0001847986
false
FY
0001847986
2022-01-01
2022-12-31
0001847986
dfli:CommonStockParValue0.0001PerShareMember
2022-01-01
2022-12-31
0001847986
dfli:RedeemableWarrantsExercisableForCommonStockAtExercisePriceOf11.50PerShareSubjectToAdjustmentMember
2022-01-01
2022-12-31
0001847986
2022-06-30
0001847986
2023-03-21
0001847986
2022-12-31
0001847986
2021-12-31
0001847986
2021-01-01
2021-12-31
0001847986
dfli:RedeemablesPreferredStockMember
2020-12-31
0001847986
us-gaap:CommonStockMember
2020-12-31
0001847986
us-gaap:AdditionalPaidInCapitalMember
2020-12-31
0001847986
us-gaap:RetainedEarningsMember
2020-12-31
0001847986
2020-12-31
0001847986
dfli:RedeemablesPreferredStockMember
2021-12-31
0001847986
us-gaap:CommonStockMember
2021-12-31
0001847986
us-gaap:AdditionalPaidInCapitalMember
2021-12-31
0001847986
us-gaap:RetainedEarningsMember
2021-12-31
0001847986
dfli:RedeemablesPreferredStockMember
2021-01-01
2021-12-31
0001847986
us-gaap:CommonStockMember
2021-01-01
2021-12-31
0001847986
us-gaap:AdditionalPaidInCapitalMember
2021-01-01
2021-12-31
0001847986
us-gaap:RetainedEarningsMember
2021-01-01
2021-12-31
0001847986
dfli:RedeemablesPreferredStockMember
2022-01-01
2022-12-31
0001847986
us-gaap:CommonStockMember
2022-01-01
2022-12-31
0001847986
us-gaap:AdditionalPaidInCapitalMember
2022-01-01
2022-12-31
0001847986
us-gaap:RetainedEarningsMember
2022-01-01
2022-12-31
0001847986
dfli:RedeemablesPreferredStockMember
2022-12-31
0001847986
us-gaap:CommonStockMember
2022-12-31
0001847986
us-gaap:AdditionalPaidInCapitalMember
2022-12-31
0001847986
us-gaap:RetainedEarningsMember
2022-12-31
0001847986
dfli:SeniorSecuredTermLoanFacilityMember
dfli:TermLoanMember
2022-12-31
0001847986
srt:MinimumMember
2022-01-01
2022-12-31
0001847986
srt:MaximumMember
2022-01-01
2022-12-31
0001847986
2021-01-01
0001847986
us-gaap:AccountsReceivableMember
us-gaap:CreditConcentrationRiskMember
dfli:CustomerOneMember
2022-01-01
2022-12-31
0001847986
us-gaap:AccountsReceivableMember
us-gaap:CreditConcentrationRiskMember
dfli:CustomerTwoMember
2022-01-01
2022-12-31
0001847986
us-gaap:AccountsReceivableMember
us-gaap:CreditConcentrationRiskMember
dfli:CustomerThreeMember
2022-01-01
2022-12-31
0001847986
us-gaap:AccountsReceivableMember
us-gaap:CreditConcentrationRiskMember
dfli:CustomerOneMember
2021-01-01
2021-12-31
0001847986
us-gaap:AccountsReceivableMember
us-gaap:CreditConcentrationRiskMember
dfli:CustomerTwoMember
2021-01-01
2021-12-31
0001847986
us-gaap:RevenueFromContractWithCustomerMember
us-gaap:CustomerConcentrationRiskMember
2022-01-01
2022-12-31
0001847986
us-gaap:RevenueFromContractWithCustomerMember
us-gaap:CustomerConcentrationRiskMember
dfli:CustomerOneMember
2022-01-01
2022-12-31
0001847986
dfli:TotalPurchasesMember
us-gaap:SupplierConcentrationRiskMember
2022-01-01
2022-12-31
0001847986
us-gaap:AccountsPayableMember
us-gaap:SupplierConcentrationRiskMember
dfli:VendorMember
2022-01-01
2022-12-31
0001847986
dfli:TotalPurchasesMember
us-gaap:SupplierConcentrationRiskMember
dfli:VendorOneMember
2022-01-01
2022-12-31
0001847986
dfli:TotalPurchasesMember
us-gaap:SupplierConcentrationRiskMember
2021-01-01
2021-12-31
0001847986
dfli:TotalPurchasesMember
us-gaap:SupplierConcentrationRiskMember
dfli:VendorOneMember
2021-01-01
2021-12-31
0001847986
dfli:TotalPurchasesMember
us-gaap:SupplierConcentrationRiskMember
dfli:VendorTwoMember
2021-01-01
2021-12-31
0001847986
dfli:TotalPurchasesMember
us-gaap:SupplierConcentrationRiskMember
dfli:VendorThreeMember
2021-01-01
2021-12-31
0001847986
us-gaap:FurnitureAndFixturesMember
srt:MinimumMember
2022-01-01
2022-12-31
0001847986
us-gaap:FurnitureAndFixturesMember
srt:MaximumMember
2022-01-01
2022-12-31
0001847986
us-gaap:VehiclesMember
2022-01-01
2022-12-31
0001847986
us-gaap:MachineryAndEquipmentMember
srt:MinimumMember
2022-01-01
2022-12-31
0001847986
us-gaap:MachineryAndEquipmentMember
srt:MaximumMember
2022-01-01
2022-12-31
0001847986
us-gaap:LeaseholdImprovementsMember
2022-01-01
2022-12-31
0001847986
us-gaap:SalesChannelDirectlyToConsumerMember
2022-01-01
2022-12-31
0001847986
us-gaap:SalesChannelDirectlyToConsumerMember
2021-01-01
2021-12-31
0001847986
us-gaap:SalesChannelThroughIntermediaryMember
2022-01-01
2022-12-31
0001847986
us-gaap:SalesChannelThroughIntermediaryMember
2021-01-01
2021-12-31
0001847986
dfli:OriginalEquipmentManufactureMember
2022-01-01
2022-12-31
0001847986
dfli:OriginalEquipmentManufactureMember
2021-01-01
2021-12-31
0001847986
2022-10-07
0001847986
2022-10-07
2022-10-07
0001847986
us-gaap:CommonClassAMember
2022-10-07
2022-10-07
0001847986
dfli:PIPEFinancingMember
2022-09-26
2022-09-26
0001847986
dfli:PIPEFinancingMember
2022-09-26
0001847986
2022-09-26
2022-09-26
0001847986
dfli:TermLoanWarrantsMember
2022-09-26
0001847986
dfli:TermLoanWarrantsMember
2022-09-26
2022-09-26
0001847986
dfli:TermLoanMember
2022-09-26
2022-09-26
0001847986
us-gaap:AdditionalPaidInCapitalMember
2022-09-26
2022-09-26
0001847986
dfli:WarrantLiabilitiesMember
2022-09-26
2022-09-26
0001847986
us-gaap:ShareBasedCompensationAwardTrancheOneMember
2022-12-31
0001847986
us-gaap:ShareBasedCompensationAwardTrancheTwoMember
2022-12-31
0001847986
dfli:HoldersOfOutstandingSharesOfLegacyDragonflyCommonStockMember
dfli:SecondTrancheMember
2022-01-01
2022-12-31
0001847986
us-gaap:ShareBasedCompensationAwardTrancheThreeMember
2022-12-31
0001847986
dfli:HoldersOfOutstandingSharesOfLegacyDragonflyCommonStockMember
dfli:AnyTimeDuringPeriodBeginningOnClosingDateAndEndingOnDecember312028Member
2022-01-01
2022-12-31
0001847986
us-gaap:ShareBasedCompensationAwardTrancheTwoMember
2022-01-01
2022-12-31
0001847986
us-gaap:FairValueInputsLevel3Member
us-gaap:MeasurementInputCommodityForwardPriceMember
2022-12-31
0001847986
us-gaap:FairValueInputsLevel3Member
us-gaap:MeasurementInputRiskFreeInterestRateMember
2022-12-31
0001847986
us-gaap:FairValueInputsLevel3Member
us-gaap:MeasurementInputRevenueMultipleMember
2022-12-31
0001847986
us-gaap:FairValueInputsLevel3Member
us-gaap:MeasurementInputEbitdaMultipleMember
2022-12-31
0001847986
us-gaap:FairValueInputsLevel3Member
us-gaap:MeasurementInputDiscountRateMember
2022-12-31
0001847986
us-gaap:FairValueInputsLevel3Member
us-gaap:MeasurementInputExpectedDividendPaymentMember
2022-12-31
0001847986
dfli:CNTQTrustAndPIPEInvestorsMember
2022-01-01
2022-12-31
0001847986
dfli:CNTQMember
2022-01-01
2022-12-31
0001847986
dfli:PIPEFinancingMember
2022-01-01
2022-12-31
0001847986
dfli:PIPEFinancingMember
2021-12-31
0001847986
dfli:PIPEFinancingMember
dfli:CNTQPublicMember
2022-01-01
2022-12-31
0001847986
dfli:PIPEFinancingMember
dfli:CNTQSponsorMember
2022-01-01
2022-12-31
0001847986
dfli:PIPEFinancingMember
2022-12-31
0001847986
us-gaap:FairValueMeasurementsRecurringMember
dfli:TermLoanMember
2022-12-31
0001847986
us-gaap:FairValueMeasurementsRecurringMember
us-gaap:FairValueInputsLevel1Member
dfli:TermLoanMember
2022-12-31
0001847986
us-gaap:FairValueMeasurementsRecurringMember
us-gaap:FairValueInputsLevel2Member
dfli:TermLoanMember
2022-12-31
0001847986
us-gaap:FairValueMeasurementsRecurringMember
us-gaap:FairValueInputsLevel3Member
dfli:TermLoanMember
2022-12-31
0001847986
us-gaap:FairValueMeasurementsRecurringMember
dfli:PrivateWarrantsMember
2022-12-31
0001847986
us-gaap:FairValueMeasurementsRecurringMember
us-gaap:FairValueInputsLevel1Member
dfli:PrivateWarrantsMember
2022-12-31
0001847986
us-gaap:FairValueMeasurementsRecurringMember
us-gaap:FairValueInputsLevel2Member
dfli:PrivateWarrantsMember
2022-12-31
0001847986
us-gaap:FairValueMeasurementsRecurringMember
us-gaap:FairValueInputsLevel3Member
dfli:PrivateWarrantsMember
2022-12-31
0001847986
us-gaap:FairValueMeasurementsRecurringMember
2022-12-31
0001847986
us-gaap:FairValueMeasurementsRecurringMember
us-gaap:FairValueInputsLevel1Member
2022-12-31
0001847986
us-gaap:FairValueMeasurementsRecurringMember
us-gaap:FairValueInputsLevel2Member
2022-12-31
0001847986
us-gaap:FairValueMeasurementsRecurringMember
us-gaap:FairValueInputsLevel3Member
2022-12-31
0001847986
srt:MinimumMember
2021-01-01
2021-12-31
0001847986
srt:MaximumMember
2021-01-01
2021-12-31
0001847986
2022-02-02
0001847986
2022-02-02
2022-02-02
0001847986
us-gaap:CostOfSalesMember
2022-01-01
2022-12-31
0001847986
us-gaap:CostOfSalesMember
2021-01-01
2021-12-31
0001847986
us-gaap:ResearchAndDevelopmentExpenseMember
2022-01-01
2022-12-31
0001847986
us-gaap:ResearchAndDevelopmentExpenseMember
2021-01-01
2021-12-31
0001847986
us-gaap:GeneralAndAdministrativeExpenseMember
2022-01-01
2022-12-31
0001847986
us-gaap:GeneralAndAdministrativeExpenseMember
2021-01-01
2021-12-31
0001847986
us-gaap:SellingAndMarketingExpenseMember
2022-01-01
2022-12-31
0001847986
us-gaap:SellingAndMarketingExpenseMember
2021-01-01
2021-12-31
0001847986
us-gaap:SeniorNotesMember
2021-11-24
0001847986
us-gaap:SeniorNotesMember
2022-01-01
2022-12-31
0001847986
us-gaap:SeniorNotesMember
2022-12-31
0001847986
dfli:NewLightCapitalLLCMember
2022-01-01
2022-12-31
0001847986
dfli:SeniorSecuredTermLoanFacilityMember
dfli:TermLoanAgreementMember
2022-10-07
0001847986
dfli:SeniorSecuredTermLoanFacilityMember
dfli:TermLoanAgreementMember
2022-10-07
2022-10-07
0001847986
dfli:UntilApril12023Member
dfli:SeniorSecuredTermLoanFacilityMember
dfli:TermLoanAgreementMember
dfli:AdjustedSecuredOvernightFinancingRateMember
2022-10-07
2022-10-07
0001847986
dfli:AfterApril12023UntilOctober12024Member
dfli:SeniorSecuredTermLoanFacilityMember
dfli:TermLoanAgreementMember
dfli:AdjustedSecuredOvernightFinancingRateMember
2022-10-07
2022-10-07
0001847986
dfli:AfterApril12023UntilOctober12024Member
dfli:SeniorSecuredTermLoanFacilityMember
dfli:TermLoanAgreementMember
dfli:AdjustedSecuredOvernightFinancingRateMember
srt:MinimumMember
2022-10-07
2022-10-07
0001847986
dfli:AfterApril12023UntilOctober12024Member
dfli:SeniorSecuredTermLoanFacilityMember
dfli:TermLoanAgreementMember
dfli:AdjustedSecuredOvernightFinancingRateMember
srt:MaximumMember
2022-10-07
2022-10-07
0001847986
dfli:PennyWarrantsMember
2022-12-31
0001847986
dfli:Warrants10Member
2022-12-31
0001847986
us-gaap:SeniorNotesMember
dfli:TermLoanAgreementMember
2022-01-01
2022-12-31
0001847986
us-gaap:SeniorNotesMember
dfli:TermLoanAgreementMember
2022-12-31
0001847986
dfli:MaximumSeniorLeverageRatioMember
2022-01-01
2022-12-31
0001847986
dfli:DecemberThirtyOneTwoThousandTwentyTwoToMarchThirtyOneTwoThousandTwentyThreeMember
2022-01-01
2022-12-31
0001847986
dfli:JuneThirtyTwoThousandTwentyThreeToSeptemberThirtyTwoThousandTwentyThreeMember
2022-01-01
2022-12-31
0001847986
dfli:DecemberThirtyOneTwoThousandTwentyThreeToMarchThirtyOneTwoThousandTwentyThreeMember
2022-01-01
2022-12-31
0001847986
dfli:JuneThirtyTwoThousandTwentyFourToSeptemberThirtyTwoThousandTwentyFourMember
2022-01-01
2022-12-31
0001847986
dfli:DecemberThirtyOneTwoThousandTwentyFourToMarchThirtyOneTwoThousandTwentyFiveMember
2022-01-01
2022-12-31
0001847986
dfli:JuneThirtyTwoThousandTwentyFiveAndThereAfterMember
2022-01-01
2022-12-31
0001847986
2021-10-06
0001847986
2021-10-06
2021-10-06
0001847986
us-gaap:DomesticCountryMember
2022-12-31
0001847986
us-gaap:DomesticCountryMember
2022-01-01
2022-12-31
0001847986
us-gaap:StateAndLocalJurisdictionMember
2022-12-31
0001847986
dfli:BournsProductionIncMember
2022-01-01
2022-01-01
0001847986
dfli:ThomasonJonesCompanyLLCMember
srt:MaximumMember
2022-04-01
2022-04-30
0001847986
dfli:ThomasonJonesCompanyLLCMember
2022-04-01
2022-04-30
0001847986
dfli:ThomasonJonesCompanyLLCMember
2022-01-01
2022-12-31
0001847986
dfli:ThomasonJonesCompanyLLCMember
2022-12-31
0001847986
dfli:PromissoryNoteWithRelatedPartyMember
srt:ChiefFinancialOfficerMember
2022-01-01
2022-12-31
0001847986
srt:ChiefOperatingOfficerMember
2022-01-01
2022-12-31
0001847986
dfli:PublicWarrantsMember
2022-12-31
0001847986
dfli:PrivateWarrantsMember
2022-12-31
0001847986
dfli:PrivateWarrantsMember
us-gaap:IPOMember
2022-12-31
0001847986
dfli:Warrants10Member
2022-10-10
0001847986
us-gaap:WarrantMember
2022-12-31
0001847986
us-gaap:WarrantMember
2022-01-01
2022-12-31
0001847986
dfli:InitialMeasurementMember
2022-12-31
0001847986
dfli:InitialMeasurementMember
us-gaap:MeasurementInputSharePriceMember
2022-12-31
0001847986
us-gaap:MeasurementInputSharePriceMember
2022-12-31
0001847986
dfli:InitialMeasurementMember
us-gaap:MeasurementInputExpectedDividendRateMember
2022-12-31
0001847986
us-gaap:MeasurementInputExpectedDividendRateMember
2022-12-31
0001847986
dfli:InitialMeasurementMember
us-gaap:MeasurementInputExpectedTermMember
2022-12-31
0001847986
us-gaap:MeasurementInputExpectedTermMember
2022-12-31
0001847986
dfli:InitialMeasurementMember
us-gaap:MeasurementInputPriceVolatilityMember
2022-12-31
0001847986
us-gaap:MeasurementInputPriceVolatilityMember
2022-12-31
0001847986
dfli:InitialMeasurementMember
us-gaap:MeasurementInputRiskFreeInterestRateMember
2022-12-31
0001847986
us-gaap:MeasurementInputRiskFreeInterestRateMember
2022-12-31
0001847986
dfli:TenWarrantsMember
dfli:InitialMeasurementMember
2022-12-31
0001847986
dfli:TenWarrantsMember
dfli:InitialMeasurementMember
us-gaap:MeasurementInputSharePriceMember
2022-12-31
0001847986
dfli:TenWarrantsMember
dfli:InitialMeasurementMember
us-gaap:MeasurementInputExpectedDividendRateMember
2022-12-31
0001847986
dfli:TenWarrantsMember
dfli:InitialMeasurementMember
us-gaap:MeasurementInputExpectedTermMember
2022-12-31
0001847986
dfli:TenWarrantsMember
dfli:InitialMeasurementMember
us-gaap:MeasurementInputPriceVolatilityMember
2022-12-31
0001847986
dfli:TenWarrantsMember
dfli:InitialMeasurementMember
us-gaap:MeasurementInputRiskFreeInterestRateMember
2022-12-31
0001847986
dfli:PrivateWarrantsMember
2021-12-31
0001847986
dfli:PrivateWarrantsMember
2022-01-01
2022-12-31
0001847986
dfli:PrivateWarrantsMember
2022-12-31
0001847986
dfli:PublicWarrantsMember
2021-12-31
0001847986
dfli:PublicWarrantsMember
2022-01-01
2022-12-31
0001847986
dfli:PublicWarrantsMember
2022-12-31
0001847986
dfli:TermLoanWarrantsMember
2021-12-31
0001847986
dfli:TermLoanWarrantsMember
2022-01-01
2022-12-31
0001847986
dfli:TermLoanWarrantsMember
2022-12-31
0001847986
us-gaap:WarrantMember
2021-12-31
0001847986
dfli:ThorIndustriesMember
2022-06-01
2022-06-12
0001847986
dfli:PurchaseAgreementMember
srt:MaximumMember
2022-01-01
2022-12-31
0001847986
dfli:PurchaseAgreementMember
dfli:CCMLLCMember
srt:MaximumMember
2022-01-01
2022-12-31
0001847986
dfli:PurchaseAgreementMember
dfli:CCMLLCMember
2022-01-01
2022-12-31
0001847986
dfli:StockIncentiveTwoThousandNineteenPlanMember
2019-08-12
2019-08-12
0001847986
dfli:StockIncentiveTwoThousandNineteenPlanMember
2019-08-12
0001847986
dfli:StockIncentiveTwoThousandTwentyOnePlanMember
2021-07-01
2021-07-31
0001847986
dfli:StockIncentiveTwoThousandTwentyOnePlanMember
2021-07-31
0001847986
dfli:StockIncentiveTwoThousandTwentyOnePlanMember
2022-05-31
0001847986
dfli:StockIncentiveTwoThousandTwentyTwoPlanMember
2022-12-31
0001847986
dfli:StockIncentiveTwoThousandTwentyTwoPlanMember
us-gaap:CommonStockMember
2022-01-01
2022-12-31
0001847986
dfli:StockIncentiveTwoThousandTwentyTwoPlanMember
us-gaap:CommonStockMember
2021-01-01
2021-12-31
0001847986
us-gaap:RestrictedStockUnitsRSUMember
2021-01-01
2021-12-31
0001847986
us-gaap:RestrictedStockUnitsRSUMember
2022-10-07
0001847986
us-gaap:RestrictedStockUnitsRSUMember
2022-10-06
2022-10-07
0001847986
us-gaap:RestrictedStockUnitsRSUMember
2021-12-31
0001847986
us-gaap:RestrictedStockUnitsRSUMember
2022-01-01
2022-12-31
0001847986
us-gaap:RestrictedStockUnitsRSUMember
2022-12-31
0001847986
us-gaap:SeriesAPreferredStockMember
srt:DirectorMember
2022-01-01
2022-12-31
0001847986
dfli:SeriesDirectorMember
2022-01-01
2022-12-31
0001847986
us-gaap:CommonStockMember
srt:DirectorMember
2022-01-01
2022-12-31
0001847986
dfli:CommonStockDirectorAMember
2022-01-01
2022-12-31
0001847986
dfli:CommonStockDirectorBMember
2022-01-01
2022-12-31
0001847986
us-gaap:SeriesAPreferredStockMember
2022-01-01
2022-12-31
0001847986
us-gaap:CommonStockMember
2022-01-01
2022-12-31
0001847986
us-gaap:WarrantMember
2021-01-01
2021-12-31
0001847986
us-gaap:EmployeeStockOptionMember
2022-01-01
2022-12-31
0001847986
us-gaap:EmployeeStockOptionMember
2021-01-01
2021-12-31
0001847986
us-gaap:SubsequentEventMember
srt:BoardOfDirectorsChairmanMember
2023-03-05
0001847986
us-gaap:SubsequentEventMember
2023-03-05
0001847986
dfli:PurchaseAgreementMember
us-gaap:SubsequentEventMember
2023-05-05
2023-05-05
iso4217:USD
xbrli:shares
iso4217:USD
xbrli:shares
xbrli:pure
dfli:Vote
dfli:item
dfli:director
utr:Y
dfli:Customer
dfli:Vendor
dfli:Installment
dfli:Segment
Part
I
Item
1. Business
All
references in this report 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 (including the recreational
vehicle (“RV”), marine vessel and off-grid residence industries), industrial and energy storage markets, 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 lithium iron phosphate (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 glasses, which are chemically unstable and form hydrogen
sulfide when exposed to air).
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, 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
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 direct-to-consumer sales in the RV market. Since 2020, we have sold over
226,000 batteries. For the years ended December 31, 2022 and 2021, we sold 96,034 and 74,652 batteries, respectively, and had $86.3
million and $78.0 million in sales, respectively. Over time, we have increased total sales through a combination of: increasing direct-to-consumer
sales of batteries for RV applications; expanding into the marine vessels and off-grid storage markets with related direct-to-consumer
sales; selling batteries to RV OEMs; increasing sales to distributors; and reselling accessories for battery systems. Our RV OEM customers
currently include Keystone RV Company (“Keystone”), who fulfills certain of its LFP battery requirements exclusively
through us (with potential annual renewals), 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.
We
currently offer a line 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.
Our
battery packs are designed and assembled in-house in the United States. In April 2021, we opened our new 99,000 square foot facility
in Reno, Nevada, allowing us to increase our production capacity and giving us the ability to increase sales to existing customers and
penetrate new markets. Our 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 plan to continue to expand our production capacity as needed
and estimate that our current production facility will allow for over $500 million in manufacturing sales capacity once fully utilized.
We
currently focus on three main consumer end markets: RVs, marine vessels and off-grid storage and, in the medium- to longer-term, we plan
on expanding into several new markets. Within our current markets, our aim is to replace incumbent lead-acid batteries. Our batteries
are primarily designed to provide consumers with a long-lasting, highly efficient power source for powering appliances, consumer electronics
and other smart devices located inside RVs, marine vessels or off-grid residences and, other than for certain smaller marine vessels,
are not intended for propulsion. Our batteries are powertrain agnostic with the ability to operate on internal combustion engine vehicles
or electric vehicles.
Our
proven sales and marketing strategy has allowed us to penetrate our current end markets efficiently. We use a variety of methods to educate
consumers on the benefits of LFP batteries and why they are a better investment compared to the legacy lead-acid batteries currently
found in our target end markets today. We also have an extensive social media program, where we partner with content creators in our
target markets to share with consumers the benefits of our products. Lastly, we participate in a variety of industry productions, including
features on RV podcasts and TV shows, and attend sponsored industry events such as the Bassmaster Classic, RV rallies and boat shows.
In
addition to our conventional LFP batteries, our experienced research and development team, headed by our founder and Chief Executive
Officer, is currently developing the next generation of LFP solid-state cells. Since our inception, we have been developing proprietary
solid-state cell technology and manufacturing processes for which we have issued patents and pending patent applications, where appropriate.
Solid-state lithium-ion technology eliminates the use of a liquid electrolyte, which addresses the residual heat and flammability issues
arising from lithium-ion batteries. The unique competitive advantage of our solid-state battery cell is highlighted by our dry deposition
technology, which completely displaces the need for toxic solvents in the manufacturing process and allows for the rapid and scalable
production of solid-state cells having an intercalation anode, like graphite or silicon. Many other solid-state technology companies
are focused on a denser lithium metal anode, which tends to form icicle-like dendrites inside the cell and lacks the cyclability of an
intercalation anode. Our design allows for a much safer, more efficient cell that we believe will be a key differentiator in the energy
storage market. Additionally, our internal production of solid-state cells will streamline our supply chain, allowing us to vertically
integrate our cells into our batteries, thereby lowering our production costs.
As
businesses, organizations and individuals increasingly seek improved clean energy use and energy storage, we believe we are well-positioned
to achieve our objectives of developing innovative technology to make clean energy accessible and affordable for everyone globally. We
will continue to focus on our core competencies of providing innovative technology, expanding our brand portfolio and providing affordable,
sustainable and accessible energy, all while being designed and manufactured in the United States.
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:
|
● |
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. |
|
|
|
|
● |
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. |
|
● |
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. |
|
|
|
|
● |
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. |
|
|
|
|
● |
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 (“Frost & Sullivan”), the total addressable market (“TAM”)
of our three current end markets is estimated to be approximately $12 billion by 2025.
|
● |
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 6.8% 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. |
|
|
|
|
● |
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. |
|
● |
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.
|
● |
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. |
|
|
|
|
● |
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 on board 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. |
|
|
|
|
● |
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. |
|
|
|
|
● |
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. |
|
|
|
|
● |
Rail.
Rail transportation is a large potential market, with an estimated market size of $98.6 billion in 2022, 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. |
|
● |
Data
Centers. Data centers have seen strong growth in recent years, with over 2,750 data centers in the United States as of January
2022 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. |
|
|
|
|
● |
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:
|
● |
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. |
|
|
|
|
● |
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 26 issued patents, with an additional 22
patent applications pending, in the United States, China, Europe, Australia, Canada and other regions. |
|
|
|
|
● |
Proven
Go-To-Market Strategy. We have successfully established a direct-to-consumer platform and have developed strong working relationships
with major RV OEMs, custom designing products 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 and distributors while further enhancing our direct-to-consumer
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. |
|
|
|
|
● |
Established
Customer Base with Brand Recognition. We have a growing customer base of more than 15,000 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 RV OEMs (with a CAGR of over 135% since 2020) with visibility for future growth through further expansion of our existing relationships. |
|
|
|
|
● |
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. |
|
|
|
|
● |
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:
|
● |
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. Moreover, in the first quarter of 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. |
|
|
|
|
● |
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 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. |
|
|
|
|
● |
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.
![](https://content.edgar-online.com/edgar_conv_img/2023/04/17/0001493152-23-012533_form10-k_001.jpg)
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 roughly 700 degrees Fahrenheit for LFP batteries, compared to
350 degrees Fahrenheit for 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.
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
currently offer non-toxic deep cycle LFP batteries for use in the RV, marine vessel and off-grid storage markets. We believe that the
innovative design of our LFP 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. We also offer chargers and other accessories either individually
or as part of bundled packages.
Our
core products are LFP battery modules with a built-in battery management system offered under two brand names: Dragonfly Energy, which
sells primarily to OEMs, and Battle Born Batteries, which sells primarily direct to consumers and increasingly to OEMs. We currently
offer seven LFP battery models across our two brands, each differentiated by size, power and capacity, consisting of seven different
models, four of which come with a heated option. The following chart highlights the key features of each of our models:
![](https://content.edgar-online.com/edgar_conv_img/2023/04/17/0001493152-23-012533_form10-k_002.jpg)
Each
battery model is capable of being discharged to a 100% depth of discharge and takes approximately five hours to charge to full capacity,
which is five times faster than a traditional lead-acid battery. Each module is designed to last between 3,000 and 5,000 cycles, at which
point the battery still holds 75% to 80% of its energy capacity. This equates to approximately 10 to 15 years of use (under typical conditions),
which is why each battery comes with an industry-leading 10-year full replacement manufacturers’ defect warranty. 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 LFP batteries are versatile and designed to be compatible
not just with standard chargers, but also with wind and solar power systems, and to be modular, and can be combined in series or in parallel
depending on customer needs.
We
also offer certain of our battery models as an internally heated battery, which utilizes our proprietary technology to maintain optimal
internal settings in cold weather conditions, allowing customers to charge the battery even in low temperatures. The unique heating technology
does not require an external energy source and the self-regulating internal heater is only activated when needed, minimizing energy drain
and extending the useful life of the battery. Unlike traditional batteries, our batteries are maintenance free and do not require cleaning,
adding of water or venting for “off gassing”.
In
April of 2022, we acquired the assets and intellectual property portfolio of Thomason Jones Company, LLC, including Wakespeed, in a move
that provides our OEM arm and consumer brand, Battle Born Batteries, the ability to offer complete alternator-connected systems for marine
and RV consumers and manufacturers. Wakespeed offers a unique alternator regulator and several other devices focused on energy systems
that are charged by a vehicle alternator. Wakespeed’s product line continues to be offered to specialty OEM manufacturers and customers
but is now additionally offered alongside the innovative product lines of Dragonfly Energy and Battle Born Batteries.
In
addition to our core battery products, we offer customers a number of adjacent products and accessories manufactured by third parties.
We offer a range of charging components that are designed for every application: inverter chargers (which allow users to recharge a DC
battery bank with AC power and also turn DC battery power into AC power), converter chargers (which allow users to charge from an AC
power source) and solar charge controllers (which manage power transfer from solar arrays to battery banks).
We
also offer customers a full suite of accessories and components to facilitate the installation of our products. These include plugs,
fuses, cables, adapters, sensors and interfaces pictured below.
![](https://content.edgar-online.com/edgar_conv_img/2023/04/17/0001493152-23-012533_form10-k_003.jpg)
We
offer specially designed bundled packages of battery modules and accessories tailored to specific applications for both RVs, marine vessels
and off-grid residences, ranging in price from $675 to over $19,000, as shown below.
![](https://content.edgar-online.com/edgar_conv_img/2023/04/17/0001493152-23-012533_form10-k_004.jpg)
With
our batteries being designed and assembled exclusively in-house, we are able to guarantee that we deliver high-quality batteries to customers.
We test our products to ensure they meet federal and local governmental regulations for both performance and safety. Our testing and
compliance with required standards and measurements are validated by a third-party lab, which includes UL Standard 2054, IEC 62133 and
the UN 38.3 shipping certification.
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:
|
● |
it
enables batteries to draw power under 135 degrees Fahrenheit, and is designed to cut off charging at 24 degrees Fahrenheit to protect
cells; |
|
|
|
|
● |
it
actively monitors the rate of change of currents to detect and prevent short circuiting, and also protects against potential ground
faults; |
|
|
|
|
● |
it
allows for up to an average of 300 amps continuously, 500 amp surges for 30 seconds, and momentary, half second maximum capacity
surges; |
|
|
|
|
● |
it
enables batteries to recharge even if completely drained; |
|
|
|
|
● |
it
utilizes larger resistors to ensure balanced loads to improve performance and extend useful life; and |
|
|
|
|
● |
it
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 customers as an adjacent component and in our product bundles during the first half of 2023.
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
allows 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.
|
● |
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 manufacturing facility will allow us to add
production capacity and increase product offerings and scale based on demand. |
|
● |
The
majority of our current batteries are 12 voltage 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. |
|
|
|
|
● |
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. |
|
|
|
|
● |
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. |
|
● |
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 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). We believe that solid-state batteries present a significant advantage to all products currently on the market, with the potential
to be lighter, smaller, safer and cheaper. Since our founding, our research team, led by our founder and CEO, has been developing solid-state
cell manufacturing technology and we aim to be a fully vertically integrated solid-state battery manufacturer. We have successfully tested
and are currently in the process of optimizing the composite materials that comprise the cathode, anode and electrolyte of the all-solid-state
battery. In addition, we are one of the only companies to focus on a true solid-state chemistry that conducts lithium with sufficiently
high conductivity and cycles lithium phosphate against graphite with positive results, and are in the process of testing more complicated
layered electrolyte compositions to maximize our cycling and power results. Our aim is to begin producing solid-state pouch cells from
a pilot production line by early 2024.
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. Our solid-state
batteries are designed to be multilayered pouch cells comprised of highly integrated layers of catholyte, electrolyte and anolyte contained
within industry standard aluminum foil at the cathode and industry standard copper or nickel foil at the anode, which are then combined
into larger battery packs. An illustrative solid-state cell is shown below.
![](https://content.edgar-online.com/edgar_conv_img/2023/04/17/0001493152-23-012533_form10-k_005.jpg)
We
have developed proprietary processes, systems and materials that are protected by issued patents and pending patent applications that
we believe place us at the forefront of solid-state storage-focused battery technology. Our cells utilize a layered electrolyte design,
which increases stability by forming a stable solid electrolyte interface at both electrodes. Rather than requiring a solid-state separator,
we have designed a patent-pending spray drying process that encapsulates each grain of cathode (LFP) or anode (graphite) with a solid
electrolyte, which completely integrates the solid-state component, creating higher interface density and, therefore, more effective
connectivity. In addition, our cathodes and anodes do not require any liquid component, making this truly solid-state. In lieu of lithium
metal, our cathode component incorporates an intercalation material, such as graphite or silicon. This mitigates the risk of forming
lithium dendrites, which degrades cell performance and could potentially cause an internal short circuit.
![](https://content.edgar-online.com/edgar_conv_img/2023/04/17/0001493152-23-012533_form10-k_006.jpg)
The
utilization of our innovative, completely dry powder deposition technology in our manufacturing process is expected to result in faster
manufacturing times with lower upfront capital costs due to the elimination of expensive dryers and vacuum ovens. We believe this will
allow our production process to shift from batch production and convert to continuous production faster than our competitors. Our spray
powder coating application is highly automated, allowing us to utilize less space and fix overhead costs while increasing the precision
of our products and manufacturing capacity of the facility. Our manufacturing process is modular, allowing us to scale up depending upon
demand.
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.
We
intend to integrate our initial solid-state cells into Dragonfly Energy and Battle Born batteries and eventually scale to mass production
of solid-state cells. We aim to be a vertically integrated LFP solid-state cell manufacturer with our technology incorporated into our
own-branded products for sale to our own customers (including our OEM customers) but also other battery manufacturers.
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 property.
Our
facility provides a streamlined, partially autonomous production process for our current batteries, which comprises module assembly and
battery assembly. We currently have two production lines, 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 plan to continue to expand our production capacity as
needed and estimate that our current production facility will allow for over $500 million in manufacturing sales capacity once fully
utilized.
Our
manufacturing process is set out below:
![](https://content.edgar-online.com/edgar_conv_img/2023/04/17/0001493152-23-012533_form10-k_007.jpg)
Our
manufacturing process is divided into two aspects: (i) module assembly and (ii) 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 discharged to empty, recharged to full charge 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.
On
February 8, 2022, we entered into a 124-month lease for an additional 390,240 square foot warehouse, which, once built, we intend to
utilize for the manufacture of our solid-state batteries.
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 solid-state cells, we have signed a non-binding Memorandum of Understanding 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 15,000 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, 2022
and 2021, OEM sales represented 39.2% and 10.5% 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 36.3% of our revenue for the year ended December 31, 2022. 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”). Under the Supply Agreement, we will be the exclusive
supplier to Keystone for certain of its future LFP battery requirements, solidifying our long-standing relationship with Keystone.
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
and the Keystone arrangement 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, 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 use a variety of methods to educate
consumers on the benefits of LFP batteries and why they are a better investment compared to the legacy lead-acid batteries found in our
target end markets today. Through informational videos found on our website and social media platforms that educate consumers on the
benefits of LFP batteries and various “DIY” videos, we assist consumers on what they need for their battery system and how
to install and use batteries and accessories.
We
utilize a multi-pronged sales and marketing strategy to ensure that the Dragonfly Energy, Battle Born and Wakespeed brands are at the
forefront of their respective end markets. We have established strong relationships, particularly in the RV industry, through participation
in trade shows and other sponsored industry events, which have allowed us to reach both OEMs and retail customers and ensure we are aware
of evolving customer preferences. We are then able to leverage this customer feedback to collaborate with major OEMs to custom design
products for new and existing applications.
In
addition to traditional print and media advertising, we have leveraged the growing influence of social media (such as YouTube, Instagram
and Facebook) and professional influencers to increase market awareness of our brands. We work closely with these influencers to create
a lasting relationship that showcases the performance of our products, rather than one-off promotions. Our products have also been featured
in television shows and on podcasts that cater specifically to RV enthusiasts.
We
also value our direct relationships with retail customers. Our website and our customer service are key elements to our sales strategy.
Our website enables customers to purchase Wakespeed and Battle Born products directly and provides access to a range of videos covering
product information, technological benefits and installation guides. We have a team of experts dedicated to supporting our customers’
sales, technical and service needs.
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, 2022 we owned 26 issued patents and 22 pending patent applications. The patents and patent applications cover the United
States, China, Europe (with individual patents in Germany, France and the United Kingdom), Australia, Canada and other regions. 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 2023 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, 2022, we own four trademark registrations to cover our house marks in the United States and we have seven pending
trademark applications relating to our design logos and slogans in the United States.
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 December 31, 2022, we have 177 employees; 171 full-time, 2 part-time and 4 seasonal. 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:
|
● |
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. |
|
|
|
|
● |
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. |
|
|
|
|
● |
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. |
|
|
|
|
● |
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”), Chardan NexTech 2 Acquisition Corp., a Delaware company (“Chardan”),
and Dragonfly Energy Corp, a Nevada corporation (together with its consolidated subsidiaries, “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 Chardan, Bronco Merger Sub, Inc., a Delaware corporation
and wholly-owned subsidiary of Chardan (“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, Chardan changed
its name to Dragonfly Energy Holdings Corp.
Prior
to the completion of the Business Combination, Chardan was a shell company. Chardan was incorporated in the state of Delaware on June
23, 2020. Chardan consummated its initial public offering at a price of $10 per unit on August 13, 2021 (the “Chardan 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 Chardan, Merger Sub, Legacy Dragonfly or the holders of any
of the following securities:
(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.
(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 is issuable if our 2023 total audited revenue is equal to or greater than $250 million and our 2023
audited operating income is 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.
PIPE
Investment
Pursuant
to the subscription agreement, dated as of May 15, 2022 (the “Subscription Agreement”), by and between Chardan 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 Chardan agreed to sell to the Sponsor, an aggregate of 500,000 shares of Chardan common stock (“Chardan
Common Stock”) for gross proceeds to Chardan of $5 million in a private placement. On September 28, 2022, the Sponsor and Chardan
Capital Markets LLC, a New York limited liability company (“CCM LLC”), 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 LLC.
Under
the Subscription Agreement, the number of shares of Chardan Common Stock that CCM LLC was obligated to purchase was to be reduced by
the number of shares of Chardan Common Stock that CCM LLC 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 LLC 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 Chardan IPO (based on a per share redemption price of $10.34) and (ii) a reduction in CCM
LLC’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 Chardan and Legacy Dragonfly,
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”), in connection with the Closing, Chardan, 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 Chardan 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).
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 “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” and, together with the Penny Warrants, the “Warrants”).
The
Penny Warrants have an exercise period of 10 years from the date of issuance. As of March 15, 2023, 1,248,294 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 dated May 15, 2022 between Legacy Dragonfly and CCM 5, we entered into a purchase agreement
(the “Purchase Agreement”) and a Registration Rights Agreement (the “ChEF RRA”) with CCM LLC in connection
with the Closing. 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 equity
facility (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 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 million 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. As of April 17, 2023, 98,500 shares
have been issued pursuant to the Purchase Agreement with CCM LLC for aggregate net proceeds to us of $670,593.
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 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
LLC 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 Chardan NexTech 2 Warrant Holdings LLC (“Warrant Holdings”), also an affiliate
of the Sponsor, may not be exercised to the extent an affiliate of the Sponsor (including CCM LLC) 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 LLC with certain registration rights with respect to the shares of
common stock issued subject to the Purchase Agreement.
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 LLC 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, Chardan, 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, Chardan’s officers,
directors, initial stockholders, CCM LLC 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
January 1, 2022, we entered into an asset purchase agreement (the “APA”) with Bourns Productions, Inc., a Nevada corporation
(“Bourns Production”), pursuant to which we acquired machinery, equipment and a lease for a podcast studio from Bourns
Production as set forth in the APA for a purchase price of approximately $197,000, which was the approximated fair market value. Tyler
Bourns, our Chief Marketing Officer, is the owner and president of Bourns Productions.
On
April 4, 2022, we entered into an asset purchase agreement (“APA”) with Thomason Jones Company, LLC, a Washington
limited liability company (“TJC”), pursuant to which we acquired intellectual property rights 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 representative, are the managing members of TJC.
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.
Recent
Developments
On
February 24, 2023, we entered into the First Amended and Restated Employment Agreement (the “Restated Agreement”)
with John Marchetti, our Chief Financial Officer. The Restated Agreement amended and restated the employment agreement, dated October
11, 2022, by and between us and Mr. Marchetti (the “Original Agreement”). The Restated Agreement provides that Mr.
Marchetti will receive a minimum annual bonus of $175,000 for the fiscal year ending December 31, 2023. All other terms of the Restated
Agreement remain the same as the Original Agreement.
On
March 5, 2023, we issued an unsecured convertible promissory note in the principal amount of $1.0 million (the “Principal Amount”)
to Brian Nelson, one of our directors, in a private placement in exchange for cash in an equal amount. The Note became due and payable
in full on April 1, 2023. We were also obligated to pay $100,000 (the “Loan Fee”) 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
March 29, 2023, we obtained a waiver 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 during the quarter ended March 31, 2023.
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
of directors 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, the Company’s 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.
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.
Item
1A. Risk Factors
An
investment in our common stock is speculative and illiquid and involves a high degree of risk including the risk of a loss of your entire
investment. You should carefully consider the risks and uncertainties described below and the other information contained in this report
and our other reports filed with the Securities and Exchange Commission (the “SEC”). The risks set forth below are not the
only ones facing us. Additional risks and uncertainties may exist that could also adversely affect our business, operations and financial
condition. If any of the following risks actually materialize, our business, financial condition and/or operations could suffer. In such
event, the value of our common stock could decline, and you could lose all or a substantial portion of the money that you pay for our
common stock.
Summary
of Risk Factors
Risks
Related to Our Existing Lithium-Ion Battery Operations
|
● |
Our
business and future growth depends on the needs and success of our customers. |
|
● |
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. |
|
● |
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). |
|
● |
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
are currently, and likely will continue to be, dependent on a single manufacturing facility. If our facility becomes 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
|
● |
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. |
|
● |
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. |
|
● |
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
|
● |
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 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
|
● |
The
uncertainty in global economic conditions, including the Russia-Ukraine conflict, could reduce consumer spending and disrupt our
supply chain which could negatively affect our results of operations. |
|
● |
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. |
|
● |
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. |
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. |
|
● |
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. |
|
● |
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
|
● |
Future
issuances of debt securities and equity securities may adversely affect us and may be dilutive to existing stockholders. |
|
● |
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. |
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. Increased overall RV OEM
sales 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; 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.
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 EV’s 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 solar integration industrial, specialty and work vehicles, material handling, 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:
|
● |
inability,
failure or unwillingness of third-party suppliers to comply with regulatory requirements; |
|
|
|
|
● |
breach
of supply agreements by the third-party suppliers; |
|
|
|
|
● |
misappropriation
or disclosure of our proprietary information, including our trade secrets and know-how; |
|
|
|
|
● |
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 |
|
|
|
|
● |
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 an approximately nine-month supply of LFP cells and six-month supply of all other critical components by pre-ordering
components 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, which 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 a single manufacturing facility. If our facility becomes 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 currently operate three LFP battery production lines, which has been sufficient to meet customer demand. If one or both production lines
were to be 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
facility 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. 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 facility. 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 of 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 no experience in manufacturing battery cells. 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 facility, 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.
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 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:
|
● |
cease
using, making, having made, selling, having sold, developing, having developed or importing products that incorporate the infringed
intellectual property rights; |
|
|
|
|
● |
pay
substantial damages; |
|
|
|
|
● |
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 |
|
|
|
|
● |
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, 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 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.
More
recently, the closures of Silicon Valley Bank, or SVB, and Signature Bank and their placement into receivership with the Federal Deposit
Insurance Corporation, or FDIC created bank-specific and broader financial institution liquidity risk and concerns. Although the Department
of the Treasury, the Federal Reserve, and the FDIC jointly released a statement that depositors at SVB and Signature Bank would have
access to their funds, even those in excess of the standard FDIC insurance limits, under a systemic risk exception, future adverse developments
with respect to specific financial institutions or the broader financial services industry may lead to market-wide liquidity shortages,
impair the ability of companies to access near-term working capital needs, and create additional market and economic uncertainty. There
can be no assurance that future credit and financial market instability and a deterioration in confidence in economic conditions will
not occur.
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.
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 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 proposed rules that would mandate 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
will incur 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
will face 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
PCAOB and the securities exchanges and the listing standards of Nasdaq, impose additional reporting and other obligations on public companies.
Compliance with public company requirements will increase costs and make certain activities more time-consuming. A number of those requirements
will require us to carry out activities we have not done previously. For example, we will create new board committees, enter into new
insurance policies and adopt new internal controls and disclosure controls and procedures. In addition, expenses associated with SEC
reporting requirements will 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 of directors
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 Annual Report and in filings required of a public company, our business and financial condition
will 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 to no 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 December 31, 2022, we had cash totaling $17.8 million. Our net loss for the year ended December 31, 2022 was $39.6 million and our net income for the year ended December 31, 2021 was
$4.3 million. 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 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:
|
● |
making
it difficult for us to pay other obligations; |
|
● |
increasing
our cost of borrowing from other sources; |
|
● |
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; |
|
● |
restricting
us from making acquisitions or causing us to make divestitures or similar transactions; |
|
● |
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; |
|
● |
placing
us at a competitive disadvantage compared to our less leveraged competitors; and |
|
● |
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 year ended December 31, 2022, we incurred losses and had a negative cash flow from operations. As of December 31, 2022, we had approximately
$17.8 million in cash and cash equivalents and working capital of $32.9 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, we
obtained a waiver 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 during the quarter ended March 31,
2023. 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 2022 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:
|
● |
incur
additional indebtedness; |
|
● |
create
or incur encumbrances or liens; |
|
● |
engage
in consolidations, amalgamations, mergers, acquisitions, liquidations, dissolutions or dispositions; |
|
● |
sell,
transfer or otherwise dispose of assets; and |
|
● |
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 elsewhere in this Annual Report, our management identified material weaknesses in our internal control over financial reporting
relating to (i) an 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 a result of
these material weaknesses, our management concluded that our internal control over financial reporting was not effective as of December
31, 2022.
We
are in the process of developing a plan to remediate these material weaknesses. In 2021, we implemented an enterprise resource planning
system and hired a new Chief Financial Officer. In 2022, we began to implement a comprehensive Sarbanes-Oxley Act compliance program,
and we will continue to identify additional appropriate remediation measures. However, the material weaknesses will not be considered
remediated until the remediation plan has been fully implemented, the applicable controls are fully operational for a sufficient period
of time, and we have concluded, through testing, that the newly implemented and enhanced controls are operating effectively. At this
time, we cannot predict the success of such efforts or the outcome of future assessments of the remediation efforts. Our efforts may
not remediate these material weaknesses in internal controls over financial reporting, 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,”
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.
There
can be no assurance that we will be able to comply with the continued listing standards of Nasdaq.
Our
common stock and Public Warrants are currently listed on the Nasdaq Global Market and the Nasdaq Capital Market, respectively. There
can be no assurance that we will be able to comply with the continued listing standards of Nasdaq. If Nasdaq delists our common stock
from trading on its exchange for failure to meet the listing standards, our stockholders could face significant material adverse consequences
including:
|
● |
a
limited availability of market quotations for our securities; |
|
● |
reduced
liquidity for our securities; |
|
● |
a
determination that our common stock is a “penny stock,” which would require brokers trading in such securities to adhere
to more stringent rules, could adversely impact the value of our securities and/or possibly result in a reduced level of trading
activity in the secondary trading market for our securities; |
|
● |
a
limited amount of news and analyst coverage; and |
|
● |
a
decreased ability to issue additional securities or obtain additional financing in the future. |
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
have filed registration statements registering the resale of up to 55,298,545 shares that may be sold and/or issued into the public markets
by certain securityholders. The shares being registered for resale into the public markets represent a substantial majority of our outstanding
common stock as of December 31, 2022. 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 Chardan 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 Chardan IPO offering price and may cause the trading prices of our securities to experience a further decline.
Further,
we have registered 21,512,027 shares of common stock to be issued and sold to CCM LLC in connection with the ChEF Equity Facility. The
21,512,027 shares that may be resold and/or issued into the public markets pursuant to the ChEF Equity Facility represent approximately
50% of the shares of our common stock outstanding as of December 31, 2022. 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 LLC
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 LLC 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.
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:
|
● |
actual
or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar
to ours; |
|
|
|
|
● |
changes
in the market’s expectations about our operating results; |
|
|
|
|
● |
the
public’s reaction to our press releases, other public announcements and filings with the SEC; |
|
|
|
|
● |
speculation
in the press or investment community; |
|
|
|
|
● |
actual
or anticipated developments in our business, competitors’ businesses or the competitive landscape generally; |
|
|
|
|
● |
innovations
or new products developed by us or our competitors; |
|
|
|
|
● |
manufacturing,
supply or distribution delays or shortages; |
|
|
|
|
● |
any
changes to our relationship with any manufacturers, suppliers, licensors, future collaborators, or other strategic partners; |
|
|
|
|
● |
the
operating results failing to meet the expectation of securities analysts or investors in a particular period; |
|
|
|
|
● |
changes
in financial estimates and recommendations by securities analysts concerning us or the market in general; |
|
|
|
|
● |
operating
and stock price performance of other companies that investors deem comparable to ours; |
|
|
|
|
● |
changes
in laws and regulations affecting our business; |
|
|
|
|
● |
commencement
of, or involvement in, litigation involving us; |
|
|
|
|
● |
changes
in our capital structure, such as future issuances of securities or the incurrence of additional debt; |
|
|
|
|
● |
the
volume of our common stock available for public sale; |
|
|
|
|
● |
any
major change in our board of directors or management; |
|
|
|
|
● |
sales
of substantial amounts of our common stock by our directors, officers or significant stockholders or the perception that such sales
could occur; and |
|
|
|
|
● |
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). |
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.
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 March 15, 2023, there are currently (i) 9,487,500 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) 4,627,858
shares of common stock issuable upon the exercise of outstanding private warrants at an exercise price of $11.50 per share (the “Private
Warrants”); and (iii) 2,593,056 shares of common stock issuable upon exercise of outstanding Penny Warrants at an exercise price
of $0.01 per share. The $10 Warrants have been exercised in full 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.
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:
|
● |
our
ability to engage target customers and successfully convert these customers into meaningful orders in the future; |
|
|
|
|
● |
our
reliance on two suppliers for LFP cells and a single supplier for the manufacture of our battery management system; |
|
|
|
|
● |
the
size and growth of the potential markets for our batteries and its ability to serve those markets; |
|
|
|
|
● |
challenges
in our attempts to develop and produce solid state battery cells; |
|
|
|
|
● |
the
level of demand for any products, which may vary significantly; |
|
|
|
|
● |
future
accounting pronouncements or changes in our accounting policies; |
|
|
|
|
● |
macroeconomic
conditions, both nationally and locally; and |
|
|
|
| ● | 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 of directors.
As our board of directors 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:
|
● |
our
board of directors will be 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 of directors; |
|
|
|
|
● |
our
board of directors has the exclusive right to expand the size of its board of directors and to elect directors to fill a vacancy
created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders
from being able to fill vacancies on our board of directors; |
|
|
|
|
● |
our
stockholders may not act by written consent, which forces stockholder action to be taken at an annual or special meeting of stockholders; |
|
● |
a
special meeting of stockholders may be called only by a majority of our board of directors, which may delay the ability of our
stockholders to force consideration of a proposal or to take action, including the removal of directors; |
|
|
|
|
● |
our
Articles of Incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders
to elect director candidates; |
|
|
|
|
● |
our
board of directors may alter certain provisions of our Bylaws without obtaining stockholder approval; |
|
|
|
|
● |
the
approval of the holders of at least sixty-six and two-thirds percent (662∕3%) of our common shares entitled to vote at an election
of our board of directors 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; |
|
|
|
|
● |
stockholders
must provide advance notice and additional disclosures to nominate individuals for election to our board of directors 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 |
|
|
|
|
● |
our
board of directors 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:
|
● |
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; |
|
|
|
|
● |
reduced
disclosure obligations regarding executive compensation in our periodic reports and annual report on Form 10-K; and |
|
|
|
|
● |
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:
| ● | the
last day of the fiscal year in which we have at least $1.235 billion in annual revenue; |
| | |
|
● |
the
date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; |
|
|
|
|
● |
the
date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or |
|
|
|
|
● |
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 will be 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:
|
● |
changes
in the valuation of our deferred tax assets and liabilities; |
|
● |
expected
timing and amount of the release of any tax valuation allowances; |
|
● |
tax
effects of stock-based compensation; |
|
● |
costs
related to intercompany restructurings; |
|
● |
changes
in tax laws, regulations or interpretations thereof; or |
|
● |
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.
Item
1B. Unresolved Staff Comments
Not
applicable.
Item
2. Properties
Our
headquarters is located at 1190 Trademark Drive #108, Reno, Nevada 89521 in a 99,000 square foot manufacturing facility. The lease for
this building was entered into on March 1, 2021 and expires on April 30, 2026. The current rent is $58,009 payable monthly.
On
February 8, 2022, we entered into a 124-month lease for an additional 390,240 square foot warehouse that is under construction in Reno,
Nevada. The rent under the lease will be $230,000 payable monthly upon substantial completion of construction as provided for in the
lease.
We
maintain a warehouse facility at 12815 Old Virginia Road in Reno, Nevada. This is a 59,500 square foot facility that we use to store
and stage materials in preparation for production work. The lease for this space was entered into on December 1, 2021, and expires December
31, 2026; the current monthly rent is $40,222.
Our
Research & Development lab is a 9,600 square foot facility located in Sparks, Nevada. The lease for these premises was entered into
on July 27, 2020 and expires on July 31, 2025. The current monthly rent is $4,736.
Our
podcast studio is a 1,772 square foot facility located in Sparks, Nevada. The lease for this space was assumed by us pursuant to the
Asset Purchase Agreement by and between the Company and Bourns Production on January 1, 2022, and expires September 30, 2023. The current
monthly rent is $1,333 We do not own any real property.
Item
3. Legal Proceedings
From
time to time, we may become involved in litigation or other legal proceedings. We are not currently a party to any litigation or legal
proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome,
litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item
4. Mine Safety Disclosures
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(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.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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, 2022, the Company incurred losses and had a negative cash flow from operations. As of December 31, 2022,
the Company had $17,781 in cash and cash equivalents and working capital of $32,923. 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. It is probable that the Company will fail to meet these covenants within the next
twelve months. 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 and 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 standards
In
May 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2021-04, Earnings Per Share (Topic 260), Debt Modifications and Extinguishments (Subtopic 470 50), Compensation – Stock Based Compensation
(Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 40): Issuer’s Accounting
for Certain Modifications or Exchanges of Freestanding Equity Classified Written Call Options. This ASU provides guidance which clarified
an issuer’s accounting for modification or exchanges of freestanding equity classified written call options that remain equity
classified after modification or exchange. The provisions of ASU No. 2021-04 are effective January 1, 2022. This ASU shall be applied
on a prospective basis. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Recently
issued accounting pronouncements
In
June 2016, the FASB issued 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 does not have a material impact to the financial statements.
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting
for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash
conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification
of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding
instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance,
including the requirement to use the if-converted method for all convertible instruments. The amendments in this update will be effective
for the Company on January 1, 2024 and may be early adopted at the beginning of fiscal year 2023. The Company is currently assessing
the impact, if any, that ASU 2020-06 would have on its financial position, results of operations or cash flows.
Cash,
Restricted 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. There were
no cash equivalents as of December 31, 2022 or 2021. The Company also maintained a restricted cash balance to satisfy its note payable
requirements as of December 31, 2021 (Refer to Note 7). There were no restricted cash balances as of December 31, 2022.
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, nor does management believe it is exposed to any significant credit risk.
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 30-60 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 Company has an allowance for doubtful accounts as
of December 31, 2022 and 2021 of $90 and $50, respectively.
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. As of December 31, 2022 and 2021, no such reserves were necessary.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 2022 and 2021 was $891 and $617, respectively. The various classes of property and equipment
and estimated useful lives are as follows:
SCHEDULE
OF VARIOUS CLASSES OF PROPERTY AND EQUIPMENT
AND ESTIMATED USEFUL LIVES
Office
furniture and equipment |
3
to 7 years |
|
|
Vehicles |
5
years |
|
|
Machinery
and equipment |
3
to 7 years |
|
|
Leasehold
improvements |
Remaining
Term of Lease |
Use
of Estimates
The
preparation of financial statements in conformity with 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.
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 require 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. At contract inception, once the contract is determined
to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that
are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the
amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is
satisfied. The Company excludes from the transaction price all taxes that are assessed by a governmental authority and imposed on and
concurrent with the Company’s revenue transactions, and therefore presents these taxes (such as sales tax) on a net basis in operating
revenues on the Consolidated Statements of Operations.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 due within 30-60 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. The company had $1,779 of contract liabilities
as of January 1, 2021. As of December 31, 2022 and 2021, the contract liability related to the Company’s customer deposits approximated
$238 and $434, respectively. The entire contract liability balance as of December 31, 2021 was recognized as revenue during the year
ended December 31, 2022. The entire contract liability balance as of January 1, 2021 was recognized as revenue during the year ended December
31, 2021.
Disaggregation
of Revenue:
The
following table present our disaggregated revenues by distribution channel:
SCHEDULE
OF DISAGGREGATED REVENUES BY DISTRIBUTION CHANNEL
Sales | |
2022 | | |
2021 | |
Retail | |
$ | 43,344 | | |
$ | 59,042 | |
Distributor | |
| 9,102 | | |
| 10,733 | |
Original
equipment manufacture | |
| 33,805 | | |
| 8,225 | |
Total | |
$ | 86,251 | | |
$ | 78,000 | |
Total sales | |
$ | 86,251 | | |
$ | 78,000 | |
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 $5,440 and $5,105 for the years ended December 31, 2022 and 2021, 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 and records 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, 2022 and 2021 to be $328
and $0,
respectively.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Concentrations
Receivables
from three customers comprised approximately 18%, 10% and 10%, respectively, of accounts receivable as of December 31, 2022. Receivables
from two customers comprised approximately 42% and 16%, respectively, of accounts receivable as of December 31, 2021. There are no other
significant accounts receivable concentrations.
Revenue
from one customer accounted for approximately 22% of the Company’s sales for year ended December 31, 2022. There were no significant
revenue concentrations for the year ended December 31, 2021.
Payables
to one vendor comprised approximately 61% of accounts payables as of December 31, 2022. There were no significant payable concentrations
as of December 31, 2021.
For
the year ended December 31, 2022, one vendor accounted for approximately 28% of the Company’s total purchases, respectively. For
the year ended December 31, 2021, three vendors accounted for approximately 27%, 10% and 10% of the Company’s total purchases,
respectively.
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 $2,334 and $1,690 for the years ended December 31, 2022 and 2021, 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 14). 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 CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Income
Taxes
Deferred
income tax assets and liabilities (Note 9) 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 $128 and $0 as of
December 31, 2022 and 2021, 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.
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 Financial Accounting Standards Board (“FASB”)
Accounting Standard Update (“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.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(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.
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 MERGER CASH FLOW AND SHAREHOLDERS EQUITY
| |
| |
| |
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 costs paid at close | |
| (18,072 | ) |
Net deficit assumed in recapitalization |
|
$ |
(10,197 |
) |
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
| |
| |
| |
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 | |
Merger
and PIPE financing shares | |
| 4,238,936 | |
Legacy
Dragonfly shares (1)(2) | |
| 38,576,650 | |
Total
shares of common stock immediately after the 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 12 for a further description of the warrants.
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.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. |
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 CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 and 2021:
SCHEDULE OF FAIR VALUE, ASSETS AND LIABILITIES
| |
As
of December 31, 2022 | |
| |
Carrying
Amount | | |
Fair
Value | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | |
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 | |
There were no assets or liabilities that were measured
at fair value as of December 31, 2021.
The carrying amounts of accounts receivable and accounts
payable are considered level 1 and approximate fair value as of December 31, 2022 and 2021 because of the relatively short maturity of
these instruments.
The carrying value of the term loan and fixed
rate senior notes as of December 31, 2022 and 2021, respectively, are considered level 2 and approximates their fair value as the interest rate does not differ significantly from the current market rates available to the
Company for similar debt.
NOTE
5 — INVENTORY
Inventory
consists of the following:
SCHEDULE
OF INVENTORY
| |
December
31, 2022 | | |
December
31, 2021 | |
Raw
material | |
$ | 42,586 | | |
$ | 22,885 | |
Finished
goods | |
| 7,260 | | |
| 4,242 | |
Total
inventory | |
$ | 49,846 | | |
$ | 27,127 | |
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.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Operating Leases
The
Company has leases related to the main office, warehouse space, research and development lab, and engineering office, all located in Reno, Nevada. The leases require annual escalating monthly payments ranging from $60
to $74.
In December of 2021, the Company entered into another lease for additional warehouse space located in Reno, Nevada that requires
annual escalating monthly payments ranging from $47
to $55.
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. The first payment is due upon substantial completion of construction of the building which is
expected to be within 2
years from the effective date. As of December 31, 2022, the lease has not commenced as the Company does not have control over the
asset.
The
following table presents the breakout of the operating leases as of:
SCHEDULE OF TABLE REPRESENTING THE BREAKOUT OF THE OPERATING LEASES
| |
December
31, 2022 | | |
December
31, 2021 | |
Operating
lease right-of-use assets | |
$ | 4,513 | | |
$ | 5,709 | |
Short-term
operating lease liabilities | |
| 1,188 | | |
| 1,082 | |
Long-term
operating lease liabilities | |
| 3,541 | | |
| 4,694 | |
Total
operating lease liabilities | |
$ | 4,729 | | |
$ | 5,776 | |
Weighted average
remaining lease term | |
| 3.6
years | | |
| 4.6
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, 2022, the future minimum lease payments under these operating leases are as follows:
SCHEDULE OF THE FUTURE MINIMUM LEASE PAYMENTS UNDER THE OPERATING LEASES
| |
| | |
2023 | |
$ | 1,399 | |
2024 | |
| 1,435 | |
2025 | |
| 1,440 | |
2026 | |
| 893 | |
Total
lease payments | |
| 5,167 | |
Less
imputed interest | |
| 438 | |
Total
operating lease liabilities | |
$ | 4,729 | |
SCHEDULE
OF LEASE COST
| |
| |
December 31, | | |
December 31, | |
Lease cost | |
Classification | |
2022 | | |
2021 | |
Operating lease cost | |
Cost of goods sold | |
$ | 1,476 | | |
$ | 633 | |
Operating lease cost | |
Research and development | |
| 95 | | |
| 103 | |
Operating lease cost | |
General and administration | |
| 50 | | |
| 42 | |
Operating lease cost | |
Selling and marketing | |
| 49 | | |
| 42 | |
Total lease cost | |
| |
$ | 1,670 | | |
$ | 820 | |
All
lease costs included in the schedule above are fixed.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Other
Contingencies
See
Note 10 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.
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 (the “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 “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 engagement of a placement agent, 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 labelled 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. A loss on extinguishment of $4,824
was recognized upon settlement. The net balance of $40,712 on the date of the merger consisted of $45,000 in principal less $4,288 in unamortized debt discount related
to the debt issuance costs and Insurance Policy.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Reserve
Accounts
Deposits
into the reserve accounts consisted of the following items:
SCHEDULE OF DEPOSITS INTO RESERVE ACCOUNTS
| |
| | |
Payment
Reserve Fund | |
$ | 3,044 | |
Capitalized
Interest Fund | |
| 144 | |
Total | |
$ | 3,188 | |
The
Payment Reserve Fund is a debt service fund to be maintained by UMB Bank, and the initial deposit is equal to the maximum amount of monthly
interest and principal debt service payment due on the Series 2021-6 notes, plus interest earned on special redemptions (see redemptions
related to certain defaults on the debt). These funds may be utilized by UMB Bank to fund certain shortfalls and a special redemption,
but otherwise such funds are released pro rata to the Company based on principal payments made by the Company on the Series 2021-6 Notes.
Since this was a deposit account maintained by the trustee and restricted for release upon the occurrence of future events, this deposit
was treated as restricted cash.
The
Capitalized Interest Fund was created to hold the interest that accrued from the closing date until the first payment due on December
15, 2021. The initial deposit, therefore, was treated as prepaid interest. These funds were utilized to pay the interest incurred through
that first payment date, therefore the balance as of December 31, 2021 was $3,088.
Both
above funds, to the extent that they are deposited into interest bearing accounts, earn interest that UMB Bank will transfer into
an Interest Earnings Fund, which funds will be held in escrow until the earlier of maturity or when the debt obligations are paid in
full (assuming no events of default). There were no funds deposited into interest bearing accounts at December 31, 2022 or December 31,
2021.
In
connection with the merger, the Company settled the Trust Indenture and the balance in the Payment Reserve Fund was offset against the
proceeds.
Collateral
As
collateral for payment of the debt and certain obligations related to performance under the Trust Indenture and related transaction documents,
the Company and the guarantors granted to NewLight Capital, LLC, as representative and for the benefit of UMB Bank a continuing security
interest in substantially all of the assets of the Company, including certain intellectual property assets.
Under
the terms of the Trust Indenture, the Insurance Policy is required as additional collateral guaranteeing the payments under the debt
by the Company. The Company determined this was not a direct incremental cost of the financing but rather a cost for maintaining the
collateral, recognized under the guidance at ASC 860-30, Transfers and Servicing, Secured Borrowing and Collateral. The premium costs
were recognized as a prepaid expense and were being amortized straight line over the term of the policy (three years, unless reduced
due to default provisions). The secured party (i.e., UMB Bank, as trustee) would not have the right to sell or repledge either the intellectual
property or the insurance collateral unless and until the Company defaulted and a claim was made. Upon settlement of the debt underlying
the Trust Indenture, the collateral requirements for the Insurance Policy were eliminated.
Loan
Monitoring Fees
The
Company was to incur ongoing monitoring service by NewLight Capital, LLC for 24
months at $180
total expense. These services entail monitory of financial records and information related to collateral enforcement on an ongoing
basis. The $60
prepayment funded on the date of closing was recognized as a prepaid expense and was being amortized on a straight line basis over
the first 10
months of the agreement as the amount was paid in full in connection with the merger. The Company incurred $77
and $10 of
monitoring fee expenses during the years ended December 31, 2022 and 2021, respectively.
In
connection with the merger, prepayment on that date of $33 was expensed and included in debt extinguishment.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Financial
Covenants – Trust Indenture
The Company was obligated to comply with certain covenants which included
a minimum adjusted EBITDA, capital expenditure requirement and minimum fixed charge coverage ratio. The Company was in compliance with
all financial covenants as of December 31, 2021 and through October 7, 2022, the date of the settlement of the obligations underlying
the Trust Indenture.
Term
Loan Agreement
On
October 7, 2022, in connection with the merger, CNTQ, Legacy Dragonfly and CCM Investments 5 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,
or 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 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 business combination.
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%.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. Beginning on the date the financial statements for the year ended December
31, 2023 are required to be delivered to the Term Loan Lenders, the Company will be required to prepay the Term Loan based on excess
cash flow, as defined in the agreement.
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 year ended December 31, 2022, a total of $3,195 of interest expense was incurred under the debt. Amortization of the debt issuance
costs amounted to $38 during the year ended December 31, 2022. The carrying balance of $19,242 on December 31, 2022 consisted of $75,000
in principal, plus $1,192 PIK interest, less $56,950 in unamortized debt discount related to the debt issuance costs.
Financial
Covenants – Term Loan
Maximum
Senior Leverage Ratio
The
senior leverage ratio is the ratio of (a) consolidated indebtedness, as defined, on such date minus 100% of the unrestricted cash and
cash equivalents held (subject to adjustment) to (b) Consolidated EBITDA for the trailing twelve (12) fiscal month period most recently
ended. If liquidity, as defined, for any fiscal quarter is less than $17,500, the senior leverage ratio shall not be permitted, as of
the last day of any fiscal quarter ending during any period set forth below, to exceed the ratio set forth opposite such period in the
table below:
SCHEDULE
OF LEVERAGE RATION
Test
Period Ending | |
Leverage
Ratio |
December 31, 2022
– March 31, 2023 | |
6.75
to 1.00 |
June 30, 2023 –
September 30, 2023 | |
6.00
to 1.00 |
December 31, 2023
– March 31, 2024 | |
5.00
to 1.00 |
June 30, 2024 –
September 30, 2024 | |
4.00
to 1.00 |
December 31, 2024
– March 31, 2025 | |
3.25
to 1.00 |
June 30, 2025 and
thereafter | |
3.00
to 1.00 |
Liquidity
The
Company shall not permit their liquidity (determined on a consolidated basis) to be less than $10,000 as of the last day of each fiscal
month (commencing with month ending December 31, 2022).
Fixed
Charge Coverage Ratio
The
fixed charge coverage ratio is the ratio of consolidated EBITDA (less capital expenditures and certain other adjustments) to consolidated
fixed charges, as defined in the agreement. If liquidity is less than $15,000 as of the last day of any fiscal quarter (commencing with
the quarter ending December 31, 2022), then the Company shall not permit the fixed charge coverage ratio for the trailing four quarterly
periods ending on the last day of any such quarter to be less than 1.15 : 1.00.
Capital
Expenditures
If
consolidated EBITDA for the trailing twelve-month period ending on the most recently completed fiscal quarter is less than $15,000, then
the level of capital expenditures is limited.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Long-Term
Debt Maturities
At
December 31, 2022, the future debt maturities are as follows:
SCHEDULE OF FUTURE DEBT MATURITIES
| |
| |
For
the Years Ending December 31, | |
Future
Debt Maturities | |
2023 | |
$ | - | |
2024 | |
| 938 | |
2025 | |
| 3,750 | |
2026 | |
| 91,809 | |
Total | |
| 96,497 | |
Less:
Estimated interest paid-in-kind | |
| (20,305 | ) |
Total
debt | |
| 76,192 | |
Less:
Unamortized debt issuance costs, non-current | |
| (56,950 | ) |
Total
carrying amount | |
| 19,242 | |
Less:
current portion of debt | |
| (19,242 | ) |
Total
long-term debt | |
$ | - | |
On March 29, 2023, the Company obtained a
waiver from the Administrative Agent and the Term Loan 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. The Company concluded it is probable it will not comply with future financial covenants. As a result, the Company classified
the entire Term Loan balance in current liabilities on the balance sheet as of December 31, 2022.
Note
8 - REVOLVING NOTE AGREEMENT
On
October 6, 2021, the Company entered into a revolving note agreement with a lender to borrow up to $8,000.
The borrowing amount is limited and based on the lesser of maximum principal amount of $8,000 and
the sum equal to 80%
of eligible accounts receivable and 50%
of eligible inventory. Interest on each advance shall accrue at the prime rate announced by US Bank from time to time, as and when
such rate changes. The revolving credit amount is collateralized by all assets of the Company. The Company drew an initial amount of
$5,000 under
the facility, which it subsequently re-paid and the revolving note was terminated as a closing condition of the 2021-6
Notes.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Note
9 - INCOME TAXES
The
income tax expense consists of the following items:
SCHEDULE OF INCOME TAX EXPENSE
| |
2022 | | |
2021 | |
Current | |
$ | (257 | ) | |
$ | 1,489 | |
Deferred | |
| (452 | ) | |
| 122 | |
Total
tax expense | |
$ | (709 | ) | |
$ | 1,611 | |
Components
of deferred tax assets (liabilities) are as follows:
SCHEDULE OF COMPONENTS OF DEFERRED TAX ASSETS (LIABILITIES)
| |
2022 | | |
2021 | |
Deferred tax assets: | |
| | | |
| | |
Lease liability | |
$ | 1,071 | | |
$ | 1,221 | |
Stock based compensation | |
| 139 | | |
| 35 | |
Accrued expenses | |
| 506 | | |
| - | |
Allowance for bad debt | |
| 75 | | |
| 59 | |
Research and development credit | |
| 200 | | |
| - | |
Fixed assets and intangibles | |
| 25 | | |
| - | |
Interest expense | |
| 1,595 | | |
| - | |
Prepaid expenses | |
| 960 | | |
| - | |
Net Operating Loss | |
| 3,727 | | |
| - | |
Inventory (Sec. 263A) | |
| 62 | | |
| 45 | |
Deferred tax asset | |
$ | 8,360 | | |
$ | 1,360 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Right of Use Asset | |
$ | 1,036 | | |
$ | 1,207 | |
Fixed assets and intangibles | |
| - | | |
| 606 | |
Deferred tax liability | |
$ | 1,036 | | |
$ | 1,813 | |
Net deferred tax asset (liability) | |
$ | 7,324 | | |
$ | (453 | ) |
Valuation Allowance | |
| (7,324 | ) | |
| - | |
Net deferred tax asset | |
$ | - | | |
$ | (453 | ) |
Reconciliation
between the effective tax rate on income from continuing operations and the statutory rate for the years ended December 31, 2022 and
2021, are as follows:
SCHEDULE OF RECONCILIATION BETWEEN THE EFFECTIVE TAX RATE ON INCOME FROM CONTINUING OPERATIONS AND THE STATUTORY RATE
| |
2022 | |
|
2021 |
|
| |
Tax | | |
Percentage | |
|
Tax |
|
|
Percentage |
|
Book
income (loss) before taxes | |
$ | (8,459 | ) | |
| 21.00% | |
|
$ |
1,249 |
|
|
|
21.00% |
|
Permanent differences (transaction costs) | |
| 2,185 | | |
| (5.42)% | |
|
|
- |
|
|
|
- |
|
Permanent differences (warrants) | |
| (1,144 | ) | |
| 2.84% | |
|
|
- |
|
|
|
- |
|
Permanent
differences (other -other than tax) | |
| 458 | | |
| (1.14)% | |
|
|
188 |
|
|
|
3.16% |
|
State
taxes, net | |
| (722 | ) | |
| 1.79% | |
|
|
128 |
|
|
|
2.15% |
|
Deferred
true-up | |
| (288 | ) | |
| 0.71% | |
|
|
56 |
|
|
|
0.94% |
|
Research
and development credits | |
| (200 | ) | |
| 0.50% | |
|
|
|
|
|
|
|
|
Uncertain
tax positions | |
| 128 | | |
| (0.32)% | |
|
|
(19 |
) |
|
|
(0.32)% |
|
Other | |
| 9 | | |
| (0.02)% | |
|
|
9 |
|
|
|
0.15% |
|
Change
in valuation allowance | |
| 7,324 | | |
| (18.18)% | |
|
|
- |
|
|
|
- |
|
Total | |
$ | (709 | ) | |
| | |
|
$ |
1,611 |
|
|
|
|
|
Effective
tax rate | |
| | | |
| 1.76% | |
|
|
|
|
|
|
27.08% |
|
The
tax returns of the Company are open for three years form the date of filing. At the report date, the statute of limitations for
federal and state tax returns are open for the Company for 2019, 2020 and 2021.
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, 2022, the Company had federal net operating loss carryforwards of approximately
$16,140,
available to reduce future taxable income which do not expire, but are limited to 80%
utilization against taxable income. As of December 31, 2022, the Company had state net operating loss carryforwards of approximately
$6,747,
available to reduce future taxable income, which start to expire in 2037. The Company also had research and development credits of $200
as of December 31, 2022 to offset future federal income taxes, which are set to expire in 2042.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 2022. The valuation allowance as of December 31, 2022 was $7,324, 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.
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 January 1, 2021 | |
$ | 19 | |
Additions for current year tax positions | |
| - | |
Reductions for prior year tax positions | |
| (19 | ) |
Balance- December 31, 2021 | |
| - | |
Additions for current year tax positions | |
| 128 | |
Balance- December 31, 2022 | |
$ | 128 | |
The
Company’s total uncertain tax positions increased during the year ended December 31, 2022 as a result 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.
Note
10 – ASSET PURCHASE AGREEMENT
Bourns
Productions, Inc.
On
January 1, 2022, the Company entered into an asset purchase agreement (the “APA”) with Bourns Productions, Inc., a
Nevada corporation (“Bourns Productions”), pursuant to which the Company acquired machinery, equipment and a lease
for a podcast studio from Bourns Production Productions as set forth in the APA for a purchase price of $197 which approximated fair
market value.
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 (“Thomason Jones”), whereby the Company acquired inventory and intellectual property assets for $444
cash plus contingent payments of $1,000
each to William Thomason and Richard Jones (the “Earn Out”). The Company determined the contingent consideration
to be recognized as contingent compensation to Mr. Thomason and Mr. Jones. The entire purchase price of $444
was allocated to inventory.
Contingent Compensation
If,
within twenty-four months of the Agreement the Company realizes $3,000 in gross sales of product either (a) sold under the Wakespeed
brand and/or (b) which incorporates any portion of Purchased IP as listed within the agreement, then the Company will pay to Thomason
Jones each the amount of $1,000 as soon as reasonably practicable. This payment may be made in cash or common stock, in the sole discretion
of the Company. As a result, the Company determined that a liability should be recorded ratably over the 24 month period. The Company
recognized expenses in the fourth quarter related to the contingent payment as no accrual was recorded from the date of the agreement
through September 30, 2022. The Company recognized immediate compensation expense within sales and marketing of $417 on October 1, 2022
for amounts that should have been accrued for during the period April 2022 through September 2022. In October 2022, the Company determined
the sales goals will most likely be achieved within 18 months. As a result, the Company changed its estimate prospectively
and accelerated the accrual as if the sales goals would be achieved within an 18 month period from the date of acquisition. As a result,
the Company recorded a cumulative accrual in the amount of $782 as of December 31, 2022.
Note
11 - RELATED PARTY
The
Company loaned its 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 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 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.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Note
12 - WARRANTS
In connection with the merger discussed in Note 3, the Company assumed the outstanding public and private placement
warrants of CNTQ.
Refer
to Note 7 for further description of the warrants issued in connection with the Term Loan.
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. No fractional
shares will be issued upon exercise of the Public Warrants. The Company may elect to redeem the Public Warrants subject to certain conditions,
in whole and not in part, 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. Upon issuance
of a redemption notice by the Company, the warrant holders have a period of 30 days to exercise for cash, or on a cashless basis. On
the Closing Date, there were 9,487,500 Public Warrants issued and outstanding. The Public Warrants are not precluded from equity classification,
and are accounted for as such on the date of issuance, and each balance sheet date thereafter. There was no activity of public warrants from the closing date through December 31, 2022.
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.
Common
Stock Warrants classified as Liability
Private
Placement Warrants
The
Private Placement 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. On the Closing Date and as of December 31, 2022, there were 4,627,858 Private Warrants
issued and outstanding.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
Company accounts for the 4,627,858 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 WARRANT CLASSIFICATION AT EACH 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, 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 (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 agreeing to issue 457,142
shares of common stock in connection with such
exercise. The Company concluded the warrants are not considered indexed to the Company’s 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.
The
following table provides the significant inputs to the Black-Scholes method for the fair value of the Penny Warrants:
SCHEDULE FAIR VALUE WARRANTS
| |
Initial
Measurement | | |
As
of December 31, 2022 | |
Common
stock price | |
$ | 14.00 | | |
$ | 11.09 | |
Exercise price | |
$ | 0.01 | | |
$ | 0.01 | |
Dividend
yield | |
| 0% | | |
| 0% | |
Term | |
| 10 | | |
| 9.77 | |
Volatility | |
| 94.00% | | |
| 90.00% | |
Risk-free
rate | |
| 3.90% | | |
| 3.90% | |
Fair value | |
$ | 13.99 | | |
$ | 11.89 | |
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
following table provides the significant inputs to the Black-Scholes method for the fair value of the $10 Warrants:
| |
Initial
Measurement | |
Common
stock price | |
$ | 14.00 | |
Exercise price | |
$ | 10.00 | |
Dividend
yield | |
| 0% | |
Term | |
| 10 | |
Volatility | |
| 85.00% | |
Risk-free
rate | |
| 4.10% | |
Fair value | |
$ | 10.42 | |
The
following tables presents a roll-forward of the Company’s warrants from January 1, 2022 to December 31, 2022:
SCHEDULE
OF ROLL FORWARD IN WARRANTS
Private
Warrants:
| |
Common Stock Warrants | |
**Warrants Outstanding, January 1, 2022 | |
| - | |
Assumed in the merger | |
| 4,627,858 | |
Exercised subsequent to the merger | |
| - | |
Warrants Outstanding, December 31, 2022 | |
| 4,627,858 | |
**There
were no warrants issued, exercised and outstanding prior to January 1, 2022.
Public
Warrants:
| |
Common Stock Warrants | |
**Warrants Outstanding, January 1, 2022 | |
| - | |
Assumed in the merger | |
| 9,487,500 | |
Exercised subsequent to the merger | |
| - | |
Warrants Outstanding, December 31, 2022 | |
| 9,487,500 | |
**There
were no warrants issued, exercised and outstanding prior to January 1, 2022.
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 | |
** | There were no warrants
issued, exercised and outstanding prior to January 1, 2022. |
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 are the term loan warrants.
| |
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 | |
** | There were no warrants
issued, exercised and outstanding prior to January 1, 2022. |
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Note
13 - COMMON STOCK
The
Company is authorized to issue up to 170,000,000 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, 2022 and 2021,
there were 43,272,728 and 36,496,998 shares issued and outstanding retroactively adjusted and no dividends on common stock had been declared
by the Company.
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.
As
of December 31, 2022 and 2021, the Company had reserved shares of common stock for issuance as follows:
SUMMARY OF RESERVED SHARES OF COMMON STOCK FOR ISSUANCE
| |
December
31,
2022 | | |
December
31,
2021 | |
Options
issued and outstanding | |
| 3,642,958 | | |
| 3,690,955 | |
Common
stock outstanding | |
| 43,272,728 | | |
| 36,496,998 | |
Warrants
outstanding | |
| 16,708,414 | | |
| - | |
Earnout
shares | |
| 40,000,000 | | |
| - | |
Shares
available for future issuance 1 | |
| 4,924,914 | | |
| 12,207 | |
Total | |
| 108,549,014 | | |
| 40,200,160 | |
(1) | | Refer to Stock
Incentive Plan amendment at Note 14 |
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.
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.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Note
14 - STOCK-BASED COMPENSATION
On
August 12, 2019, the Board of Directors approved the 2019 Stock Incentive Plan (the “2019 Plan”) 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 that were reserved for grants of awards under the Plan was 3,000,000
shares. The Plan provided for the grant of stock options (both incentive stock options and nonqualified stock options), and the
grants and sale of restricted stock units (“RSUs”). Shares issued under this Plan may be drawn from authorized
and unissued shares, or shares reacquired by the Company.
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 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, 2021 | |
| 3,029,791 | | |
$ | 0.45 | | |
$ | 0.72 | | |
| 7.92 | | |
$ | 651 | |
Options
granted | |
| 2,069,309 | | |
| 3.41 | | |
| 2.03 | | |
| | | |
| 3,551 | |
Options
forfeited | |
| (421,094 | ) | |
| 1.44 | | |
| 1.82 | | |
| | | |
| - | |
Options
exercised | |
| (987,051 | ) | |
| 0.51 | | |
| 0.53 | | |
| | | |
| 442 | |
Balances,
December 31, 2021 | |
| 3,690,955 | | |
$ | 1.98 | | |
$ | 1.38 | | |
| 8.52 | | |
$ | 6,550 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
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 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
At
December 31, 2022 | |
| | | |
| | | |
| | | |
| | | |
| | |
Vested
and Exercisable | |
| 1,646,304 | | |
$ | 1.48 | | |
| | | |
| 7.13 | | |
$ | 17,114 | |
Vested
and expected to vest | |
| 3,642,958 | | |
$ | 2.02 | | |
| | | |
| 7.90 | | |
$ | 35,898 | |
(1) | | Number of options
and weighted average exercise price 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. |
Share-based
compensation expense for options and RSUs totaling $2,467
and $734
was recognized in the Company’s consolidated statements of operations for the years ended December 31, 2022 and 2021,
respectively. 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. Of the $734
of share-based compensation incurred during the year ended December 31, 2021, $252
is allocated to cost of goods sold, $95
to research and development, $156
to selling and marketing, and $231
to general and administrative expenses.
As
of December 31, 2022, there were 4,924,914
shares of unissued authorized and available for future awards under the plans.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
| |
2022 | | |
2021 | |
Weighted
average fair value of options granted | |
$ | 1.57 | | |
$ | 2.05 | |
Risk-free
interest rate | |
| 2.71% | | |
| 1.08% | |
Volatility | |
| 45.0% | | |
| 52.6% | |
Expected
life (years) | |
| 5.68 | | |
| 6.02 | |
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 vest 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.
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, 2022:
SCHEDULE
OF RESTRICTED STOCK UNITS ACTIVITY
| |
Number of Shares | | |
Weighted-Average Fair Market Value | |
Unvested shares, December 31, 2021 | |
| - | | |
| - | |
Granted and unvested | |
| 180,000 | | |
$ | 14.00 | |
Vested | |
| - | | |
| - | |
Forfeited/Cancelled | |
| - | | |
| - | |
Unvested shares, December 31, 2022 | |
| 180,000 | | |
$ | 14.00 | |
Vested as of December 31, 2022 | |
| - | | |
$ | - | |
Note
15 - REDEEMABLE PREFERRED STOCK RIGHTS
In
connection with the merger, Legacy Redeemable Convertible Preferred Stock previously classified as temporary equity was retroactively
adjusted, converted into common stock at an exchange ratio of approximately 1.182, and reclassified to permanent equity as a result of
the reverse recapitalization. As of December 31, 2022, there was no Legacy Redeemable Convertible Preferred Stock authorized, issued
or outstanding.
The
following describes the rights and preferences of the Legacy Dragonfly Redeemable Convertible Preferred Stock prior to the conversion
in the merger:
Dividends
The
Company shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company (other
than dividends on shares of common stock payable in shares of common stock) unless the holders of Series A Preferred Stock then outstanding
shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A preferred stock in an amount as set
forth in the amended and restated certificate of incorporation. No dividends have been declared to date.
Voting
Rights
The
holders of Preferred Stock are entitled to vote, together with the holders of common stock, on all matters submitted to stockholders
for a vote. Each preferred stockholder is entitled to the number of votes equal to the number of shares of common stock into which each
preferred share is convertible at the time of such vote.
The
holders of record of the shares of Series A Preferred Stock, exclusively and as a separate class, shall be entitled to elect one director
of the Company (the “Series A Director”). The Series A Director shall be given two votes on any action requiring the
vote or approval of the Board of Directors.
The
holders of record of the shares of common stock, exclusively and as a separate class, shall be entitled to elect two directors of the
Company, the “Common Stock Director A” and the “Common Stock Director B”). The Common Stock Director
A shall be given three votes on any action requiring the vote or approval of the Board of Directors and the Common Stock Director B shall
be given one vote on any action requiring the vote or approval of the Board of Directors. Any director elected as provided above may
be removed without caused by, and only by, the affirmative vote of the holders of the shares of the class or series of capital stock
entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purpose or
pursuant to a written consent of stockholders.
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Liquidation,
Dissolution or Winding Up; Certain Mergers, Consolidations and Assets Sales
In
the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or deemed liquidation event, as defined,
the holders of shares of Series A Preferred Stock then outstanding (the “Series A shareholders”) shall be entitled
to be paid out of the assets of the Company available for distribution to its stockholders prior to payment to common shareholders, an
amount per share equal to the greater of (i) the Series A Original Issue Price, plus any dividends declared but unpaid thereon, or (ii)
such amount per share as would have been payable had all shares of Series A preferred Stock been converted into common stock immediately
prior to such liquidation event. If upon the occurrence of such liquidation event, if the assets of the Company available for distribution
to its stockholders are insufficient to pay the Series A shareholders the full amount to which they shall be entitled, the Series A shareholders
will be entitled to a pro rata distribution of assets in proportion to the respective amounts which would otherwise be payable in respect
of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. Upon the
occurrence of such liquidation event, and after the payment of all preferential amounts required to be paid to the Series A holders,
the remaining assets of the Company available for distribution to its stockholders shall be distributed among the holders of shares of
common stock, pro rata based on the number of shares held by each such holder.
Redemption
The
preferred shares are subject to mandatory redemption based on the occurrence of certain “deemed liquidation events” as defined
which include a merger or consolidation or the sale, exchange, lease, transfer, exclusive license, or other disposition by the Company
of all or substantially all of the Company’s assets. If the Company does not affect a dissolution of the Company under Nevada Law
within ninety days after a deemed liquidation event, then the Company is required to send written notice to each holder of Series A Preferred
Stock no later than the ninetieth day after the deemed liquidation event advising such holders of their right to require the redemption
of such shares of Preferred Stock. Dissolution of the Company under Nevada Law with ninety days after a deemed liquidation event is not
within the control of the Company. As such the Preferred Stock is precluded from permanent equity classification and has been presented
as mezzanine equity.
Conversion
Rights
Each
share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without
the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of common stock
as is determined by dividing the Series A Original Issue Price by the Series A Conversion Price of $0.20. Such initial conversion price
may be converted into common stock, subject to certain adjustments.
Mandatory
Conversion
Upon
either (a) the closing of the sale of shares of common stock at a price of at least $1.00 per share, in a firm-commitment underwritten
public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $25,000
of gross proceeds to the Company or (b) the date and time, or the occurrence of an event, specified by vote or written consent of the
holders of more than 50% of the then outstanding shares of Series A Preferred Stock, then (i) all outstanding shares of Series A Preferred
Stock shall automatically be converted into shares of common stock, at the then effective conversion rate and (ii) such shares may not
be reissued by the Company.
Note
16 - EARNINGS (LOSS) PER SHARE
Earnings
(Loss) per Common Share
The
following table sets forth the information needed to compute basic and diluted (loss) earnings per share for the years ended December
31, 2022 and December 31, 2021:
SCHEDULE OF INFORMATION NEEDED TO COMPUTE BASIC AND DILUTED EARNINGS PER SHARE
| |
December
31, 2022 | | |
December
31, 2021 | |
Basic
(Loss) Earnings per common share: | |
| | | |
| | |
Net
(Loss) Income available to common shareholders | |
$ | (39,571 | ) | |
$ | 4,338 | |
Weighted average
number of common shares-basic | |
| 38,565,307 | | |
| 35,579,137 | |
(Loss)
Earnings per share, basic | |
$ | (1.03 | ) | |
$ | 0.12 | |
| |
| | | |
| | |
Diluted
(Loss) earnings per common share: | |
| | | |
| | |
Net
(Loss) Income available to common shareholders | |
$ | (39,571 | ) | |
$ | 4,338 | |
Weighted average
number of common shares-basic | |
| 38,565,307 | | |
| 35,579,137 | |
Dilutive
effect related to stock options | |
| - | | |
| 2,163,200 | |
Weighted average
diluted shares outstanding | |
| 38,565,307 | | |
| 37,742,337 | |
(Loss)
Earnings per share, diluted | |
$ | (1.03 | ) | |
$ | 0.11 | |
DRAGONFLY
ENERGY HOLDINGS CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022 AND 2021
(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The
following table sets forth the number of potential shares of common stock that have been excluded from diluted net income per share net
(loss) income per share because their effect was anti-dilutive:
SCHEDULE OF POTENTIAL SHARES OF COMMON STOCK EXCLUDED FROM DILUTED NET (LOSS) INCOME PER SHARE
| |
December
31, 2022 | | |
December
31, 2021 | |
Warrants | |
| 16,708,414 | | |
| - | |
Restricted stock units | |
| 180,000 | | |
| - | |
Options | |
| 3,642,958 | | |
| - | |
Weighted
average number of common shares-basic | |
| 20,531,372 | | |
| - | |
NOTE
17 – SUBSEQUENT EVENTS
On
March 5, 2023, the Company entered into a convertible promissory 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,
or 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
March 29, 2023, the Company obtained a waiver from the Administrative Agent and the Term Loan 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
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.
Under
the terms of the Purchase Agreement described in Note 13 the Company issued 98,500 shares pursuant to the Purchase Agreement with CCM
LLC for aggregate net proceeds to the Company of $671 through April 17, 2023.