM to the extent such shares of common stock, when aggregated with all
other common stock then beneficially owned by CCM and its affiliates, would cause CCM and its affiliates’ beneficial ownership
of our common stock to exceed 9.9% of the outstanding voting power or shares of common stock. |
|
(3) |
Assumes
the sale of all shares being offered pursuant to this prospectus. The actual number of shares of common stock issuable will vary
depending on the then current market price of shares of common stock sold to CCM under the ChEF Equity Facility. |
U.S.
FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The
following is a discussion of certain material U.S. federal income tax consequences to non-U.S. Holders (as defined below) of the
acquisition, ownership and disposition of shares of common stock. This discussion is limited to certain U.S. federal income tax considerations
to beneficial owners of the common stock who purchase common stock from the selling securityholders pursuant to this offering and hold
the common stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”).
This
summary is based upon U.S. federal income tax laws as of the date of this prospectus, which is subject to change or differing interpretations,
possibly with retroactive effect. This discussion is a summary only and does not describe all of the tax consequences that may be relevant
to you in light of your particular circumstances, including but not limited to the alternative minimum tax, the Medicare tax on certain
net investment income and the different consequences that may apply if you are subject to special rules that apply to certain types of
investors, including but not limited to:
|
● |
financial
institutions or financial services entities; |
|
● |
broker-dealers; |
|
● |
governments
or agencies or instrumentalities thereof; |
|
● |
regulated
investment companies; |
|
● |
real
estate investment trusts; |
|
● |
expatriates
or former long-term residents of the United States; |
|
● |
persons
that actually or constructively own five percent or more (by vote or value) of our shares; |
|
● |
persons
subject to the “applicable financial statement” accounting rules under Section 451(b) of the Code; |
|
● |
persons
that acquired our common stock pursuant to an exercise of employee share options, in connection with employee share incentive plans
or otherwise as compensation; |
|
● |
insurance
companies; |
|
● |
dealers
or traders subject to a mark-to-market method of accounting with respect to our common stock; |
|
● |
persons
holding our common stock as part of a “straddle,” constructive sale, hedge, conversion or other integrated or similar
transaction; |
|
● |
partnerships
(or entities or arrangements classified as partnerships or other pass-through entities for U.S. federal income tax purposes) and
any beneficial owners of such partnerships; |
|
● |
tax-exempt
entities; |
|
● |
controlled
foreign corporations; and |
|
● |
passive
foreign investment companies. |
If
a partnership (including an entity or arrangement treated as a partnership or other pass-thru entity for U.S. federal income tax purposes)
holds our common stock, the tax treatment of a partner, member or other beneficial owner in such partnership will generally depend upon
the status of the partner, member or other beneficial owner, the activities of the partnership and certain determinations made at the
partner, member or other beneficial owner level. If you are a partner, member or other beneficial owner of a partnership holding our
common stock, you are urged to consult your tax advisor regarding the tax consequences of the acquisition, ownership and disposition
of our common stock.
This
discussion is based on the Code, and administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations
as of the date hereof, which are subject to change, possibly on a retroactive basis, and changes to any of which subsequent to the date
of this prospectus may affect the tax consequences described herein. This discussion does not address any aspect of state, local or non-U.S.
taxation, or any U.S. federal taxes other than income taxes (such as gift and estate taxes).
We
have not sought, and do not expect to seek, a ruling from the U.S. Internal Revenue Service (the “IRS”) as to any
U.S. federal income tax consequence described herein. The IRS may disagree with the discussion herein, and its determination may be upheld
by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions will
not adversely affect the accuracy of the statements in this discussion. You are urged to consult your tax advisor with respect to the
application of U.S. federal tax laws to your particular situation, as well as any tax consequences arising under the laws of any state,
local or foreign jurisdiction.
THIS
DISCUSSION IS ONLY A SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS ASSOCIATED WITH THE ACQUISITION,
OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK. EACH PROSPECTIVE INVESTOR IN OUR COMMON STOCK IS URGED TO CONSULT ITS OWN TAX ADVISOR
WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY U.S. FEDERAL NON-INCOME, STATE, LOCAL, AND NON-U.S. TAX LAWS.
As
used herein, the term “non-U.S. Holder” means a beneficial owner of our common stock who or that is for U.S. federal
income tax purposes:
|
● |
a
non-resident alien individual (other than certain former citizens and residents of the United States subject to U.S. tax as expatriates); |
|
● |
a
foreign corporation; or |
|
● |
an
estate or trust that is not a U.S. Holder; |
but
generally does not include an individual who is present in the United States for 183 days or more in the taxable year of the disposition
of our common stock. If you are such an individual, you should consult your tax advisor regarding the U.S. federal income tax consequences
of the acquisition, ownership or sale or other disposition of our common stock.
Taxation
of Distributions
In
general, any distributions we make to a Non-U.S. Holder of shares of our common stock, to the extent paid out of our current or accumulated
earnings and profits (as determined under U.S. federal income tax principles), will constitute dividends for U.S. federal income tax
purposes and, provided such dividends are not effectively connected with the Non-U.S. Holder’s conduct of a trade or business within
the United States, we will be required to withhold tax from the gross amount of the dividend at a rate of 30%, unless such Non-U.S. Holder
is eligible for a reduced rate of withholding tax under an applicable income tax treaty and provides proper certification of its eligibility
for such reduced rate (usually on an IRS Form W-8BEN or W-8BEN-E). Any distribution not constituting a dividend will be treated first
as reducing (but not below zero) the Non-U.S. Holder’s adjusted tax basis in its shares of our common stock and, to the extent
such distribution exceeds the Non-U.S. Holder’s adjusted tax basis, as gain realized from the sale or other disposition of the
common stock, which will be treated as described under “Non-U.S. Holders - Gain on Sale, Taxable Exchange or
Other Taxable Disposition of Our Common Stock” below. In addition, if we determine that we are likely to be classified as a “United
States real property holding corporation” (see “Non-U.S. Holders - Gain on Sale, Taxable Exchange
or Other Taxable Disposition of Our Common Stock” below), we generally will withhold 15% of any distribution that exceeds our
current and accumulated earnings and profits.
The
withholding tax generally does not apply to dividends paid to a non-U.S. Holder who provides a Form W-8ECI, certifying that the
dividends are effectively connected with the non-U.S. Holder’s conduct of a trade or business within the United States.
Instead, the effectively connected dividends will be subject to regular U.S. federal income tax as if the non-U.S. Holder were
a U.S. resident, subject to an applicable income tax treaty providing otherwise. A corporate non-U.S. Holder receiving effectively
connected dividends may also be subject to an additional “branch profits tax” imposed at a rate of 30% (or a lower applicable
treaty rate).
Gain
on Sale, Taxable Exchange or Other Taxable Disposition of Our Common Stock
A
non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax in respect of gain recognized on a sale,
taxable exchange or other taxable disposition of our common stock unless:
|
● |
the
gain is effectively connected with the conduct by the non-U.S. Holder of a trade or business within the United States (and,
under certain income tax treaties, is attributable to a United States permanent establishment or fixed base maintained by the Non-U.S.
Holder); or |
|
● |
we
are or have been a “United States real property holding corporation” for U.S. federal income tax purposes at any time
during the shorter of the five-year period ending on the date of disposition or the period that the Non-U.S. Holder held our common
stock, and, in the case where shares of our common stock are regularly traded on an established securities market, the Non-U.S. Holder
has owned, directly or constructively, more than 5% of our common stock at any time within the shorter of the five-year period preceding
the disposition or such Non-U.S. Holder’s holding period for the shares of our common stock. There can be no assurance that
our common stock will be treated as regularly traded on an established securities market for this purpose. |
Unless
an applicable treaty provides otherwise, gain described in the first bullet point above will be subject to tax at generally applicable
U.S. federal income tax rates as if the non-U.S. Holder were a U.S. resident. Any gains described in the first bullet point above
of a non-U.S. Holder that is a foreign corporation may also be subject to an additional “branch profits tax” imposed
at a 30% rate (or lower treaty rate).
If
the second bullet point above applies to a non-U.S. Holder, gain recognized by such holder on the sale, exchange or other disposition
of our common stock will be subject to tax at generally applicable U.S. federal income tax rates. In addition, a buyer of our common
stock from such holder may be required to withhold U.S. federal income tax at a rate of 15% of the amount realized upon such disposition.
We will be classified as a United States real property holding corporation if the fair market value of our “United States real
property interests” equals or exceeds 50% of the sum of the fair market value of our worldwide real property interests plus our
other assets used or held for use in a trade or business, as determined for U.S. federal income tax purposes. We do not expect to be
a United States real property holding corporation immediately after the Business Combination is completed.
Foreign
Account Tax Compliance Act (FATCA) Withholding
Taxes
Provisions
commonly referred to as “FATCA” impose withholding of 30% on payments of dividends on our common stock to “foreign
financial institutions” (which is broadly defined for this purpose and in general includes investment vehicles) and certain other
non-U.S. entities unless various U.S. information reporting and due diligence requirements (generally relating to ownership by United
States persons of interests in or accounts with those entities) have been satisfied by, or an exemption applies to, the payee (typically
certified as to by the delivery of a properly completed IRS Form W-8BEN-E). Foreign financial institutions located in jurisdictions that
have an intergovernmental agreement with the United States governing FATCA may be subject to different rules. Under certain circumstances,
a non-U.S. Holder might be eligible for refunds or credits of such withholding taxes, and a Non-U.S. Holder might be required
to file a U.S. federal income tax return to claim such refunds or credits. Thirty percent withholding under FATCA was scheduled to apply
to payments of gross proceeds from the sale or other disposition of property that produces U.S.-source interest or dividends beginning
on January 1, 2019, but on December 13, 2018, the IRS released proposed regulations that, if finalized in their proposed form, would
eliminate the obligation to withhold on gross proceeds. Such proposed regulations also delayed withholding on certain other payments
received from other foreign financial institutions that are allocable, as provided for under final Treasury regulations, to payments
of U.S.-source dividends, and other fixed or determinable annual or periodic income. Although these proposed Treasury regulations are
not final, taxpayers generally may rely on them until final Treasury regulations are issued. Prospective investors should consult their
tax advisors regarding the effects of FATCA on their investment in our common stock.
CHEF
EQUITY FACILITY
General
On
October 7, 2022, we entered into the Original Purchase Agreement with CCM, pursuant to which CCM has agreed to purchase from us up
to an aggregate of $150 million of our common stock (subject to certain limitations) from time to time over the term of the Purchase
Agreement. We also entered into the ChEF RRA, dated as of October 7, 2022, pursuant to which we have filed with the SEC the
registration statement that includes this prospectus to register for resale under the Securities Act the shares of common stock that
may be issued and sold to CCM under the Purchase Agreement. On May 20, 2024, we entered into the A&R Purchase Agreement with CCM to update the VWAP mechanics to include
Intraday VWAP Purchases. As of May 13, 2024, we have sold 588,500 shares under the ChEF Equity
Facility for aggregate net proceeds to us of $1,278,566.
Subject
to the conditions set forth in the Purchase Agreement, we have the right, but not the obligation, from time to time at our sole discretion,
during the term of the Purchase Agreement, to direct CCM to purchase up to a specified maximum amount of shares of common stock as set
forth in the Purchase Agreement by delivering written notice to CCM on any trading day, so long as all shares of common stock subject
to all prior purchases by CCM under the Purchase Agreement have theretofore been received by CCM electronically as set forth in the Purchase
Agreement. The purchase price of the shares of common stock that we elect to sell to CCM pursuant to the Purchase Agreement will be determined
by reference to the VWAP of the common stock during the applicable VWAP Purchase Date on which we have timely delivered written notice to
CCM directing it to purchase shares of common stock under the Purchase Agreement, less a fixed 3.5% discount to such VWAP. As consideration
for its commitment to purchase shares of our common stock under the Purchase Agreement, we have agreed to pay a commitment fee of $1
million to CCM (the “Commitment Fee”), payable by way of an additional 3.0% discount to such VWAP until the Commitment
Fee has been paid in full.
The
Purchase Agreement may be terminated by us at any time at our sole discretion, without any cost or penalty, but subject to the full payment
of the Commitment Fee, payable by us to CCM pursuant to the conditions set forth in the Purchase Agreement, by giving five trading days
written notice to CCM to terminate the Purchase Agreement.
Actual
sales of shares of common stock to CCM under the Purchase Agreement will depend on a variety of factors to be determined by us from time
to time, including (among others) market conditions, the trading price of our common stock and determinations by us as to available and
appropriate sources of funding for our operations. Under the Purchase Agreement, CCM is not obligated to (but may, at its option, choose
to) purchase an amount of shares of common stock to the extent such amount purchased exceeds the amount of shares of common stock equal
to the least of: (a) a number of shares that would result in beneficial ownership (as calculated pursuant to Section 13(d) of the Exchange
Act and Rule 13d-3 promulgated thereunder) by CCM, together with its affiliates, of more than 9.9% of the outstanding voting power or
shares of common stock, (b) a number of shares that would cause the aggregate purchase price on the applicable Purchase Date (as defined
in the Purchase Agreement) for such purchase to exceed $3 million or (c) a number of shares that would equal 20% of the total number
of shares of common stock that would count towards the VWAP on the applicable VWAP Purchase Date of such purchase.
Immediately
following the closing of the Business Combination on October 7, 2022, there were 44,848,686 shares of our common stock outstanding. Although
the Purchase Agreement provides that we may sell up to an aggregate of $150 million of our common stock to CCM, only 21,512,027 shares
of our common stock are being offered under this prospectus to CCM. Depending on the market prices of our common stock at the time we
elect to issue and sell shares to CCM under the Purchase Agreement, we may need to file with the SEC one or more additional registration
statements to register the resale under the Securities Act by CCM of additional shares of common stock we wish to sell from time to time
under the Purchase Agreement, which the SEC must declare effective. If all of the 21,512,027 shares offered by CCM under this prospectus
were issued and outstanding as of the date hereof, such shares would represent approximately 36% of the total number of shares of our
common stock outstanding as of May 13, 2024. If we elect to issue and sell more than the 21,512,027 shares offered under this
prospectus to CCM, which we may have the right, but not the obligation, to do, we must first register for resale under the Securities
Act any such additional shares, which could cause additional substantial dilution to our stockholders. The number of shares ultimately
offered for resale by CCM is dependent upon the number of shares we sell to CCM under the Purchase Agreement.
Issuances
of our common stock in this offering will not affect the rights or privileges of our existing stockholders, except that the economic
and voting interests of each of our existing stockholders will be diluted as a result of any such issuance. Although the number of shares
of common stock that our existing stockholders own will not decrease, the shares owned by our existing stockholders will represent a
smaller percentage of our total outstanding shares after any such issuance to CCM.
We
have agreed for a period of thirty months from the closing date of the Business Combination, that CCM shall have a right of first refusal
to act as a book-running manager or placement manager for public and private offerings and as an exclusive sales agent in any “at-the-market-offering”
as defined in Rule 415(a)(4) under the Securities Act. If CCM provides any such additional services, we will enter into separate agreements
with CCM in connection with such additional services, containing customary terms and conditions based on the prevailing market for similar
services for global, full-service investment banks. We may terminate CCM’s engagement under the Purchase Agreement for cause in
the event CCM materially fails to provide the services contemplated hereunder, in which case, our obligations with respect to this right
of first refusal will be eliminated.
Other
than the limitations described above, and subject to the conditions precedent in the Purchase Agreement, we will control the timing and
amount of any sales of our common stock to CCM.
The
Purchase Agreement contains customary representations, warranties, covenants, closing conditions and indemnification provisions by, among
and for the benefit of the parties. There are no limitations on the use of proceeds, financial covenants, participation rights, penalties
or liquidated damages in the Purchase Agreement.
Termination
In
addition to our sole discretion to terminate the Purchase Agreement, CCM may terminate effective upon ten (10) Trading Days’ prior
written notice to us, upon the occurrence of certain events, including:
|
● |
any
condition, occurrence, state of facts or event constituting a Material Adverse Effect (as defined in the Purchase Agreement) has
occurred and is continuing; |
|
● |
certain
fundamental transactions shall have occurred; or |
|
● |
we
are in breach or default in any material respect of any of its covenants and agreements in the ChEF RRA, and, if such breach or default
is capable of being cured, such breach or default is not cured within fifteen (15) Trading Days after notice of such breach or default
is delivered to us. |
Unless
earlier terminated, the Purchase Agreement will remain in effect until the earliest to occur of (i) the 36-month anniversary of the effective
date of this Registration Statement, (ii) the date on which CCM has purchased the total commitment pursuant to the Purchase Agreement,
(iii) the date on which our common stock fails to be listed or quoted on Nasdaq or any successor market, and (iv) the date on which,
pursuant to or within the meaning of any bankruptcy law, we commence a voluntary case or any Person commences a proceeding against us,
a custodian is appointed for us or for all or substantially all of our property, or we make a general assignment for the benefit of our
creditors.
No
Short Selling or Hedging by CCM
CCM
has agreed that neither it nor any entity managed or controlled by CCM (the “Restricted Persons”) shall directly or
indirectly, engage in any short sales or hedging of our common stock during any time prior to the termination of the Purchase Agreement,
which establishes a new short position with respect to our common stock, taking into account the holdings of all Restricted Persons.
Prohibitions
on Certain Specified Transactions
Subject
to our right to terminate as described above and for such time the Purchase Agreement is in effect, we shall not effect or enter into
an agreement to effect any issuance by us or any of our subsidiaries of common stock or common stock equivalents (or a combination of
units thereof) involving certain specified transactions. Such restrictions do not include follow-on offerings or follow-on public offerings,
in each case where we issue or sell any securities with a fixed price. Furthermore, we may enter into certain exempt issuances under
the Purchase Agreement.
Effect
of Performance of the Purchase Agreement on Our Stockholders
All
21,512,027 shares registered in this offering which have been or may be issued or sold by us to CCM under the Purchase Agreement are
expected to be freely tradable. It is anticipated that shares registered in this offering will be sold over the term of the Purchase
Agreement. The sale by CCM of a significant amount of shares registered in this offering at any given time could cause the market price
of our common stock to decline and to be highly volatile. Sales of our common stock to CCM, if any, will depend upon market conditions
and other factors to be determined by us. We may ultimately decide to sell to CCM all, some or none of the additional shares of our common
stock that may be available for us to sell pursuant to the Purchase Agreement. As of May 13, 2024, we have sold 588,500 shares under the ChEF Equity Facility
for aggregate net proceeds to us of $1,278,566.
If
and when we do sell shares to CCM, after CCM has acquired the shares, CCM may resell all, some or none of those shares at any time or
from time to time in its discretion. Therefore, sales to CCM by us under the Purchase Agreement may result in substantial dilution to
the interests of other holders of our common stock. In addition, if we sell a substantial number of shares to CCM under the Purchase
Agreement, or if investors expect that we will do so, the actual sales of shares or the mere existence of our arrangement with CCM may
make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise
wish to effect such sales. However, we have the right to control the timing and amount of any additional sales of our shares to CCM and
the Purchase Agreement may be terminated by us at any time at our discretion without any cost to us, subject to the full payment of the
Commitment Fee.
The
following table sets forth the amount of gross proceeds we would receive from CCM from our sale of shares to CCM under the Purchase Agreement
at varying purchase prices:
Assumed Average Purchase Price
Per Share | | |
Number of Registered Shares to
be Issued if Full Purchase(1) | | |
Percentage of Outstanding Shares
After Giving Effect to the Issuance to CCM(2) | | |
Proceeds from the Sale of Shares
to CCM Under the Purchase Agreement(1) | |
$ | 0.75 | | |
| 21,512,027 | | |
| 26.23 | % | |
$ | 564,690.71 | |
$ | 1.00 | | |
| 21,512,027 | | |
| 26.23 | % | |
$ | 752,920.95 | |
$ | 1.12 | (3) | |
| 21,512,027 | | |
| 26.23 | % | |
$ | 843,271.46 | |
$ | 1.25 | | |
| 21,512,027 | | |
| 26.23 | % | |
$ | 941,151.18 | |
$ | 1.75 | | |
| 21,512,027 | | |
| 26.23 | % | |
$ | 1,317,611.65 | |
$ | 2.00 | | |
| 21,512,027 | | |
| 26.23 | % | |
$ | 1,505,841.89 | |
(1) |
As of May 13, 2024, we have issued 588,500 shares under the ChEF Equity
Facility for gross proceeds of $1,278,566. Although the Purchase Agreement provides that we may sell up to $150 million of our common
stock to CCM, we are only registering 21,512,027 shares under this prospectus and may need to file additional registration statements
to register additional shares if we determine to sell more than the 21,512,027 shares registered for resale pursuant to this Registration
Statement. The actual number of shares of common stock issuable will vary depending on the then current market price of shares of common
stock sold to CCM under the ChEF Equity Facility. Accordingly, depending on the assumed average price per share, we may or may not be
able to ultimately sell to CCM a number of shares of our common stock with a total value of $150 million under this prospectus. |
|
|
(2) |
The numerator is based on the number of shares issuable at the corresponding
assumed purchase price as set forth in the adjacent column. The denominator is based on 60,509,476 shares of our common stock outstanding
immediately as of May 13, 2024, adjusted to include the number of shares of our common stock set forth in the adjacent column which we
would have sold to CCM, assuming the purchase price in the adjacent column. The numerator is based on the number of shares of our common
stock issuable under the Purchase Agreement at the corresponding assumed purchase price set forth in the adjacent column without giving
effect to the Beneficial Ownership Limitation. |
|
|
(3) |
The
closing sale price of our shares of common stock on May 17, 2024. |
Plan
of Distribution (CONFLICTS OF INTEREST)
We
are registering the resale by CCM of up to 21,512,027 shares of our common stock. Our common stock may be sold or distributed from time
to time by CCM directly to one or more purchasers or through brokers, dealers, or underwriters who may act solely as agents at market
prices prevailing at the time of sale, at prices related to the prevailing market prices, at negotiated prices, or at fixed prices, which
may be changed.
Although
the Purchase Agreement provides that we may sell up to an aggregate of $150 million of shares of common stock to CCM, only 21,512,027
shares of common stock are being registered for resale under the registration statement that includes this prospectus. The actual number
of shares of common stock issuable will vary depending on the then current market price of shares of common stock sold to CCM under the
ChEF Equity Facility.
The
sale of common stock offered by this prospectus could be effected in one or more of the following methods:
|
● |
ordinary
brokers’ transactions; |
|
● |
transactions
involving cross or block trades; |
|
● |
through
brokers, dealers, or underwriters who may act solely as agents; |
|
● |
“at
the market” into an existing market for common stock; |
|
● |
in
other ways not involving market makers or established business markets, including direct sales to purchasers or sales effected through
agents; |
|
● |
in
privately negotiated transactions; |
|
● |
any
combination of the foregoing; or |
|
● |
any
other method permitted pursuant to applicable law. |
CCM
will act independently of us in making decisions with respect to the timing, manner and size of each sale, subject to the restrictions
in the Purchase Agreement. Such sales may be made on one or more exchanges or in the over-the-counter market or otherwise, at prices
and under terms then prevailing or at prices related to the then current market price or in negotiated transactions. CCM reserves the
right to accept and, together with its respective agents, to reject, any proposed purchase of securities to be made directly or through
agents.
In
order to comply with the securities laws of certain states, if applicable, the shares may be sold only through registered or licensed
brokers or dealers.
CCM
is a selling securityholder and is an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act.
CCM
is a registered broker-dealer and FINRA member and has informed us that it presently anticipates effectuating resales, if any, of shares
of our common stock that it may acquire from us pursuant to the Purchase Agreement, and that it may also engage one or more other registered
broker-dealers to effectuate resales, if any, of such shares that it may acquire from us. Such sales will be made at prices and at terms
then prevailing or at prices related to the then current market price. Each such registered broker-dealer will be an underwriter within
the meaning of Section 2(a)(11) of the Securities Act. CCM has informed us that each such broker-dealer (excluding CCM), may receive
commissions from CCM for executing such sales for CCM and, if so, such commissions will not exceed customary brokerage commissions.
The
purchase price of the shares of common stock that we elect to sell to CCM pursuant to the Purchase Agreement will be determined by reference
to the VWAP of the common stock during the applicable purchase date on which we have timely delivered written notice to CCM directing
it to purchase shares of common stock under the Purchase Agreement, less a fixed 3.5% discount to such VWAP. Also, as consideration for
its commitment to purchase shares of our common stock under the Purchase Agreement, we have agreed to pay a commitment fee of $1 million
to CCM, payable by way of a reduction of the VWAP Purchase Price under the terms of the Purchase Agreement. The foregoing 3.5% discount
and commitment fee will be deemed to be underwriting compensation in connection with sales of the shares of common stock by CCM to the
public.
In
addition, pursuant to the Purchase Agreement we have agreed to pay a structuring fee of $50,000 to CCM for advising us on the structure
of the ChEF Equity Facility in order to establish all necessary corporate and other arrangements for the conduct of the ChEF Equity Facility.
We have also agreed to reimburse CCM up to $125,000 for the fees and disbursements of its counsel in connection with the transactions
contemplated by the Purchase Agreement and up to $25,000 per fiscal quarter thereafter for up to 36 months, or up to $425,000 in the
aggregate, in connection with CCM’s ongoing due diligence review. These fees and reimbursed expenses will be deemed to be underwriting
compensation in connection with sales of shares of common stock by CCM to the public.
As
described under “Unaudited Pro Forma Condensed Combined Financial Information - PIPE Investment,” CCM acquired 15,000 shares
of our common stock in a private placement on October 7, 2022. Such shares will be treated as underwriting compensation in connection
with this offering and will not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale,
derivative, put or call transaction that would result in the effective economic disposition of such shares for a period of 180 days beginning
on the date of commencement of sales of the public offering under the Purchase Agreement, except as provided in FINRA Rule 5110(e)(2).
The
total underwriting compensation to be received in connection with sales of shares of common stock by CCM to the public, as determined
under FINRA Rule 5110, will not exceed 8% of the maximum dollar amount of common stock to be sold to the public under the Purchase Agreement.
Brokers,
dealers, underwriters or agents participating in the distribution of the shares as agents may receive compensation in the form of commissions,
discounts, or concessions from CCM and/or purchasers of common stock for whom the broker-dealers may act as agent. Neither we nor CCM
can presently estimate the amount of compensation that any agent will receive. We know of no existing arrangements between CCM or any
other stockholder, broker, dealer, underwriter or agent relating to the sale or distribution of the shares offered by this prospectus.
At the time a particular offer of shares is made, a prospectus supplement, if required, will be distributed that will set forth the names
of any agents, underwriters or dealers and any compensation from CCM, and any other required information.
We
will pay the expenses incident to the registration, offering, and sale of the shares to CCM. We have agreed to indemnify CCM and certain
other persons against certain liabilities in connection with the offering of shares of common stock offered hereby, including liabilities
arising under the Securities Act or, if such indemnity is unavailable, to contribute amounts required to be paid in respect of such liabilities.
CCM
has represented to us that at no time prior to the Purchase Agreement has it or its agents, representatives or affiliates engaged in
or effected, in any manner whatsoever, directly or indirectly, any short sale (as such term is defined in Rule 200 of Regulation SHO
of the Exchange Act) of our common stock or any hedging transaction, which establishes a net short position with respect to our common
stock. CCM has agreed that during the term of the Purchase Agreement, it, its agents, representatives or affiliates will not enter into
or effect, directly or indirectly, any of the foregoing transactions.
We
have advised CCM that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and
to the activities of CCM and its affiliates.
Right
of First Refusal
We
have agreed, subject to entering into separate agreements containing customary terms and conditions, for a period of thirty months from
the closing date of the Business Combination, that CCM shall have a right of first refusal to act as a book-running manager or placement
manager for public and private offerings and as an exclusive sales agent in any “at-the-market-offering” as defined in Rule
415(a)(4) under the Securities Act. This right of first refusal will be deemed to be underwriting compensation in connection with this
offering.
Conflicts
of Interest
CCM,
an affiliate of the Sponsor, is a member of FINRA and is expected to act as an executing broker for the resale of common stock in this
offering. The receipt by CCM of all the proceeds from resales of common stock results in a “conflict of interest” under FINRA
Rule 5121. Accordingly, such resales will be conducted in compliance with FINRA Rule 5121. To the extent that the shares of common stock
do not have a “bona fide public market,” as defined in FINRA Rule 5121, a qualified independent underwriter will participate
in the preparation of, and exercise the usual standards of “due diligence” with respect to, the registration statement. LifeSci
Capital, LLC has agreed to act as qualified independent underwriter for this offering and receive an upfront fee of $100,000 for performing
the services required by a qualified independent underwriter under FINRA Rule 5121(a)(2)(A) prior to the filing of the initial registration
statement relating to this offering, including conducting due diligence in connection with this offering and advising of any required
changes to the registration statement (the “QIU Services”), and for its ongoing QIU Services during the first year
after the date of the Purchase Agreement. In addition, beginning one year after the date of the Purchase Agreement until its termination,
LifeSci Capital, LCC will receive quarterly fees of $25,000 for providing QIU Services. The total fees to be received by LifeSci Capital,
LLC for its QIU Services will not exceed $300,000 in the aggregate. Pursuant to FINRA Rule 5121, CCM will not confirm resales of common
stock to any account over which it exercises discretionary authority without the prior written approval of the customer.
Our
common stock is quoted on the Nasdaq Global Market under the trading symbol “DFLI.”
LEGAL
MATTERS
The
validity of the securities offered hereby will be passed upon for us by Parsons Behle & Latimer.
EXPERTS
The
consolidated financial statements of Dragonfly Energy Holdings Corp. as of December 31, 2023 included in this prospectus and
in this Registration Statement, have been so included in reliance on the report of Marcum LLP, an independent registered public accounting
firm given on the authority of said firm as experts in auditing and accounting. The report on the consolidated financial statements contains an explanatory paragraph regarding the Company’s ability
to continue as a going concern. The report also contains an explanatory paragraph regarding adjustments
described in Note 15 of such report that were applied to review the 2022 financial statements to correct an error. They were not engaged
to audit, review or apply any procedures to the 2022 financial statements other than with respect to the adjustments
The
consolidated financial statements of Dragonfly Energy Holdings Corp. as of December 31, 2022 and for the year then ended,
included in this prospectus and in this Registration Statement, have been so included in reliance on the report of BDO USA, LLP (n/k/a
BDO USA, P.C.), an independent registered public accounting firm given on the authority of said firm as experts in
auditing and accounting. The report on the consolidated financial statements contains an explanatory paragraph regarding the
Company’s ability to continue as a going concern.
Changes
in Registrant’s Certifying Accountant
On
November 15, 2023, the Audit Committee (the “Audit Committee”) of our Board dismissed
BDO USA, LLP (n/k/a BDO USA, P.C.) (“BDO”) as our independent registered public accounting firm. BDO had served
as our independent registered public accounting firm from October 7, 2022 through the period ended September 30, 2023. On November
15, 2023, the Audit Committee appointed Marcum LLP (“Marcum”) as our new independent registered public accounting
firm commencing with our fiscal year ended December 31, 2023.
BDO’s
audit report on our consolidated
financial statements as of December 31, 2022 and for the year then ended did not contain an adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except for BDO’s
report for the year ended December 31, 2022, which contained an explanatory paragraph regarding the substantial doubt about
our ability to continue as a going concern.
We provided BDO with a copy of the foregoing disclosures.
During
the fiscal years ended December 31, 2022 and 2021 and the subsequent interim period through November 15, 2023: (1)
there were no “disagreements” (as defined in Item 304(a)(1)(iv) of Regulation S-K) with BDO on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements,
if not resolved to the satisfaction of BDO, would have caused BDO to make reference to the subject matter of
such disagreements in connection with its reports on the consolidated financial statements for the following periods and
(2) there were no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K), except as set
forth below. As previously disclosed in Item 9A of the Company’s Annual Report on Form 10-K for the year ended December
31, 2022 (the “2022 Annual Report”), the Company’s management identified material weaknesses related
to maintaining effective controls in the following areas: (i) insufficient number of accounting and financial reporting resources with
the appropriate level of knowledge, experience and training; (ii) ineffective identification and assessment of risks impacting internal
control over financial reporting; and (iii) ineffective evaluation and determination as to whether the components of internal
control were present and functioning. As described in the 2022 Annual Report, the foregoing material weaknesses contributed to the following
additional material weaknesses in business processes: (i) designing and implementing procedures surrounding completion, accuracy and
review of account reconciliations; (ii) designing and implementing controls to assess the completeness, accuracy and accounting analysis
of material contracts entered into by the Company; (iii) designing and implementing controls to sufficiently supervise and review the
work completed by specialist engaged by the Company; (iv) designing and implementing controls to ensure the accuracy of period-end inventory
count procedures to ensure proper financial reporting; and (v) designing and implementing control procedures to ensure the accuracy of
the financial statements to the underlying accounting records and ensure the completeness of required disclosure. This was discussed
among the Company’s management, the Audit Committee and BDO. BDO has been authorized by the Company to respond fully to the
inquiries of Marcum, the successor accountant, including concerning this change in auditors.
During
our fiscal year ended December 31,
2022 and the subsequent interim periods through November 17, 2023, neither we nor anyone acting on our behalf consulted with Marcum regarding either of the following: (i)
the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion
that might be rendered on our financial statements, and neither a written report nor oral advice was provided
to us that Marcum concluded was an important factor considered by us in reaching a decision as
to the accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a disagreement,
as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions, or a “reportable event,” as described
in Item 304(a)(1)(v) of Regulation S-K.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed a registration statement on Form S-1, including exhibits, under the Securities Act of 1933, as amended, with respect to the
securities offered by this prospectus. This prospectus does not contain all of the information included in the registration statement.
For further information pertaining to us and our securities, you should refer to the registration statement and exhibits.
In
addition, we file annual, quarterly and current reports, prospectus and other information with the SEC. Our SEC filings are available
to the public on a website maintained by the SEC located at www.sec.gov. We also maintain a website at https://www.dragonflyenergy.com/.
Through our website, we make available, free of charge, annual, quarterly and current reports, prospectus and other information as soon
as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained on, or that may
be accessed through, our website is not part of, and is not incorporated into, this prospectus.
DRAGONFLY
ENERGY HOLDINGS CORP.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
of Dragonfly Energy Holdings Corp.
Opinion on the Financial
Statements
We have audited the accompanying
consolidated balance sheet of Dragonfly Energy Holdings Corp. (the “Company”) as of December 31, 2023, the related consolidated
statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2023, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended
December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 15 to the
financial statements, the 2022 financial statements have been revised to correct for the under reporting of tariffs. The financial statements
of the Company for the year ended December 31, 2022, before the effects of the adjustments to correct the errors discussed in Note 15
to the financial statements, were audited by other auditors whose report, dated April 17, 2023, expressed an unqualified opinion on those
statements and included an explanatory paragraph regarding the Company’s ability to continue as a going concern. We have also audited
the adjustments described in Note 15 that were applied to revise the 2022 financial statements to correct the errors. In our opinion,
such adjustments are appropriate and have been properly applied. Except for the corrections described in Note 15 we were not engaged to
audit, review, or apply any procedures to the financial position of the Company as of December 31, 2022, and the results of its operations
and its cash flows for the year then ended, other than stated above and, accordingly, we do not express an opinion or any other form of
assurance on the 2022 financial statements taken as a whole.
Explanatory Paragraph –
Going Concern
The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company incurred
loss from operations and had negative cash flow from operations and concluded it is probable the Company will not comply with future covenants
of the Term Loan and does not have sufficient resources to repay the Term Loan, which raises substantial doubt about its ability to continue
as a going concern. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Basis for Opinion
These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our
opinion.
/s/ Marcum llp
Marcum LLP
We served as the Company’s auditor since
2023.
New York, NY
April 16, 2024
Report
of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Dragonfly Energy Holdings Corp.
Reno, Nevada
Opinion on the Consolidated
Financial Statements
We have audited, before the
effects of the adjustments for the correction of the error described in Note 15, the accompanying consolidated balance sheet of Dragonfly
Energy Holdings Corp. (the “Company”) as of December 31, 2022, the related consolidated statements of operations, shareholders’
equity, and cash flows for the year then ended (the 2022 consolidated financial statements before the effects of the adjustments discussed
in Note 15 are not presented herein). In our opinion, except for the error described in Note 15, the 2022 consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations
and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of
America.
We were not engaged to audit,
review, or apply any procedures to the adjustments for the correction of the error described in Note 15 and, accordingly, we do not express
an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments
were audited by Marcum LLP.
Going Concern
The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has incurred losses and has a negative cash flow from operations and concluded it is probable the Company
will not comply with future covenants of the Term Loan and does not have sufficient resources to repay the Term Loan, which raises substantial
doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note
2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing
procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit
provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
We served as the Company’s auditor from 2021
to 2023.
Spokane, Washington
April 17, 2023
DRAGONFLY
ENERGY HOLDINGS CORP.
Consolidated
Balance Sheets
December
31, 2023 and 2022
(in
thousands, except share and per share data)
| |
2023 | | |
2022 | |
Current Assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 12,713 | | |
$ | 17,781 | |
Accounts receivable, net of allowance for credit losses | |
| 1,639 | | |
| 1,444 | |
Inventory | |
| 38,778 | | |
| 50,189 | |
Prepaid expenses | |
| 772 | | |
| 1,624 | |
Prepaid inventory | |
| 1,381 | | |
| 2,002 | |
Prepaid income tax | |
| 519 | | |
| 525 | |
Other current assets | |
| 118 | | |
| 267 | |
Total Current Assets | |
| 55,920 | | |
| 73,832 | |
Property and Equipment | |
| | | |
| | |
Machinery and equipment | |
| 16,714 | | |
| 10,214 | |
Office furniture and equipment | |
| 319 | | |
| 275 | |
Leasehold improvements | |
| 1,727 | | |
| 1,709 | |
Vehicle | |
| 33 | | |
| 195 | |
Total | |
| 18,793 | | |
| 12,393 | |
Less accumulated depreciation | |
| (2,824 | ) | |
| (1,633 | ) |
Property and Equipment | |
| 15,969 | | |
| 10,760 | |
Operating lease right of use asset, net | |
| 3,315 | | |
| 4,513 | |
Total Assets | |
$ | 75,204 | | |
$ | 89,105 | |
Current Liabilities | |
| | | |
| | |
Accounts payable | |
| 10,258 | | |
| 13,475 | |
Accrued payroll and other liabilities | |
| 7,107 | | |
| 6,250 | |
Accrued tariffs | |
| 1,713 | | |
| 932 | |
Customer deposits | |
| 201 | | |
| 238 | |
Uncertain tax position liability | |
| 91 | | |
| 128 | |
Notes payable, current portion, net of debt issuance costs | |
| 19,683 | | |
| 19,242 | |
Operating lease liability, current portion | |
| 1,288 | | |
| 1,188 | |
Financing lease liability, current portion | |
| 36 | | |
| 10 | |
Total Current Liabilities | |
| 40,377 | | |
| 41,463 | |
Long-Term Liabilities | |
| | | |
| | |
Warrant liabilities | |
| 4,463 | | |
| 32,831 | |
Accrued expenses-long term | |
| 152 | | |
| 492 | |
Operating lease liability, net of current portion | |
| 2,234 | | |
| 3,541 | |
Financing lease liability, net of current portion | |
| 66 | | |
| 35 | |
Total Long-Term Liabilities | |
| 6,915 | | |
| 36,899 | |
Total Liabilities | |
| 47,292 | | |
| 78,362 | |
Commitments and Contingencies (See Note 6) | |
| - | | |
| - | |
Stockholders’ Equity | |
| | | |
| | |
Preferred stock, 5,000,000 shares at $0.0001 par value, authorized, no shares issued and outstanding as of December 31, 2023 and 2022, respectively | |
| - | | |
| - | |
Common stock, 250,000,000 shares at $0.0001 par value, authorized, 60,260,282 and 43,272,728 shares issued and outstanding as of December 31, 2023 and 2022, respectively | |
| 6 | | |
| 4 | |
Additional paid in capital | |
| 69,445 | | |
| 38,461 | |
Accumulated deficit | |
| (41,539 | ) | |
| (27,722 | ) |
Total Stockholders’ Equity | |
| 27,912 | | |
| 10,743 | |
Total Liabilities and Stockholders’ Equity | |
$ | 75,204 | | |
$ | 89,105 | |
Dragonfly
Energy Holdings Corp.
Consolidated
Statements of Operations
Years
Ended December 31, 2023 and 2022
(in
thousands, except share and per share data)
| |
2023 | | |
2022 | |
| |
| | |
| |
Net Sales | |
$ | 64,392 | | |
$ | 86,251 | |
| |
| | | |
| | |
Cost of Goods Sold | |
| 48,946 | | |
| 62,633 | |
| |
| | | |
| | |
Gross Profit | |
| 15,446 | | |
| 23,618 | |
| |
| | | |
| | |
Operating Expenses | |
| | | |
| | |
Research and development | |
| 3,863 | | |
| 2,764 | |
General and administrative | |
| 26,389 | | |
| 41,566 | |
Selling and marketing | |
| 12,623 | | |
| 13,671 | |
| |
| | | |
| | |
Total Operating Expenses | |
| 42,875 | | |
| 58,001 | |
| |
| | | |
| | |
Loss From Operations | |
| (27,429 | ) | |
| (34,383 | ) |
| |
| | | |
| | |
Other Income (Expense) | |
| | | |
| | |
Other income (expense) | |
| 19 | | |
| 40 | |
Other expense | |
| | | |
| | |
Interest expense, net | |
| (16,015 | ) | |
| (6,979 | ) |
Change in fair market value of warrant liability | |
| 29,582 | | |
| 5,446 | |
Debt extinguishment | |
| - | | |
| (4,824 | ) |
Total Other Income (Expense) | |
| 13,586 | | |
| (6,317 | ) |
| |
| | | |
| | |
Loss Before Taxes | |
| (13,843 | ) | |
| (40,700 | ) |
| |
| | | |
| | |
Income Tax Benefit | |
| (26 | ) | |
| (709 | ) |
| |
| | | |
| | |
Net Loss | |
$ | (13,817 | ) | |
$ | (39,991 | ) |
| |
| | | |
| | |
Loss Per Share- Basic and Diluted | |
$ | (0.26 | ) | |
$ | (1.04 | ) |
| |
| | | |
| | |
Weighted Average Number of Shares – Basic and Diluted | |
| 52,786,481 | | |
| 38,565,307 | |
Dragonfly
Energy Holdings Corp.
Consolidated
Statements of Shareholders’ Equity
Years
Ended December 31, 2023 and 2022
(in
thousands, except share data)
| |
| | |
| | |
| | |
| | |
| |
| |
Common Stock | | |
Additional
Paid-In | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
Balance – January 1, 2022 | |
| 36,496,998 | | |
| 4 | | |
| 3,619 | | |
| 12,269 | | |
| 15,892 | |
Net loss | |
| - | | |
| - | | |
| - | | |
| (39,991 | ) | |
| (39,991 | ) |
Stock purchase agreement | |
| 1,498,301 | | |
| - | | |
| 15,000 | | |
| - | | |
| 15,000 | |
Exercise of stock options | |
| 581,351 | | |
| - | | |
| 706 | | |
| - | | |
| 706 | |
Reverse capitalization, net of transaction costs (See note 3) | |
| 4,238,936 | | |
| - | | |
| - | | |
| - | | |
| - | |
Cashless exercise of liability classified warrants | |
| 457,142 | | |
| - | | |
| 16,669 | | |
| - | | |
| 16,669 | |
Stock compensation expense | |
| - | | |
| - | | |
| 2,467 | | |
| - | | |
| 2,467 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance – December 31, 2022 | |
| 43,272,728 | | |
| 4 | | |
| 38,461 | | |
| (27,722 | ) | |
| 10,743 | |
Balance | |
| 43,272,728 | | |
| 4 | | |
| 38,461 | | |
| (27,722 | ) | |
| 10,743 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| - | | |
| - | | |
| - | | |
| (13,817 | ) | |
| (13,817 | ) |
Common stock issued in public offering (ATM), net of costs | |
| 588,500 | | |
| - | | |
| 1,273 | | |
| - | | |
| 1,273 | |
Common stock issued in public offering, net of costs | |
| 11,405,000 | | |
| 1 | | |
| 7,877 | | |
| - | | |
| 7,878 | |
Exercise of stock options | |
| 917,662 | | |
| - | | |
| 586 | | |
| - | | |
| 586 | |
Exercise of public warrants | |
| 64,971 | | |
| - | | |
| 747 | | |
| - | | |
| 747 | |
Exercise of investor warrants | |
| 273,100 | | |
| - | | |
| 546 | | |
| - | | |
| 546 | |
Cashless exercise of liability classified warrants | |
| 3,069,323 | | |
| 1 | | |
| 13,245 | | |
| - | | |
| 13,245 | |
Shares issued for vested restricted stock units | |
| 641,998 | | |
| - | | |
| - | | |
| - | | |
| - | |
Stock compensation expense | |
| - | | |
| - | | |
| 6,710 | | |
| - | | |
| 6,710 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance – December 31, 2023 | |
| 60,260,282 | | |
$ | 6 | | |
$ | 69,445 | | |
$ | (41,539 | ) | |
$ | 27,912 | |
Balance | |
| 60,260,282 | | |
$ | 6 | | |
$ | 69,445 | | |
$ | (41,539 | ) | |
$ | 27,912 | |
Dragonfly
Energy Holdings Corp.
Consolidated
Statements of Cash Flows
Years
Ended December 31, 2023 and 2022
(in
thousands)
| |
2023 | | |
2022 | |
Cash flows from Operating Activities | |
| | | |
| | |
Net Loss | |
$ | (13,817 | ) | |
$ | (39,991 | ) |
Adjustments to Reconcile Net Loss to Net Cash | |
| | | |
| | |
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities | |
| | | |
| | |
Used in Operating Activities | |
| | | |
| | |
Stock based compensation | |
| 6,710 | | |
| 2,467 | |
Debt extinguishment | |
| - | | |
| 4,824 | |
Assumption of warrant liability | |
| - | | |
| 1,990 | |
Amortization of debt discount | |
| 1,470 | | |
| 1,822 | |
Change in fair market value of warrant liability | |
| (29,582 | ) | |
| (5,446 | ) |
Deferred tax liability | |
| - | | |
| (453 | ) |
Non-cash interest expense (paid-in kind) | |
| 4,938 | | |
| 1,192 | |
Provision for credit losses | |
| 114 | | |
| 108 | |
Depreciation | |
| 1,237 | | |
| 891 | |
Amortization of right of use of assets | |
| | | |
| | |
Loss on disposal of property and equipment | |
| 116 | | |
| 56 | |
Write-off of prepaid inventory | |
| 596 | | |
| - | |
Changes in Assets and Liabilities | |
| | | |
| | |
Accounts receivable | |
| (309 | ) | |
| (769 | ) |
Inventories | |
| 11,411 | | |
| (22,732 | ) |
Prepaid expenses | |
| 852 | | |
| (1,467 | ) |
Prepaid inventory | |
| 25 | | |
| 5,459 | |
Other current assets | |
| 149 | | |
| 1,520 | |
Other assets | |
| 1,198 | | |
| 1,196 | |
Income taxes payable | |
| 6 | | |
| (1,156 | ) |
Accounts payable and accrued expenses | |
| (3,527 | ) | |
| 4,428 | |
Accrued tariffs | |
| 781 | | |
| 433 | |
Uncertain tax position liability | |
| (37 | ) | |
| 128 | |
Customer deposits | |
| (37 | ) | |
| (196 | ) |
Total Adjustments | |
| (3,889 | ) | |
| (5,705 | ) |
Net Cash Used in Operating Activities | |
| (17,706 | ) | |
| (45,696 | ) |
| |
| | | |
| | |
Cash Flows From Investing Activities | |
| | | |
| | |
Proceeds from disposal of property and equipment | |
| - | | |
| 35 | |
Purchase of property and equipment | |
| (6,885 | ) | |
| (6,862 | ) |
Net Cash Used in Investing Activities | |
| (6,885 | ) | |
| (6,827 | ) |
Dragonfly
Energy Holdings Corp.
Consolidated
Statements of Cash Flows (continued)
Years
Ended December 31, 2023 and 2022
(in
thousands)
(continued from previous page) | |
2023 | | |
2022 | |
Cash Flows From Financing Activities | |
| | | |
| | |
Proceeds from public offering | |
| 24,177 | | |
| - | |
Payments from public offering costs | |
| (1,258 | ) | |
| | |
Proceeds from note payable, related party | |
| 1,000 | | |
| - | |
Repayment of note payable, related party | |
| (1,000 | ) | |
| - | |
Proceeds from term loan | |
| - | | |
| 75,000 | |
Repayment of note payable | |
| (5,275 | ) | |
| (45,000 | ) |
Proceeds from exercise of public warrants | |
| 747 | | |
| - | |
Payment of debt issuance costs | |
| - | | |
| (4,032 | ) |
Proceeds from exercise of options | |
| 586 | | |
| 706 | |
Proceeds from stock purchase agreement | |
| - | | |
| 15,000 | |
Proceeds from exercise of investor warrants | |
| 546 | | |
| - | |
Net Cash Provided by Financing Activities | |
| 19,523 | | |
| 41,674 | |
| |
| | | |
| | |
Net Decrease in Cash and cash equivalents | |
| (5,068 | ) | |
| (10,849 | ) |
Cash and cash equivalents – beginning of year | |
| 17,781 | | |
| 28,630 | |
Cash and cash equivalents – end of year | |
$ | 12,713 | | |
$ | 17,781 | |
| |
| | | |
| | |
Supplemental Disclosures of Cash Flow Information: | |
| | | |
| | |
Cash paid for income taxes | |
$ | 238 | | |
$ | 773 | |
Cash paid for interest | |
$ | 9,102 | | |
$ | 2,252 | |
Supplemental Non-Cash Items | |
| | | |
| | |
Purchases of property and equipment, not yet paid | |
$ | 96 | | |
$ | 419 | |
Recognition of warrant liability – Investor Warrants | |
$ | 13,762 | | |
$ | - | |
Recognition of warrant liability – Penny Warrants | |
$ | 698 | | |
$ | - | |
Non-cash impact of cash exercise of liability classified warrants | |
$ | 617 | | |
$ | - | |
Cashless exercise of liability classified warrants | |
$ | 12,629 | | |
$ | 16,669 | |
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
1 – NATURE OF BUSINESS
Dragonfly
Energy Holdings Corp. (“New Dragonfly” or the “Company”) sells lithium-ion battery packs for use in a wide variety
of applications. The Company sells to distributors under the Dragonfly Energy brand name, and sells direct to consumers under the trade
name Battleborn Batteries. In addition, the Company develops technology for improved lithium-ion battery manufacturing and assembly methods.
On
October 7, 2022, a merger transaction between Chardan NexTech Acquisition 2 Corporation (“CNTQ”), Dragonfly Energy Corp.
(“Legacy Dragonfly”), and Bronco Merger Sub, Inc. (“Merger Sub”) was completed pursuant to which Merger Sub was
merged with and into Legacy Dragonfly, with Legacy Dragonfly surviving the merger. As a result of the merger, Legacy Dragonfly became
a wholly owned subsidiary of New Dragonfly.
Although
New Dragonfly was the legal acquirer of Legacy Dragonfly in the merger, Legacy Dragonfly is deemed to be the accounting acquirer, and
the historical financial statements of Legacy Dragonfly became the basis for the historical financial statements of New Dragonfly upon
the closing of the merger. New Dragonfly together with its wholly owned subsidiary, Dragonfly Energy Corp., is referred to hereinafter
as the “Company”.
Furthermore,
the historical financial statements of Legacy Dragonfly became the historical financial statements of the Company upon the consummation
of the merger. As a result, the financial statements included in this Annual Report reflect (i) the historical operating results of Legacy
Dragonfly prior to the merger; (ii) the combined results of CNTQ and Legacy Dragonfly following the close of the merger; (iii) the assets
and liabilities of Legacy Dragonfly at their historical cost and (iv) the Legacy Dragonfly’s equity structure for all periods presented,
as affected by the recapitalization presentation after completion of the merger. See Note 3 – Reverse Capitalization for further
details of the merger.
On
March 31, 2023, the Company changed its state of incorporation from the State of Delaware to the State of Nevada (the “Reincorporation”)
pursuant to a plan of conversion dated March 30, 2023 (the “Plan of Conversion”). Pursuant to the Plan of Conversion, the
issued and outstanding shares of common stock of the Company were automatically converted into common stock of the reincorporated company
at the effective time of the Reincorporation.
On
November 29, 2023, the Company filed an amendment to the articles of incorporation with the State of Nevada, to increase the number
of authorized shares of its common stock to 250,000,000
shares. The par value remained at $0.0001
per share.
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GOING CONCERN
Basis
of presentation
The
accompanying consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”) and in accordance with generally accepted accounting principles generally accepted in the United States of America (“U.S. GAAP”) and present the consolidated financial statements of the
Company and its wholly owned subsidiary.
Principles
of consolidation
The
accompanying consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP and present the consolidated financial statements of the Company and
its wholly owned subsidiary. All significant intercompany transactions and balances are eliminated in consolidation.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
2 – Summary of Significant Accounting Policies (continued)
Going
Concern
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
For
the year ended December 31, 2023 and 2022, the Company incurred loss from operations and had negative cash flow from operations. As of
December 31, 2023, the Company had $12,713 in cash and cash equivalents and working capital of $15,543. The Company’s ability to
achieve profitability and positive cash flow depends on its ability to increase revenue, contain its expenses and maintain compliance
with the financial covenants in its outstanding indebtedness agreements.
In
connection with the Company’s senior secured term loan facility in an aggregate principal amount of $75,000 (the “Term Loan”),
the Company is obligated to comply with certain financial covenants, which include maintaining a maximum senior leverage ratio, minimum
liquidity, a springing fixed charge coverage ratio, and maximum capital expenditures (See Note 7). On March 29, 2023, the Company
obtained a waiver from the Term Loan administrative agent and lenders of its failures to satisfy the fixed charge coverage ratio and
maximum senior leverage ratio with respect to the minimum cash requirements under the Term Loan during the quarter ended March 31, 2023.
On September 29, 2023 and December 29, 2023, the Company obtained a second and third waiver from the Term Loan administrative agent and
lenders of its failures to satisfy the fixed charge coverage ratio and maximum senior leverage ratio with respect to the minimum cash
requirements under the Term Loan during the quarters ended September 30, 2023 and December 31, 2023. On March 31, 2024, the Company obtained a waiver from the Term Loan administrative agent and lenders of its failures
to satisfy the liquidity test during the quarter ended March 31, 2023. If the Company is unable to obtain
a waiver or if the Company is unable to comply with such covenants, the lenders have the right to accelerate the maturity of the Term
Loan. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
In
addition, the Company may need to raise additional debt and/or equity financings to fund its operations, strategic plans, and meet its
financial covenants. The Company has historically been able to raise additional capital through issuance of equity and/or debt financings
and the Company intends to use its equity facility and raise additional capital as needed. However, the Company cannot guarantee that
it will be able to raise additional equity, contain expenses, or increase revenue, and comply with the financial covenants under the
Term Loan.
Recently
adopted accounting pronouncements:
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently
issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2023. These standards replace
the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measure at amortized cost
to be presented at the net amount expected to be collected. The Company determined that this change did not have a material impact to
the financial statements or financial statement disclosures.
Recently
issued accounting pronouncements:
In
November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07,
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 requires, among
other updates, enhanced disclosures about significant segment expenses that are regularly provided to the CODM, as well as the aggregate
amount of other segment items included in the reported measure of segment profit or loss. ASU 2023-07 is effective for fiscal years beginning
after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective adoption.
Early adoption is permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements and related
disclosures
In
December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”).
ASU 2023-09 requires enhanced annual disclosures regarding the rate reconciliation and income taxes paid information. ASU 2023-09 is
effective for fiscal years beginning after December 15, 2024, and may be adopted on a prospective or retrospective basis. Early adoption
is permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
2 – Summary of Significant Accounting Policies (continued)
Cash
and Cash Equivalents
The
Company considers all short-term debt securities when purchased with a maturity of three months or less to be cash equivalents. As of
December 31, 2023 and 2022, the Company held no Cash Equivalents.
From
time to time the Company has amounts on deposit with financial institutions that exceed federally insured limits. The Company has not
experienced any significant losses in such accounts.
Accounts
Receivable
The
Company’s trade receivables are recorded when billed and represent claims against third parties that will be settled in cash. Generally,
payment is due from customers within 30- 90 days of the invoice date and the contracts do not have significant financing components.
Trade accounts receivables are recorded gross and are net of any applicable allowance. The allowance for credit losses as of December
31, 2023 and 2022 were not material.
Inventory
Inventories
(Note 5), which consist of raw materials and finished goods, are stated at the lower of cost (first in, first out) or net realizable
value, net of reserves for obsolete inventory. We continually analyze our slow moving and excess inventories. Based on historical and
projected sales volumes and anticipated selling prices, we established reserves. Inventory that is in excess of current and projected
use is reduced by an allowance to a level that approximates its estimate of future demand. Products that are determined to be obsolete
are written down to net realizable value. The Company had a reserve of $67 and $0 as of December 31, 2023 and 2022, respectively.
Property
and Equipment
Property
and equipment are stated at cost, including the cost of significant improvements and renovations. Costs of routine repairs and maintenance
are charged to expense as incurred. Depreciation and amortization are calculated by the straight line method over the estimated useful
lives for owned property, or, for leasehold improvements, over the shorter of the asset’s useful life or term of the lease. Depreciation
expense for the years ended December 31, 2023 and 2022 was $1,237 and $891, respectively.
SCHEDULE
OF VARIOUS CLASSES OF PROPERTY AND EQUIPMENT
AND ESTIMATED USEFUL LIVES
The
various classes of property and equipment and estimated useful lives are as follows:
Office
furniture and equipment |
3
to 7 years |
Vehicles |
5
years |
Machinery
and equipment |
3
to 7 years |
Leasehold
improvements |
Shorter
of Useful Life or Remaining Term of Lease |
Use
of Estimates
The
preparation of financial statements in conformity with U.S GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The
Company utilizes the use of estimates in its calculations for the reserve for obsolete or slow moving inventory, warrant liability, equity
based compensation, and income taxes.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
2 – Summary of Significant Accounting Policies (continued)
Impairment
of Long-Lived Assets
The
Company evaluates its long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances
indicate that the carrying amount of these asset may not be recoverable. Recoverability of these assets is measured by comparison of
the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its remaining life. When
indications of impairment are present and the estimated undiscounted future cash flows from the use of these assets is less than the
assets’ carrying value, the related assets will be written down to fair value. There were no impairments of the Company’s
long-lived assets for the periods presented.
Warrants
The
Company applies relevant accounting guidance for warrants to purchase the Company’s stock based on the nature of the relationship
with the counterparty. For warrants issued to investors or lenders in exchange for cash or other financial assets, the Company follows
guidance issued within ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), and ASC 815, Derivatives and Hedging
(“ASC 815”), to assist in the determination of whether the warrants should be classified as liabilities or equity. Warrants
that are determined to require liability classification are measured at fair value upon issuance and are subsequently remeasured to their
then fair value at each subsequent reporting period with changes in fair value recorded in current earnings. Warrants that are determined
to qualify for equity classification are measured at fair value upon issuance and are not subsequently remeasured unless they are required
to be reclassified.
Commitments
and Contingencies
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable
that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies
are expensed as incurred.
Revenue
Recognition
Under
Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the
consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements
that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s)
with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the
transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance
obligation. The Company only applies the five-step model to contracts when it is probable the entity will collect the consideration it
is entitled to in exchange for the goods or services it transfers to the customer.
Revenue
is recognized when control of the promised goods is transferred to the customer or reseller, in an amount that reflects the consideration
the Company expects to be entitled to in exchange for those goods and services. Revenue associated with products holding rights of return
are recognized when the Company concludes there is not a risk of significant revenue reversal in the future periods for the expected
consideration in the transaction. There are no material instances including discounts and refunds where variable consideration is constrained
and not recorded at the initial time of sale. Generally, our revenue is recognized at a point in time for standard promised goods at
the time of shipment when title and risk of loss pass to the customer.
The
Company may receive payments at the onset of the contract before delivery of goods for customers in the retail channel. Payment terms
for distributors and OEMs are typically due within 30-90 days after shipment. In such instances, the Company records a customer deposit
liability. The Company recognizes these contract liabilities as sales after the revenue criteria are met. As of December 31, 2023 and
2022, the contract liability related to the Company’s customer deposits approximated $201 and $238, respectively.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
2 – Summary of Significant Accounting Policies (continued)
The
Company recognized $230
of the contract liability pertaining to the year ended December 31, 2022 during the year ended December 31, 2023. After the year
ended December 31, 2023, the residual balance of $8 was recognized during the quarter ending March 31, 2024. The entire contract
liability balance of $434
as of January 1, 2022 was recognized as revenue during the year ended December 31, 2022.
Disaggregation
of Revenue
The
following table present our disaggregated revenues by distribution channel:
SCHEDULE
OF DISAGGREGATED REVENUES BY DISTRIBUTION CHANNEL
Sales | |
2023 | | |
2022 | |
| |
December 31, | |
Sales | |
2023 | | |
2022 | |
Direct to Customer | |
| 36,875 | | |
| 52,446 | |
Original equipment manufacturer | |
| 27,517 | | |
| 33,805 | |
Total | |
$ | 64,392 | | |
$ | 86,251 | |
During
the year ended December 31, 2023, the Company deemed it more appropriate to classify Retail and Distributor revenues as a single
line item referred to as direct-to-consumer revenue. The Company has combined previously reported retail and distributor amounts to
direct-to-consumer revenue to conform with current year presentation. The consolidation into direct-to-consumer revenue is motivated
by the Company’s strategic perspective on its operations and better represents how it evaluates their sales
channels.
Shipping
and Handling
Shipping
and handling fees paid by customers are recorded within net sales, with the related expenses recorded in cost of sales. Shipping and
handling costs associated with outbound freight are included in sales and marketing expenses. Shipping and handling costs associated
with outbound freight totaled $3,466 and $5,440 for the years ended December 31, 2023 and 2022, respectively.
Product
Warranty
The
Company offers assurance type warranties from 5 to 10 years on its products. The Company estimates the costs associated with the warranty
obligation using historical data of warranty claims and costs incurred to satisfy those claims. The Company estimates, based upon a review
of historical warranty claim experience, the costs that may be incurred under our warranties and record a liability in the amount of
such estimate at the time a product is sold. Factors that affect our warranty liability include the number of units sold, historical
and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liability
and adjust the accrual as claims data and historical experience warrants. The Company has assessed the costs of fulfilling its existing
assurance type warranties and has determined that the estimated outstanding warranty obligation on December 31, 2023 and 2022 to be $307
and $328, respectively.
SCHEDULE
OF WARRANTY OBLIGATION
| |
2023 | | |
2022 | |
| |
December 31, | |
| |
2023 | | |
2022 | |
Beginning warranty obligation | |
$ | 328 | | |
$ | - | |
Provision of warranty expense | |
| 397 | | |
| 328 | |
Settlement of warranty claims | |
| (418 | ) | |
| - | |
Ending warranty obligation | |
$ | 307 | | |
$ | 328 | |
Concentrations
Receivables
from two customers comprised approximately 28% and 10%, respectively, of accounts receivable as of December 31, 2023. Receivables from
three customers comprised approximately 18%, 10% and 10%, respectively, of accounts receivable as of December 31, 2022. There are no
other significant accounts receivable concentration.
Sales
from one customer comprised approximately 16% of revenue for the year ended December 31, 2023. Sales from one customer accounted for
approximately 22% of revenue for the year ended December 31, 2022.
Payables
to one vendor comprised approximately 65% of accounts payables as of December 31, 2023. Payables to one vendor comprised approximately
61% of accounts payables as of December 31, 2022.
For
the year ended December 31, 2023, one vendor accounted for approximately 14% of the Company’s total purchases.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
2 – Summary of Significant Accounting Policies (continued)
Concentrations
(continued)
For
the year ended December 31, 2022, one vendor accounted for approximately 28% of the Company’s total purchases.
Deferred
Financing Costs
The
incremental cost, including the fair value of warrants, directly associated with obtaining debt financing is capitalized as deferred
financing costs upon the issuance of the debt and amortized over the term of the related debt agreement using the effective-interest
method with such amortized amounts included as a component of interest expense in the consolidated statement of operations. Unamortized
deferred financing costs are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related
debt obligation.
Research
and Development
The
Company expenses research and development costs as incurred. Research and development expenses include salaries, contractor and consultant
fees, supplies and materials, as well as costs related to other overhead such as depreciation, facilities, utilities, and other departmental
expenses. The costs we incur with respect to internally developed technology and engineering services are included in research and development
expenses as incurred as they do not directly relate to acquisition or construction of materials, property or intangible assets that have
alternative future uses.
Advertising
The
Company expenses advertising costs as they are incurred and are included in selling and marketing expenses. Advertising expenses amounted
to $2,167 and $2,334 for the years ended December 31, 2023 and 2022, respectively.
Stock-Based
Compensation
The
Company accounts for stock based compensation arrangements with employees and non employee consultants using a fair value method which
requires the recognition of compensation expense for costs related to all stock based payments, including stock options (Note 12). The
fair value method requires the Company to estimate the fair value of stock based payment awards to employees and non employees on the
date of grant using an option pricing model. Stock based compensation costs are based on the fair value of the underlying option calculated
using the Black Scholes option pricing model and recognized as expense on a straight line basis over the requisite service period, which
is the vesting period. Restricted stock unit awards are valued based on the closing trading value of the Company’s common stock
on the date of grant and then amortized on a straight-line basis over the requisite service period of the award. The Company measures
equity based compensation awards granted to non employees at fair value as the awards vest and recognizes the resulting value as compensation
expense at each financial reporting period.
Determining
the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatility, expected dividend
yield, expected term, risk free rate of return, and the estimated fair value of the underlying common stock. Due to the lack of company
specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility
of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate
with the expected term assumption. The group of representative companies have characteristics similar to the Company, including stage
of product development and focus on the lithium-ion battery industry. The Company uses the simplified method, which is the average of
the final vesting tranche date and the contractual term, to calculate the expected term for options granted to employees as it does not
have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk free interest
rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The Company uses an assumed
dividend yield of zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock. The
Company accounts for forfeitures as they occur.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
2 – Summary of Significant Accounting Policies (continued)
Income
Taxes
Deferred
income tax assets and liabilities (Note 15) are determined based on the estimated future tax effects of net operating loss, credit carryforwards
and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured at
the current enacted tax rates.
The
Company recognizes a tax benefit for an uncertain tax position only if it is more likely than not that the tax position will be sustained
on examination by taxing authorities, based on the technical merits of the position. The Company has a liability of $91 and $128 as of
December 31, 2023 and 2022, respectively, of uncertain tax positions.
The
Company’s accounting policy is to include penalties and interest related to income taxes if any, in selling, general and administrative
expenses. We regularly assess the need to record a valuation allowance against net deferred tax assets if, based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets will not be realized.
Net
(Loss) Earnings per Common Share
Basic
net (loss) earnings per share is calculated by dividing net (loss) earnings by the weighted-average number of common shares outstanding
during the period. Diluted net (loss) earnings per share is calculated using the weighted-average number of common shares outstanding
during the period and, if dilutive, the weighted-average number of potential shares of common stock.
The
weighted-average number of common shares included in the computation of diluted net (loss) earnings gives effect to all potentially dilutive
common equivalent shares, including outstanding stock options and warrants.
Common
stock equivalent shares are excluded from the computation of diluted net (loss) earnings per share if their effect is antidilutive. In
periods in which the Company reports a net loss, diluted net loss per share is generally the same as basic net loss per share since dilutive
common shares are not assumed to have been issued if their effect is anti-dilutive.
The
following table sets forth the number of potential shares of common stock that have been excluded from diluted net loss per share because
their effect was anti-dilutive:
SCHEDULE OF POTENTIAL SHARES OF COMMON STOCK EXCLUDED FROM DILUTED NET LOSS PER SHARE
| |
December 31,
2023 | | |
December 31,
2022 | |
Warrants | |
| 24,510,575 | | |
| 16,708,414 | |
Restricted stock units | |
| 47,000 | | |
| 180,000 | |
Options | |
| 2,364,787 | | |
| 3,642,958 | |
Weighted average number of common shares-basic | |
| 26,922,362 | | |
| 20,531,372 | |
As
the Merger has been accounted for as a reverse recapitalization, the consolidated financial statements of the merged entity reflect the
continuation of the pre-merger Legacy Dragonfly financial statements; Dragonfly equity has been retroactively adjusted to the earliest
period presented to reflect the legal capital of the legal acquirer, CNTQ. As a result, net (loss) earnings per share was also retrospectively
adjusted for periods ended prior to the Merger. See–Note 3 - Reverse Capitalization for details and discussion of the retrospective
adjustment of net loss per share.
Leases
At
the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and
circumstances present in the arrangement including the use of an identified asset(s) and the Company’s control over the use of
that identified asset. The Company elected, as allowed under FASBASU 2016-02, Leases (“ASC 842”), to not recognize leases
with a lease term of one year or less on its balance sheet. Leases with a term greater than one year are recognized on the balance sheet
as right-of-use (“ROU”) assets and current and non-current lease liabilities, as applicable.
Segment
Reporting
Operating
segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation
by the Company’s Chief Executive Officer to make decisions with respect to resource allocation and assessment of performance. To
date, the Company has viewed its operations and manages its business as one operating segment.
Reclassification
Certain
prior period amounts have been reclassified to conform to the current period presentation in the consolidated financial statements and
these accompanying notes. The reclassifications did not have a material impact on the Company’s consolidated
financial statements and related disclosures. The impact on any prior period disclosures was immaterial.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
3 - REVERSE CAPITALIZATION
On
October 7, 2022, Legacy Dragonfly consummated a merger with CNTQ. Legacy Dragonfly was deemed to be the accounting acquirer in the merger.
The determination was primarily based on Legacy Dragonfly’s stockholders having a majority of the voting power in the combined
Company, Legacy Dragonfly having the ability to appoint a majority of the Board of Directors of the Company, Legacy Dragonfly’s
existing management team comprising the senior management of the combined Company, Legacy Dragonfly comprising the ongoing operations
of the combined Company and the combined Company assumed the name “Dragonfly Energy Holdings Corp.”. Accordingly, for accounting
purposes, the merger was treated as the equivalent of Legacy Dragonfly issuing stock for the net assets of CNTQ, accompanied by a recapitalization.
The net assets of CNTQ are stated at historical cost, with no goodwill or other intangible assets recorded.
In
accordance with guidance applicable to these circumstances, the equity structure has been restated in all comparable periods up to October
7, 2022, to reflect the number of shares of the Company’s common stock, $0.0001 par value per share, issued to Legacy Dragonfly’s
stockholders in connection with the merger. As such, the shares and corresponding capital amounts and earnings per share related to Legacy
Dragonfly’s outstanding convertible preferred stock and Legacy Dragonfly’s common stock prior to the merger have been retroactively
restated as shares reflecting the exchange ratio of 1.182 established in the merger. Legacy Dragonfly’s convertible preferred stock
previously classified as temporary equity was retroactively adjusted, converted into common stock and reclassified to permanent equity
as a result of the reverse recapitalization.
Immediately
before the closing of the merger, and prior to the PIPE Financing, and the funds remaining after such redemptions, totaling approximately
$6,265, became available to finance transaction expenses and the future operations of New Dragonfly. In connection with the merger, CNTQ
entered into agreements with new investors and existing Legacy Dragonfly investors to subscribe and purchase an aggregate of approximately
500,000 shares of CNTQ Class A common stock (the “PIPE Financing”).
The
PIPE Financing was consummated on September 26, 2022 and resulted in gross proceeds of an additional approximately $5,017, prior to payment
of the transaction costs. As part of the PIPE Financing, the Company entered an initial Term Loan for an aggregate principal amount of
$75,000. The Company incurred debt issuance costs of $1,950 of original issuance discount and additional $2,081 of transaction costs
that were allocated to the Term Loan, resulting in net cash proceeds of $70,969. In addition, $52,956 of Term Loan warrants based on
their combined relative fair values was recorded as a debt discount resulting in initial carrying amount of debt of $18,013. Pursuant
to the terms of the loan agreement, the Term Loan was advanced in one tranche on the closing date and the funds were used to refinance
on the closing date prior indebtedness of $42,492 (including payment of make-whole interest related to early extinguishment of debt),
(ii) to support the Transaction under the Merger Agreement, (iii) for working capital purposes and other corporate purposes, and (iv)
to pay any fees associated with transactions contemplated under the Term Loan Agreement and the other loan documents entered into in
connection therewith, including the transactions described in the foregoing clauses (i) and (ii) and fees and expenses related to the
merger. The direct and incremental transaction costs of approximately $13,221 were allocated to all instruments assumed and issued in
the merger on a relative fair value basis. As such, the Company allocated $2,081 to the Term Loan, $9,633 to equity instruments, which
was expensed in general and administrative expenses as the offering costs exceeded the proceeds received, and $1,507 to the warrant liabilities
assumed and warrant liabilities issued with the term debt, which was expensed within the general and administrative expenses within the
statement of operations.
Additionally,
pursuant to the terms of the merger, the Company assumed $18,072 of CNTQ accrued and unpaid transaction expenses, of which all were paid
upon consummation of the merger. As detailed below, $10,197 of these costs were expensed as the amount exceeded the proceeds received
and such costs were determined not be a return to investors.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
3 - Reverse Capitalization (Continued)
Upon
the closing of the merger, the Company’s certificate of incorporation was amended and restated to, among other things, increase
the total number of authorized shares of all classes of capital stock to 175,000,000 common shares, of which 170,000,000 were designated
as common stock and 5,000,000 were designated as preferred stock, both having a par value of $0.0001 per share.
Upon
the closing of the merger, holders of Legacy Dragonfly common stock and preferred stock received shares of common stock in an amount
determined by application of the Exchange Ratio. For periods prior to the merger, the reported share and per share amounts have been
retroactively converted by applying the Exchange Ratio. The consolidated assets, liabilities, and results of operations prior to the
merger are those of Legacy Dragonfly.
The
following table summarizes the elements of the merger allocated to the Consolidated Statements of Operations:
SCHEDULE OF ELEMENTS OF MERGER ALLOCATED TO CONSOLIDATED STATEMENTS OF OPERATIONS
| |
Amounts | |
Cash:
CNTQ trust and PIPE Investors | |
$ | 10,979 | |
Cash:
CNTQ | |
| 303 | |
Gross
Proceeds | |
| 11,282 | |
Net
liabilities assumed in merger transaction | |
| (1,017 | ) |
Warrant
liability assumed in merger | |
| (1,990 | ) |
CNTQ
note payable settlement at close | |
| (400 | ) |
CNTQ
transaction cost paid at close | |
| (18,072 | ) |
Net
deficit assumed in recapitalization | |
$ | (10,197 | ) |
| |
Number of Shares | |
Common stock, outstanding prior to merger | |
| 3,093,348 | |
Less: Redemption of CNTQ shares | |
| (2,016,912 | ) |
CNTQ Public Shares | |
| 1,076,436 | |
CNTQ Sponsor Shares | |
| 3,162,500 | |
Merger and PIPE financing shares | |
| 4,238,936 | |
Legacy Dragonfly shares
(1)(2) | |
| 38,576,650 | |
Total shares of common stock immediately after merger | |
| 42,815,586 | |
1) | - The number
of Legacy Dragonfly shares was determined from the shares of Legacy Dragonfly outstanding immediately prior to the closing of the merger
converted at the Exchange Ratio. All fractional shares were rounded down. |
2) | - The preferred
shares of Legacy Dragonfly were exchanged on a 1 to 1 ratio to common stock and the shares were then exchanged for shares of Dragonfly
Energy Holdings Corp. at the Exchange Ratio. |
Warrants
As
part of the reverse capitalization transaction, the Company issued public warrants, private placement warrants and Term Loan warrants.
Refer to Note 10 for a further description of the warrants.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
3 - Reverse Capitalization (Continued)
Earnout
The
former holders of shares of Legacy Dragonfly common stock (including shares received as a result of the conversion of Legacy Dragonfly
Preferred Stock into New Dragonfly Common Stock) are entitled to receive their pro rata share of up to 40,000,000 additional shares of
common stock (the “Earnout Shares”). The Earnout Shares are issuable in three tranches. The first tranche of 15,000,000 shares
is issuable if New Dragonfly’s 2023 total audited revenue is equal to or greater than $250,000 and New Dragonfly’s 2023 audited
operating income is equal to or greater than $35,000. The second tranche of 12,500,000 shares is issuable upon achieving a volume-weighted
average trading price threshold of at least $22.50 on or prior to December 31, 2026 and the third tranche of 12,500,000 is issuable upon
achieving a volume-weighted average trading price threshold of at least $32.50 on or prior to December 31, 2028. To the extent not previously
earned, the second tranche is issuable if the $32.50 price target is achieved by December 31, 2028.
The
Company accounts for the Earnout Shares as either equity-classified or liability-classified instruments based on an assessment of the
Earnout Shares specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”)
and ASC 815, as defined below. The Company has determined that the Earnout Shares are indexed to the Company’s common stock and
are therefore not precluded from equity classification. Such accounting determination will be assessed at each financial statement reporting
date to determine whether equity classification remains appropriate. If the Earnout Shares are later determined to be liability-classified
instruments, the Company would recognize subsequent changes in the fair value of such Earnout Shares within earnings at each reporting
period during the earnout period. The value of the Earnout Shares was prepared utilizing a Monte Carlo simulation model. The significant
assumptions utilized in determining the fair value of Earnout Shares include the following: (1) a price for our common stock of approximately
$14.00; (2) a risk-free rate of 4.24%; (3) projected revenue and EBITDA of $255,100 and $41,000, respectively; (4) expected volatility
of future annual revenue and future annual EBITDA of 42.0% and 64.0% respectively; (5) discount rate of 4.24%; and (6) expected probability
of change in control of 15.0%.
The
accounting treatment of the Earnout Shares have been recognized at fair value upon the closing of the merger and classified in stockholders’
equity. Because the merger is accounted for as a reverse recapitalization, the recognition of the Earnout Shares has been treated as
a deemed dividend and has been recorded within additional-paid-in-capital and has no net impact on additional paid-in capital.
Note
4 - FAIR VALUE MEASUREMENTS
ASC
820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a fair value hierarchy for instruments measured at
fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable
inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained
from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs
that market participants would use in pricing the asset or liability and are developed based on the best information available in the
circumstances.
ASC
820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions
in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following:
● |
Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. |
● |
Level
2 inputs are inputs other than quoted prices included within Level 1 that are observable for a similar asset or liability, either directly
or indirectly. |
● |
Level
3 inputs are unobservable inputs that reflect the Company’s own assumptions about the inputs that market participants would use
in pricing the asset or liability. |
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
4 - Fair Value Measurements (continued)
Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest
for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level
of any input that is significant to the fair value measurement.
The
following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheets on a recurring basis
as of December 31, 2023 and 2022:
SCHEDULE
OF FAIR VALUE OF ASSETS AND LIABILITIES
| |
Carrying Amount | | |
Fair Value | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| |
As of December 31, 2023 | |
Liabilities | |
| | |
| | |
| | |
| | |
| |
Warrant liability- Term Loan | |
$ | 1,014 | | |
$ | 1,014 | | |
$ | - | | |
$ | - | | |
$ | 1,014 | |
Warrant liability- June Public Offering | |
| 3,434 | | |
| 3,434 | | |
| - | | |
| - | | |
| 3,434 | |
Warrant liability- Private Placement Warrants | |
| 15 | | |
| 15 | | |
| - | | |
| 15 | | |
| - | |
Total liabilities | |
$ | 4,463 | | |
$ | 4,463 | | |
$ | - | | |
$ | 15 | | |
$ | 4,448 | |
The
following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheets on a recurring basis
as of December 31, 2022:
| |
Carrying Amount | | |
Fair Value | | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | |
| |
As of December 31, 2022 | |
Liabilities | |
| | |
| | |
| | |
| | |
| |
Warrant liability- Term Loan | |
$ | 30,841 | | |
$ | 30,841 | | |
$ | - | | |
$ | - | | |
$ | 30,841 | |
Warrant liability- Private placement warrants | |
| 1,990 | | |
| 1,990 | | |
| - | | |
| 1,990 | | |
| - | |
Total liabilities | |
$ | 32,831 | | |
$ | 32,831 | | |
$ | - | | |
$ | 1,990 | | |
$ | 30,841 | |
The
carrying amounts of accounts receivable and accounts payable are considered level 1 and approximate fair value as of December 31, 2023
and 2022 because of the relatively short maturity of these instruments.
The
carrying value of the term loan as of December 31, 2023 and, 2022 approximates fair value as the interest rate does not differ significantly
from the current market rates available to the Company for similar debt and is considered level 2.
Level
3 Rollforward
Fair
value measurements categorized within Level 3 are sensitive to changes in assumptions or methodology used to determine fair value, and
such changes could result in a significant increase or decrease in the fair value.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
4 - Fair Value Measurements (continued)
Level
3 Rollforward (continued)
The
changes for Level 3 items measured at fair value on recurring basis using significant unobservable inputs are as follows:
SCHEDULE
OF CHANGES FOR LEVEL 3 ITEMS MEASURED AT FAIR VALUE ON RECURRING BASIS USING SIGNIFICANT UNOBSERVABLE INPUTS
| |
Warrant Liability - Term Loan | | |
Warrant Liability- June Public Offering | |
Fair value as of December 31, 2022 | |
$ | 30,841 | | |
$ | - | |
Additions | |
| 698 | | |
| 13,762 | |
Warrant exercises | |
| (11,284 | ) | |
| (617 | ) |
Change in fair value, loss (gain) included in net loss(1) | |
| (19,241 | ) | |
| (9,711 | ) |
Fair value as of December 31, 2023 | |
$ | 1,014 | | |
$ | 3,434 | |
| |
Warrant Liability - Term Loan | |
Fair value as of December 31, 2021 | |
$ | - | |
Additions | |
| 52,956 | |
Warrant exercises | |
| (16,669 | ) |
Change in fair value, loss (gain) included in net loss(1) | |
| (5,446 | ) |
Fair value as of December 31, 2022 | |
$ | 30,841 | |
(1) | Changes in fair
value of warrant liabilities are disclosed separately in the Consolidated Statements of Operations |
Note
5 - INVENTORY
Inventory
consists of the following:
SCHEDULE
OF INVENTORY
| |
December
31, 2023 | | |
December
31, 2022 | |
Raw
material | |
$ | 31,604 | | |
$ | 42,929 | |
Finished
goods | |
| 7,174 | | |
| 7,260 | |
Total
inventory | |
$ | 38,778 | | |
$ | 50,189 | |
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
6 - COMMITMENTS AND CONTINGENCIES
Litigation
From
time to time the Company may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, governmental
actions, administrative actions, investigations or claims are pending against the Company or involve the Company that, in the opinion
of the Company’s management, could reasonably be expected to have a material adverse effect on the Company’s business and
financial condition.
Operating
Leases
The
Company has leases related to the main office, warehouse space, research and development lab, engineering office, and sales office, all
located in Reno, Nevada. The leases require annual escalating monthly payments ranging from $111 to $128. On February 2, 2022, the Company
entered into a 124-month lease agreement in Reno, Nevada. The lease calls for monthly base rent of $230, $23 of fixed operating expense
costs, and estimated monthly property taxes of $21. The monthly base rent and fixed operating expense costs are subject to escalation
of 3% and 2.4%, respectively, on an annual basis. As of December 31, 2023, the lease has not commenced as the Company does not have
control over the asset. Subsequent to year end the building has passed inspections and a certificate of substantial completion has been
issued. The monthly rent under the lease will begin July 24, 2024.
The
following table presents the breakout of the operating leases as of:
SCHEDULE OF BREAKOUT OF OPERATING LEASES
| |
December
31, 2023 | | |
December
31, 2022 | |
Operating
lease right-of-use assets | |
$ | 3,315 | | |
$ | 4,513 | |
Short-term
operating lease liabilities | |
| 1,288 | | |
| 1,188 | |
Long-term
operating lease liabilities | |
| 2,234 | | |
| 3,541 | |
Total
operating lease liabilities | |
$ | 3,522 | | |
$ | 4,729 | |
Weighted
average remaining lease term | |
| 2.6
years | | |
| 3.6
years | |
Weighted
average discount rate | |
| 5.2 | % | |
| 5.2 | % |
Assumptions
used in determining our incremental borrowing rate include our implied credit rating and an estimate of secured borrowing rates based
on comparable market data.
At
December 31, 2023, the future minimum lease payments under these operating leases are as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER OPERATING LEASES
Fiscal
Years Ending | |
| |
December 31, 2024(1) | |
$ | 2,460 | |
December
31, 2024 | |
$ | 1,435 | |
December
31, 2025 | |
| 1,435 | |
December
31, 2026 | |
| 893 | |
December 31, 2028 | |
| 3,094 | |
Thereafter | |
| 19,070 | |
Total
lease payments | |
| 3,763 | |
Less
imputed interest | |
| 241 | |
Total
operating lease liabilities | |
$ | 3,522 | |
SCHEDULE
OF LEASE COST
| |
| |
For
The Years Ended December 31, | |
Lease
cost | |
Classification | |
2023 | | |
2022 | |
Operating
lease cost | |
Cost
of goods sold | |
$ | 1,393 | | |
$ | 1,476 | |
Operating
lease cost | |
Research
and development | |
| 90 | | |
| 95 | |
Operating
lease cost | |
General
and administration | |
| 47 | | |
| 50 | |
Operating
lease cost | |
Selling
and marketing | |
| 47 | | |
| 49 | |
Total
lease cost | |
| |
$ | 1,577 | | |
$ | 1,670 | |
All
lease costs included in the schedule above are fixed.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
6 - Commitments and Contingencies (continued)
Financing
Leases
During
the years ended December 31, 2023 and 2022, the Company entered into a finance lease agreement for equipment to support the Company’s
operations. Payments under the finance lease agreement are fixed for a term of 3-5 years. The leased assets are recognized in property
plant & equipment.
The
following table presents the breakout of the financing leases as of:
SCHEDULE
OF BREAKOUT OF FINANCE LEASES
| |
December
31, 2023 | | |
December
31, 2022 | |
Finance
lease right-of-use assets | |
$ | 106 | | |
$ | 45 | |
Short-term
finance lease liabilities | |
| 36 | | |
| 10 | |
Long-term
finance lease liabilities | |
| 66 | | |
| 35 | |
Total
finance lease liabilities | |
$ | 102 | | |
$ | 45 | |
Weighted
average remaining lease term | |
| 2.7
years | | |
| 4.2
years | |
Weighted
average discount rate | |
| 5.2 | % | |
| 5.2 | % |
Assumptions
used in determining our incremental borrowing rate include our implied credit rating and an estimate of secured borrowing rates based
on comparable market data.
At
December 31, 2023, the future minimum lease payments under these financing leases are as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER FINANCE LEASES
Fiscal
Years Ending | |
| |
December
31 | |
| 31 | |
December
31, 2024 | |
$ | 41 | |
December
31, 2025 | |
| 41 | |
December
31, 2026 | |
| 24 | |
December
31, 2027 | |
| 4 | |
Total
lease payments | |
| 110 | |
Less
imputed interest | |
| 8 | |
Total
financing lease liabilities | |
$ | 102 | |
Other
Contingencies
See
Note 8 for further discussion regarding contingent consideration arising from the April 2022 Asset Purchase agreement with Thomason Jones
Company, LLC.
See
Note 3 for further discussion regarding the earnout related to the reverse capitalization transaction.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
7 - LONG TERM DEBT
Financing—Trust
Indenture
On
November 24, 2021, the Company entered into agreements to issue $45,000 in fixed rate senior notes (“Series 2021 6 Notes”)
pursuant to a Trust Indenture held by UMB Bank, as trustee and disbursing agent, and Newlight Capital, LLC as servicer. The trust and
debt documents also required the entry into a Lender Collateral Residual Value Insurance Policy (the “Insurance Policy”,
with UMB Bank as named insured for $45,000), and the engagement of a placement agent, which is Tribe Capital Markets, LLC.
Upon
closing date of the financing the Company received a wire for $35,474, which is comprised of the gross proceeds of $45,000 less $3,188
in deposits to certain reserve accounts (see subsection labeled Reserve Accounts below), and $6,338 in expenses withdrawn from the gross
proceeds, which included $4,725 in prepaid policy premiums and related costs underlying the Insurance Policy (see subsection labeled
Collateral below), a prepaid loan monitoring fee of $60 and $1,553 in debt issuance costs.
The
obligation for the Series 2021-6 Notes underlying the Trust Indenture is $45,000 in principal on the date of the closing of the financing.
The debt bears interest at 5.50% per annum accruing monthly on a 360 day basis. Late payments will be subject to a $50 late fee and default
interest based on a rate 5 percentage points above the applicable interest immediately prior to such default. The Company was making
interest only payments on the unpaid principal amount in arrears, commencing December 1, 2021 and ending on November 1, 2022 (for interest
accruing from the Financing Closing Date through October 31, 2022). Beginning on December 1, 2022, the Company was obligated to repay
the debt in twenty four equal installments of principal in the amount of $1,875, plus accrued interest on the unpaid principal amount.
Any remaining obligations were due and payable on November 1, 2024 (the “Maturity Date”). The obligations under the Trust
Indenture will be deemed to be repaid or prepaid to the same extent, in the same amounts and at the same times as the Series 2021-6 Notes
are redeemed with funds provided except for payments made from the proceeds of the Insurance Policy (see subsection labelled Collateral
below) as such funds must be reimbursed by the Company to the insurer. During the year ended December 31, 2022, a total of $1,873 of
interest expense was incurred under the debt. Amortization of the debt issuance costs amounted to $1,783 during the year ended December
31, 2022. In connection with the merger on October 7, 2022, the Company entered into a Term Loan, Guarantee and Security Agreement (see
subsection labeled Term Loan Agreement below) and the outstanding principal balance for the Series 2021-6 Notes underlying the Trust
Indenture was paid in full.
Term
Loan Agreement
On
October 7, 2022, in connection with the merger, CNTQ, Legacy Dragonfly and CCM Investments 5 LLC, an affiliate of CCM LLC (“CCM
5”, and in connection with the Term Loan, the “Chardan Lender”), and EICF Agent LLC (“EIP” and, collectively
with the Chardan Lender, the “Initial Term Loan Lenders”) entered into the Term Loan, Guarantee and Security Agreement (the
“Term Loan Agreement”) setting forth the terms of a senior secured term loan facility in an aggregate principal amount of
$75,000 (the “Term Loan”). The Chardan Lender backstopped its commitment under the Debt Commitment Letter by entering into
a backstop commitment letter, dated as of May 20, 2022 (the “Backstop Commitment Letter”), with a certain third party financing
source (the “Backstop Lender” and collectively with EIP, the “Term Loan Lenders”), pursuant to which the Backstop
Lender committed to purchase from the Chardan Lender the aggregate amount of the Term Loan held by the Chardan Lender (the “Backstopped
Loans”) immediately following the issuance of the Term Loan on the Closing Date. Pursuant to an assignment agreement, the Backstopped
Loans were assigned by CCM 5 to the Backstop Lender on the Closing Date.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
7 - Long Term Debt (continued)
Pursuant
to the terms of the Term Loan Agreement, the Term Loan was advanced in one tranche on the Closing Date. The proceeds of the Term Loan
were used (i) to refinance on the Closing Date prior indebtedness (including the obligations underlying the Trust Indenture), (ii) to
support the Transaction under the merger Agreement, (iii) for working capital purposes and other corporate purposes, and (iv) to pay
any fees associated with transactions contemplated under the Term Loan Agreement and the other loan documents entered into in connection
therewith, including the transactions described in the foregoing clauses (i) and (ii) and fees and expenses related to the merger. The
Term Loan amortizes in the amount of 5% per annum (or $937.5 on the first day of each calendar quarter) beginning 24 months after the
Closing Date and matures on the fourth anniversary of the Closing Date (“Maturity Date”). The Term Loan accrues interest
(i) until April 1, 2023, at a per annum rate equal to the adjusted Secured Overnight Financing Rate (“SOFR”) plus a margin
equal to 13.5%, of which 7% will be payable in cash and 6.5% will be paid in kind, (ii) thereafter until October 1, 2024, at a per annum
rate equal to adjusted SOFR plus 7% payable in cash plus an amount ranging from 4.5% to 6.5%, depending on the senior leverage ratio
of the consolidated company, which will be paid in kind and (iii) at all times thereafter, at a per annum rate equal to adjusted SOFR
plus a margin ranging from 11.5% to 13.5% payable in cash, depending on the senior leverage ratio of the consolidated company. In each
of the foregoing cases, adjusted SOFR will be no less than 1%.
During
the year ended December 31, 2023, the Company prepaid the first four installments of the Term Loan which amounted to $5,275 and delayed
the first principal payment to October 2025.
In
connection with the entry into the Term Loan Agreement, and as a required term and condition thereof, the Company issued (i) the penny
warrants to the Term Loan Lenders exercisable to purchase an aggregate of 2,593,056 and (ii) the $10 warrants to issue warrants to the
Term Loan Lenders exercisable to purchase an aggregate of 1,600,000 shares of common stock at $10 per share. Refer to Note 12 for further
information.
Unless
the obligations under the Term Loan are accelerated under the terms of the agreement, the maturity date will be October 7, 2026.
The
Term Loan Lenders have been granted a first priority lien, and security interest in, the mortgaged properties underlying the Company’s
mortgages.
During
the years ended December 31, 2023 and 2022, a total of $14,272 and $3,195, respectively, of interest expense was incurred under the debt.
Amortization of the debt issuance costs amounted to $1,471 and $38, respectively, during the years ended December 31, 2023 and 2022.
The
carrying balance of $19,683 on December 31, 2023 consisted of $69,725 in principal, plus $6,130 PIK interest, less $56,172 in unamortized
debt discount related to the debt issuance costs. The carrying balance of $19,242 on December 31, 2022 consisted of $75,000 in principal,
plus $1,192 payment in kind interest, less $56,950 in unamortized debt discount related to the debt issuance costs.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
7 - Long Term Debt (continued)
Term
Loan Agreement (continued)
Financial
Covenants
The Company is subject to restrictive financial covenants
pertaining to Maximum Senior Leverage Ratio, Liquidity, Fixed Charge Coverage Ratio, and Capital Expenditures as defined in the Term Loan
Agreement. As of December 31, 2023, the Company was not in compliance with our financial covenants pertaining to the fixed charge coverage
ratio, liquidity, and the maximum senior leverage ratio. On December 29, 2023, the Company received a waiver from its Administrative Agent
and Term Loan Lenders in regards to its compliance with the Tests as of the last day of the quarter ended December 31, 2023. If the Company
is unable to obtain a waiver or if the Company is unable to comply with such covenants, the lenders have the right to accelerate the maturity
of the Term Loan. Because of this, the entire debt is classified as current instead of long-term debt.
At
December 31, 2023, the future debt maturities are as follows:
SCHEDULE OF FUTURE DEBT MATURITIES
| |
| |
For
Year Ended December 31, | |
| |
2024 | |
| - | |
2024 | |
| - | |
2025 | |
| 938 | |
2026 | |
| 78,731 | |
Total | |
| 79,669 | |
Less:
Estimated interest paid-in-kind | |
| (3,814 | ) |
Total
debt | |
| 75,855 | |
Less:
Unamortized debt issuance costs | |
| (56,172 | ) |
Total
carrying amount | |
| 19,683 | |
Less:
Current portion of debt | |
| (19,683 | ) |
Total
long-term debt | |
$ | - | |
Note
8 - ASSET PURCHASE AGREEMENT
Thomason
Jones Company, LLC
In
April 2022, the Company entered into an Asset Purchase Agreement with William Thomason, Richard Jones, and Thomason Jones Company, LLC
whereby the Company acquired inventory and intellectual property assets for a price not to exceed $700 cash plus contingent payments
of $1,000 each to William Thomason and Richard Jones (the “Earn Out”). The transaction was determined to be a business combination
under the guidance in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805: Business Combinations.
The Company followed the guidance under ASC 805-10-55 and determined the contingent consideration to be separate from the business combination
and the earn out to be recognized as contingent compensation to Mr. Thomason and Mr. Jones as the contingency became probable of being
met. The Company concluded the purchase price to be $444 and was allocated in its entirety to inventory.
Pursuant to the terms of the agreement dated April 2022, Dragonfly Energy Corp. agreed to a contingent compensation
arrangement with Mr. Thomason and Mr. Jones. According to this agreement, if Dragonfly Energy Corp. realizes $3,000 in gross sales from
products sold under the Wakespeed brand or which incorporate any portion of the Purchased Intellectual Property (IP) within twenty-four
months of the acquisition, the Company is obligated to pay each of Thomason and Jones $1,000. The Company may satisfy this obligation
in cash or by issuing common stock at its discretion.
The Company has determined that this arrangement constitutes compensation for post-acquisition services. Consequently,
the Company has recognized this contingent consideration as a compensation expense, measured at its fair value at the acquisition date.
The fair value was determined using a probability-weighted expected outcome approach, considering the likelihood of reaching the gross
sales target.
As of December 31, 2023, the Company has recognized $2,000 of compensation expense in connection with this arrangement.
This expense is reflected in the statement of operations under Sales and marketing expense. The total amount has been recognized as compensation
expense as of December 31, 2023, since it was deemed earned and no further service performance was required.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
9 - RELATED PARTY
The
Company loaned its former Chief Financial Officer $469 to repay amounts owed by him to his former employer and entered into a related
Promissory Note with a maturity date of March 1, 2026. The loan was forgiven in full in March of 2022, prior to the merger and was recorded
within general and administrative expense.
On
October 25, 2022, the Company entered into a separation and release of claims agreement with its former Chief Operating Officer (“COO”).
As consideration for the COO’s execution of the agreement, the Company agreed to pay the employee a lump sum payment of $100 which
is included in general and administrative expenses in the statements of operations, payments equivalent to $1,000 divided into 24 monthly
payments commencing on December 1, 2022, and all outstanding equity-based compensation awards to become fully vested and exercisable.
The COO shall have 12 months from the termination date to exercise outstanding options. The twelve (12) month period ended on November
7, 2023 in which the COO exercised 100,000 options and 77,316 options expired
In
February 2023, the Company entered into an agreement with its former COO in which the COO waived their rights to a transaction bonus
resulting from the merger transaction (Note 1) in lieu of a Company van. The Company accounted for the cost of the van as an employee
bonus, resulting in $116 of general and administrative expense for the current period.
On
March 5, 2023, the Company entered into a convertible promissory note (the “March Note”) with a board member in the amount
of $1,000, or the March Principal Amount. Upon execution of the Note and funding of the original principal sum, a payment of $100 (the
“March Loan Fee”) was fully earned as of the date of the March Note and was due and payable in full in cash on April 4, 2023.
The Company paid the March Principal Amount and the March Loan Fee on April 1, 2023 and April 4, 2023, respectively.
On
April 26, 2023, the Company entered into a separation and release of claims agreement with its former Chief Legal Officer (“CLO”).
As consideration for the CLO’s execution of the agreement, the Company agreed to pay the employee payments equivalent to $720 divided
into 24 monthly payments commencing on June 1, 2023, and all outstanding equity based compensation awards to become fully vested and
exercisable at an expense of $76. The CLO shall have 3 months from the termination date to exercise outstanding options. The three (3)
month period ended on July 26, 2023 in which the options were not exercised and the options were forfeited as a result.
Note
10 - WARRANTS
Common
Stock Warrants classified as Equity
Public
Warrants
Each
Public Warrant entitles the holder to the right to purchase one share of common stock at an exercise price of $11.50 per share. The Company
may elect to redeem the Public Warrants subject to certain conditions, at a price of $0.01 per Public Warrant if (i) 30 days’ prior
written notice of redemption is provided to the holders, and (ii) the last reported sale price of the Company’s common stock equals
or exceeds $16.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any
20 trading days within a 30-trading day period ending on the third business day prior to the date on which the Company sends the notice
of redemption to the warrant holders. On the Closing Date, there were 9,487,500 Public Warrants issued and outstanding.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
10 - Warrants (Continued)
Common
Stock Warrants classified as Equity (Continued)
Public
Warrants (Continued)
The
measurements of the Public Warrants after the detachment of the Public Warrants from the Units are classified as Level 1 due to the use
of an observable market quote in an active market under the ticker DFLIW. For periods subsequent to the detachment of the Public Warrants
from the Units, the close price of the Public Warrant price was used as the fair value of the Warrants as of each relevant date.
During
the year ended December 31, 2023, the Company received proceeds from public warrant exercises of $747 in exchange for 64,971 common shares.
The Company did not receive any proceeds from public warrants during the year ended December 31, 2022.
June
2023 Offering (Underwriter and Investor Warrants)
In
connection with the entry into the underwriting agreement as further described in Note 11 of the financial statements, (the “June
2023 Offering”) the Company issued (i) underwriters warrants to purchase up to an aggregate of 570,250 shares of Common Stock (the
“Underwriters’ Warrants”) which are exercisable upon issuance and will expire on June 20, 2028. The initial exercise
price of the Underwriters’ Warrants is $2.50 per share, which equals 125% of the per share public offering price in the June 2023
Offering and (ii) warrants to purchase up to 10,000,000 shares of Common Stock to the investors in the offering together with shares
of Common Stock (the “Investor Warrants”), at the combined public offering price of $2.00 per share of Common Stock and accompanying
Investor Warrant, less underwriting discounts and commissions. The Company also granted the underwriters a 45-day over-allotment option
to purchase up to an additional 1,500,000 shares of Common Stock and/or Investor Warrants to purchase up to 1,500,000 shares of Common
Stock at the public offering price per security, less underwriting discounts and commissions. The underwriters exercised their over-allotment
option to purchase an additional 1,405,000 shares of Common Stock and Investor Warrants to purchase up to 1,405,000 shares of Common
Stock. The Company accounts for the Investor Warrants issued in connection with the Offering in accordance with the guidance contained
in ASC 815-40. Such guidance provides that because the Investor Warrants do not meet the criteria for equity treatment thereunder, each
warrant must be recorded as a liability. This liability is subject to re-measurement at each balance sheet date. With each such re-measurement,
the warrant liabilities will be adjusted to its current fair value, with the change in fair value recognized in the Company’s statement
of operations. The Company will reassess the classification at each balance sheet date. It was determined that the Underwriters’
Warrants were not precluded from equity treatment and have been accounted for as such.
Underwriters’
Warrants:
SCHEDULE
OF UNDERWRITER WARRANTS
| |
Common
Stock Warrants | |
Underwriters’
Warrants Outstanding, January 1, 2023 | |
| - | |
Underwriters’
Warrants issued | |
| 570,250 | |
Underwriters’
Warrants Outstanding, December 31, 2023 | |
| 570,250 | |
DRAGONFLY
ENERGY HOLDINGS CORP
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
10 - Warrants (Continued)
Common
Stock Warrants classified as Liability
Private
Placement Warrants
On
October 7, 2022, in connection with the merger, the Company assumed the outstanding private placement warrants of CNTQ. There were no
Private Placement Warrants outstanding prior to the merger. The Private Placement Warrants (the “Private Warrants”) may not
be redeemed by the Company so long as the Private Placement Warrants are held by the initial purchasers, or such purchasers’ permitted
transferees. The Private Warrants: (i) will be exercisable either for cash or on a cashless basis at the holders’ option and (ii)
will not be redeemable by the Company, in either case as long as the Private Warrants are held by the initial purchasers or any of their
permitted transferees (as prescribed in the Subscription Agreement). During the year ended December 31, 2023, private placement warrant
holders exercised 3,126,472 warrants on a cashless basis, with the Company agreeing to issue 1,100,000 shares of Common Stock in connection
with such exercise. There were 1,501,386 and 4,627,858 private warrants outstanding as of December 31, 2023 and 2022, respectively. The
Company accounts for the Private Warrants issued in connection with the Initial Public Offering in accordance with the guidance contained
in ASC 815-40. Such guidance provides that because the private warrants do not meet the criteria for equity treatment thereunder, each
private warrant must be recorded as a liability. This liability is subject to re-measurement at each balance sheet date. With each such
re-measurement, the warrant liabilities will be adjusted to its current fair value, with the change in fair value recognized in the Company’s
statement of operations. The Company will reassess the classification at each balance sheet date.
SCHEDULE
OF WARRANTS CLASSIFICATION AT BALANCE SHEET DATE
Warrant Class | |
Shares | | |
Inception Date Fair Value | | |
Initial Recognition Date | |
Exercise Price | | |
Expiration Date |
Private Placement Warrants | |
| 4,627,858 | | |
| 1,990 | | |
10/7/2022 | |
| 11.5 | | |
8/11/2026 |
The
private placement warrants are classified as Level 2 as the transfer of Private Placement Warrants to anyone who is not a permitted transferee
would result in the Private Placement Warrants having substantially similar terms as the Public Warrants (with the exception of a different
remaining life). We determined, through use of a Binomial Lattice model, that the fair value of each Private Placement Warrant less a
discount for the difference in remaining life is equivalent to that of each Public Warrant.
Term
Loan Warrants
In
connection with the entry into the Term Loan Agreement on October 7, 2022, and as a required term and condition thereof, the Company
issued (i) the penny warrants to the Term Loan Lenders exercisable to purchase an aggregate of 2,593,056 shares of Common Stock (the
“Penny Warrants”) and (ii) the $10 warrants to issue warrants to the Term Loan Lenders exercisable to purchase an aggregate
of 1,600,000 shares of Common Stock at $10 per share (the “$10 Warrants” and, together with the Penny Warrants, the “Term
Loan Warrants”). The $10 Warrants were exercised on a cashless basis on October 10, 2022, with the Company issuing 457,142 shares
of Common Stock in connection with such exercise. During the year ended December 31, 2023, Penny Warrant holders exercised 2,000,000
warrants on a cashless basis, with the Company agreeing to issue 1,996,323 shares of Common Stock in connection with such exercise. During
the year ended December 31, 2023 the Company issued additional Penny Warrants to purchase 4,783 shares of Common Stock to the Term Loan
Lenders in accordance with the anti-dilution provisions of the penny warrants with respect to certain sales made by the Company under
the ChEF Equity Facility. In addition, pursuant to the Company’s limited waiver agreement on December 29, 2023 between the Company
and the lenders and lending agent, the Company agreed to issue to the lenders additional penny warrants exercisable to purchase an aggregate
1,286,671 shares of its Common Stock. The Company concluded the Penny Warrants are not considered indexed to the Company’s Common
Stock and to be accounted for as liabilities under ASC 815. As such, the estimated fair value is recognized as a liability each reporting
period, with changes in the fair value recognized within income each period. There were no Term Loan Warrants outstanding prior to the
merger.
DRAGONFLY
ENERGY HOLDINGS CORP
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
10 - Warrants (continued)
Common
Stock Warrants classified as Liability (Continued)
The
following table provides the significant inputs to the Black-Scholes method for the fair value of the Penny Warrants:
SCHEDULE
FAIR VALUE WARRANTS
| |
As
of December 31, 2023 | | |
As
of December 31, 2022 | |
Common
stock price | |
$ | 0.54 | | |
$ | 11.09 | |
Exercise
price | |
| 0.01 | | |
| 0.01 | |
Dividend
yield | |
| 0 | % | |
| 0 | % |
Term | |
| 10 | | |
| 9.77 | |
Volatility | |
| 96.00 | % | |
| 90.00 | % |
Risk-free
rate | |
| 3.90 | % | |
| 3.90 | % |
Fair
value | |
$ | 0.54 | | |
$ | 11.89 | |
The
following table provides the significant inputs to the Black-Scholes method for the fair value of the Investor Warrants issued in the
June 2023 Offering:
| |
As
of December 31, 2023 | |
Common
stock price | |
$ | 0.54 | |
Exercise
price | |
$ | 2.00 | |
Dividend
yield | |
| 0 | % |
Term | |
| 4.48 | |
Volatility | |
| 106.00 | % |
Risk-free
rate | |
| 3.90 | % |
Fair
value | |
$ | 0.31 | |
The
following table presents a roll-forward of the Company’s warrants from January 1, 2023 to December 31, 2023:
SCHEDULE
OF ROLL FORWARD IN WARRANTS
Private
Warrants:
| |
Common
Stock Warrants | |
Warrants
Outstanding, January 1, 2022 | |
| - | |
Assumed
in the merger | |
| 4,627,858 | |
Exercise
of warrants | |
| | |
Issued
in conjunction with merger | |
| | |
Exercised
subsequent to the merger | |
| | |
Warrants
issued | |
| | |
Warrants
Outstanding, December 31, 2022 | |
| 4,627,858 | |
| |
| | |
Warrants
Outstanding, January 1, 2023 | |
| 4,627,858 | |
Exercise
of warrants | |
| (3,126,472 | ) |
Balances,
December 31, 2023 | |
| 1,501,386 | |
Public
Warrants:
| |
Common
Stock Warrants | |
Warrants
Outstanding, January 1, 2022 | |
| - | |
Assumed
in the merger | |
| 9,487,500 | |
Warrants
Outstanding, December 31, 2022 | |
| 9,487,500 | |
| |
| | |
Warrants
Outstanding, January 1, 2023 | |
| 9,487,500 | |
Exercise
of warrants | |
| (64,971 | ) |
Balances,
December 31, 2023 | |
| 9,422,529 | |
Dragonfly
Energy Holdings Corp.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
10 - Warrants (continued)
Term
Loan Warrants:
| |
Common
Stock Warrants | |
Warrants
Outstanding, January 1, 2022 | |
| - | |
Issued
in conjunction with merger | |
| 4,193,056 | |
Exercised
subsequent to the merger | |
| (1,600,000 | ) |
Warrants
Outstanding, December 31, 2022 | |
| 2,593,056 | |
| |
| | |
Warrants
Outstanding, January 1, 2023 | |
| 2,593,056 | |
Exercise
of warrants | |
| (2,000,000 | ) |
Warrants
issued | |
| 1,291,454 | |
Warrants
Outstanding, December 31, 2023 | |
| 1,884,510 | |
Investor
Warrants:
| |
Common
Stock Warrants | |
Warrants
Outstanding, January 1, 2023 | |
| - | |
Warrants
Outstanding, Beginning | |
| - | |
Issuance
of warrants | |
| 11,405,000 | |
Exercise
of warrants | |
| (273,100 | ) |
Warrants
outstanding, December 31, 2023 | |
| 11,131,900 | |
Warrants
Outstanding, Ending | |
| 11,131,900 | |
The
following table presents a roll forward of the aggregate fair values of the Company’s warrant liabilities for which fair value
is determined by Level 3 Inputs. The only class of warrants that were determined to be Level 3 were the term loan and June Offering Investor
Warrants.
SCHEDULE
OF ROLL FORWARD OF AGGREGATE FAIR VALUES OF WARRANT LIABILITIES
| |
Warrant
Liability | |
Balances,
January 1, 2022 | |
$ | - | |
Issuance
of warrants | |
| 52,956 | |
Exercise
of warrants | |
| (16,669 | ) |
Change
in fair value of warrants | |
| (5,446 | ) |
Balances,
December 31, 2022 | |
$ | 30,841 | |
| |
| | |
Balances,
January 1, 2023 | |
$ | 30,841 | |
Issuance
of warrants | |
| 14,460 | |
Exercise
of warrants | |
| (11,901 | ) |
Change
in fair value of warrants | |
| (28,952 | ) |
Balances,
December 31, 2023 | |
$ | 4,448 | |
Note
11 - COMMON STOCK
The
Company is authorized to issue up to 250,000,000 shares of common stock with $0.0001 par value. Common stockholders are entitled to dividends
if and when declared by the Board of Directors subject to the rights of the preferred stockholders. As of December 31, 2023 and 2022,
there were 60,260,282 and 43,272,728 shares issued and outstanding. No dividends on common stock had been declared by the Company.
Dragonfly
Energy Holdings Corp.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
11 - Common Stock (continued)
On
June 12, 2022, Dragonfly entered into a Stock Purchase Agreement with THOR Industries, whereby THOR purchased shares of Dragonfly common
stock for $15,000 in cash. The Stock Purchase agreement was issued in connection with a binding agreement among the parties whereby the
parties would use commercially reasonable efforts to enter into a mutually agreed distribution and joint development agreement. The final
terms of the agreement have not yet been determined.
For
the year ended December 31, 2023 and 2022, the Company had reserved shares of common stock for issuance as follows:
SUMMARY OF RESERVED SHARES OF COMMON STOCK FOR ISSUANCE
| |
December
31, 2023 | | |
December
31, 2022 | |
Options
issued and outstanding | |
| 2,364,787 | | |
| 3,642,958 | |
Common
stock outstanding | |
| 60,260,282 | | |
| 43,272,728 | |
Warrants
outstanding | |
| 24,510,575 | | |
| 16,708,414 | |
Earnout
shares | |
| 40,000,000 | | |
| 40,000,000 | |
Shares
available for future issuance | |
| 4,469,280 | | |
| 4,924,914 | |
Total | |
| 131,604,924 | | |
| 108,549,014 | |
ChEF
Equity Facility
The
Company and CCM LLC entered into a purchase agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the
“ChEF RRA”) in connection with the merger. Pursuant to the Purchase Agreement, the Company has the right to sell to CCM LLC
an amount of shares of common stock, up to a maximum aggregate purchase price of $150,000, from time to time, pursuant to the terms of
the Purchase Agreement.
Pursuant
to, on the terms of, and subject to the satisfaction of the conditions in the Purchase Agreement, including the filing and effectiveness
of a registration statement registering the resale by CCM LLC of the shares of common stock issued to it under the Purchase Agreement,
the Company will have the right from time to time at its option to direct CCM LLC to purchase up to a specified maximum amount of shares
of common stock, up to a maximum aggregate purchase price of $150,000, over the term of the equity facility (“ChEF Equity Facility”).
Under
the terms of the Purchase Agreement, CCM LLC will not be obligated to (but may, at its option, choose to) purchase shares of common stock
to the extent the number of shares to be purchased would exceed the lowest of the number of shares of common stock (i) which would result
in beneficial ownership (as calculated pursuant to Section 13(d) of the Exchange Act and Rule 13d-3 promulgated thereunder) by CCM LLC,
together with its affiliates, of more than 9.9%, (ii) which would cause the aggregate purchase price on the applicable VWAP Purchase
Date (as defined in the Purchase Agreement) for such purchases to exceed $3,000 and (iii) equal to 20% of the total number of shares
of common stock that would count towards VWAP on the applicable Purchase Date of such purchase.
The
net proceeds from any sales under the Purchase Agreement will depend on the frequency with, and prices at, which shares of common stock
are sold to CCM LLC. To the extent the Company sells shares of common stock under the Purchase Agreement, it currently plans to use any
proceeds therefrom for working capital and other general corporate purposes.
In
addition, pursuant to the ChEF RRA, the Company has agreed to provide CCM LLC with certain registration rights with respect to the shares
of common stock issued subject to the Purchase Agreement.
Dragonfly
Energy Holdings Corp.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
11 - Common Stock (continued)
The
Purchase Agreement will automatically terminate on the earliest to occur of (i) the 36-month anniversary of the later of (x) the closing
of the merger and (y) effective date of the Initial Registration Statement (as defined in the Purchase Agreement), (ii) the date on which
CCM LLC shall have purchased 150,000,000 of shares of common stock pursuant to the Purchase Agreement, (iii) the date on which common
stock shall have failed to be listed or quoted on Nasdaq or any successor principal market and (iv) the commencement of certain bankruptcy
proceedings or similar transactions with respect to the Company or all or substantially all of its property.
Under
the terms of the Purchase Agreement, the Company issued 588,500
shares pursuant to the Purchase Agreement with CCM LLC for aggregate net proceeds to the Company of $1,273 from
the period January 1, 2023 through December 31, 2023.
June
2023 Offering
In
the June 2023 Offering, the Company sold an aggregate of (i) 10,000,000 shares of its Common Stock and, (ii) accompanying Investor Warrants
to purchase up to 10,000,000 shares of Common Stock, at the combined public offering price of $2.00 per share and accompanying Investor
Warrant, less underwriting discounts and commissions, and (iii) the Underwriters’ Warrants.
The
Investor Warrants are exercisable for five years from the closing date of the June 2023 Offering, have an exercise price of $2.00 per
share and are immediately exercisable. In the event of certain fundamental transactions, holders of the Investor Warrants will have the
right to receive the Black Scholes Value (as defined in the Investor Warrants) of their Investor Warrants calculated pursuant to the
formula set forth in the Investor Warrants, payable either in cash or in the same type or form of consideration that is being offered
and being paid to the holders of Common Stock. The Underwriters’ Warrants are exercisable upon issuance at an exercise price of
$2.50 per share and will expire on June 20, 2028.
The
Company granted the underwriters a 45-day over-allotment option to purchase up to an additional 1,500,000 shares of Common Stock and/or
Warrants to purchase up to an aggregate of 1,500,000 shares of Common Stock at the public offering price per security, less underwriting
discounts and commissions, of which the underwriters exercised for 1,405,000 shares of Common Stock and Investor Warrants to purchase
up to 1,405,000 shares of Common Stock and the remaining was not exercised within the 45-day window.
The
Company received gross proceeds of $22,810 and incurred $2,074 of offering related costs. The gross proceeds were first allocated to
the liability classified warrants based upon the transaction date fair value and then to the equity classified warrants with the residual
allocated to the common shares. The offering related costs were allocated based on the relative fair value of all instruments, of which
$1,169 was accounted for as a reduction of additional-paid-in-capital and $904 was recorded within general and administrative expenses.
The Company accounted for the investor warrants issued in connection with the Public Offering and the exercise of the underwriters’
over-allotment option in accordance with the guidance contained in ASC 815-40. Such guidance provides that the warrants described above
are precluded from equity classification. The fair value of the warrants were recorded as a liability in the amount of $13,762 on issuance
and are being fair valued at each reporting period.
Dragonfly
Energy Holdings Corp.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
12 - STOCK-BASED COMPENSATION
In
July of 2021, the Board of Directors approved the 2021 Stock Incentive Plan (the “2021 Plan” and, together with the 2019
Plan, the “Prior Plans”) with a term of ten years. The Plan was administered by the Board of Directors, which was authorized
to grant, at its discretion, awards to employees, directors, and consultants. The maximum number of common shares reserved for grants
of awards under the Plan was 1,000,000 shares which was amended and increased to 2,000,000 in May of 2022. The Plan provides for the
grant of stock options (both incentive stock options and nonqualified stock options), and the grants and sale of RSUs. Shares issued
under this Plan may be drawn from authorized and unissued shares, or shares reacquired by the Company.
In
connection with the merger, shareholders and board members approved the Dragonfly Energy Holdings 2022 Equity Incentive Plan (the “2022
Plan”). A total of 2,785,950 shares of common stock was initially reserved for issuance under the 2022 Plan, with the potential
for additional shares to be issued under the plan. The 2022 Plan replaced the Prior Plans, which the Company assumed in the merger. Following
the Closing, no additional awards will be granted under the Prior Plans, although all stock awards granted under the Prior Plans that
are outstanding immediately prior to the Closing will be assumed by the Company and continue to be subject to the terms and conditions
as set forth in the agreements evidencing such stock awards and the terms of the applicable Prior Plan.
If
an incentive award granted under the 2022 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered
to us in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for future
awards under the 2022 Plan. The number of shares subject to the 2022 Plan, and the number of shares and terms of any Incentive Award
may be adjusted in the event of any change in our outstanding common stock by reason of any stock dividend, spin-off, stock split, reverse
stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares, or similar
transaction.
The
Company maintains an Employee Stock Purchase Plan (“ESPP”) which is designed to allow eligible employees and the eligible
employees of our participating subsidiaries to purchase shares of our common stock, at semi-annual intervals, with their accumulated
payroll deductions. A total of 2,464,400 shares of the Company’s common stock will initially be available for issuance under the
ESPP. The share limit will automatically increase on the first trading day in January of each year by an amount equal to lesser of (1)
1% of the total number of outstanding shares of our common stock on December 31 in the prior year, (2) 1,500,000 shares, or (3) such
number as determined by the Company’s board of directors.
A
summary of the Company’s option activity and related information follows:
SCHEDULE OF OPTION ACTIVITY AND RELATED INFORMATION
| |
Number of Options (1) | | |
Weighted-Average Exercise Price | | |
Weighted-Average Grant Date Fair Value | | |
Weighted- Average Remaining Contractual Life (in years) | |
Aggregate intrinsic value | |
Balances, January 1, 2022 | |
| 3,690,955 | | |
$ | 1.98 | | |
$ | 1.38 | | |
8.52 | |
$ | 6,550 | |
Options granted | |
| 572,428 | | |
| 3.46 | | |
| 1.57 | | |
| |
| - | |
Options forfeited | |
| (39,074 | ) | |
| 3.13 | | |
| 1.73 | | |
| |
| - | |
Options exercised | |
| (581,351 | ) | |
| 1.16 | | |
| 0.89 | | |
| |
| - | |
Balances, December 31, 2022 | |
| 3,642,958 | | |
$ | 2.02 | | |
$ | 1.21 | | |
7.90 | |
$ | 35,898 | |
| |
| | | |
| | | |
| | | |
| |
| | |
Balances, January 1, 2023 | |
| 3,642,958 | | |
$ | 2.02 | | |
$ | 1.21 | | |
7.90 | |
$ | 35,898 | |
Options granted | |
| 143,607 | | |
| 7.50 | | |
| 3.82 | | |
| |
| 632 | |
Options forfeited | |
| (504,116 | ) | |
| 2.95 | | |
| 1.63 | | |
| |
| 439 | |
Options exercised | |
| (917,662 | ) | |
| 0.64 | | |
| 1.28 | | |
| |
| 585 | |
Balances, December 31, 2023 | |
| 2,364,787 | | |
$ | 2.69 | | |
$ | 1.57 | | |
7.60 | |
$ | 60 | |
| |
| | | |
| | | |
| | | |
| |
| | |
At December 31, 2023 | |
| | | |
| | | |
| | | |
| |
| | |
Vested and Exercisable | |
| 1,530,078 | | |
$ | 2.43 | | |
| | | |
7.44 | |
$ | 60 | |
Vested and expected to vest | |
| 2,364,787 | | |
$ | 2.69 | | |
| | | |
7.60 | |
$ | 60 | |
(1) | | Number of options
and weighted average exercise price prior to the merger has been adjusted to reflect the exchange of Legacy Dragonfly’s stock options
for New Dragonfly stock options at an exchange ratio of approximately 1.182 as a result of the merger. See Note 3 for further information. |
Dragonfly
Energy Holdings Corp.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
12 - Stock-Based Compensation (continued)
Share-based
compensation expense for options and RSUs totaling $6,710 and $2,467 was recognized in the Company’s consolidated statements of
operations for the year ended December 31, 2023 and 2022, respectively. Of the $6,710 of share-based compensation incurred during the
year ended December 31, 2023, $133 is allocated to cost of goods sold, $116 to research and development, $1,097 to selling and marketing,
and $5,364 to general and administrative expenses. Of the $2,467 of share-based compensation incurred during the year ended December
31, 2022, $155 is allocated to cost of goods sold, $149 to research and development, $654 to selling and marketing, and $1,509 to general
and administrative expenses.
The
valuation methodology used to determine the fair value of the options issued during the year was the Black Scholes option pricing model.
The Black Scholes model requires the use of a number of assumptions including volatility of the stock price, the fair value of the underlying
stock, the average risk free interest rate, and the weighted average expected life of the options. The expected term was estimated using
the simplified method due to lack of sufficient history of option exercises.
SCHEDULE OF VALUATION ASSUMPTIONS OF OPTIONS
| |
2023 | | |
2022 | |
Weighted
average fair value of options granted | |
$ | 3.82 | | |
$ | 1.57 | |
Risk-free
interest rate | |
| 4.20 | % | |
| 2.71 | % |
Volatility | |
| 45.0 | % | |
| 45.0 | % |
Expected
life (years) | |
| 6.45 | | |
| 5.68 | |
Dividend
yield | |
| 0.00 | % | |
| 0.00 | % |
Restricted
Stock Units
On
October 7, 2022, the Company granted 180,000 restricted stock units under the 2022 Plan which vested in full one year from the grant
date. The fair value of the restricted stock units on the date of grant was $2,520, which is recognized as compensation expense over
the requisite service period based on the value of the underlying shares on the date of grant. On February 10, 2023, the Company granted
461,998 restricted stock units under the 2022 Plan which vested in full immediately upon grant. The fair value of the restricted stock
units on the date of grant was $3,464 and was recorded as compensation expense during the year ended December 31, 2023. The Company granted
an additional 47,000 restricted stock units which have not vested. The fair value of the 47,000 unvested restricted stock units was $126
and an expense of $22 was recorded during the year ended December 31, 2023.
Dragonfly
Energy Holdings Corp.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
12 - Stock-Based Compensation (continued)
Restricted
Stock Units (Continued)
There
were no grants of restricted stock units prior to October 7, 2022. The following table presents the restricted stock units activity for
the year ended December 31, 2023:
SCHEDULE
OF RESTRICTED STOCK UNITS ACTIVITY
| |
Number
of Shares | | |
Weighted-
Average Fair
Market Value | |
Unvested
shares at January 1, 2022 | |
| - | | |
$ | - | |
Granted
and unvested | |
| 180,000 | | |
| 14.00 | |
Vested | |
| - | | |
| - | |
Unvested
shares, December 31, 2022 | |
| 180,000 | | |
$ | 14.00 | |
| |
| | | |
| | |
Unvested
shares, January 1, 2023 | |
| 180,000 | | |
$ | 14.00 | |
Granted
and unvested | |
| 508,998 | | |
| 7.06 | |
Vested | |
| (641,998 | ) | |
| 9.32 | |
Unvested
shares, December 31, 2023 | |
| 47,000 | | |
$ | 2.69 | |
As
of December 31, 2023, there were 4,469,280 shares of unissued authorized and available for future awards under the 2022 Equity Incentive
Plan and Employee Stock Purchase Plan.
Note
13 - SUPPLIER AGREEMENT
On
May 9, 2023, Ioneer Rhyolite Ridge LLC (“seller”), an emerging lithium-boron producer, and the Company announced a commercial
offtake agreement partnership whereby the seller is developing the Rhyolite Ridge Project which, once completed, is expected to produce
20 ktpa of lithium carbonate, and 174 ktpa of boic acid (the “project”). Beginning on the Supply Start Date which is the
date the seller notifies the Company that the project is fully completed and commissioned in accordance with the engineering, procurement
and construction contract, and for the duration of the supply period, the Company shall purchase and receive product from seller, on
the terms and conditions of the agreement. The agreement calls for a minimum annual purchase requirement. The agreement becomes effective
when the seller has informed the Company that the seller has made a positive financial investment decision in respect of the project.
Dragonfly
Energy Holdings Corp.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
14 - INCOME TAXES
The
income tax expense consists of the following items:
SCHEDULE OF INCOME TAX EXPENSE
| |
2023 | | |
2022 | |
Current
- Federal | |
$ | (36 | ) | |
$ | (317 | ) |
Current
– State | |
| 10 | | |
| 60 | |
Deferred
– Federal | |
| - | | |
| (448 | ) |
Deferred
– State | |
| - | | |
| (4 | ) |
Total
tax expense | |
$ | (26 | ) | |
$ | (709 | ) |
Components
of deferred tax assets (liabilities) are as follows:
SCHEDULE OF COMPONENTS OF DEFERRED TAX ASSETS (LIABILITIES)
| |
2023 | | |
2022 | |
Deferred tax assets: | |
| | | |
| | |
Start up costs | |
$ | 850 | | |
$ | - | |
Lease
liability | |
| 804 | | |
| 1,071 | |
Stock
based compensation | |
| 1,305 | | |
| 139 | |
Accrued
expenses | |
| 1,179 | | |
| 506 | |
Allowance
for bad debt | |
| 62 | | |
| 75 | |
Research
and development credit | |
| 847 | | |
| 200 | |
Fixed
assets and intangibles | |
| 1,657 | | |
| 25 | |
Interest
expense | |
| 4,907 | | |
| 1,595 | |
Prepaid
expenses | |
| 512 | | |
| 960 | |
Net
Operating Loss | |
| 7,891 | | |
| 3,727 | |
Inventory
(Sec. 263A) | |
| 360 | | |
| 62 | |
Deferred
tax asset | |
$ | 20,374 | | |
$ | 8,360 | |
| |
| | | |
| | |
Deferred
tax liabilities: | |
| | | |
| | |
Right
of Use Asset | |
| 757 | | |
| 1,036 | |
| |
| | | |
| | |
Deferred
tax liability | |
| 757 | | |
| 1,036 | |
Net
deferred tax asset (liability) | |
| 19,617 | | |
| 7,324 | |
Valuation
Allowance | |
| (19,617 | ) | |
| (7,324 | ) |
Net
deferred tax asset | |
$ | - | | |
$ | - | |
Dragonfly
Energy Holdings Corp.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
14 - Income Taxes (Continued)
Reconciliation
between the effective tax rate on income from continuing operations and the statutory rate for the year ending December 31, 2023 and
2022, is as follows:
SCHEDULE OF RECONCILIATION BETWEEN THE EFFECTIVE TAX RATE ON INCOME FROM CONTINUING OPERATIONS AND THE STATUTORY RATE
| |
2023 | | |
2022 | |
| |
Tax | | |
Percentage | | |
Tax | | |
Percentage | |
Book
income (loss) before taxes | |
$ | (2,902 | ) | |
| 21.00 | % | |
| (8,547 | ) | |
| 21.00 | % |
Permanent
differences (transaction costs) | |
| - | | |
| - | % | |
| 2,185 | | |
| (5.37 | )% |
Permanent
differences (warrants) | |
| - | | |
| - | % | |
| (1,144 | ) | |
| 2.81 | % |
Permanent
differences (other than tax)) | |
| (6,089 | ) | |
| 44.07 | % | |
| 458 | | |
| (1.13 | )% |
State
taxes, net | |
| (1,233 | ) | |
| 8.92 | % | |
| (722 | ) | |
| 1.77 | % |
Deferred
true-up | |
| (1,617 | ) | |
| 11.71 | % | |
| (288 | ) | |
| 0.71 | % |
Research
and development credits | |
| (647 | ) | |
| 4.68 | % | |
| (200 | ) | |
| 0.49 | % |
Research
and development capitalization | |
| (300 | ) | |
| 2.17 | % | |
| - | | |
| - | % |
Uncertain
tax positions | |
| 132 | | |
| (0.96 | )% | |
| 128 | | |
| (0.31 | )% |
Other | |
| 68 | | |
| (0.49 | )% | |
| 97 | | |
| (0.24 | )% |
Rate
Change | |
| 268 | | |
| (1.94 | )% | |
| | | |
| | |
Change
in valuation allowance | |
| 12,294 | | |
| (88.96 | )% | |
| 7,324 | | |
| (18.00 | )% |
Total | |
$ | (26 | ) | |
| | | |
| (709 | ) | |
| | |
Effective
tax rate | |
| | | |
| 0.20 | % | |
| | | |
| 1.74 | % |
The
tax returns of the Company are open for three years form the date of filing. At the report date, federal tax returns are open for the
Company for 2020, 2021 and 2022.
Under
the provisions of the Internal Revenue Code, the net operating loss and tax credit carryforwards are subject to review and possible adjustment
by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit carryforwards may become subject to an annual
limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period
in excess of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions.
This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount
of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership
changes may further affect the limitation in future years. The Company has not yet evaluated if section 382 was triggered.
Subject
to the limitations described below, as of December 31, 2023, the Company had federal net operating loss carryforwards of approximately
$34,941 available to reduce future taxable income which do not expire, but are limited to 80% utilization against taxable income. As
of December 31, 2023, the Company had state net operating loss carryforwards of approximately $14,969 available to reduce future taxable
income, which start to expire in 2037. The Company also had research and development credits of $847 as of December 31, 2023 to offset
future federal income taxes, which are set to expire in 2042.
Management
of the Company evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets and determined
that it is more likely than not that the Company will not recognize the benefits of the deferred tax assets. As a result, a full valuation
allowance was recorded as of December 31, 2023. The valuation allowance as of December 31, 2023 was $19,617, primarily due to the company
entering into a 3 year cumulative loss position and no expectation of income for the year ended December 31, 2023.
Dragonfly
Energy Holdings Corp.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
14 - Income Taxes (Continued)
As
part of the Tax Cuts and Jobs Act that was enacted in December of 2017, taxpayers are required to capitalize research and development
expenses and amortize them over five years if the expense is incurred in the US and over fifteen years if incurred in a foreign jurisdiction.
The effective date for that provision is for tax years beginning on or after January 1, 2022. The new capitalization requirement increased
deferred tax assets related to research and development expenses and decreased taxable loss in the current year, both of which were offset
by a full valuation allowance.
The
roll-forward of the Company’s gross uncertain tax positions is as follows:
SCHEDULE
OF GROSS UNCERTAIN TAX POSITIONS
| |
Gross
Uncertain
Tax Position | |
Balance at January 1, 2022 | |
$ | - | |
Additions for
current year tax positions | |
| 128 | |
Balance at December 31, 2022 | |
| 128 | |
Additions for current year
tax positions | |
| (37 | ) |
Balance at December 31, 2023 | |
$ | 91 | |
The
Company’s total uncertain tax positions decreased during the year ended December 31, 2023 because of a reserve established on federal
research and development credits generated in the current year. None of the uncertain tax positions that, if realized, would affect the
Company’s effective tax rate in future periods due to a valuation allowance provided against the Company’s net deferred tax
assets.
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR
Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1% excise tax on certain repurchases
of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign corporations
occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which
shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of
the repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value
of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions
apply to the excise tax. The U.S. Department of the Treasury (the “Treasury”) has been given the authority to provide regulations
and other guidance to carry out and prevent the abuse or avoidance of the excise tax. During the year ended December 31, 2023, the Company
did not undergo any repurchases of its stock that were subject to the IR Act.
Note
15 - REVISIONS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company has revised the previously issued 2022
financial statements for the underpayment of tariffs to U.S. Customs and Border Protection (“CBP”) in the amount of $1.58 million in
the aggregate, related to the improper classification and valuation of certain of the products used in its batteries. The Company has
reported the underpayment to CBP. The underpayment of tariffs was primarily the result of utilizing an improper tariff rate. The additional
amount of the tariffs was allocated between inventory and cost of goods sold based on the status of imported items (i.e. included in the
inventories held vs included in the inventories already sold to customers).
In
accordance with Staff Accounting Bulletin (“SAB”) 99, Materiality, and SAB 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the materiality of the error from qualitative
and quantitative perspectives, and concluded that the error was immaterial to any prior annual or interim financial statements. Notwithstanding
this conclusion, management has revised the accompanying consolidated financial statements for 2022 and related notes included herein
to correct this error for the 2022 financial statements presented.
The
following tables present the effect of correcting this error on the Company’s previously issued financial statements.
SCHEDULE OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Dragonfly
Energy Holdings Corp.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
15 - Revisions of Previously Issued Financial Statements (Continued)
Consolidated
Balance Sheet | |
As
previously reported | | |
Adjustment | | |
As
revised | |
| |
As
of December 31, 2022 | |
Consolidated
Balance Sheet | |
As
previously reported | | |
Adjustment | | |
As
revised | |
Inventory | |
$ | 49,846 | | |
$ | 343 | | |
$ | 50,189 | |
Total Current Assets | |
| 73,489 | | |
| 343 | | |
| 73,832 | |
Total Assets | |
| 88,761 | | |
| 343 | | |
| 89,105 | |
Accrued tariffs | |
| - | | |
$ | 932 | | |
$ | 932 | |
Total Current Liabilities | |
| 40,531 | | |
| 932 | | |
| 41,463 | |
Total Liabilities | |
| 77,430 | | |
| 932 | | |
| 78,362 | |
Total Equity | |
| 11,332 | | |
| (589 | ) | |
| 10,743 | |
Consolidated
Balance Sheet | |
As
previously reported | | |
Adjustment | | |
As
revised | |
| |
For
the Year ended December 31, 2022 | |
Consolidated
Statement of Operations | |
As
previously reported | | |
Adjustment | | |
As
revised | |
Cost of Goods
Sold | |
$ | 62,247 | | |
$ | 386 | | |
$ | 62,633 | |
Gross Profit | |
| 24,004 | | |
| (386 | ) | |
| 23,618 | |
Loss From Operations | |
| (33,997 | ) | |
| (386 | ) | |
| (34,383 | ) |
Interest expense | |
| (6,945 | ) | |
| (34 | ) | |
| (6,979 | ) |
Total Other Expense | |
| (6,283 | ) | |
| (34 | ) | |
| (6,317 | ) |
Loss before taxes | |
| (40,280 | ) | |
| (420 | ) | |
| (40,700 | ) |
Net Loss | |
| (39,571 | ) | |
| (420 | ) | |
| (39,991 | ) |
Loss Per Share | |
| (1.03 | ) | |
| (0.01 | ) | |
| (1.04 | ) |
Consolidated
Balance Sheet | |
As
previously reported | | |
Adjustment | | |
As
revised | |
| |
For
the Year ended December 31, 2022 | |
Consolidated Statement
of Cash Flows | |
As
previously reported | | |
Adjustment | | |
As
revised | |
Net Loss | |
$ | (39,571 | ) | |
$ | (420 | ) | |
$ | (39,991 | ) |
Change in Inventory | |
| (22,719 | ) | |
| (13 | ) | |
| (22,732 | ) |
Change in Accrued tariffs | |
| - | | |
| 433 | | |
| 433 | |
Change in Cash Used in Operating Activities | |
| (45,696 | ) | |
| - | | |
| (45,696 | ) |
Consolidated
Balance Sheet | |
As
previously reported | | |
Adjustment | | |
As
revised | |
| |
For
the Year ended December 31, 2022 | |
Consolidated
Statement of Shareholder’ Equity | |
As
previously reported | | |
Adjustment | | |
As
revised | |
Retained Earnings Balance –
January 1, 2022 | |
$ | 12,438 | | |
$ | (169 | ) | |
$ | 12,269 | |
Net Loss | |
| (39,571 | ) | |
| (420 | ) | |
| (39,991 | ) |
Retained Earnings Deficit – December 31, 2022 | |
| (27,133 | ) | |
| (589 | ) | |
| (27,722 | ) |
Dragonfly
Energy Holdings Corp.
Notes
to Consolidated Financial Statements
December
31, 2023 and 2022
(in
thousands, except share and per share data)
Note
17 - SUBSEQUENT EVENTS
On
January 26, 2024 the Company entered into a convertible promissory note (the “January Note”) with a board member in the amount
of $1,000, or the January Principal Amount. Upon execution of the January Note and funding of the original principal sum, a payment of
$50 (the “January Loan Fee”) was fully earned as of the date of the January Note and was due and payable in full in cash
on February 2, 2024. The Company paid the January Principal Amount and the January Loan Fee on February 1, 2024.
On
February 27, 2024 the Company entered into a convertible promissory note (the “February Note”) with a board member in the
amount of $1,700, or the February Principal Amount. Upon execution of the February Note and funding of the original principal sum, a
payment of $85 (the “February Loan Fee”) was fully earned as of the date of the February Note and was due and payable in
full in cash on March 1, 2024. The Company paid the February Principal Amount and the February Loan Fee on March 1, 2024.
On
March 31, 2024, the Company received a waiver from its Administrative Agent and Term Loan Lenders in regard to the Company’s compliance
with its liquidity requirement as of the last day of the fiscal quarter ended March 31, 2024.
Effective
April 12, 2024, the Company entered into amendments to the employment agreements with its Chief Executive Officer, its Chief Revenue
Officer and its Chief Marketing Officer to amend the terms of their annual equity compensation (the “Amended Employee Agreements”).
The Amended Employee Agreements allow the Company to issue a combination of cash and equity awards on an annual basis up to a specified
amount ($1,532 for the Chief Executive Officer, $490 for the Chief Revenue Officer and $236 for the Chief Marketing Officer),
subject to approval and such other terms and conditions imposed by the compensation committee of the board of directors.
On April 12, 2024, the Company issued a total of 836 RSUs to the following
employees: (i) 568 RSUs to the Chief Executive Officer; (ii) 181 RSUs to the Chief Revenue Officer; and (iii) 87 RSUs to the
Chief Marketing Officer. Each of the RSUs granted will vest in three equal annual installments, with the first vesting date on the one (1)
year anniversary of the date of issuance and the following two vesting dates on each subsequent anniversary of the date of issuance, subject
to each employees’ continued employment as of each vesting date. In addition to the RSU awards, the Board also approved the following
cash awards to the above referenced employees: (i) $511 to the Chief Executive Officer; (ii) $163 to the Chief Revenue Officer;
and (iii) $79 to the Chief Marketing Officer. Each of the approved cash awards will not be paid out to the employees until the Company
has achieved a minimum cash balance of $30,000, and are subject to each employee’s continued employment on the date of payment.
On April 12, 2024, the board of directors authorized the issuance
of 222 RSUs to each director in connection with their service as directors for the year ended December 31, 2023. The RSUs will vest
in three equal annual installments, with the first vesting date on the one (1) year anniversary date of their issuance, subject to the
directors continued service on with the Company on each vesting date.
On April 15, 2024, the board of directors approved an amendment
to the Company’s Director Compensation Policy offering its directors long-term incentive awards that are issuable subject to the
sole discretion of the Company’s compensation committee. Each such long-term incentive award is payable in the form of cash and
or equity awards. Each such award shall be determined each fiscal year and are subject to the director’s continued service with
the Company and other conditions as the Company’s compensation committee deems appropriate. Where equity awards are issued, such
awards are subject to the terms and conditions of the Dragonfly Energy Holdings Corp. 2022 Equity Incentive Plan.
On
April 12, 2024 the Company entered into a lease agreement, pursuant to which the Company agreed to lease an approximately 64 square foot facility (the “Premises”)
located in Fernley, Nevada, to be used for general, warehousing, assembly/light manufacturing, painting of products,
storage fulfillment, distribution of the Company’s products, and other uses as permitted under the Fernley Lease Agreement (the
“Fernley Lease Agreement”). The initial term of the Fernley Lease Agreement (the “Term”) is for a period of sixty
(60) months, effective April 1, 2024. The base rent for the Premises, payable monthly, is $45 for the first twelve months of the
Term and is subject to a three percent (3.0%) increase on the anniversary of each year. The Company also will be responsible for twenty-five
percent (25%) of any operating expenses, taxes and insurance expenses incurred by the Landlord in connection with the building in which
the Premises are located (the “Expenses”) as well as utility expenses. The Expenses are subject to recalculation
and increase upon the completion of the Initial Improvements (as defined in the Fernley Lease Agreement). The Landlord is responsible
for completing the Initial Improvements. The Fernley Lease Agreement also contains customary default provisions allowing the Landlord
to terminate the Fernley Lease Agreement if the Company fails to cure certain breaches of its obligations under the Fernley Lease Agreement
within a specified period of time upon written notice to the Company. Concurrent with the execution of the Fernley Lease Agreement, the
Company paid the Landlord a security deposit of $50.
DRAGONFLY
ENERGY HOLDINGS CORP.
Unaudited
Condensed Consolidated Balance Sheets
(in
thousands, except share and per share data)
| |
2024 | | |
2023 | |
Current Assets | |
| | | |
| | |
Cash and
cash equivalents | |
$ | 8,501 | | |
$ | 12,713 | |
Accounts receivable,
net of allowance for credit losses | |
| 2,247 | | |
| 1,639 | |
Inventory | |
| 33,578 | | |
| 38,778 | |
Prepaid expenses | |
| 843 | | |
| 772 | |
Prepaid inventory | |
| 1,468 | | |
| 1,381 | |
Prepaid income tax | |
| 345 | | |
| 519 | |
Other
current assets | |
| 709 | | |
| 118 | |
Total
Current Assets | |
| 47,691 | | |
| 55,920 | |
Property and Equipment | |
| | | |
| | |
Machinery and equipment | |
| 17,847 | | |
| 16,714 | |
Office furniture and
equipment | |
| 319 | | |
| 319 | |
Leasehold improvements | |
| 1,727 | | |
| 1,727 | |
Vehicle | |
| 33 | | |
| 33 | |
Total | |
| 19,926 | | |
| 18,793 | |
Less
accumulated depreciation and amortization | |
| (3,156 | ) | |
| (2,824 | ) |
Property and Equipment,
Net | |
| 16,770 | | |
| 15,969 | |
Operating lease right
of use asset, net | |
| 23,988 | | |
| 3,315 | |
Total
Assets | |
$ | 88,449 | | |
$ | 75,204 | |
Current Liabilities | |
| | | |
| | |
Accounts payable | |
$ | 9,550 | | |
$ | 10,258 | |
Accrued payroll and
other liabilities | |
| 8,295 | | |
| 7,107 | |
Accrued tariffs | |
| 1,800 | | |
| 1,713 | |
Customer deposits | |
| 231 | | |
| 201 | |
Uncertain tax position
liability | |
| 91 | | |
| 91 | |
Notes payable, current
portion, net of debt issuance costs | |
| 21,837 | | |
| 19,683 | |
Operating lease liability,
current portion | |
| 1,682 | | |
| 1,288 | |
Financing
lease liability, current portion | |
| 37 | | |
| 36 | |
Total
Current Liabilities | |
| 43,523 | | |
| 40,377 | |
Long-Term Liabilities | |
| | | |
| | |
Warrant liabilities | |
| 4,227 | | |
| 4,463 | |
Accrued expenses-long
term | |
| 69 | | |
| 152 | |
Operating lease liability,
net of current portion | |
| 22,763 | | |
| 2,234 | |
Financing
lease liability, net of current portion | |
| 56 | | |
| 66 | |
Total
Long-Term Liabilities | |
| 27,115 | | |
| 6,915 | |
Total
Liabilities | |
| 70,638 | | |
| 47,292 | |
Commitments and Contingencies
(See Note 5) | |
| - | | |
| - | |
Stockholders’ Equity | |
| | | |
| | |
Preferred stock, 5,000,000
shares at $0.0001
par value, authorized, no
shares issued and outstanding as of March 31, 2024
and December 31, 2023, respectively | |
| - | | |
| - | |
Common stock, 250,000,000
shares at $0.0001
par value, authorized, 60,260,282
shares issued and outstanding as of March 31, 2024
and December 31, 2023, respectively | |
| 6 | | |
| 6 | |
Additional paid in capital | |
| 69,711 | | |
| 69,445 | |
Accumulated deficit | |
| (51,906 | ) | |
| (41,539 | ) |
Total
Stockholders’ Equity | |
| 17,811 | | |
| 27,912 | |
Total
Liabilities and Stockholders’ Equity | |
$ | 88,449 | | |
$ | 75,204 | |
The
accompanying notes are an integral part of the condensed consolidated financial statements.
Dragonfly
Energy Holdings Corp.
Unaudited
Condensed Consolidated Statements of Operations
For
the Three Months Ended March 31, 2024 and 2023
(in
thousands, except share and per share data)
| |
2024 | | |
2023 | |
| |
For
The Three Months Ended March
31, | |
| |
2024 | | |
2023 | |
| |
| | |
| |
Net
Sales | |
$ | 12,505 | | |
$ | 18,791 | |
| |
| | | |
| | |
Cost
of Goods Sold | |
| 9,454 | | |
| 14,124 | |
| |
| | | |
| | |
Gross Profit | |
| 3,051 | | |
| 4,667 | |
| |
| | | |
| | |
Operating Expenses | |
| | | |
| | |
Research and development | |
| 1,333 | | |
| 880 | |
General and administrative | |
| 4,813 | | |
| 9,495 | |
Selling
and marketing | |
| 2,744 | | |
| 4,184 | |
| |
| | | |
| | |
Total
Operating Expenses | |
| 8,890 | | |
| 14,559 | |
| |
| | | |
| | |
Loss
From Operations | |
| (5,839 | ) | |
| (9,892 | ) |
| |
| | | |
| | |
Other Income (Expense) | |
| | | |
| | |
Interest expense, net | |
| (4,760 | ) | |
| (3,856 | ) |
Other expense | |
| (4 | ) | |
| - | |
Change
in fair market value of warrant liability | |
| 236 | | |
| 18,523 | |
Total
Other Income (Expense) | |
| (4,528 | ) | |
| 14,667 | |
| |
| | | |
| | |
Net
(Loss) Income Before Taxes | |
| (10,367 | ) | |
| 4,775 | |
| |
| | | |
| | |
Income
Tax (Benefit) Expense | |
| - | | |
| - | |
| |
| | | |
| | |
Net
(Loss) Income | |
$ | (10,367 | ) | |
$ | 4,775 | |
| |
| | | |
| | |
Net (loss) income
Per Share- Basic | |
$ | (0.17 | ) | |
$ | 0.11 | |
Net (loss) income
Per Share- Diluted | |
$ | (0.17 | ) | |
$ | 0.10 | |
| |
| | | |
| | |
Weighted Average
Number of Shares - Basic | |
| 60,260,282 | | |
| 45,104,515 | |
Weighted Average
Number of Shares - Diluted | |
| 60,260,282 | | |
| 48,455,996 | |
The
accompanying notes are an integral part of the condensed consolidated financial statements.
Dragonfly
Energy Holdings Corp.
Unaudited
Condensed Consolidated Statements of STockholders’ Equity
For
the Three Months Ended March 31, 2024 and 2023
(in
thousands, except share data)
| |
Shares | | |
Amount | | |
Paid-In Capital | | |
(Deficit) | | |
Total | |
| |
Common
Stock | | |
Additional | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Paid-In Capital | | |
(Deficit) | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
Balance
-January 1, 2023 | |
| 43,272,728 | | |
| 4 | | |
| 38,461 | | |
| (27,722 | ) | |
| 10,743 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net Income | |
| - | | |
| - | | |
| - | | |
| 4,775 | | |
| 4,775 | |
Common stock issued in public offering (ATM),
net of costs | |
| 73,500 | | |
| - | | |
| 597 | | |
| - | | |
| 597 | |
Exercise of stock options | |
| 36,009 | | |
| - | | |
| 93 | | |
| - | | |
| 93 | |
Exercise of public warrants | |
| 64,971 | | |
| - | | |
| 747 | | |
| - | | |
| 747 | |
Cashless exercise of liability classified
warrants | |
| 2,348,294 | | |
| 1 | | |
| 10,166 | | |
| - | | |
| 10,167 | |
Stock compensation
expense | |
| - | | |
| - | | |
| 4,487 | | |
| - | | |
| 4,487 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance
- March 31, 2023 | |
| 45,795,502 | | |
$ | 5 | | |
$ | 54,551 | | |
$ | (22,947 | ) | |
$ | 31,609 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance
- January 1, 2024 | |
| 60,260,282 | | |
$ | 6 | | |
$ | 69,445 | | |
$ | (41,539 | ) | |
$ | 27,912 | |
Balance | |
| 60,260,282 | | |
$ | 6 | | |
$ | 69,445 | | |
$ | (41,539 | ) | |
$ | 27,912 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| - | | |
| - | | |
| - | | |
| (10,367 | ) | |
| (10,367 | ) |
Net income (loss) | |
| - | | |
| - | | |
| - | | |
| (10,367 | ) | |
| (10,367 | ) |
Stock compensation
expense | |
| - | | |
| - | | |
| 266 | | |
| - | | |
| 266 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance
- March 31, 2024 | |
| 60,260,282 | | |
$ | 6 | | |
$ | 69,711 | | |
$ | (51,906 | ) | |
$ | 17,811 | |
Balance | |
| 60,260,282 | | |
$ | 6 | | |
$ | 69,711 | | |
$ | (51,906 | ) | |
$ | 17,811 | |
The
accompanying notes are an integral part of the condensed consolidated financial statements.
Dragonfly
Energy Holdings Corp.
Unaudited
Condensed Consolidated Statements of Cash Flows
For
the Three Months Ended March 31, 2024 and 2023
(in
thousands)
| |
2024 | | |
2023 | |
Cash flows from Operating Activities | |
| | | |
| | |
Net (Loss)
Income | |
$ | (10,367 | ) | |
$ | 4,775 | |
Adjustments to Reconcile Net (Loss) Income
to Net Cash Used in Operating Activities | |
| | | |
| | |
Stock based compensation | |
| 266 | | |
| 4,487 | |
Amortization of debt
discount | |
| 894 | | |
| 219 | |
Change in fair market
value of warrant liability | |
| (236 | ) | |
| (18,523 | ) |
Non-cash interest expense
(paid-in kind) | |
| 1,260 | | |
| 1,238 | |
Provision for credit
losses | |
| 47 | | |
| 52 | |
Depreciation and amortization | |
| 332 | | |
| 297 | |
Amortization of right of use of assets | |
| 422 | | |
| 308 | |
Loss on disposal of
property and equipment | |
| - | | |
| 116 | |
Changes in Assets and Liabilities | |
| | | |
| | |
Accounts receivable | |
| (655 | ) | |
| (1,577 | ) |
Inventory | |
| 5,200 | | |
| (1,966 | ) |
Prepaid expenses | |
| (71 | ) | |
| (196 | ) |
Prepaid inventory | |
| (87 | ) | |
| 299 | |
Other current assets | |
| (591 | ) | |
| (129 | ) |
Income taxes payable | |
| 174 | | |
| - | |
Accounts payable and
accrued expenses | |
| (100 | ) | |
| 6,465 | |
Accrued tariffs | |
| 87 | | |
| 117 | |
Customer
deposits | |
| 30 | | |
| 180 | |
Total
Adjustments | |
| 6,972 | | |
| (8,613 | ) |
Net
Cash Used in Operating Activities | |
| (3,395 | ) | |
| (3,838 | ) |
| |
| | | |
| | |
Cash Flows From Investing Activities | |
| | | |
| | |
Purchase
of property and equipment | |
| (817 | ) | |
| (589 | ) |
Net
Cash Used in Investing Activities | |
| (817 | ) | |
| (589 | ) |
The
accompanying notes are an integral part of the condensed consolidated financial statements.
Dragonfly
Energy Holdings Corp.
Unaudited
Condensed Consolidated Statements of Cash Flows (continued)
For
the Three Months Ended March 31, 2024 and 2023
(in
thousands)
(continued from previous
page) | |
2024 | | |
2023 | |
Cash Flows From Financing Activities | |
| | | |
| | |
Proceeds
from public offering, net | |
| - | | |
| 597 | |
Proceeds from note payable,
related party | |
| 2,700 | | |
| 1,000 | |
Repayment of note payable,
related party | |
| (2,700 | ) | |
| - | |
Proceeds from exercise
of public warrants | |
| - | | |
| 747 | |
Proceeds
from exercise of options | |
| - | | |
| 93 | |
Net
Cash Provided by Financing Activities | |
| - | | |
| 2,437 | |
| |
| | | |
| | |
Net Decrease in Cash and cash equivalents | |
| (4,212 | ) | |
| (1,990 | ) |
Cash and cash equivalents
- beginning of period | |
| 12,713 | | |
| 17,781 | |
Cash and cash equivalents
- end of period | |
$ | 8,501 | | |
$ | 15,791 | |
| |
| | | |
| | |
Supplemental Disclosures of Cash Flow Information: | |
| | | |
| | |
Cash
paid for income taxes | |
$ | - | | |
$ | - | |
Cash
paid for interest | |
$ | 2,390 | | |
$ | 2,003 | |
Supplemental Non-Cash Items | |
| | | |
| | |
Purchases
of property and equipment, not yet paid | |
$ | 412 | | |
$ | 352 | |
Recognition
of right of use asset obtained in exchange for operating lease liability | |
$ | 21,095 | | |
$ | - | |
Cashless
exercise of liability classified warrants | |
$ | - | | |
$ | 10,167 | |
The
accompanying notes are an integral part of the condensed consolidated financial statements.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
1 - NATURE OF BUSINESS
Dragonfly
Energy Holdings Corp. (“New Dragonfly” or the “Company”) sells lithium ion battery packs for use in a wide variety
of applications. The Company sells to distributors under the Dragonfly Energy brand name, and sells direct to consumers under the trade
name Battleborn Batteries. In addition, the Company develops technology for improved lithium ion battery manufacturing and assembly methods.
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GOING CONCERN
Principles
of consolidation
The
accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) and present the consolidated financial statements
of the Company and its wholly owned subsidiary. All significant intercompany transactions and balances are eliminated in consolidation.
Basis
of presentation
The
accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP
for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”)
set forth in Article 8 of Regulation SX. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP
for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal
recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.
Unaudited interim results are not necessarily indicative of the results for the full fiscal year. These condensed consolidated financial
statements should be read along with the 10-K filed with the SEC on April 16, 2024 (as amended April 29, 2024, the “Annual Report”)
of the Company for the annual period ended December 31, 2023. The consolidated balance sheet as of December 31, 2023 was derived from
the audited consolidated financial statements as of and for the year then ended.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
2 – Summary of Significant Accounting Policies (continued)
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The condensed consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
During
the three months ended March 31, 2024 and 2023, the Company incurred losses from operations and had negative cash flow from operations.
As of March 31, 2024, the Company had $8,501 in
cash and cash equivalents and working capital of $4,168.
The Company’s ability to achieve profitability and positive cash flow depends on its ability to increase revenue, contain its expenses
and maintain compliance with the financial covenants in its outstanding indebtedness agreements.
In
connection with the Company’s senior secured term loan facility in an aggregate principal amount of $75,000
(the “Term Loan”), the Company
is obligated to comply with certain financial covenants, which include maintaining a maximum senior leverage ratio, minimum liquidity,
a springing fixed charge coverage ratio, and maximum capital expenditures (See Note 6). On March 31, 2024, the Company obtained
a waiver from the Term Loan administrative agent and lenders of its failures to satisfy the liquidity requirement under the Term Loan
for the quarter ended March 31, 2024. If the Company is unable to obtain a waiver or if the Company is unable to comply with such covenants,
the lenders have the right to accelerate the maturity of the Term Loan. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
In
addition, the Company may need to raise additional debt and/or equity financings to fund its operations, strategic plans, and meet its
financial covenants. The Company has historically been able to raise additional capital through issuance of equity and/or debt financings
and the Company intends to use its equity facility and raise additional capital as needed. However, the Company cannot guarantee that
it will be able to raise additional equity, contain expenses, or increase revenue, and comply with the financial covenants under the
Term Loan.
Recently
issued accounting pronouncements:
In
November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07,
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 requires, among
other updates, enhanced disclosures about significant segment expenses that are regularly provided to the CODM, as well as the aggregate
amount of other segment items included in the reported measure of segment profit or loss. ASU 2023-07 is effective for fiscal years beginning
after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective adoption.
Early adoption is permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements and related
disclosures.
In
December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”).
ASU 2023-09 requires enhanced annual disclosures regarding the rate reconciliation and income taxes paid information. ASU 2023-09 is
effective for fiscal years beginning after December 15, 2024, and may be adopted on a prospective or retrospective basis. Early adoption
is permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
2 – Summary of Significant Accounting Policies (continued)
Cash
and Cash Equivalents
The
Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. As of March
31, 2024 and December 31, 2023, the Company held no
Cash Equivalents.
From
time to time the Company has amounts on deposit with financial institutions that exceed federally insured limits. The Company has not
experienced any significant losses in such accounts.
Accounts
Receivable
The
Company’s trade receivables are recorded when billed and represent claims against third parties that will be settled in cash. Generally,
payment is due from customers within 30- 90 days of the invoice date and the contracts do not have significant financing components.
Trade accounts receivables are recorded gross and are net of any applicable allowance. The allowance for credit losses as of March 31,
2024 and December 31, 2023 were not material.
Inventory
Inventories
(Note 4), which consist of raw materials and finished goods, are stated at the lower of cost (first in, first out) or net realizable
value, net of reserves for obsolete inventory. We continually analyze our slow moving and excess inventories. Based on historical and
projected sales volumes and anticipated selling prices, we established reserves. Inventory that is in excess of current and projected
use is reduced by an allowance to a level that approximates its estimate of future demand. Products that are determined to be obsolete
are written down to net realizable value. The inventory reserve as of March 31, 2024 and December 31, 2023 is immaterial.
Use
of Estimates
The
preparation of financial statements in conformity with U.S GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The
Company utilizes the use of estimates in its calculations for the reserve for obsolete or slow moving inventory, right of use assets,
warrant liability, equity based compensation, and income taxes.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
2 – Summary of Significant Accounting Policies (continued)
Revenue
Recognition
Under
Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the
consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements
that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s)
with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the
transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance
obligation. The Company only applies the five-step model to contracts when it is probable the entity will collect the consideration it
is entitled to in exchange for the goods or services it transfers to the customer.
Revenue
is recognized when control of the promised goods is transferred to the customer or reseller, in an amount that reflects the consideration
the Company expects to be entitled to in exchange for those goods and services. Revenue associated with products holding rights of return
are recognized when the Company concludes there is not a risk of significant revenue reversal in the future periods for the expected
consideration in the transaction. There are no material instances including discounts and refunds where variable consideration is constrained
and not recorded at the initial time of sale. Generally, our revenue is recognized at a point in time for standard promised goods at
the time of shipment when title and risk of loss pass to the customer.
The
Company may receive payments at the onset of the contract before delivery of goods for customers in the retail channel. Payment terms
for distributors and OEMs are typically due within 30-90
days after shipment. In such instances,
the Company records a customer deposit liability. The Company recognizes these contract liabilities as sales after the revenue criteria
are met. As of March 31, 2024 and December 31, 2023, the contract liability related to the Company’s customer deposits are $231
and $201,
respectively.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
2 – Summary of Significant Accounting Policies (continued)
Revenue
Recognition (Continued)
The
Company recognized $134
of the contract liability as of December
31, 2023 during the three months ended March 31, 2024. The Company recognized $211
of the contract liability as of December
31, 2022 during the three months ended March 31, 2023.
Disaggregation
of Revenue
The
following table present our disaggregated revenues by distribution channel:
SCHEDULE
OF DISAGGREGATED REVENUES BY DISTRIBUTION CHANNEL
| |
2024 | | |
2023 | |
| |
For the Three Months Ended | |
| |
March
31 | |
| |
2024 | | |
2023 | |
Sales | |
| | |
| |
Direct to
Customer | |
| 5,203 | | |
| 10,038 | |
Original
equipment manufacturer | |
| 7,302 | | |
| 8,753 | |
Total | |
$ | 12,505 | | |
$ | 18,791 | |
During
the year ended December 31, 2023, the Company deemed it more appropriate to classify Retail and Distributor revenues as a single line
item referred to as direct-to-consumer revenue. The Company has combined previously reported retail and distributor amounts to direct-to-consumer
revenue to conform with current year presentation. The consolidation into direct-to-consumer revenue is motivated by The Company’s
strategic perspective on its operations and better represents how it evaluates their sales channels.
Product
Warranty
The
Company offers assurance type warranties from 5
to 10
years on its products. The Company estimates
the costs associated with the warranty obligation using historical data of warranty claims and costs incurred to satisfy those claims.
The Company estimates, based upon a review of historical warranty claim experience, the costs that may be incurred under its warranties
and record a liability in the amount of such estimate at the time a product is sold. Factors that affect our warranty liability include
the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses
the adequacy of our recorded warranty liability and adjust the accrual as claims data and historical experience warrants. The Company
has assessed the costs of fulfilling its existing assurance type warranties and has determined that the estimated outstanding warranty
obligation at March 31, 2024 and December 31, 2023 to be $414
and $307,
respectively.
SCHEDULE
OF WARRANTY OBLIGATION
| |
March
31,
2024 | | |
December
31,
2023 | |
Beginning warranty obligation | |
| 307 | | |
| 328 | |
Provision of warranty expense | |
| 197 | | |
| 397 | |
Settlement of warranty
claims | |
| (90 | ) | |
| (418 | ) |
Ending warranty
obligation | |
$ | 414 | | |
$ | 307 | |
Concentrations
As of March 31, 2024, receivables
from Customer A, Customer B and Customer C comprised approximately 22%,
14%
and 12%,
respectively, of accounts receivable. As of December 31, 2023, receivables from Customer D and Customer E comprised approximately 28%
and 10%,
respectively, of accounts receivable.
For
the three months ended March 31, 2024, sales from Customer A accounted for approximately 16%
of the Company’s total revenue. For the three months ended March 31, 2023, sales from Customer B accounted for approximately 26%
of the Company’s total revenue.
As
of March 31, 2024, payables to Vendor A comprised approximately 60%
of accounts payables. As of December 31, 2023, payables to Vendor A comprised approximately 65%
of accounts payables.
For the three months ended March 31,
2024, Vendor A accounted for approximately 12%
of the Company’s total purchases. For the three months ended March 31, 2023, Vendor B and Vendor C accounted for approximately
38%
and 10%,
respectively, of the Company’s total purchases.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
2 – Summary of Significant Accounting Policies (continued)
Stock-Based
Compensation
The
Company accounts for stock based compensation arrangements with employees and non employee consultants using a fair value method which
requires the recognition of compensation expense for costs related to all stock based payments, including stock options (Note 11). The
fair value method requires the Company to estimate the fair value of stock based payment awards to employees and non employees on the
date of grant using an option pricing model. Stock based compensation costs are based on the fair value of the underlying option calculated
using the Black Scholes option pricing model and recognized as expense on a straight line basis over the requisite service period, which
is the vesting period. Restricted stock unit awards are valued based on the closing trading value of the Company’s common stock
on the date of grant and then amortized on a straight-line basis over the requisite service period of the award. The Company measures
equity based compensation awards granted to non employees at fair value as the awards vest and recognizes the resulting value as compensation
expense at each financial reporting period.
Determining
the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatility, expected dividend
yield, expected term, risk free rate of return, and the estimated fair value of the underlying common stock. Due to the lack of company
specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility
of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate
with the expected term assumption. The group of representative companies have characteristics similar to the Company, including stage
of product development and focus on the lithium ion battery industry. The Company uses the simplified method, which is the average of
the final vesting tranche date and the contractual term, to calculate the expected term for options granted to employees as it does not
have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk free interest
rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The Company uses an assumed
dividend yield of zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock. The
Company accounts for forfeitures as they occur.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
2 – Summary of Significant Accounting Policies (continued)
Income
Taxes
Deferred
income tax assets and liabilities are determined based on the estimated future tax effects of net operating loss, credit carryforwards
and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured at
the current enacted tax rates.
The
Company recognizes a tax benefit for an uncertain tax position only if it is more likely than not that the tax position will be sustained
on examination by taxing authorities, based on the technical merits of the position. The Company has a liability of $91
as of March 31, 2024, and December 31,
2023, respectively, of uncertain tax positions.
The
Company’s accounting policy is to include penalties and interest related to income taxes if any, in selling, general and administrative
expenses. The Company regularly assesses the need to record a valuation allowance against net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Net
(Loss) Income per Common Share
Basic
net (loss) income per share is calculated by dividing net (loss) earnings by the weighted-average number of common shares outstanding
during the period. Diluted net (loss) income per share is calculated using the weighted-average number of common shares outstanding during
the period and, if dilutive, the weighted-average number of potential shares of common stock.
The
weighted-average number of common shares included in the computation of diluted net (loss) income gives effect to all potentially dilutive
common equivalent shares, including outstanding stock options and warrants.
Common
stock equivalent shares are excluded from the computation of diluted net (loss) income per share if their effect is antidilutive. In
periods in which the Company reports a net loss, diluted net loss per share is generally the same as basic net loss per share since dilutive
common shares are not assumed to have been issued if their effect is anti-dilutive.
Leases
At
the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and
circumstances present in the arrangement including the use of an identified asset(s) and the Company’s control over the use of
that identified asset. The Company elected, as allowed under FASB ASU 2016-02, Leases (“ASC 842”), to not recognize leases
with a lease term of one year or less on its balance sheet. Leases with a term greater than one year are recognized on the balance sheet
as right-of-use (“ROU”) assets and current and non-current lease liabilities, as applicable.
Segment
Reporting
Operating
segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation
by the Company’s Chief Executive Officer to make decisions with respect to resource allocation and assessment of performance. To
date, the Company has viewed its operations and manages its business as one operating segment.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period presentation in the condensed consolidated financial statements
and these accompanying notes. The reclassifications did not have a material impact on the Company’s unaudited condensed consolidated
financial statements and related disclosures. The impact on any prior period disclosures was immaterial.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
3 - FAIR VALUE MEASUREMENTS
ASC
820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a fair value hierarchy for instruments measured at
fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable
inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained
from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs
that market participants would use in pricing the asset or liability and are developed based on the best information available in the
circumstances.
ASC
820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions
in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following:
● | Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. |
● | Level
2 inputs are inputs other than quoted prices included within Level 1 that are observable
for a similar asset or liability, either directly or indirectly. |
● | Level
3 inputs are unobservable inputs that reflect the Company’s own assumptions about the
inputs that market participants would use in pricing the asset or liability. |
Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest
for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level
of any input that is significant to the fair value measurement.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
3 - Fair Value Measurements (continued)
The
following table presents assets and liabilities that were measured at fair value in the Condensed Consolidated Balance Sheets on a recurring
basis as of March 31, 2024:
SCHEDULE
OF FAIR VALUE OF ASSETS AND LIABILITIES
| |
Carrying
Amount | | |
Fair
Value | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | |
| |
As
of March 31, 2024 | |
Liabilities | |
| | |
| | |
| | |
| | |
| |
Warrant liability- Term Loan | |
$ | 1,010 | | |
$ | 1,010 | | |
$ | - | | |
$ | - | | |
$ | 1,010 | |
Warrant liability- June Public Offering | |
| 3,214 | | |
| 3,214 | | |
| - | | |
| - | | |
| 3,214 | |
Warrant liability-
Private Placement Warrants | |
| 3 | | |
| 3 | | |
| - | | |
| 3 | | |
| - | |
Total liabilities | |
$ | 4,227 | | |
$ | 4,227 | | |
$ | - | | |
$ | 3 | | |
$ | 4,224 | |
The
following table presents assets and liabilities that were measured at fair value in the Condensed Consolidated Balance Sheets on a recurring
basis as of December 31, 2023:
| |
Carrying
Amount | | |
Fair
Value | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | |
| |
As
of December 31, 2023 | |
Liabilities | |
| | |
| | |
| | |
| | |
| |
Warrant liability- Term Loan | |
$ | 1,014 | | |
$ | 1,014 | | |
$ | - | | |
$ | - | | |
$ | 1,014 | |
Warrant liability- June Public Offering | |
| 3,434 | | |
| 3,434 | | |
| - | | |
| - | | |
| 3,434 | |
Warrant liability- Private placement warrants | |
| 15 | | |
| 15 | | |
| - | | |
| 15 | | |
| - | |
Total liabilities | |
$ | 4,463 | | |
$ | 4,463 | | |
$ | - | | |
$ | 15 | | |
$ | 4,448 | |
The
carrying amounts of accounts receivable and accounts payable are considered level 1 and approximate fair value as of March 31, 2024 and
December 31, 2023 because of the relatively short maturity of these instruments.
The
carrying value of the term loan as of March 31, 2024 and December 31, 2023 approximates fair value as the interest rate does not differ
significantly from the current market rates available to the Company for similar debt and is considered level 2.
Level
3 Roll forward
Fair
value measurements categorized within Level 3 are sensitive to changes in assumptions or methodology used to determine fair value, and
such changes could result in a significant increase or decrease in the fair value.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
The
changes for Level 3 items measured at fair value on recurring basis using significant unobservable inputs are as follows:
SCHEDULE
OF CHANGES FOR LEVEL 3 ITEMS MEASURED AT FAIR VALUE ON RECURRING BASIS USING SIGNIFICANT UNOBSERVABLE INPUTS
| |
Warrant
Liability - Term Loan | | |
Warrant
liability- June Public Offering | |
Fair value as of January 1,
2024 | |
$ | 1,014 | | |
$ | 3,434 | |
Warrant exercises | |
| | | |
| | |
Change
in fair value, gain included in net loss(1) | |
| (4 | ) | |
| (220 | ) |
Fair value as of
March 31, 2024 | |
$ | 1,010 | | |
$ | 3,214 | |
| |
Warrant
Liability - Term Loan | |
Fair value as of January 1,
2023 | |
$ | 30,841 | |
Warrant exercises | |
| (8,822 | ) |
Change
in fair value, gain included in net loss(1) | |
| (17,998 | ) |
Fair value as of
March 31, 2023 | |
$ | 4,021 | |
(1) | Changes
in fair value of warrant liabilities are disclosed separately in the Condensed Consolidated
Statements of Operations |
Note
4 - INVENTORY
Inventory
consists of the following:
SCHEDULE
OF INVENTORY
| |
March
31,
2024 | | |
December
31,
2023 | |
Raw material | |
$ | 26,995 | | |
$ | 31,604 | |
Finished goods | |
| 6,583 | | |
| 7,174 | |
Total inventory | |
$ | 33,578 | | |
$ | 38,778 | |
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
5 - COMMITMENTS AND CONTINGENCIES
Litigation
From
time to time the Company may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, governmental
actions, administrative actions, investigations or claims are pending against the Company or involve the Company that, in the opinion
of the Company’s management, could reasonably be expected to have a material adverse effect on the Company’s business and
financial condition.
Operating
Leases
The
Company has leases related to the main office, warehouse space, research and development lab, engineering office, and sales office, all
located in Reno, Nevada. The leases require annual escalating monthly payments ranging from $118
to $361.
On February 2, 2022, the Company entered into a 124-month lease agreement in Reno, Nevada. The lease calls for monthly base rent of $230,
$23 of
fixed operating expense costs, and estimated monthly property taxes of $21.
The monthly base rent and fixed operating expense costs are subject to escalation of 3%
and 2.4%,
respectively, on an annual basis. A certificate of substantial completion has been issued and the lease commencement date was March 25,
2024. The monthly rent under the lease will begin July 24, 2024.
The
following table presents the breakout of the operating leases as of:
SCHEDULE
OF BREAKOUT OF OPERATING LEASES
| |
March
31,
2024 | | |
December
31,
2023 | |
Operating
lease right-of-use assets | |
$ | 23,988 | | |
$ | 3,315 | |
Short-term operating lease liabilities | |
| 1,682 | | |
| 1,288 | |
Long-term operating
lease liabilities | |
| 22,763 | | |
| 2,234 | |
Total operating lease
liabilities | |
$ | 24,445 | | |
$ | 3,522 | |
Weighted average remaining lease term | |
| 9.29
years | | |
| 2.6
years | |
Weighted average discount rate | |
| 7.75 | % | |
| 5.2 | % |
Assumptions
used in determining our incremental borrowing rate include the Company’s implied credit rating and an estimate of secured borrowing
rates based on comparable market data.
At
March 31, 2024, the future minimum lease payments under these operating leases are as follows:
SCHEDULE
OF FUTURE MINIMUM LEASE PAYMENTS UNDER OPERATING LEASES
Fiscal Years Ending | |
| |
December 31, 2024(1) | |
$ | 2,460 | |
December 31, 2025 | |
| 4,267 | |
December 31, 2026 | |
| 3,810 | |
December 31, 2027 | |
| 3,004 | |
December 31, 2028 | |
| 3,094 | |
Thereafter | |
| 19,070 | |
Total lease payments | |
| 35,705 | |
Less imputed interest | |
| 11,260 | |
Total operating lease
liabilities | |
$ | 24,445 | |
(1) | Represents scheduled payments for the remaining nine-month period ending December 31, 2024. |
SCHEDULE
OF LEASE COST
| |
| |
For
The Three Months Ended March 31, | |
Lease cost | |
Classification | |
2024 | | |
2023 | |
Operating lease cost | |
Cost of goods sold | |
$ | 350 | | |
$ | 347 | |
Operating lease cost | |
Research and development | |
| 23 | | |
| 22 | |
Operating lease cost | |
General and administration | |
| 270 | | |
| 12 | |
Operating lease cost | |
Selling and marketing | |
| 12 | | |
| 12 | |
Total lease cost | |
| |
$ | 655 | | |
$ | 393 | |
All
lease costs included in the schedule above are fixed.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
5 – Commitments and Contingencies (continued)
Financing
Leases
The
Company entered into finance lease agreements for equipment to support the Company’s operations. Payments under the finance lease
agreements are fixed for a term of 3-5
years. The leased assets are recognized
in property plant & equipment.
The
following table presents the breakout of the financing leases as of:
SCHEDULE
OF BREAKOUT OF FINANCE LEASES
| |
March
31,
2024 | | |
December
31,
2023 | |
Finance
lease right-of-use assets | |
$ | 99 | | |
$ | 106 | |
Short-term finance lease liabilities | |
| 37 | | |
| 36 | |
Long-term finance
lease liabilities | |
| 56 | | |
| 66 | |
Total finance lease
liabilities | |
$ | 93 | | |
$ | 102 | |
Weighted average remaining lease term | |
| 2.5
years | | |
| 2.7
years | |
Weighted average discount rate | |
| 5.2 | % | |
| 5.2 | % |
Assumptions
used in determining our incremental borrowing rate include our implied credit rating and an estimate of secured borrowing rates based
on comparable market data.
At
March 31, 2024, the future minimum lease payments under these operating leases are as follows:
SCHEDULE
OF FUTURE MINIMUM LEASE PAYMENTS UNDER FINANCE LEASES
Fiscal Years Ending | |
| |
December 31, 2024(1) | |
$ | 31 | |
December 31, 2025 | |
| 41 | |
December 31, 2026 | |
| 24 | |
December 31, 2027 | |
| 4 | |
Total lease payments | |
| 100 | |
Less imputed interest | |
| 7 | |
Total operating lease
liabilities | |
$ | 93 | |
(1) | Represents
scheduled payments for the remaining nine-month period ending December 31, 2024. |
Other
Contingencies
See
Note 7 for further discussion regarding contingent consideration arising from the April 2022 Asset Purchase agreement with Thomason Jones
Company, LLC.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
6 - LONG TERM DEBT
Term
Loan Agreement
On
October 7, 2022 (the “Closing Date”), in connection with the merger, CNTQ, Legacy Dragonfly and CCM Investments 5 LLC, an
affiliate of CCM LLC (“CCM 5”, and in connection with the Term Loan, the “Chardan Lender”), and EICF Agent LLC
(“EIP”) entered into the Term Loan, Guarantee and Security Agreement (the “Term Loan Agreement”) setting forth
the terms of the Term Loan. The Chardan Lender backstopped its commitment under the Debt Commitment Letter by entering into a backstop
commitment letter, dated as of May 20, 2022 (the “Backstop Commitment Letter”), with a certain third party financing source
(the “Backstop Lender” and collectively with EIP, the “Term Loan Lenders”), pursuant to which the Backstop Lender
committed to purchase from the Chardan Lender the aggregate amount of the Term Loan held by the Chardan Lender (the “Backstopped
Loans”) immediately following the issuance of the Term Loan on the Closing Date. Pursuant to an assignment agreement, the Backstopped
Loans were assigned by CCM 5 to the Backstop Lender on the Closing Date.
Pursuant
to the terms of the Term Loan Agreement, the Term Loan was advanced in one tranche on the Closing Date. The proceeds of the Term Loan
were used (i) to refinance on the Closing Date prior indebtedness (including the obligations underlying the Trust Indenture), (ii) to
support the merger and related transactions under the merger agreement, (iii) for working capital purposes and other corporate purposes,
and (iv) to pay any fees associated with transactions contemplated under the Term Loan Agreement and the other loan documents entered
into in connection therewith, including the transactions described in the foregoing clauses (i) and (ii) and fees and expenses related
to the merger. The Term Loan amortizes in the amount of 5%
per annum (or $937.5
on the first day of each calendar quarter)
beginning 24
months after the Closing Date and matures
on the fourth anniversary of the Closing Date (“Maturity Date”). The Term Loan accrues interest (i) until April 1, 2023,
at a per annum rate equal to the adjusted Secured Overnight Financing Rate (“SOFR”) plus a margin equal to 13.5%,
of which 7%
will be payable in cash and 6.5%
will be paid in kind, (ii) thereafter
until October 1, 2024, at a per annum rate equal to adjusted SOFR plus 7%
payable in cash plus an amount ranging
from 4.5%
to 6.5%,
depending on the senior leverage ratio of the consolidated company, which will be paid in kind and (iii) at all times thereafter, at
a per annum rate equal to adjusted SOFR plus a margin ranging from 11.5%
to 13.5%
payable in cash, depending on the senior
leverage ratio of the consolidated company. In each of the foregoing cases, adjusted SOFR will be no less than 1%.
In
addition to optional prepayments by the Company upon written notice, the Term Loan Agreement provides for mandatory prepayments upon
receipt of proceeds from certain transactions or casualty events. The Company is required to prepay the Term Loan based on excess cash
flow, as defined in the agreement, beginning with the financial statements for the year ended December 31, 2023.
During
the year ended December 31, 2023, the Company prepaid the first four installments of the Term Loan which amounted to $5,275
and pushed back the first principal payment
to October 2025.
In
connection with the entry into the Term Loan Agreement, and as a required term and condition thereof, the Company issued (i) the penny
warrants to the Term Loan Lenders exercisable to purchase an aggregate of 2,593,056
and (ii) the $10
warrants to issue warrants to the Term
Loan Lenders exercisable to purchase an aggregate of 1,600,000
shares of common stock at $10
per share. Refer to Note 9 for further
information.
Unless
the obligations under the Term Loan are accelerated under the terms of the agreement, the maturity date will be October 7, 2026.
The
Term Loan Lenders have been granted a first priority lien, and security interest in, the mortgaged properties underlying the Company’s
mortgages.
During
the three months ended March 31, 2024 and 2023, a total of $3,701
and $3,496,
respectively, of interest expense was incurred under the debt. Amortization of the debt issuance costs amounted to $894
and $219,
respectively, during the three months ended March 31, 2024 and 2023.
The
carrying balance of $21,837
on March 31, 2024 consisted of $69,725
in principal, plus $7,389
PIK interest, less $55,277
in unamortized debt discount related to
the debt issuance costs. The carrying balance of $19,683
on December 31, 2023 consisted of $69,725
in principal, plus $6,130
PIK interest, less $56,172
in unamortized debt discount related to
the debt issuance costs.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
6 - Long Term Debt (continued)
Term
Loan Agreement (continued)
Financial
Covenants
The
Company is subject to restrictive financial covenants pertaining to Maximum Senior Leverage Ratio, Liquidity, Fixed Charge Coverage Ratio,
and Capital Expenditures as defined in the Term Loan Agreement. As of March 31, 2024, the Company was not in compliance with our financial
covenants pertaining to the fixed charge coverage ratio, liquidity, and the maximum senior leverage ratio. On March 31, 2024, the Company
received a waiver from its Administrative Agent and Term Loan Lenders in regards to its compliance with the liquidity requirement under
the Term Loan as of the last day of the quarter ended March 31, 2024. If the Company is unable to obtain a waiver or if the Company is
unable to comply with such covenants, the lenders have the right to accelerate the maturity of the Term Loan. Because of this, the entire
debt is classified as current instead of long-term debt.
At
March 31, 2024, the future debt maturities are as follows:
SCHEDULE
OF FUTURE DEBT MATURITIES
For Year Ended December 31, | |
| |
2024 | |
| - | |
2025 | |
| 938 | |
2026 | |
| 78,703 | |
Total | |
| 79,641 | |
Less: Estimated
interest paid-in-kind | |
| (2,527 | ) |
Total debt | |
| 77,114 | |
Less: Unamortized
debt issuance costs | |
| (55,277 | ) |
Total carrying
amount | |
| 21,837 | |
Less: Current
portion of debt | |
| (21,837 | ) |
Total long-term
debt | |
$ | - | |
Note
7 - ASSET PURCHASE AGREEMENT
Thomason
Jones Company, LLC
In
April 2022, the Company entered into an Asset Purchase Agreement with William Thomason, Richard Jones, and Thomason Jones Company, LLC
whereby the Company acquired inventory and intellectual property assets for a price not to exceed $700
cash plus contingent payments of $1,000
each to William Thomason and Richard Jones
(the “Earn Out”). The transaction was determined to be a business combination under the guidance in FASB ASC 805: Business
Combinations. The Company followed the guidance under ASC 805-10-55 and determined the contingent consideration to be separate from the
business combination and the earn out to be recognized as contingent compensation to Mr. Thomason and Mr. Jones as the contingency became
probable of being met. The Company concluded the purchase price to be $444
and was allocated in its entirety to inventory.
Pursuant
to the terms of the agreement dated April 2022, Dragonfly Energy Corp. agreed to a contingent compensation arrangement with Mr. Thomason
and Mr. Jones. According to this agreement, if Dragonfly Energy Corp. realizes $3,000
in gross sales from products sold under
the Wakespeed brand or which incorporate any portion of the Purchased Intellectual Property (IP) within twenty-four months of the acquisition,
the Company is obligated to pay each of Thomason and Jones $1,000.
The Company may satisfy this obligation in cash or by issuing common stock at its discretion.
The
Company has determined that this arrangement constitutes compensation for post-acquisition services. Consequently, the Company has recognized
this contingent consideration as a compensation expense, measured at its fair value at the acquisition date. The fair value was determined
using a probability weighted expected outcome approach, considering the likelihood of reaching the gross sales target.
As
of December 31, 2023, the Company has recognized $2,000
of compensation expense in connection
with this arrangement. This expense is reflected in the statement of operations under Sales and marketing expense. The total amount has
been recognized as compensation expense as of December 31, 2023, since it was deemed earned and no further service performance was required.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
8 - RELATED PARTY
On
October 25, 2022, the Company entered into a separation and release of claims agreement with its Chief Operating Officer
(“COO”). As consideration for the COO’s execution of the agreement, the Company agreed to pay the employee a lump
sum payment of $100 which
is included in general and administrative expenses in the statements of operations, payments equivalent to $1,000 divided
into 24 monthly payments commencing on December 1, 2022, and all outstanding equity-based compensation awards to become fully vested
and exercisable. The COO shall have 12 months from the termination date to exercise outstanding options. The twelve (12) month
period ended on November 7, 2023 in which the COO exercised 100,000 options
and 76,316 options
expired.
In
February 2023, the Company entered into an agreement with its former COO in which the COO waived their rights to a transaction bonus
resulting from the merger transaction in lieu of a Company van. The Company accounted for the cost of the van as an employee bonus, resulting
in $116
of general and administrative expense
for the prior year.
On
March 5, 2023, the Company entered into a convertible promissory note (the “Note”) with a board member in the amount of $1,000,
or the Principal Amount. Upon execution of the Note and funding of the original principal sum, a payment of $100
(the “Loan Fee”) was fully
earned as of the date of the Note and was due and payable in full in cash on April 4, 2023. The Company paid the Principal Amount and
the Loan Fee on April 1, 2023 and April 4, 2023, respectively.
On
April 26, 2023, the Company entered into a separation and release of claims agreement with its former Chief Legal Officer (“CLO”).
As consideration for the CLO’s execution of the agreement, the Company agreed to pay the employee payments equivalent to $720
divided into 24 monthly payments commencing
on June 1, 2023, and all outstanding equity based compensation awards to become fully vested and exercisable at an expense of $76.
The CLO shall have 3 months from the termination date to exercise outstanding options. The three (3) month period ended on July 26, 2023
in which the options were not exercised and the options were forfeited as a result.
On
January 26, 2024 the Company entered into a convertible promissory note (the “January Note”) with a board member in the amount
of $1,000,
or the January Principal Amount. Upon execution of the January Note and funding of the original principal sum, a payment of $50
(the “January Loan Fee”) was
fully earned as of the date of the January Note and was due and payable in full in cash on February 2, 2024. The Company paid the January
Principal Amount and the January Loan Fee on February 1, 2024.
On
February 27, 2024 the Company entered into a convertible promissory note (the “February Note”) with a board member in the
amount of $1,700,
or the February Principal Amount. Upon execution of the February Note and funding of the original principal sum, a payment of $85
(the “February Loan Fee”)
was fully earned as of the date of the February Note and was due and payable in full in cash on March 1, 2024. The Company paid the February
Principal Amount and the February Loan Fee on March 1, 2024.
Note
9 - WARRANTS
Common
Stock Warrants classified as Equity
Public
Warrants
The
Company’s Public Warrants are classified as equity as of March 31, 2024 and March 31, 2023 there were 9,487,500
Public Warrants issued and outstanding.
During
the three months ended March 31, 2024, no
public warrants were exercised.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
9 - Warrants (Continued)
Common
Stock Warrants classified as Liability
Private
Placement Warrants
On
October 7, 2022, in connection with the merger, the Company assumed the outstanding private placement warrants of CNTQ. There were no
Private Placement Warrants outstanding prior to the merger. The Private Placement Warrants (the “Private Warrants”) may not
be redeemed by the Company so long as the Private Placement Warrants are held by the initial purchasers, or such purchasers’ permitted
transferees. The Private Warrants: (i) will be exercisable either for cash or on a cashless basis at the holders’ option and (ii)
will not be redeemable by the Company, in either case as long as the Private Warrants are held by the initial purchasers or any of their
permitted transferees (as prescribed in the Subscription Agreement). The Private Warrants may not be sold, transferred, assigned, pledged
or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective
economic disposition of, the Private Warrants (or any securities underlying the Private Warrants) for a period of one hundred eighty
(180) days following the effective date of the Registration Statement to anyone other than any member participating in the Public Offering
and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction for the remainder of
the time period. During the year ended December 31, 2023, private placement warrant holders exercised 3,126,472
warrants on a cashless basis, with the
Company agreeing to issue 1,100,000
shares of Common Stock in connection with
such exercise. There were 1,501,386
private warrants outstanding as of March
31, 2024 and December 31, 2023, respectively. The Company accounts for the Private Warrants issued in connection with the Initial Public
Offering in accordance with the guidance contained in ASC 815-40. Such guidance provides that because the private warrants do not meet
the criteria for equity treatment thereunder, each private warrant must be recorded as a liability. This liability is subject to re-measurement
at each balance sheet date. With each such re-measurement, the warrant liabilities will be adjusted to its current fair value, with the
change in fair value recognized in the Company’s statement of operations. The Company will reassess the classification at each
balance sheet date.
The
private placement warrants are classified as Level 2 as the transfer of Private Placement Warrants to anyone who is not a permitted transferee
would result in the Private Placement Warrants having substantially similar terms as the Public Warrants (with the exception of a different
remaining life). We determined, through use of a Binomial Lattice model, that the fair value of each Private Placement Warrant less a
discount for the difference in remaining life is equivalent to that of each Public Warrant.
Term
Loan Warrants
In
connection with the entry into the Term Loan Agreement on October 7, 2022, and as a required term and condition thereof, the Company
issued (i) the penny warrants to the Term Loan Lenders exercisable to purchase an aggregate of 2,593,056 shares of Common Stock (the
“Penny Warrants”) and (ii) the $10 warrants to issue warrants to the Term Loan Lenders exercisable to purchase an aggregate
of 1,600,000 shares of Common Stock at $10 per share (the “$10 Warrants” and, together with the Penny Warrants, the “Term
Loan Warrants”). The $10 Warrants were exercised on a cashless basis on October 10, 2022, with the Company issuing 457,142 shares
of Common Stock in connection with such exercise. During the year ended December 31, 2023, Penny Warrant holders exercised 2,000,000
warrants on a cashless basis, with the
Company agreeing to issue 1,996,323
shares of Common Stock in connection with
such exercise. During the year ended December 31, 2023 the Company issued additional Penny Warrants to purchase 4,783
shares of Common Stock to the Term Loan
Lenders in accordance with the anti-dilution provisions of the penny warrants with respect to certain sales made by the Company under
the ChEF Equity Facility. In addition, pursuant to the Company’s limited waiver agreement on December 29, 2023 between the Company
and the lenders and lending agent, the Company agreed to issue to the lenders additional penny warrants exercisable to purchase an aggregate
1,286,671
shares of its Common Stock. The Company
concluded the Penny Warrants are not considered indexed to the Company’s Common Stock and to be accounted for as liabilities under
ASC 815. As such, the estimated fair value is recognized as a liability each reporting period, with changes in the fair value recognized
within income each period. There were no Term Loan Warrants outstanding prior to the merger.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
9 - Warrants (continued)
Common
Stock Warrants classified as Liability (Continued)
The
following table provides the significant inputs to the Black-Scholes method for the fair value of the Penny Warrants:
SCHEDULE
FAIR VALUE WARRANTS
| |
As of March 31, 2024 | | |
As of
December 31,
2023 | |
Common stock price | |
$ | 0.54 | | |
$ | 0.54 | |
Exercise price | |
| 0.01 | | |
| 0.01 | |
Dividend yield | |
| 0 | % | |
| 0 | % |
Term | |
| 8.52
-9.75 | | |
| 10 | |
Volatility | |
| 96.00 | % | |
| 96.00 | % |
Risk-free rate | |
| 4.20 | % | |
| 3.90 | % |
Fair value | |
$ | 0.54 | | |
$ | 0.54 | |
The
following table provides the significant inputs to the Black-Scholes method for the fair value of the Investor Warrants issued in the
June 2023 Offering:
| |
As of
March 31,
2024 | | |
As of
December 31,
2023 | |
Common stock price | |
$ | 0.54 | | |
$ | 0.54 | |
Exercise price | |
$ | 2.00 | | |
$ | 2.00 | |
Dividend yield | |
| 0 | % | |
| 0 | % |
Term | |
| 4.23 | | |
| 4.48 | |
Volatility | |
| 104.00 | % | |
| 106.00 | % |
Risk-free rate | |
| 4.30 | % | |
| 3.90 | % |
Fair value | |
$ | 0.29 | | |
$ | 0.31 | |
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
9 - Warrants (continued)
SCHEDULE
OF ROLL FORWARD IN WARRANTS
Term
Loan Warrants:
| |
Common
Stock Warrants | |
Warrants Outstanding, January 1, 2024 | |
| 1,884,510 | |
Exercise of warrants | |
| - | |
Warrants issued | |
| - | |
Warrants Outstanding, March 31, 2024 | |
| 1,884,510 | |
Investor
Warrants:
| |
Common
Stock Warrants | |
Warrants Outstanding, January 1, 2023 | |
| 11,131,900 | |
Warrants Outstanding, Beginning | |
| 11,131,900 | |
Issuance of warrants | |
| - | |
Exercise of warrants | |
| - | |
Warrants outstanding, March 31, 2024 | |
| 11,131,900 | |
Warrants outstanding,
Ending | |
| 11,131,900 | |
Note
10 - COMMON STOCK
No dividends on common stock had been declared
by the Company.
For
the three months ended March 31, 2024 and 2023, the Company had reserved shares of common stock for issuance as follows:
SUMMARY
OF RESERVED SHARES OF COMMON STOCK FOR ISSUANCE
| |
March 31, 2024 | | |
March 31, 2023 | |
Options issued and outstanding | |
| 2,315,299 | | |
| 3,731,392 | |
Common stock outstanding | |
| 60,260,282 | | |
| 45,795,502 | |
Warrants outstanding | |
| 24,510,575 | | |
| 12,266,971 | |
Earnout shares | |
| 40,000,000 | | |
| 40,000,000 | |
Shares available for future issuance | |
| 10,986,525 | | |
| 4,319,309 | |
Total | |
| 138,072,681 | | |
| 106,113,174 | |
ChEF
Equity Facility
The
Company and Chardan Capital Markets LLC, a New York limited liability company (“CCM LLC”) entered into a purchase agreement
(the “Purchase Agreement”) and a Registration Rights Agreement in connection with the merger. Pursuant to the Purchase Agreement,
the Company has the right to sell to CCM LLC an amount of shares of Common Stock, up to a maximum aggregate purchase price of $150
million, pursuant to the terms of the
Purchase Agreement. In addition, the Company appointed LifeSci Capital, LLC as “qualified independent underwriter” with respect
to the transactions contemplated by the Purchase Agreement. Under the terms of the Purchase Agreement, the Company issued 73,500
shares pursuant to the Purchase Agreement
with CCM LLC for aggregate net proceeds to the Company of $597
from the period January 1, 2023 through
March 31, 2023. No issuances have occurred for the period of January 1, 2024 through March 31, 2024.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
11 - STOCK-BASED COMPENSATION
Share-based
compensation expense for options and RSUs totaling $266
and $4,487
was recognized in the Company’s
consolidated statements of operations for the three months ended March 31, 2024 and 2023, respectively. Of the $266
of share-based compensation incurred during
the three months ended March 31, 2024, $32
is allocated to cost of goods sold, $65
to research and development, $60
to selling and marketing, and $109
to general and administrative expenses.
Of the $4,487
of share-based compensation incurred during the three months
ended March 31, 2023, $36
is allocated to cost of goods sold, $29
to research and development, $856
to selling and marketing, and $3,566
to general and administrative expenses.
The
Company maintains an Employee Stock Purchase Plan (“ESPP”) which is designed to allow eligible employees and the eligible
employees of our participating subsidiaries to purchase shares of our common stock, at semi-annual intervals, with their accumulated
payroll deductions. A total of 2,464,400
shares of the Company’s common stock
will initially be available for issuance under the ESPP. The share limit will automatically increase on the first trading day in January
of each year by an amount equal to lesser of (1) 1%
of the total number of outstanding shares
of our common stock on December 31 in the prior year, (2) 1,500,000
shares, or (3) such number as determined
by the Company’s board of directors.
A
summary of the Company’s option activity and related information follows:
SCHEDULE
OF OPTION ACTIVITY AND RELATED INFORMATION
| |
Number of Options | | |
Weighted-Average Exercise Price | | |
Weighted-Average Grant Date Fair Value | | |
Weighted-Average Remaining Contractual Life (in years) | | |
Aggregate intrinsic value | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balances, January 1, 2024 | |
| 2,364,787 | | |
$ | 2.69 | | |
$ | 1.57 | | |
| 7.60 | | |
$ | 60 | |
Options granted | |
| - | | |
| - | | |
| - | | |
| | | |
| - | |
Options forfeited | |
| (49,488 | ) | |
| 3.11 | | |
| 1.77 | | |
| | | |
| - | |
Options exercised | |
| - | | |
| - | | |
| - | | |
| | | |
| - | |
Balances, March 31, 2024 | |
| 2,315,299 | | |
$ | 2.68 | | |
$ | 1.56 | | |
| 6.42 | | |
$ | 60 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
At March 31, 2024 | |
| | | |
| | | |
| | | |
| | | |
| | |
Vested and Exercisable | |
| 1,651,913 | | |
$ | 2.46 | | |
| | | |
| 6.34 | | |
$ | 60 | |
Vested and expected to vest | |
| 2,315,299 | | |
$ | 2.68 | | |
| | | |
| 6.42 | | |
$ | 60 | |
Restricted
Stock Units
On
February 10, 2023, the Company granted 461,998
restricted stock units under the 2022
plan which vest immediately. The fair value of the restricted stock units on the date of grant was $3,464
and was recorded as compensation expense
during the three months ended March 31, 2023. On February 5, 2024, the Company granted 220,000
restricted stock units of which 100,000
vested immediately. The fair value of
the 220,000
restricted stock units was $95
and an expense of $45
was recorded as compensation expense during
the three months ended March 31, 2024.
The
following table presents the restricted stock units activity for the three months ended March 31, 2024:
SCHEDULE
OF RESTRICTED STOCK UNITS ACTIVITY
| |
Number of Shares | | |
Weighted-Average Fair Market Value | |
| |
| | | |
| | |
Unvested shares, January 1, 2024 | |
| 47,000 | | |
$ | 2.69 | |
Granted and unvested | |
| 220,000 | | |
| 0.43 | |
Vested | |
| (104,875 | ) | |
| 2.34 | |
Unvested shares, March 31, 2024 | |
| 162,125 | | |
$ | 0.97 | |
As
of March 31, 2024, there were 10,986,525
shares of unissued authorized and available
for future awards under the 2022 Equity Incentive Plan and Employee Stock Purchase Plan.
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
12 - SUPPLIER AGREEMENT
On
May 9, 2023, Ioneer Rhyolite Ridge LLC, or the seller, an emerging lithium-boron producer, and the Company announced a commercial offtake
agreement partnership whereby the seller is developing the Rhyolite Ridge Project which, once completed, is expected to produce 20 ktpa
of lithium carbonate, and 174 ktpa of boic acid (the “project”). Beginning on the Supply Start Date which is the date the
seller notifies the Company that the project is fully completed and commissioned in accordance with the engineering, procurement and
construction contract, and for the duration of the supply period, the Company shall purchase and receive product from seller, on the
terms and conditions of the agreement. The agreement calls for a minimum annual purchase requirement. The agreement becomes effective
when the seller has informed the Company that the seller has made a positive financial investment decision in respect of the project.
Note
13 - (LOSS) INCOME PER SHARE
(Loss) Income per Common Share
The
following table sets forth the information needed to compute basic and diluted net (loss) income per share for the three months ended
March 31, 2024 and 2023:
SCHEDULE
OF BASIC AND DILUTED EARNING (LOSS) PER SHARE
| |
March
31, 2024 | | |
March
31, 2023 | |
Basic Net (Loss) Income per common share: | |
| | | |
| | |
Net (Loss) Income | |
$ | (10,367 | ) | |
$ | 4,775 | |
Weighted average number of common shares-basic | |
| 60,260,282 | | |
| 45,104,515 | |
Net (Loss) Income per share, basic | |
$ | (0.17 | ) | |
$ | 0.11 | |
| |
| | | |
| | |
Diluted Net (Loss) Income per common share: | |
| | | |
| | |
Net (Loss) Income available to common stockholders | |
$ | (10,367 | ) | |
$ | 4,775 | |
Weighted average number of common shares-basic | |
| 60,260,282 | | |
| 45,104,515 | |
Dilutive effect related to stock options and warrants | |
| - | | |
| 3,351,481 | |
Weighted average diluted shares outstanding | |
| 60,260,282 | | |
| 48,455,996 | |
Net (Loss) Income per share, diluted | |
$ | (0.17 | ) | |
$ | 0.10 | |
The
following table sets forth the number of potential shares of common stock that have been excluded from diluted net loss per share because
their effect was anti-dilutive:
SCHEDULE
OF NUMBER OF POTENTIAL SHARES OF COMMON STOCK
| |
March
31, 2024 | | |
March
31, 2023 | |
Warrants | |
| 24,510,575 | | |
| 10,923,915 | |
Restricted stock units | |
| 162,125 | | |
| 111,015 | |
Options | |
| 2,315,299 | | |
| - | |
Weighted average number of common shares-basic | |
| 26,987,999 | | |
| 11,034,930 | |
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
14 - REVISIONS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The
Company has revised the previously issued financial statements for the quarter ended March 31, 2023 for the underpayment of tariffs to
U.S. Customs and Border Protection (“CBP”) related to the improper classification and valuation of certain of the products
used in its batteries. The Company has reported the underpayment to CBP. The underpayment of tariffs was primarily the result of utilizing
an improper tariff rate. The additional amount of the tariffs was allocated between inventory and cost of goods sold based on the status
of imported items (i.e. included in the inventories held vs included in the inventories already sold to customers).
In
accordance with Staff Accounting Bulletin (“SAB”) 99, Materiality, and SAB 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the materiality of the error from qualitative
and quantitative perspectives, and concluded that the error was immaterial to any prior annual or interim financial statements. Notwithstanding
this conclusion, management has revised the accompanying condensed consolidated financial statements for the quarter ended March 31,
2023 and related notes included herein to correct this error for the financial statements for the quarter ended March 31, 2023 presented.
The
following tables present the effect of correcting this error on the Company’s previously issued financial statements.
SCHEDULE
OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Consolidated
Statements of Operations | |
As
previously reported | | |
Adjustment | | |
As
revised | |
| |
For the Period Ended March 31, 2023 | |
Consolidated
Statements of Operations | |
As previously reported | | |
Adjustment | | |
As revised | |
Cost of Goods Sold | |
| 14,048 | | |
| 76 | | |
| 14,124 | |
Gross Profit | |
| 4,743 | | |
| (76 | ) | |
| 4,667 | |
Loss From Operations | |
| (9,816 | ) | |
| (76 | ) | |
| (9,892 | ) |
Interest Expense | |
| (3,815 | ) | |
| (41 | ) | |
| (3,856 | ) |
Income Before Taxes | |
| 4,892 | | |
| (117 | ) | |
| 4,775 | |
Net Income | |
| 4,892 | | |
| (117 | ) | |
| 4,775 | |
Net Income per share - Basic | |
| (0.11 | ) | |
| (0.0 | ) | |
| (0.11 | ) |
Net Income per share – Diluted | |
| (0.10 | ) | |
| (0.0 | ) | |
| (0.10 | ) |
Consolidated
Statements of Cash Flows | |
As
previously reported | | |
Adjustment | | |
As
revised | |
| |
For the Period Ended March 31, 2023 | |
Consolidated
Statements of Cash Flows | |
As previously reported | | |
Adjustment | | |
As revised | |
Net Income | |
| 4,892 | | |
| (117 | ) | |
| 4,775 | |
Change in Accrued Tariffs | |
| - | | |
| 117 | | |
| 117 | |
Consolidated
Statements of Stockholders’ Equity | |
As
previously reported | | |
Adjustment | | |
As
revised | |
| |
For the Period Ended March 31, 2023 | |
Consolidated
Statements of Stockholders’ Equity | |
As previously reported | | |
Adjustment | | |
As revised | |
Accumulated Deficit - January 1, 2023 | |
| (27,133 | ) | |
| (589 | ) | |
| (27,722 | ) |
Net Income | |
| 4,892 | | |
| (117 | ) | |
| 4,775 | |
Accumulated Deficit - March 31, 2023 | |
| (22,241 | ) | |
| (706 | ) | |
| (22,947 | ) |
DRAGONFLY
ENERGY HOLDINGS CORP.
Notes
to Unaudited Condensed Consolidated Financial Statements
(in
thousands, except share and per share data)
Note
15 - SUBSEQUENT EVENTS
On April 17, 2024, the
Company issued 3,428
shares in exchange for 4,875
vested RSU’s less shares deducted to cover taxes. On April 24, 2024, the Company issued 244,774
shares in connection with its Employee Stock Purchase Plan for a total consideration of approximately $112. On April 30,
2024, the Company issued 992
shares as a result of exercised stock options upon the receipt of proceeds of approximately $1.
On
April 12, 2024 the Company entered into a lease agreement, pursuant to which the Company agreed to lease an approximately 64
square foot facility (the “Premises”)
located in Fernley, Nevada, to be used for general, warehousing, assembly/light manufacturing, painting of products, storage fulfillment,
distribution of the Company’s products, and other uses as permitted under the Fernley Lease Agreement (the “Fernley Lease
Agreement”). The initial term of the Fernley Lease Agreement (the “Term”) is for a period of sixty (60) months, effective
April 1, 2024. The base rent for the Premises, payable monthly, is $45
for the first twelve months of the Term
and is subject to a three percent (3.0%)
increase on the anniversary of each year. The Company also will be responsible for twenty-five percent (25%) of any operating expenses,
taxes and insurance expenses incurred by the Landlord in connection with the building in which the Premises are located (the “Expenses”)
as well as utility expenses. The Expenses are subject to recalculation and increase upon the completion of the Initial Improvements (as
defined in the Fernley Lease Agreement). The Landlord is responsible for completing the Initial Improvements. The Fernley Lease Agreement
also contains customary default provisions allowing the Landlord to terminate the Fernley Lease Agreement if the Company fails to cure
certain breaches of its obligations under the Fernley Lease Agreement within a specified period of time upon written notice to the Company.
Concurrent with the execution of the Fernley Lease Agreement, the Company paid the Landlord a security deposit of $50.
Effective
April 12, 2024, the Company entered into amendments to the employment agreements with its Chief Executive Officer, its Chief Revenue
Officer and its Chief Marketing Officer to amend the terms of their annual equity compensation (the “Amended Employee Agreements”).
The Amended Employee Agreements allow the Company to issue a combination of cash and equity awards on an annual basis up to a specified
amount ($1,532
for the Chief Executive Officer, $490
for the Chief Revenue Officer and $236
for the Chief Marketing Officer), subject
to approval and such other terms and conditions imposed by the compensation committee of the board of directors.
On
April 12, 2024, the Company issued a total of 836,295
RSUs to the following employees: (i) 567,407
RSUs to the Chief Executive Officer; (ii)
181,481
RSUs to the Chief Revenue Officer; and
(iii) 87,407
RSUs to the Chief Marketing Officer. Each
of the RSUs granted will vest in three equal annual installments, with the first vesting date on the one (1) year anniversary of the
date of issuance and the following two vesting dates on each subsequent anniversary of the date of issuance, subject to each employees’
continued employment as of each vesting date. In addition to the RSU awards, the Board also approved the following cash awards to the
above referenced employees: (i) $511
to the Chief Executive Officer; (ii) $163
to the Chief Revenue Officer; and (iii)
$79
to the Chief Marketing Officer. Each of
the approved cash awards will not be paid out to the employees until the Company has achieved a minimum cash balance of $30,000,
and are subject to each employee’s continued employment on the date of payment.
On
April 12, 2024, the board of directors authorized the issuance of 222,222
RSUs to each director in connection with
their service as directors for the year ended December 31, 2023. The RSUs will vest in three equal annual installments, with the first
vesting date on the one (1) year anniversary date of their issuance, subject to the directors continued service on with the Company on
each vesting date.
On April 15, 2024, the
board of directors approved an amendment to the Company’s Director Compensation Policy offering its directors long-term incentive
awards that are issuable subject to the sole discretion of the Company’s compensation committee. Each such long-term incentive
award is payable in the form of cash and or equity awards. Each such award shall be determined each fiscal year and are subject to the
director’s continued service with the Company and other conditions as the Company’s compensation committee deems appropriate.
Where equity awards are issued, such awards are subject to the terms and conditions of the Dragonfly Energy Holdings Corp. 2022 Equity
Incentive Plan.
On April 29, 2024, the
Company obtained a waiver from the Term Loan administrative agent and lenders in regard to the Company’s compliance with the liquidity
requirement under the Term Loan as of the last day of the fiscal month ended April 30, 2024.
On May 13, 2024, the
Company received a waiver from its Administrative Agent and Term Loan Lenders (the “May 2024 Waiver”) in regards to its compliance
with the to satisfy the Senior Leverage Ratio and Fixed Charge Coverage Ratio tests (the “Tests”) as of the last
day of the quarter ended March 31, 2024 from the Term Loan Lenders in regards to its compliance with the Tests as of the last day of
the quarter ended March 31, 2024. The May 2024 Waiver provided for a one-time issuance of penny warrants (the “May 2024 Penny Warrants”)
to purchase up to 2,550,000
shares of the Company’s common stock, par value $0.0001
per share (the “May 2024 Penny Warrant Shares”), at an exercise price of $0.01
per share, in connection with the Term Loan Lenders’ agreement to waive the Tests under the Term Loan for the quarter
ended March 31, 2024. The May 2024 Penny Warrants were immediately exercisable upon issuance and will expire ten
years from the date of issuance.
Up to 21,512,027 Shares
of Common Stock
PROSPECTUS
May 21, 2024
Dragonfly Energy (NASDAQ:DFLIW)
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Dragonfly Energy (NASDAQ:DFLIW)
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