UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
For the transition period from to
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or
other jurisdiction of incorporation or organization) |
(IRS Employer
Identification No.) |
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| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The Global Market | ||||
| The Capital Market |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was
required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of August 16, 2023, there were shares of the registrant’s common stock, par value $0.0001 per share, issued and outstanding.
DRAGONFLY ENERGY HOLDINGS CORP.
TABLE OF CONTENTS
| 2 |
PAR T I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DRAGONFLY ENERGY HOLDINGS CORP.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
| As of | ||||||||
| June 30, 2023 | December 31, 2022 | |||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for credit losses | ||||||||
| Inventory | ||||||||
| Prepaid expenses | ||||||||
| Prepaid inventory | ||||||||
| Prepaid income tax | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment | ||||||||
| Machinery and equipment | ||||||||
| Office furniture and equipment | ||||||||
| Leasehold improvements | ||||||||
| Vehicle | ||||||||
| Total | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property and Equipment, Net | ||||||||
| Operating lease right of use asset | ||||||||
| Total Assets | $ | $ | ||||||
| Current Liabilities | ||||||||
| Accounts payable | ||||||||
| Accrued payroll and other liabilities | ||||||||
| Customer deposits | ||||||||
| Uncertain tax position liability | ||||||||
| Notes payable, current portion, net of deferred financing fees | ||||||||
| Operating lease liability, current portion | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities | ||||||||
| Warrant liabilities | ||||||||
| Accrued expenses-long term | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (See Note 5) | ||||||||
| Equity | ||||||||
| Common stock, shares at $ par value, authorized, and shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | ||||||||
| Preferred stock, shares at $ par value, authorized, shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid in capital | ||||||||
| Retained deficit | ( | ) | ( | ) | ||||
| Total Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed and consolidated financial statements.
| 3 |
DRAGONFLY eNERGY hOLDINGS CORP.
Unaudited Condensed Interim Consolidated Statements of Operations
(in thousands, except share and per share data)
For The Three Months Ended June 30, | For The Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net Sales | $ | $ | $ | $ | ||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss From Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (Expense) Income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair market value of warrant liability | ||||||||||||||||
| Total Other (Expense) Income | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss Before Taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income Tax (Benefit) Expense | ( | ) | ( | ) | ||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss Per Share- Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss Per Share- Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted Average Number of Shares- Basic | ||||||||||||||||
| Weighted Average Number of Shares- Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed and consolidated financial statements.
| 4 |
dRAGONFLY eNERGY HOLDINGS CORP.
Unaudited Condensed Consolidated Statements of Shareholders’ Equity
FOR THE PERIOD ENDED jUNE 30, 2023 AND 2022
(in thousands, except share data)
| Redeemable
Preferred Stock | Common Stock | Additional Paid-In | Retained Earnings | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||||||||
| Balance -January 1, 2022 | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Retroactive application of recapitalization | ( | ) | ( | ) | ||||||||||||||||||||||||
| Adjusted balance, beginning of period | - | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock compensation expense | - | - | ||||||||||||||||||||||||||
| Exercise of stock options | - | |||||||||||||||||||||||||||
| Balance – March 31, 2022 | $ | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock compensation expense | - | - | ||||||||||||||||||||||||||
| Exercise of stock options | - | |||||||||||||||||||||||||||
| Balance – June 30, 2022 | $ | |||||||||||||||||||||||||||
| Balance -January 1, 2023 | ( | ) | ||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Common stock issued in public offering (ATM), net of costs | - | |||||||||||||||||||||||||||
| Exercise of stock options | - | |||||||||||||||||||||||||||
| Exercise of public warrants | - | |||||||||||||||||||||||||||
| Cashless exercise of liability classified warrants | - | |||||||||||||||||||||||||||
| Stock compensation expense | - | - | ||||||||||||||||||||||||||
| Balance – March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net income | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Common stock issued in public offering, net of costs | - | |||||||||||||||||||||||||||
| Common stock issued in public offering (ATM), net of costs | - | |||||||||||||||||||||||||||
| Exercise of stock options | - | |||||||||||||||||||||||||||
| Cashless exercise of liability classified warrants | - | |||||||||||||||||||||||||||
| Shares issued for vested restricted stock units | - | |||||||||||||||||||||||||||
| Stock compensation expense | - | - | ||||||||||||||||||||||||||
| Balance - June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed and consolidated financial statements.
| 5 |
dRAGONFLY eNERGY hOLDINGS cORP.
Unaudited Condensed Consolidated Statements of Cash Flows
For the SIX Months Ended June 30, 2023 and 2022
(in thousands)
| 2023 | 2022 | |||||||
| Cash flows from Operating Activities | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash | ||||||||
| Used in Operating Activities | ||||||||
| Stock based compensation | ||||||||
| Amortization of debt discount | ||||||||
| Change in fair market value of warrant liability | ( | ) | ||||||
| Deferred tax liability | ( | ) | ||||||
| Non-cash interest expense (Paid-in Kind) | ||||||||
| Provision for doubtful accounts | ||||||||
| Depreciation and amortization | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Changes in Assets and Liabilities | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Prepaid inventory | ( | ) | ||||||
| Other current assets | ( | ) | ||||||
| Other assets | ||||||||
| Income taxes payable | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Customer deposits | ( | ) | ( | ) | ||||
| Total Adjustments | ( | ) | ||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
The accompanying notes are an integral part of these condensed and consolidated financial statements.
| 6 |
dRAGONFLY eNERGY hOLDINGS cORP.
Unaudited Condensed Consolidated Statements of Cash Flows (Continued)
For the Six Months Ended June 30, 2023 and 2022
(in thousands)
| (continued from previous page) | 2023 | 2022 | ||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from public offering, net | ||||||||
| Payment of offering costs | ( | ) | ||||||
| Proceeds from public offering (ATM), net | ||||||||
| Proceeds from note payable, related party | ||||||||
| Repayment of note payable, related party | ( | ) | ||||||
| Proceeds from exercise of public warrants | ||||||||
| Proceeds from exercise of options | ||||||||
| Net Cash Provided by Financing Activities | ||||||||
| Net Increase (Decrease) in Cash | ( | ) | ||||||
| Beginning cash | ||||||||
| Ending cash | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental Non-Cash Items | ||||||||
| Receivable of options exercised | $ | $ | ||||||
| Purchases of property and equipment, not yet paid | $ | $ | ||||||
| Cashless exercise of liability classified warrants | $ | $ | ||||||
The accompanying notes are an integral part of these condensed and consolidated financial statements.
| 7 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 1 - NATURE OF BUSINESS
Dragonfly Energy Holdings Corp. (“New Dragonfly” or the “Company”) sells lithium-ion battery packs for use in a wide variety of applications. The Company sells to distributors under the Dragonfly Energy brand name, and sells direct to consumers under the trade name Battleborn Batteries. In addition, the Company develops technology for improved lithium-ion battery manufacturing and assembly methods.
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 was 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 Quarterly 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.
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and present the consolidated financial statements of the Company and its wholly owned subsidiary. All significant intercompany transactions and balances are eliminated in consolidation.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation S X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Unaudited interim results are not necessarily indicative of the results for the full fiscal year. These condensed and consolidated financial statements should be read along with the Annual Report filed of the Company for the annual period ended December 31, 2022. The consolidated balance sheet as of December 31, 2022 was derived from the audited consolidated financial statements as of and for the year then ended.
| 8 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Going Concern
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
For
the six months ended June 30, 2023 and 2022, the Company incurred loss from operations and had negative cash flow from operations. As
of June 30, 2023, the Company had $
In
connection with the Company’s senior secured term loan facility in an aggregate principal amount of $
In addition, the Company may need to raise additional debt and/or equity financings to fund our operations, strategic plans, and meet its financial covenants. The Company has historically been able to raise additional capital through issuance of equity and/or debt financings and the Company intends to use its equity facility and raise additional capital as needed. However, the Company cannot guarantee that it will be able to raise additional equity, contain expenses, or increase revenue, and comply with the financial covenants under the Term Loan.
Recently adopted accounting standards:
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2023. These standards replace the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measure at amortized cost to be presented at the net amount expected to be collected. The Company determined that this change does not have a material impact to the financial statements or financial statement disclosures.
Recently issued accounting pronouncements:
There were no recently adopted accounting standards that had a material impact on the Company’s financial statements. There were no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.
| 9 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 2 – Summary of Significant Accounting Policies (continued)
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
Inventory
Inventories (Note 4), which consist of raw materials and finished goods, are stated at the lower of cost (first in, first out) or net realizable value, net of reserves for obsolete inventory. We continually analyze our slow moving and excess inventories. Based on historical and projected sales volumes and anticipated selling prices, we establish 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 June 30, 2023 and December 31, 2022, no such reserves were necessary.
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 six months ended June 30, 2023 and 2022 was $
| Office furniture and equipment | |
| Vehicles | |
| Machinery and equipment | |
| Leasehold improvements |
Use of Estimates
The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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 Accounting Standards Codification (“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.
| 10 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 2 – Summary of Significant Accounting Policies (continued)
Revenue Recognition
Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
Revenue is recognized when control of the promised goods is transferred to the customer or reseller, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Revenue associated with products holding rights of return are recognized when the Company concludes there is not a risk of significant revenue reversal in the future periods for the expected consideration in the transaction. There are no material instances including discounts and refunds where variable consideration is constrained and not recorded at the initial time of sale. Generally, our revenue is recognized at a point in time for standard promised goods at the time of shipment when title and risk of loss pass to the customer.
The
Company may receive payments at the onset of the contract before delivery of goods for customers in the retail channel. Payment terms
for distributors and OEMs are typically due within
Disaggregation of Revenue
The following table present our disaggregated revenues by distribution channel:
| For The Three Months Ended June 30, | For The Six Months Ended June 30, | |||||||||||||||
| Sales | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Retail | $ | $ | ||||||||||||||
| Distributor | ||||||||||||||||
| Original equipment manufacture | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 $
Product Warranty
The
Company offers assurance type warranties from
| 11 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 2 – Summary of Significant Accounting Policies (continued)
Concentrations
Receivables
from
Sales
from
Payables
to
For
the six months ended June 30, 2023,
Advertising
The
Company expenses advertising costs as they are incurred and are included in selling and marketing expenses.. Advertising expenses amounted
to $
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements with employees and non-employee consultants using a fair value method which requires the recognition of compensation expense for costs related to all stock-based payments, including stock options (Note 11). The fair value method requires the Company to estimate the fair value of stock-based payment awards to employees and non-employees on the date of grant using an option pricing model. Stock based compensation costs are based on the fair value of the underlying option calculated using the Black Scholes option pricing model and recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. Restricted stock unit awards are valued based on the closing trading value of the Company’s common stock, par value $, per share (the “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.
| 12 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 2 – Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred
income tax assets and liabilities are determined based on the estimated future tax effects of net operating loss, credit carryforwards
and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured at
the current enacted tax rates. The Company recognizes a tax benefit for an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The Company
has a liability of $
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
Note 3 - FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.
ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following:
| ● | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| ● | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for a similar asset or liability, either directly or indirectly. |
| ● | Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability. |
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
| 13 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 3 - Fair Value Measurements (Continued)
The following table presents assets and liabilities that were measured at fair value in the Condensed Consolidated Balance Sheets on a recurring basis as of June 30, 2023:
| Carrying Amount |
Fair Value |
(Level 1) |
(Level 2) |
(Level 3) | ||||||||||||||||
| As of June 30, 2023 | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Warrant liability- Term Loan | $ | $ | $ | $ | $ | |||||||||||||||
| Warrant liability- June public offering | ||||||||||||||||||||
| Warrant liability- Private placement warrants | ||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | $ | |||||||||||||||
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheets on a recurring basis as of December 31, 2022:
Carrying Amount | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Warrant liability- Term Loan | $ | $ | $ | $ | $ | |||||||||||||||
| Warrant liability- Private placement warrants | ||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | $ | |||||||||||||||
The carrying amounts of accounts receivable and accounts payable are considered level 1 and approximate fair value as of June 30, 2023 and December 31, 2022 because of the relatively short maturity of these instruments.
The carrying value of the term loan as of June 30, 2023 and December 31, 2022 approximates fair value as the interest rate does not differ significantly from the current market rates available to the Company for similar debt and is considered level 2.
| 14 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 4 - INVENTORY
Inventory consists of the following:
| June
30, 2023 | December 31, 2022 | |||||||
| Raw material | $ | $ | ||||||
| Finished goods | ||||||||
| Total inventory | $ | $ | ||||||
Note 5 - COMMITMENTS AND CONTINGENCIES
Litigation
From time to time the Company may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, governmental actions, administrative actions, investigations or claims are pending against the Company or involve the Company that, in the opinion of the Company’s management, could reasonably be expected to have a material adverse effect on the Company’s business and financial condition.
Operating Leases
The
Company has leases related to the main office, warehouse space, research and development lab, and engineering office, all located in
Reno, Nevada. The leases require annual escalating monthly payments ranging from $
The following table presents the breakout of the operating leases as of:
| June
30, 2023 | December 31, 2022 | |||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Short-term operating lease liabilities | ||||||||
| Long-term operating lease liabilities | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term | ||||||||
| Weighted average discount rate | % | % | ||||||
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.
| 15 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 5 - Commitments and Contingencies (Continued)
Operating Leases (Continued)
At June 30, 2023, the future minimum lease payments under these operating leases are as follows:
| Fiscal Years Ending | Amount | |||
| December 31, 2023 (1) | $ | |||
| December 31, 2024 | ||||
| December 31, 2025 | ||||
| December 31, 2026 | ||||
| Total lease payments | ||||
| Less imputed interest | ||||
| Total operating lease liabilities | $ | |||
| (1) |
| For
The Three Months Ended June 30, | For
The Six Months Ended June 30, | |||||||||||||||||
| Lease cost | Classification | 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating lease cost | Cost of goods sold | $ | $ | $ | $ | |||||||||||||
| Operating lease cost | Research and development | |||||||||||||||||
| Operating lease cost | General and administration | |||||||||||||||||
| Operating lease cost | Selling and marketing | |||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||||
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 additional shares of
common stock (the “Earnout Shares”). The Earnout Shares are issuable in three tranches. The first tranche of shares
is issuable if New Dragonfly’s 2023 total audited revenue is equal to or greater than $
Other Contingencies
See Note 7 for further discussion regarding contingent consideration arising from the April 2022 asset purchase agreement with Thomason Jones Company, LLC.
| 16 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 6 - DEBT
Financing Trust Indenture
On
November 24, 2021, the Company entered into agreements to issue $
In
connection with the merger on October 7, 2022 (the “Closing Date”), the Company entered into a Term Loan, Guarantee and Security
Agreement (see “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 $
| 17 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 6 - Debt (continued)
Term Loan Agreement
On October 7, 2022, in connection with the merger, CNTQ, Legacy Dragonfly and CCM Investments 5 LLC, an affiliate of CCM LLC (“CCM 5”, and in connection with the Term Loan, the “Chardan Lender”), and EICF Agent LLC (“EIP” and, collectively with the Chardan Lender, the “Initial Term Loan Lenders”) entered into the Term Loan Agreement setting forth the terms of the Term Loan. The Chardan Lender backstopped its commitment under the Debt Commitment Letter by entering into a backstop commitment letter, dated as of May 20, 2022 (the “Backstop Commitment Letter”), with a certain third party financing source (the “Backstop Lender” and collectively with EIP, the “Term Loan Lenders”), pursuant to which the Backstop Lender committed to purchase from the Chardan Lender the aggregate amount of the Term Loan held by the Chardan Lender (the “Backstopped Loans”) immediately following the issuance of the Term Loan on the Closing Date. Pursuant to an assignment agreement, the Backstopped Loans were assigned by CCM 5 to the Backstop Lender on the Closing Date.
Pursuant
to the terms of the Term Loan Agreement, the Term Loan was advanced in one tranche on the Closing Date. The proceeds of the Term Loan
were used (i) to refinance on the Closing Date prior indebtedness (including the obligations underlying the Trust Indenture), (ii) to
support the Transaction under the merger Agreement, (iii) for working capital purposes and other corporate purposes, and (iv) to pay
any fees associated with transactions contemplated under the Term Loan Agreement and the other loan documents entered into in connection
therewith, including the transactions described in the foregoing clauses (i) and (ii) and fees and expenses related to the merger. The
Term Loan amortizes in the amount of
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.
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.
| 18 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 6 - Debt (continued)
Term Loan Agreement (Continued)
During
the three and six months ended June 30, 2023, a total of $
The
carrying balance of $
Financial Covenants
Maximum Senior Leverage Ratio
| Test Period Ending | Leverage Ratio | |
| December 31, 2022 - March 31, 2023 | ||
| June 30, 2023 - September 30, 2023 | ||
| December 31, 2023 - March 31, 2024 | ||
| June 30, 2024 - September 30, 2024 | ||
| December 31, 2024 - March 31, 2025 | ||
| June 30, 2025 and thereafter |
Liquidity
Fixed Charge Coverage Ratio
Capital Expenditures
The Company was in compliance with its covenants as of June 30, 2023 and December 31, 2022. During the three months ended March 31, 2023, the Company determined it would fail to satisfy the fixed charge coverage ratio and maximum senior leverage ratio for the quarter. 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. As a result of the uncertainty of maintaining compliance with financial covenants the Company has continued to classify the entire term loan balance within current liabilities on the balance sheet..
| 19 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 6 - Debt (continued)
Future Debt Maturities
At June 30, 2023, the future debt maturities are as follows:
| For Year Ended December 31, | ||||
| 2023 (1) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total | ||||
| Less: Estimated interest paid-in-kind | ( | ) | ||
| Total debt | ||||
| Less: Unamortized debt issuance costs, noncurrent | ( | ) | ||
| Total carrying amount | ||||
| Less: Current portion of debt | ( | ) | ||
| Total long-term debt | $ | |||
| (1) |
Note 7 - ASSET PURCHASE AGREEMENT
Bourns Production, 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 Productions as set forth in the APA for a purchase price of $
Thomason Jones Company, LLC
In
April 2022, the Company entered into an Asset Purchase Agreement (the “April 2022 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 up to $
Contingent Compensation
If,
within twenty-four months of the Agreement the Company realizes $
| 20 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 8 - RELATED PARTY
The
Company loaned its Chief Financial Officer $
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 $
In February 2023, the Company entered into an agreement with its former COO in which the COO waived their rights to a transaction bonus resulting from the merger transaction (Note 1) in lieu of a Company van. The Company accounted for the cost of the van as an employee bonus, resulting in $116 of general and administrative expense for the current period.
On
March 5, 2023, the Company entered into a convertible promissory note (the “Note”) with a board member in the amount of $
On
April 26, 2023, the Company entered into a separation and release of claims agreement with its Chief Legal Officer
(“CLO”). As consideration for the CLO’s execution of the agreement, the Company agreed to pay the employee
payments equivalent to $
Note 9 - WARRANTS
Common Stock Warrants classified as Equity
Public Warrants
Each
Public Warrant entitles the holder to the right to purchase one share of common stock at an exercise price of $
The measurements of the Public Warrants after the detachment of the Public Warrants from the Units are classified as Level 1 due to the use of an observable market quote in an active market under the ticker DFLIW. For periods subsequent to the detachment of the Public Warrants from the Units, the close price of the Public Warrant price was used as the fair value of the Warrants as of each relevant date.
During
the six months ended June 30, 2023, the Company received proceeds from public warrant exercises of $
June 2023 Offering
In
connection with the entry into the underwriting agreement as further described in Note 10 of the financial statements, (the “June
2023 Offering”) the Company issued (i) underwriters warrants to purchase up to an aggregate of shares of Common Stock (the “Underwriters’
Warrants”) which are exercisable upon issuance and will expire on June 20, 2028. The initial exercise price of the Underwriters’
Warrants is $per share, which equals
Underwriter Warrants:
| Common Stock Warrants | ||||
| Warrants Outstanding, January 1, 2023 | ||||
| Warrants issued | ||||
| Warrants Outstanding, June 30, 2023 | ||||
There were no underwriter warrants issued, exercised and outstanding from the period January 1, 2022 through June 30, 2022.
| 21 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 9 - Warrants (continued)
Common Stock Warrants classified as Liability
Private Placement Warrants
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. During the six months ended June 30, 2023, private placement warrant holders exercised
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
| 22 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 9 - Warrants (continued)
Common Stock Warrants classified as Liability (Continued)
| As
of June 30, 2023 | As
of December 31, 2022 | |||||||
| Common stock price | $ | $ | | |||||
| Exercise price | ||||||||
| Dividend yield | % | % | ||||||
| Term (in years) | ||||||||
| Volatility | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Fair value | $ | $ | ||||||
The following table provides the significant inputs to the Black-Scholes method for the fair value of the June Offering Warrants:
| As
of June 30, 2023 | As
of June 20, 2023 (Initial Measurement) | |||||||
| Common stock price | $ | $ | ||||||
| Exercise price | $ | $ | ||||||
| Dividend yield | % | % | ||||||
| Term (in years) | ||||||||
| Volatility | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Fair value | $ | $ | ||||||
The following table presents a roll-forward of the Company’s warrants from January 1, 2023 to June 30, 2023:
Private Warrants:
| Common Stock Warrants | ||||
| Warrants Outstanding, January 1, 2023 | ||||
| Exercise of warrants | ( | ) | ||
| Warrants Outstanding, June 30, 2023 | ||||
There were no private warrants issued, exercised and outstanding from the period January 1, 2022 through June 30, 2022.
Public Warrants:
| Common Stock Warrants | ||||
| Warrants Outstanding, January 1, 2023 | ||||
| Exercise of warrants | ( | ) | ||
| Warrants Outstanding, June 30, 2023 | ||||
There were no public warrants issued, exercised and outstanding from the period January 1, 2022 through June 30, 2022.
Term Loan Warrants:
| Common Stock Warrants | ||||
| Warrants Outstanding, January 1, 2023 | ||||
| Exercise of warrants | ( | ) | ||
| Warrants Outstanding, June 30, 2023 | ||||
There were no term loan warrants issued, exercised and outstanding from the period January 1, 2022 through June 30, 2022.
Investor Warrants:
| Common Stock Warrants | ||||
| Warrants Outstanding, January 1, 2023 | ||||
| Warrants issued | ||||
| Warrants Outstanding, June 30, 2023 | ||||
There were no investor warrants issued, exercised and outstanding from the period January 1, 2022 through June 30, 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, 2023 | $ | |||
| Issuance of warrants | ||||
| Exercise of warrants | ( | ) | ||
| Change in fair value of warrants | ( | ) | ||
| Balances, June 30, 2023 | $ | |||
| 23 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 10 - COMMON STOCK
The Company is authorized to issue up to shares of common stock with $ 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 June 30, 2023 and December 31, 2022, there were and shares issued and outstanding. No dividends on common stock had been declared by the Company.
| June
30, 2023 | June
30, 2022 | |||||||
| Options issued and outstanding | ||||||||
| Common stock outstanding | ||||||||
| Warrants outstanding | ||||||||
| Earnout shares | ||||||||
| Shares available for future issuance | ||||||||
| Total | ||||||||
ChEF Equity Facility
The
Company and Chardan Capital Markets LLC, a New York limited liability company (“CCM LLC”) entered into a purchase agreement
(the “Purchase Agreement”) and a Registration Rights Agreement (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 $
June 2023 Offering
In the June 2023 Offering, the Company sold an aggregate of (i) shares of its Common Stock and, (ii) accompanying Investor Warrants to purchase up to shares of Common Stock, at the combined public offering price of $ per share and accompanying Investor Warrant, less underwriting discounts and commissions, and (iii) the Underwriters’ Warrants. In addition, the Company granted the underwriters a 45-day over-allotment option to purchase up to an additional shares of Common Stock and/or Investor Warrants to purchase up to an aggregate of shares of Common Stock at the public offering price per security, less underwriting discounts and commissions.
The Investor Warrants are exercisable for five years from the closing date of the June 2023 Offering, have an exercise price of $
per share and are immediately exercisable. In the event of certain fundamental transactions, holders of the Investor Warrants will have
the right to receive the Black Scholes Value (as defined in the Investor Warrants) of their Investor Warrants calculated pursuant to
the formula set forth in the Investor Warrants, payable either in cash or in the same type or form of consideration that is being offered
and being paid to the holders of Common Stock. The Underwriters’ Warrants are exercisable upon issuance at an exercise price of
$ per share and will expire on
The Company granted the underwriters a 45-day over-allotment option to purchase up to an additional shares of Common Stock and/or Warrants to purchase up to an aggregate of shares of Common Stock at the public offering price per security, less underwriting discounts and commissions, of which the underwriters exercised for shares of Common Stock and Investor Warrants to purchase up to shares of Common Stock and the remaining was not exercised within the 45-day window.
The
Company received gross proceeds of $
| 24 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Share-based compensation expense for options and RSUs totaling $and $was recognized in the Company’s consolidated statements of operations for the six months ended June 30, 2023 and 2022, respectively. Share-based compensation expense for options and RSUs totaling $and $was recognized in the Company’s consolidated statements of operations for the three months ended June 30, 2023 and 2022, respectively.
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cost of goods sold | $ | $ | ||||||
| Research and development | ||||||||
| Selling and marketing | ||||||||
| General and administrative expense | ||||||||
| Total | $ | $ | ||||||
Share-based compensation for the three months ended June 30, 2023 and 2022 was allocated as follows:
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cost of goods sold | $ | $ | ||||||
| Research and development | ||||||||
| Selling and marketing | ||||||||
| General and administrative expense | ||||||||
| Total | $ | $ | ||||||
Number of Options (1) | Weighted-Average Exercise Price | Weighted-Average Grant Date Fair Value | Weighted-Average Remaining Contractual Life (in years) | Aggregate intrinsic value | ||||||||||||||||
| Balances, January 1, 2022 | $ | $ | $ | |||||||||||||||||
| Options granted | ||||||||||||||||||||
| Options forfeited | ( | ) | ||||||||||||||||||
| Options exercised | ( | ) | ||||||||||||||||||
| Balances, June 30, 2022 | $ | $ | $ | |||||||||||||||||
| Balances, January 1, 2023 | $ | $ | $ | |||||||||||||||||
| Options granted | ||||||||||||||||||||
| Options forfeited | ( | ) | ||||||||||||||||||
| Options exercised | ( | ) | ||||||||||||||||||
| Balances, June 30, 2023 | $ | $ | $ | |||||||||||||||||
| At June 30, 2023 | ||||||||||||||||||||
| Vested and Exercisable | $ | $ | ||||||||||||||||||
| Vested and expected to vest | $ | $ | ||||||||||||||||||
| (1) |
Restricted Stock Units
On
October 7, 2022, the Company granted
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 $
| 25 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
Note 11 - Stock-Based Compensation (Continued)
Restricted Stock Units (Continued)
There were no grants of restricted stock units prior to October 7, 2022. The following table presents the restricted stock units activity for the six months ended June 30, 2023:
| Number
of Shares | Weighted-Average Fair Market Value | |||||||
| Unvested shares at January 1, 2023 | $ | |||||||
| Granted and unvested | ||||||||
| Vested | ( | ) | ||||||
| Unvested shares, June 30, 2023 | $ | |||||||
| Vested and exercisable as of June 30, 2023 | $ | - | ||||||
As
of June 30, 2023, there were
Note 12 – SUPPLIER AGREEMENT
On May 9, 2023, Ioneer Rhyolite Ridge LLC (“Seller”), an emerging lithium-boron producer, and the Company announced a commercial offtake agreement partnership whereby the Seller is developing the Rhyolite Ridge Project which, once completed, is expected to produce lithium carbonate, and boric acid (the “Project”). Beginning on the supply start date which is the date the Seller notifies the Company that the project is fully completed and commissioned in accordance with the engineering, procurement and construction contract, and for the duration of the supply period, the Company shall purchase and receive product from Seller, on the terms and conditions of the agreement. The agreement calls for a minimum annual purchase requirement. The agreement becomes effective when the seller has informed the Company that the seller has made a positive financial investment decision in respect of the project.
The Company follows the two-class method when computing net loss per share as the Company has issued warrants that meet the definition of participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.
Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back any convertible preferred dividends. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding. Potential common shares consist of potential future exercises of outstanding stock options and common stock warrants. Because the inclusion of potential common shares would be anti-dilutive for all periods presented, they have been excluded from the calculation.
The Company’s common stock warrants contractually entitle the holders of such securities to participate in dividends but do not contractually require the holders of such securities to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss, such losses are not allocated to such participating securities. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common stockholders for the three and six months ended June 30, 2023 and 2022.
The following table sets forth the information needed to compute basic and diluted loss per share for the three and six months ended June 30, 2023 and 2022:
| For The Three Months Ended June 30, | For The Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator | ||||||||||||||||
| Net Loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator | ||||||||||||||||
| Weighted average common shares outstanding used to compute net loss per share, basic and diluted | ||||||||||||||||
| Net loss per share of common stock, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 26 |
Dragonfly Energy Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share data)
| June 30, 2023 | June 30, 2022 | |||||||
| Warrants | ||||||||
| Restricted stock units | ||||||||
| Options | ||||||||
| Weighted average number of common shares-basic | ||||||||
NOTE 14 – INCOME TAXES
The
Company’s tax provision and the resulting effective tax rate for interim periods is determined based upon its estimated annual
effective tax rate adjusted for the effect of discrete items arising in that quarter. The Company recorded an income tax expense (benefit)
of $ and ($
NOTE 15 – SUBSEQUENT EVENTS
Subsequent
to the period ending June 30, 2023, and through August 8, 2023,
In
July 2023, upon a request from the Company’s lenders under the term loan agreement, the Company repaid $
On
July 6, 2023, the Company opened a 12-month time deposit account at Wells Fargo Commercial Banking amounting to $
In July of 2023, the Company was notified by its largest RV OEM customer that, due to weaker demand for its products and their subsequent focus on reducing costs, it would no longer install the Company’s storage solutions as standard equipment, but rather return to offering those solutions as an option to dealers and consumers. While this customer is not moving to a different solution or competitor, the Company expects this change in strategy to have a material limiting effect on the Company’s revenue throughout the remainder of 2023.
On August 20, 2023, upon mutual agreement between the Company and Mr. Marchetti, Mr. Marchetti resigned from his position as the Company’s Chief Financial Officer. Mr. Marchetti will continue in the role of Senior Vice President, Operations. In connection with Mr. Marchetti’s resignation, on August 20, 2023, the Board appointed Denis Phares, the Company’s President, Chief Executive Officer, and Chairman of the Board, to succeed Mr. Marchetti as the Company’s interim Chief Financial Officer. Dr. Phares will continue his duties as President, Chief Executive Officer, and Chairman of the Board. The Company intends to commence a search for a full time Chief Financial Officer.
| 27 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References in this report (the “Quarterly Report”) to “we,” “us,” “our” or the “Company” refer to Dragonfly Energy Holdings Corp., a Nevada corporation. References to our “Sponsor” refer to Chardan NexTech Investments 2 LLC, a Delaware limited liability company and references to “Legacy Dragonfly” refer to Dragonfly Energy Corp., a Nevada corporation and our wholly-owned subsidiary. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
As a result of the completion of the Business Combination (as defined herein), the financial statements of Legacy Dragonfly are now the financial statements of us. Prior to the Business Combination, we had no operating assets but, upon consummation of the Business Combination, the business and operating assets of Legacy Dragonfly acquired by us became our sole business and operating assets. Accordingly, the financial statements of Legacy Dragonfly and their respective subsidiaries as they existed prior to the Business Combination and reflecting the sole business and operating assets of the Company going forward, are now the financial statements of us.
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and the other financial information included elsewhere in this Quarterly Report and with our audited consolidated financial statements (and notes thereto) for the year ended December 31, 2022 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), particularly those under “Risk Factors.” This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.
Cautionary Note Regarding Forward Looking-Statements
This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future.
There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:
| ● | our ability to recognize the anticipated benefits of our recent Business Combination, which may be affected by, among other things, the factors listed below; | |
| ● | our ability to successfully increase market penetration into target markets; | |
| ● | the addressable markets that we intend to target do not grow as expected; | |
| ● | the loss of any members of our senior management team or other key personnel; | |
| ● | the loss of any relationships with key suppliers, including suppliers in China; | |
| ● | the loss of any relationships with key customers; | |
| ● | our ability to protect our patents and other intellectual property; |
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| ● | the failure to successfully optimize solid-state cells or to produce commercially viable solid-state cells in a timely manner or at all, or to scale to mass production; | |
| ● | changes in applicable laws or regulations; | |
| ● | our ability to maintain the listing of our common stock on the Nasdaq Global Market and our public warrants on the Nasdaq Capital Market; | |
| ● | the possibility that we may be adversely affected by other economic, business and/or competitive factors (including an economic slowdown or inflationary pressures); | |
| ● | our ability to sell the desired amounts of shares of common stock at desired prices under our equity facility; | |
| ● | the potential for events or circumstances that result in our failure to timely achieve the anticipated benefits of our customer arrangements with THOR Industries and its affiliate brands (including Keystone RV Company); | |
| ● | our ability to raise additional capital to fund our operations; | |
| ● | our ability to generate revenue from future product sales and our ability to achieve and maintain profitability; | |
| ● | the accuracy of our projections and estimates regarding our expenses, capital requirements, cash utilization, and need for additional financing; | |
| ● | developments relating to our competitors and our industry; | |
| ● | our ability to engage target customers and successfully retain these customers for future orders; | |
| ● | the reliance on two suppliers for our lithium iron phosphate cells and a single supplier for the manufacture of our battery management system; and | |
| ● | our current dependence on a single manufacturing facility. |
The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in such forward-looking statements. Please see “Part I—Item 1A—Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on April 17, 2023, as amended on May 1, 2023, for additional risks which could adversely impact our business and financial performance.
All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report or the date of the document incorporated by reference into this report. We have no obligation, and expressly disclaims any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.
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Overview
Our Business
We are a manufacturer of non-toxic deep cycle lithium-ion batteries that are designed to displace lead acid batteries in a number of different storage applications and end markets including recreational vehicle (“RV”), marine vessel, and solar and off-grid industries, with disruptive solid-state cell technology currently under development.
Since 2020, we have sold over 266,000 batteries. For the quarters ended June 30, 2023, and June 30, 2022, we sold 20,966 and 21,651 batteries, respectively, and had $19.3 million and $21.6 million in net sales, respectively. We currently offer a line of batteries across our “Battle Born” and “Dragonfly” brands, each differentiated by size, power and capacity, consisting of seven different models, four of which come with a heated option. We primarily sell “Battle Born” branded batteries directly to consumers (“DTC”) and “Dragonfly” branded batteries to original equipment manufacturers (“OEMs”).
We currently source the lithium iron phosphate cells incorporated into our batteries from a limited number of carefully selected suppliers that can meet our demanding quality standards and with whom we have developed long-term relationships.
To supplement our battery offerings, we also offer our line of proprietary Wakespeed alternator regulation products which are necessary 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. In addition to its own accessories we are also a reseller of accessories for battery systems. These include chargers, inverters, monitors, controllers, solar panels and other system accessories from brands such as Victron Energy, Progressive Dynamics, REDARK, Rich Solar, and Sterling Power.
In addition to our conventional lithium iron phosphate (“LFP”) batteries, we are currently developing the next generation of LFP solid-state cells. Since our founding, we have been developing proprietary battery cell manufacturing processes and solid-state battery cell technology 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 cell manufacturing process 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 chemistry-agnostic cells. Additionally, our internal production of battery cells will streamline our supply chain, allowing us to vertically integrate our cells into our batteries, thereby lowering our production costs.
As of June 30, 2023, we had cash totaling $32.9 million. Our net loss for the quarter ended June 30, 2023 was $11.7 million and our net loss for the quarter ended June 30, 2022 was $1.5 million. As a result of becoming a publicly traded company, we continue to need to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees. As discussed under “—Liquidity and Capital Resources” below we expect that we will need to raise additional funds, including through the use of our $150 million equity facility (the “ChEF Equity Facility”) with Chardan Capital Markets LLC (“CCM LLC”) and the issuance of equity, equity-related or debt securities or by obtaining additional credit from financial institutions to fund, together with our principal sources of liquidity, ongoing costs, such as research and development relating to our solid-state batteries, expansion of our facilities, and new strategic investments. If such financings are not available, or if the terms of such financings are less desirable than we expect, we may be forced to take actions to reduce our capital or operating expenditures, including not seeking potential acquisition opportunities, eliminating redundancies, or reducing or delaying our production facility expansions, which may adversely affect our business, operating results, financial condition and prospects.
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The Business Combination
On October 7, 2022, Chardan NexTech 2 Acquisition Corp., a Delaware company (“Chardan”), and Legacy Dragonfly consummated the merger 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. Legacy Dragonfly is deemed the accounting acquirer, which means that Legacy Dragonfly’s financial statements for previous periods will be disclosed in our future periodic reports filed with the SEC. Following the Business Combination, our business is the business of Legacy Dragonfly.
The Business Combination was accounted for as a reverse recapitalization. Under this method of accounting, Chardan was treated as the acquired company for financial statement reporting purposes.
June 2023 Offering
On June 20, 2023, we entered into an underwriting agreement (the “Underwriting Agreement”) with Roth Capital Partners, LLC, as representative of the several underwriters (the “Underwriters”), pursuant to which we sold to the Underwriters, in a firm commitment underwritten public offering (the “June 2023 Offering”), an aggregate of (i) 10,000,000 shares of its common stock, par value $0.0001 (“Common Stock”) and (ii) accompanying warrants to purchase up to 10,000,000 shares of Common Stock (the “Investor Warrants”), at the combined public offering price of $2.00 per share and accompanying Investor Warrant, less underwriting discounts and commissions, and (iii) warrants to purchase up to an aggregate of 570,250 shares of Common Stock (the “Underwriters’ Warrants”). In addition, we granted the Underwriters a 45-day over-allotment option to purchase up to an additional 1,500,000 shares of Common Stock and/or Investor Warrants to purchase up to an aggregate of 1,500,000 shares of Common Stock at the public offering price per security, less underwriting discounts and commissions.
The Investor Warrants are exercisable for five years from the closing date of the Offering, have an exercise price of $2.00 per share
and are immediately exercisable. In the event of certain fundamental transactions, holders of the Investor Warrants will have the right
to receive the Black Scholes Value (as defined in the Investor Warrants) of their Investor Warrants calculated pursuant to the formula
set forth in the Investor Warrants, payable either in cash or in the same type or form of consideration that is being offered and being
paid to the holders of Common Stock. The Underwriters’ Warrants are exercisable upon issuance and will expire on June 20, 2028.
The initial exercise price of the Underwriters’ Warrants is $2.50 per share, which equals 125% of the per share public offering
price in the Offering.
As part of the June 2023 Offering, the Underwriters partially exercised their over-allotment option in the amount of 1,405,000 shares of Common Stock and Investor Warrants to purchase 1,405,000 shares of Common Stock. The June 2023 Offering closed on June 22, 2023. The aggregate net proceeds from this offering, including the partial over-allotment option, was approximately $21.1 million.
Key Factors Affecting Our Operating Results
Our financial position and results of operations depend to a significant extent on the following factors:
End Market Consumers
The demand for our products ultimately depends on demand from consumers in our current end markets. We generate sales through (1) DTC and (2) through OEMs, particularly in the RV market.
An increasing proportion of our sales has been and is expected to continue to be derived from sales to RV OEMs, driven by continued efforts to develop and expand sales to RV OEMs with whom we have longstanding relationships. Our RV OEM sales have been on a purchase order basis, without firm revenue commitments, and we expect that this will likely continue to be the case. Therefore, future RV OEM sales will be subject to risks and uncertainties, including the number of RVs these OEMs manufacture and sell, which in turn may be driven by the expectations these OEMs have around end market consumer demand.
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Demand from end market consumers is impacted by a number of factors, including travel restrictions, fuel costs and energy demands (including an increasing trend towards the use of green energy), as well as overall macro-economic conditions. Sales of our batteries have benefited from the increased adoption of the RV lifestyle, the demand for and inclusion of additional appliances and electronics in RVs, and the accelerating trend of solar power adoption among RV customers. However, in recent months rising fuel costs and other macro-economic conditions, such as inflation and rising interest rates, have caused a downward shift in decisions taken by end market consumers around spending in the RV market and in July of 2023, we were notified by our largest RV OEM customer that, due to weaker demand for its products and their subsequent focus on reducing costs, it would no longer install our storage solutions as standard equipment, but rather return to offering those solutions as an option to dealers and consumers. While this customer is not moving to a different solution or competitor, we do expect this change in strategy to have a material limiting effect on our revenue throughout the remainder of 2023.
Our strategy includes plans to expand into new end markets that we have identified as opportunities for our LFP batteries, including industrial, rail, specialty and work vehicles, material handling, solar integration, and emergency and standby power, in the medium term, and data centers, telecom and distributed on-grid storage in the longer term. We believe that our current LFP batteries and, eventually, our solid-state batteries, will be well-suited to supplant traditional lead-acid batteries as a reliable power source for the variety of low power density uses required in these markets (such as powering the increasing number of on-board tools needed in emergency vehicles). The success of this strategy requires (1) continued growth of these addressable markets in line with our expectations and (2) our ability to successfully enter these markets. We expect to incur significant marketing costs understanding these new markets, and researching and targeting customers in these end markets, which may not result in sales. If we fail to execute on this growth strategy in accordance with our expectations, our sales growth would be limited to the growth of existing products and existing end markets.
Supply
We currently rely on two carefully selected cell manufacturers located in China, and a single supplier, also located in China, to manufacture our proprietary battery management system, and we intend to continue to rely on these suppliers going forward. Our close working relationships with our China-based LFP cell suppliers, reflected in our ability to increase our purchase order volumes (qualifying us for related volume-based discounts) and order and receive delivery of cells in anticipation of required demand, has helped us moderate increased supply-related costs associated with inflation, currency fluctuations and U.S. government tariffs imposed on our imported battery cells and to avoid potential shipment delays. To mitigate against potential adverse production events, we opted to build our inventory of key components, such as battery cells. However, as many of the supply chain challenges and delays that were prevalent over the last several years have eased, the Company is now actively working down its inventory to more appropriate safety stock levels.
As a result of our battery chemistry and active steps we have taken to manage our inventory levels, we have not been subject to the shortages or price impacts that have been present for manufacturers of nickel manganese cobalt and nickel cobalt aluminum batteries. As we look toward the production of our solid-state cells, we have signed a Commercial Offtake Agreement with a lithium mining company located in Nevada for the supply of lithium, which we expect will enable us to further manage our cost of goods over time.
Product and Customer Mix
Our product sales consist of sales of seven different models of LFP batteries, along with accessories for battery systems (individually or bundled). These products are sold to different customer types (e.g., consumers, OEMs and distributors) and at different prices and involve varying levels of costs. In any particular period, changes in the mix and volume of particular products sold and the prices of those products relative to other products will impact our average selling price and our cost of goods sold. Despite our work to moderate increased supply-related costs, the price of our products may also increase as a result of increases in the cost of components due to inflation, currency fluctuations and tariffs. OEM sales typically result in lower average selling prices and related margins, which could result in margin erosion, negatively impact our growth or require us to raise our prices. However, this reduction is typically offset by the benefits of increased sales volumes. Sales of third-party sourced accessories typically have lower related margin. We expect accessory sales to increase as we further develop full-system design expertise and product offerings and consumers increasingly demand more sophisticated systems, rather than simple drop-in replacements. In addition to the impacts attributable to the general sales mix across our products and accessories, our results of operations are impacted by the relative margins of products sold. As we continue to introduce new products at varying price points, our overall gross margin may vary from period to period as a result of changes in product and customer mix.
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Production Capacity
All of our battery assembly currently takes place at our 99,000 square foot headquarters and manufacturing facility located in Reno, Nevada. We currently operate three LFP battery production lines. Consistent with our operating history, we plan to continue to automate additional aspects of our battery production lines. Our existing facility has the capacity to add up to four additional LFP battery production lines and construct and operate a pilot production line for our solid-state cells, all designed to maximize the capacity of our manufacturing facility. Although our automation efforts are expected to reduce our costs of goods, we may not fully recognize the anticipated savings when planned and could experience additional costs or disruptions to our production activities.
In addition, we have entered into a lease for an additional 390,240 square foot warehouse in Reno, Nevada, which is expected to be completed in early 2024. This facility, combined with our existing facility, will allow further scaling of our increasingly automated battery pack assembly capabilities, expand our warehousing space, and allow for deployment of our solid-state cell manufacturing.
Competition
We compete with traditional lead-acid battery manufacturers and lithium-ion battery manufacturers, who primarily either import their products or components or manufacture products under a private label. As we continue to expand into new markets, develop new products and move towards production of our solid-state cells, we will experience competition with a wider range of companies. These competitors may have greater resources than we do, and may be able to devote greater resources to the development of their current and future technologies. Our competitors may be able to source materials and components at lower costs, which may require us to evaluate measures to reduce our own costs, lower the price of our products or increase sales volumes in order to maintain our expected levels of profitability.
Research and Development
Our research and development is primarily focused on the advanced manufacturing of solid-state lithium-ion batteries using an LFP catholyte, a solid electrolyte and an intercalation-based anolyte (intercalation being the reversible inclusion of a molecule or ion into layered solids). The next stage in our technical development is to construct the battery to optimize performance and longevity to meet and exceed industry standards for our target storage markets. Ongoing testing and optimizing of more complicated batteries incorporating layered pouch cells will assist us in determining the optimal cell chemistry to enhance conductivity and increase the number of cycles (charge and discharge) in the cell lifecycle. This is expected to require significant additional expense, and we may need to raise additional funds to continue these research and development efforts.
Components of Results of Operations
Net Sales
Net sales are primarily generated from the sale of our LFP batteries to OEMs and consumers, as well as chargers and other accessories, either individually or bundled.
Cost of Goods Sold
Cost of goods sold includes the cost of cells and other components of our LFP batteries, labor and overhead, logistics and freight costs, and depreciation of manufacturing equipment.
Gross Profit
Gross profit, calculated as net sales less cost of goods sold, may vary between periods and is primarily affected by various factors including average selling prices, product costs, product mix and customer mix.
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Operating Expenses
Research and development
Research and development costs include personnel-related expenses for scientists, experienced engineers and technicians as well as the material and supplies to support the development of new products and our solid-state technology. As we work towards completing the development of our solid-state lithium-ion cells and the manufacturing of batteries that incorporate this technology, we anticipate that research and development expenses will increase significantly for the foreseeable future as we continue to invest in product development and optimizing and producing solid-state cells.
General and administrative
General and administrative costs include personnel-related expenses attributable to our executive, finance, human resources, and information technology organizations, certain facility costs, and fees for professional services.
Selling and marketing
Selling and marketing costs include outbound freight, personnel-related expenses, as well as trade show, industry event, marketing, customer support, and other indirect costs. We expect to continue to make the necessary sales and marketing investments to enable the execution of our strategy, which includes expanding into additional end markets.
Total Other Income (Expense)
Other income (expense) consists primarily of interest expense, the change in fair value of the warrant liability and amortization of debt issuance costs.
Results of Operations
Comparisons for the Three months ended June 30, 2023 and June 30, 2022
The following table sets forth our results of operations for the three months ended June 30, 2023, and June 30, 2022. This data should be read together with our financial statements and related notes included elsewhere in this Quarterly Report, and is qualified in its entirety by reference to such financial statements and related notes.
| Three months ended June 30, | ||||||||||||||||
| 2023 | % Net Sales | 2022 | % Net Sales | |||||||||||||
| (in thousands) | ||||||||||||||||
| Net Sales | $ | 19,274 | 100.0 | $ | 21,622 | 100.0 | ||||||||||
| Cost of Goods Sold | 15,176 | 78.7 | 14,594 | 67.5 | ||||||||||||
| Gross profit | 4,098 | 21.3 | 7,028 | 32.5 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | 1,067 | 5.5 | 859 | 4.0 | ||||||||||||
| General and administrative | 7,614 | 39.5 | 3,816 | 17.6 | ||||||||||||
| Sales and marketing | 3,808 | 19.8 | 2,881 | 13.3 | ||||||||||||
| Total Operating expenses | 12,489 | 64.8 | 7,556 | 34.9 | ||||||||||||
| Loss From Operations | (8,391 | ) | (43.5 | ) | (528 | ) | (2.4 | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Other income | — | — | — | — | ||||||||||||
| Interest expense, net | (4,113 | ) | (21.3 | ) | (1,228 | ) | (5.7 | ) | ||||||||
| Change in fair market value of warrant liability | 804 | 4.2 | — | — | ||||||||||||
| Total Other Expense | (3,309 | ) | (17.2 | ) | (1,228 | ) | (5.7 | ) | ||||||||
| Loss Before Taxes | (11,700 | ) | (60.7 | ) | (1,756 | ) | (8.1 | ) | ||||||||
| Income Tax Benefit | — | — | (287 | ) | (1.3 | ) | ||||||||||
| Net Loss | $ | (11,700 | ) | (60.7 | ) | $ | (1,469 | ) | (6.8 | ) | ||||||
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| Three months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| (in thousands) | ||||||||
| Retailer | 5,829 | 11,850 | ||||||
| Distributor | 4,143 | 2,534 | ||||||
| DTC | 9,972 | 14,384 | ||||||
| % Net Sales | 51.7 | 66.5 | ||||||
| OEM | 9,302 | 7,238 | ||||||
| % Net Sales | 48.3 | 33.5 | ||||||
| Net Sales | $ | 19,274 | 21,622 | |||||
Net Sales
Net sales decreased by $2.3 million, or 10.9%, to $19.3 million for the three months ended June 30, 2023, as compared to $21.6 million for the quarter ended June 30, 2022. This decrease was primarily due to lower DTC battery and accessory sales partially offset by higher OEM sales. For the quarter ended June 30, 2023, OEM revenue increased by $2.1 million as a result of increased adoption of our products by new and existing customers, several of whom have begun to “design in” our batteries in various RV models as original equipment or have increased purchases in response to end-customer demand for safer, more efficient batteries and as a replacement for traditional lead-acid batteries. In July of 2023, we were notified by our largest RV OEM customer that, due to weaker demand for its products and their subsequent focus on reducing costs, it would no longer install our storage solutions as standard equipment, but rather return to offering those solutions as an option to dealers and consumers. While this customer is not moving to a different solution or competitor, we do expect this change in strategy to have a material limiting effect on our revenue throughout the remainder of 2023. DTC revenue decreased by $4.4 million as a result of decreased customer demand for our products due to rising interest rates and inflation.
Cost of Goods Sold
Cost of revenue increased by $0.6 million, or 4.0%, to $15.2 million for the three months ended June 30, 2023, as compared to $14.6 million for the quarter ended June 30, 2022. This increase was primarily due to higher material costs associated with consuming higher priced inventory.
Gross Profit
Gross profit decreased by $2.9 million, or 41.7%, to $4.1 million for the three months ended June 30, 2023, as compared to $7.0 million for the quarter ended June 30, 2022. The decrease in gross profit was primarily due to a change in revenue mix that included a larger percentage of lower margin OEM sales and a lower percentage of higher margin DTC sales, combined with the aforementioned increase in material costs.
Research and Development Expenses
Research and development expenses increased by $0.2 million or 24.2%, to $1.1 million for the three months ended June 30, 2023, as compared to $0.9 million for the quarter ended June 30, 2022. The increase was primarily due to higher patent expenses, increase wages associated with increased headcount, and higher materials and supply costs associated with development work.
General and Administrative Expenses
General and administrative expenses increased by $3.8 million, or 99.5%, to $7.6 million for the three months ended June 30, 2023, as compared to $3.8 million for the quarter ended June 30, 2022. This increase was primarily due a $2.0 million increase in professional services, compliance, and insurance costs, a $0.7 million severance expense, and a $0.7 million increase in stock-based compensation costs.
Selling and Marketing Expenses
Sales and marketing expenses increased by $0.9 million, or 32.2%, to $3.8 million for the three months ended June 30, 2023, as compared to $2.9 million for the quarter ended June 30, 2022. This increase was primarily due to a $1.1 million increase in wage-related expenses primarily due to the addition of sales and marketing personnel to support growth in our existing end markets, as well as to drive growth in the new, adjacent end markets we are targeting. This increase was partially offset by lower shipping costs, due to the decline in DTC sales and change in revenue mix.
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Total Other Expense
Other expense totaled $3.3 million for the quarter ended June 30, 2023 as compared to total other expense of $1.2 million for the quarter ended June 30, 2022. Other income in the quarter ended June 30, 2023 is comprised of $4.1 million in interest expense related to our debt securities, partially offset by a change in fair market value of our warrants in the amount of $0.8. The $1.2 million expense in the quarter ended June 30, 2022 was comprised of interest expense related to the senior secured notes of $45 million which were retired as a result of the Business Combination.
Income Tax (Benefit) Expense
There was no tax expense recorded for the quarter ended June 30, 2023, as compared to $0.3 million benefit for the quarter ended June 30, 2022. The income tax benefit of $0.3 million for the quarter ended June 30, 2022 was expected to be used against future tax obligations. Based on available evidence as of June 30, 2023, management believes it is more likely than not that some or all the deferred tax assets will not be realized. Accordingly, the Company established a 100% valuation allowance. As a result of the full valuation allowance, the Company did not record a tax benefit during the quarter ended June 30, 2023.
Net Loss
We generated a net loss of $11.7 million for the quarter ended June 30, 2023, as compared to a net loss of $1.5 million for the quarter ended June 30, 2022. As described above, this result was driven lower sales, increased cost of goods sold, higher operating expenses, and increased other expense.
Comparisons for the Six months ended June 30, 2023 and June 30, 2022
The following table sets forth our results of operations for the six months ended June 30, 2023, and June 30, 2022. This data should be read together with our financial statements and related notes included elsewhere in this Quarterly Report, and is qualified in its entirety by reference to such financial statements and related notes.
| Six months ended June 30, | ||||||||||||||||
| 2023 | % Net Sales | 2022 | % Net Sales | |||||||||||||
| (in thousands) | ||||||||||||||||
| Net Sales | $ | 38,065 | 100.0 | $ | 39,925 | 100.0 | ||||||||||
| Cost of Goods Sold | 29,224 | 76.8 | 27,402 | 68.6 | ||||||||||||
| Gross profit | 8,841 | 23.2 | 12,523 | 31.4 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | 1,947 | 5.1 | 1,198 | 3.0 | ||||||||||||
| General and administrative | 17,109 | 44.9 | 7,442 | 18.6 | ||||||||||||
| Sales and marketing | 7,992 | 21.0 | 5,973 | 15.0 | ||||||||||||
| Total Operating expenses | 27,048 | 71.1 | 14,613 | 36.6 | ||||||||||||
| (Loss) From Operations | (18,207 | ) | (47.8 | ) | (2,090 | ) | (5.2 | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Other income | — | — | — | — | ||||||||||||
| Interest expense, net | (7,928 | ) | (20.8 | ) | (2,491 | ) | (6.2 | ) | ||||||||
| Change in fair market value of warrant liability | 19,327 | 50.8 | — | — | ||||||||||||
| Total Other Income (Expense) | 11,399 | 29.9 | (2,491 | ) | (6.2 | ) | ||||||||||
| (Loss) Before Taxes | (6,808 | ) | (17.9 | ) | (4,581 | ) | (11.5 | ) | ||||||||
| Income Tax Benefit | — | — | (814 | ) | (2.0 | ) | ||||||||||
| Net Loss | $ | (6,808 | ) | (17.9 | ) | $ | (3,767 | ) | (9.4 | ) | ||||||
| Six months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| (in thousands) | ||||||||
| Retailer | 12,898 | 24,885 | ||||||
| Distributor | 7,111 | 4,621 | ||||||
| DTC | 20,009 | 29,506 | ||||||
| % Net Sales | 52.6 | 73.9 | ||||||
| OEM | 18,056 | 10,419 | ||||||
| % Net Sales | 47.4 | 26.1 | ||||||
| Net Sales | $ | 38,065 | 39,925 | |||||
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Net Sales
Net sales decreased by $1.9 million, or 4.7%, to $38.1 million for the six months ended June 30, 2023, as compared to $39.9 million for the six months ended June 30, 2022. This decrease was primarily due to lower DTC battery and accessory sales partially offset by higher OEM sales. For the six months ended June 30, 2023, OEM revenue increased by $7.6 million as a result of increased adoption of our products by new and existing customers, several of whom have begun to “design in” our batteries in various RV models as original equipment or have increased purchases in response to end-customer demand for safer, more efficient batteries and as a replacement for traditional lead-acid batteries. . In July of 2023, we were notified by our largest RV OEM customer that, due to weaker demand for its products and their subsequent focus on reducing costs, it would no longer install our storage solutions as standard equipment, but rather return to offering those solutions as an option to dealers and consumers. While this customer is not moving to a different solution or competitor, we do expect this change in strategy to have a material limiting effect on our revenue throughout the remainder of 2023. DTC revenue decreased by $9.5 million as a result of decreased customer demand for our products due to rising interest rates and inflation.
Cost of Goods Sold
Cost of revenue increased by $1.8 million, or 6.6%, to $29.2 million for the six months ended June 30, 2023, as compared to $27.4 million for the six months ended June 30, 2022. This increase was primarily due to higher material costs associated with consuming higher priced inventory.
Gross Profit
Gross profit decreased by $3.7 million, or 29.4%, to $8.8 million for the six months ended June 30, 2023, as compared to $12.5 million for the six months ended June 30, 2022. The decrease in gross profit was primarily due to a change in revenue mix that included a larger percentage of lower margin OEM sales and a lower percentage of higher margin DTC sales, combined with the aforementioned higher material costs.
Research and Development Expenses
Research and development expenses increased by $0.7 million or 62.5%, to $1.9 million for the six months ended June 30, 2023, as compared to $1.2 million for the six months ended June 30, 2022. The increase was primarily due increased wages in the amount of $0.4 million associated with higher headcount, higher patent expenses, and higher materials and supply costs associated with development work.
General and Administrative Expenses
General and administrative expenses increased by $9.7 million, or 129.9%, to $17.1 million for the six months ended June 30, 2023, as compared to $7.4 million for the six months ended June 30, 2022. This increase was primarily due a $4.1 million increase in stock-based compensation costs, a $3.9 million increase in professional services, compliance, and insurance costs, a $0.7 million severance expense, and increased wages associated with higher headcount in the amount of $0.5 million.
Selling and Marketing Expenses
Sales and marketing expenses increased by $2.0 million, or 33.8%, to $8.0 million for the six months ended June 30, 2023, as compared to $6.0 million for the six months ended June 30, 2022. This increase was primarily due to a $2.7 million increase in wage-related expenses. This increase was partially offset by lower shipping costs, due to the decline in DTC sales and change in revenue mix.
Total Other Income (Expense)
Other income totaled $11.4 million for the six months ended June 30, 2023 as compared to total other expense of $2.5 million for the six months ended June 30, 2022. Other income for the six months ended June 30, 2023 is comprised of a change in fair market value of our warrants in the amount of $19.3 million offset by $7.9 million in interest expense related to our debt securities. The $2.5 million expense in for the six months ended June 30, 2022 was comprised of interest expense related to the senior secured notes of $45 million which were retired as a result of the Business Combination.
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Income Tax (Benefit) Expense
There was no tax expense recorded for the six months ended June 30, 2023, as compared to a $0.8 million benefit for the six months ended June 30, 2022. The income tax benefit of $0.8 million for the six months ended June 30, 2022 was expected to be used against future tax obligations.Based on available evidence as of June 30, 2023, management believes it is more likely than not that some or all the deferred tax assets will not be realized. Accordingly, the Company established a 100% valuation allowance. As a result of the full valuation allowance, the Company did not record a tax benefit during the six months ended June 30, 2023.
Net Loss
We generated a net loss of $6.8 million for the six months ended June 30, 2023, as compared to net loss of $3.8 million for the six months ended June 30, 2022. As described above, this result was driven primarily by lower sales, increased cost of goods sold, higher operating expenses, partially offset by increased other income (primarily as a result of a change in fair market value of warrants).
Critical Accounting Estimates
Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these condensed consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. On a recurring basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in an estimate, if any, will be reflected in the consolidated financial statements prospectively from the date of the change in the estimate.
We believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
Inventory Valuation
We periodically review physical inventory for excess, obsolete, and potentially impaired items and reserves. Any such inventory is written down to net realizable value. The reserve estimate for excess and obsolete inventory is dependent on expected future use and requires management judgement.
Warrants
We apply relevant accounting guidance for warrants to purchase our stock based on the nature of the relationship with the counterparty. For warrants issued to investors or lenders in exchange for cash or other financial assets, we follow guidance issued within ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), and ASC 815, Derivatives and Hedging (“ASC 815”), to assist in the determination of whether the warrants should be classified as liabilities or equity. Warrants that are determined to require liability classifications are measured at fair value upon issuance and are subsequently remeasured to their then fair value at each subsequent reporting period with changes in fair value recorded in current earnings. Warrants that are determined to require equity classifications are measured at fair value upon issuance and are not subsequently remeasured unless they are required to be reclassified. See “Note 9—Warrants” in our accompanying consolidated financial statements for information on the warrants.
Equity-Based Compensation
We use the Black-Scholes option-pricing model to determine the fair value of option grants. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility of our future share price, risk-free rates, future dividend yields and estimated forfeitures at the initial grant date. Restricted stock unit (“RSU”) awards are valued based on the closing trading price of the Company’s common stock on the date of grant. Changes in assumptions used to estimate fair value could result in materially different results.
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Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted rates. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date.
We recognize the financial statement effect of an uncertain income tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Recognized income tax positions are measured at the largest amount that is greater than 50% likely to be realized. A valuation allowance is recorded to reduce deferred income tax assets to an amount, which in the opinion of management is more likely than not to be realized.
Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. We consider factors such as the cumulative income or loss in recent years; reversal of deferred tax liabilities; projected future taxable income exclusive of temporary differences; the character of the income tax asset, including income tax positions; tax planning strategies and the period over which we expect the deferred tax assets to be recovered in the determination of the valuation allowance. In the event that actual results differ from these estimates or we adjust our estimates in the future, we may need to adjust our valuation allowance, which could materially impact our financial position and results of operations.
Non-GAAP Financial Measures
This Quarterly Report includes a non-generally accepted account principles within the United States (“U.S. GAAP”) measure that we use to supplement our results presented in accordance with U.S. GAAP. Earnings before interest tax and amortization (“EBITDA”) is defined as earnings before interest and other income (expenses), income taxes, and depreciation and amortization. Adjusted EBITDA is calculated as EBITDA adjusted for stock-based compensation, Enterprise Resource Planning (“ERP”) implementation, promissory note forgiveness, and change in the fair market value of warrant liabilities. Adjusted EBITDA is a performance measure that we believe is useful to investors and analysts because it illustrates the underlying financial and business trends relating to our core, recurring results of operations and enhances comparability between periods.
Adjusted EBITDA is not a recognized measure under U.S. GAAP and is not intended to be a substitute for any U.S. GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry. Investors should exercise caution in comparing our non-GAAP measure to any similarly titled measure used by other companies. This non-GAAP measure excludes certain items required by U.S. GAAP and should not be considered as an alternative to information reported in accordance with U.S. GAAP.
The table below presents our adjusted EBITDA, reconciled to net income (loss) for the three and six months ended June 30, 2023, and June 30, 2022.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| Net loss | $ | (11,700 | ) | $ | (1,469 | ) | $ | (6,808 | ) | $ | (3,767 | ) | ||||
| Interest Expense | 4,113 | 1,228 | 7,928 | 2,491 | ||||||||||||
| Taxes | — | (287 | ) | — | (814 | ) | ||||||||||
| Depreciation and Amortization | 296 | 272 | 593 | 389 | ||||||||||||
| EBITDA | (7,291 | ) | (256 | ) | 1,713 | (1,701 | ) | |||||||||
| Adjusted for: | ||||||||||||||||
| Stock-Based Compensation(1) | 954 | 431 | 5,441 | 719 | ||||||||||||
| Separation Agreement(2) | 720 | — | 720 | — | ||||||||||||
| June Offering Costs (3) | 904 | — | 904 | — | ||||||||||||
| Promissory Note Forgiveness(4) | — | — | — | 469 | ||||||||||||
| Change in fair market value of warrant liability (5) | (804 | ) | — | (19,327 | ) | — | ||||||||||
| Adjusted EBITDA | $ | (5,517 | ) | $ | 175 | (10,549 | ) | (513 | ) | |||||||
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| (1) | Stock-Based Compensation is comprised of costs associated with option and RSU grants made to our employees, consultants and board members. |
| (2) | Separation Agreement is comprised of $720 in cash severance associated with separation agreement dated April 26, 2023 between us and our former Chief Legal Officer. |
| (3) | June Offering Costs is comprised of fees and expenses, including legal, accounting, and other expenses associated with our secondary offering. |
| (4) | Promissory Note Forgiveness is comprised of the loan that was forgiven, prior to the Business Combination, in connection with the promissory note, with a maturity date of March 1, 2026, between us and John Marchetti, our former Chief Financial Officer. |
| (5) | Change in fair market value of warrant liabilities represents the change in fair value from January 1, 2023 through June 30, 2023. |
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, contractual obligations and other commitments. We assess liquidity in terms of our cash flows from operations and their sufficiency to fund our operating and investing activities. As of June 30, 2023, we had cash totaling $33.0 million.
We expect our capital expenditures and working capital requirements to increase materially in the near future, as we continue our research and development efforts (particularly those related to solid-state lithium-ion battery development), expand our production lines, scale up production operations and look to enter into adjacent markets for our batteries (with operating expenses expected to increase across all major expense categories). We expect to deploy a significant amount of capital to continue our optimization and commercialization efforts dedicated to our solid-state technology development, as well as continued investment to automate and increase the production capacity of our existing assembly operation, expansion of our facilities and new strategic investments. To date, our focus has been on seeking to prove the fundamental soundness of our manufacturing techniques and our solid-state chemistry. Moving forward, our solid-state related investments will focus on chemistry optimization and establishing a pilot line for pouch cell production. Over the next two to three years, we expect to spend in excess of $50 million on solid-state development and cell manufacturing technologies.
We expect that we will need to raise additional funds, including through the use of the ChEF Equity Facility and the issuance of equity, equity-related or debt securities or by obtaining additional credit from financial institutions to fund, together with our principal sources of liquidity, ongoing costs, such as research and development relating to our solid-state batteries, expansion of our facilities, and new strategic investments. If such financings are not available, or if the terms of such financings are less desirable than we expect, we may be forced to take actions to reduce our capital or operating expenditures, including by not seeking potential acquisition opportunities, eliminating redundancies, or reducing or delaying our production facility expansions, which may adversely affect our business, operating results, financial condition and prospects. Further, any future debt or equity financings may be dilutive to our current stockholders.
Financing Obligations and Requirements
On November 24, 2021, we issued $45 million of fixed rate senior notes, secured by among other things, a security interest in our intellectual property. As part of the Business Combination, we entered into a senior secured term loan facility in an aggregate principal amount of $75 million (the “Term Loan”) pursuant to the Term Loan, Guarantee and Security Agreement (the “Term Loan Agreement”), the proceeds of which were used to repay the $45 million fixed rate senior notes, and ChEF Equity Facility.
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The Term Loan proceeds were used to: (i) support the Business Combination, (ii) prepay the fixed rate senior notes at closing of the Business Combination, (iii) pay fees and expenses in connection with the foregoing, (iv) to provide additional growth capital and (v) for other general/corporate purposes. The Term Loan will mature on October 7, 2026, or the Maturity Date, and will be subject to quarterly amortization of 5% per annum beginning 24 months after issuance. The definitive documents for the Term Loan incorporate certain mandatory prepayment events and certain affirmative and negative covenants and exceptions hereto. The financial covenants for the Term Loan include a maximum senior leverage ratio covenant, a minimum liquidity covenant, a springing fixed charge coverage ratio covenant, and a maximum capital expenditures covenant. On March 29, 2023, we obtained a waiver from Alter Domus (US) LLC, as administrative agent for the lenders (the “Administrative Agent”) and EICF Agent LLC and certain third-party financing source of our failure 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. We were in compliance with the covenants as of June 30, 2023. However, it is probable that we will fail to meet these covenants within the next twelve months. In accordance with U.S. GAAP, we reclassified our notes payable from a long-term liability to a current liability. The Term Loan accrues interest (i) until April 1, 2023 at a per annum rate equal to adjusted secured overnight financing rate (“SOFR”) is a margin equal to 13.5%, of which 7% will be payable in cash and 6.5% will be paid in-kind, (ii) thereafter until October 1, 2024, at a per annum rate equal to adjusted SOFR plus 7% payable in cash plus an amount ranging from 4.5% to 6.5%, depending on the senior leverage ratio of the consolidated company. In each of the foregoing case, adjusted SOFR will be no less than 1%.
We may elect to prepay all or any portion of the amounts owed prior to the Maturity Date, provided that we provide notice to the Administrative Agent and the amount is accompanied by the applicable prepayment premium, if any. Prepayments of the Term Loan are required to be accompanied by a premium of 5% of the principal amount so prepaid if made prior to the October 7, 2023, 3% if made on and after October 7, 2023 but prior to October 7, 2024, 1% if made after October 7, 2024 but prior to October 7, 2025, and 0% if made on or after October 7, 2025. If the Term Loan is accelerated following the occurrence of an event of default, Legacy Dragonfly is required to immediately pay to lenders the sum of all obligations for principal, accrued interest, and the applicable prepayment premium.
Pursuant to the Term Loan Agreement, we have guaranteed the obligations of Legacy Dragonfly and such obligations will be guaranteed by any of Legacy Dragonfly’s subsidiaries that are party thereto from time to time as guarantors. Also pursuant to the Term Loan Agreement, the Administrative Agent was granted a security interest in substantially all of the personal property, rights and assets of us as and Legacy Dragonfly to secure the payment of all amounts owed to lenders under the Term Loan Agreement. In addition, we entered into a Pledge Agreement pursuant to which we pledged to the Administrative Agent our equity interests in Legacy Dragonfly as further collateral security for the obligations under the Term Loan Agreement. At the closing of the Business Combination, we issued to the Term Loan Lenders (i) the penny warrants exercisable to purchase an aggregate of 2,593,056 shares at an exercise price of $0.01 per share, and (ii) warrants exercisable to purchase 1,600,000 shares of our common stock at an exercise price of $10.00 per share.
From January 1, 2023 to June 30, 2023, we issued and sold approximately 98,500 shares of our common stock under the ChEF Equity Facility, resulting in net cash proceeds of $670,593.
On March 5, 2023, we issued a 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”). The Note became due and payable in full on April 1, 2023. We were also obligated to pay a fee in the amount of $100,000 (the “Loan Fee”) to Mr. Nelson on April 4, 2023. The Principal Amount of the Note was paid in full on April 1, 2023 and the Loan Fee was paid in full on April 4, 2023.
In June 2023, we completed the June 2023 Offering which provided net proceeds to us, including the partial over-allotment option exercise, of approximately $21.1 million.
Going Concern
For the quarter ended June 30, 2023, we generated a net loss of $11.7 million and had a negative cash flow from operations. As of June 30, 2023, we had approximately $33.0 in cash and cash equivalents and working capital of $30.6 million.
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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. While the Company was in compliance with its covenants for the quarter ended June 30, 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.
In addition, we may need to raise additional debt and/or equity financing to fund our operations and strategic plans and meet our financial covenants. We have historically been able to raise additional capital through issuance of equity and/or debt financing and we intend to use the ChEF Equity Facility and raise additional capital as needed. However, we cannot guarantee that we will be able to raise additional equity, contain expenses, or increase revenue, and comply with the financial covenants under the Term Loan. If such financings are not available, or if the terms of such financings are less desirable than we expect, we may be forced to take actions to reduce our capital or operating expenditures, including by not seeking potential acquisition opportunities, eliminating redundancies, or reducing or delaying our production facility expansions, which may adversely affect our business, operating results, financial condition and prospects. Further, future debt or equity financings may be dilutive to our current stockholders.
Cash Flows for the Six months ended June 30, 2023, and June 30, 2022
| Six months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Net Cash (used in)/provided by: | (in thousands) | |||||||
| Operating Activities | $ | (5,639 | ) | $ | (19,912 | ) | ||
| Investing activities | $ | (2,571 | ) | $ | (4,819 | ) | ||
| Financing activities | $ | 23,381 | $ | 200 | ||||
Operating Activities
Net cash used in operating activities was $5.6 million for six months ended June 30, 2023, primarily due to a net loss of $6.8 million and negative change of $19.3 million in the fair market value of our warrant liability during the period offset by lower inventory levels an increase in accounts payable and accrued expenses as a result of extended payments for the large influx of cells received late in 2022 and early 2023.
Net cash used in operating activities was $19.9 million for the six months ended June 30, 2022, primarily due to a net loss during the period in addition to an increase in inventory.
Investing Activities
Net cash used in investing activities was $2.6 million for the six months ended June 30, 2023, as compared to net cash used in investing activities of $4.8 million for the three months ended June 30, 2022. The decrease in cash used in investing activities was primarily due to a decrease in capital equipment expenses.
Financing Activities
Net cash provided by financing activities was $23.4 million for the six months ended June 30, 2023, as compared to net cash provided by financing activities of $0.2 million for the six months ended June 30, 2022, and was primarily due to net proceeds of $21.1 million from our June equity offering.
Contractual Obligations
Our estimated future obligations consist of short-term and long-term operating lease liabilities. As of June 30, 2023, we had $1.2 million in short-term operating lease liabilities and $2.9 million in long-term operating lease liabilities.
As disclosed above, we have a Term Loan. As of June 30, 2023, the principal amount outstanding under the Term Loan was $78.7 million.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer, as our principal executive officer, and Chief Financial Officer, as our principal financial officer, to allow timely decisions regarding required disclosure.
In connection with the preparation of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the evaluation described above, our Chief Executive Officer and our Chief Financial Officer concluded that, due to the material weaknesses previously reported in our 2022 Annual Report that have not yet been remediated, our disclosure controls and procedures were not effective as of June 30, 2023.
Changes in Internal Control over Financial Reporting
Management described a plan to remediate the material weaknesses within our 2022 Annual Report. Management, with the assistance of a third-party service provider, continues to design and implement internal controls. Additionally, management continued its risk assessment to identify risks and objectives. There were no other changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management will continue to evaluate and enhance our processes as noted in the remediation plan described within our 2022 Annual Report. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these will ultimately have the intended effects.
PART II - OTHER INFORMATION
ITEM 1. 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 the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide the information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
On August 20, 2023, upon mutual agreement between us and Mr. Marchetti, Mr. Marchetti resigned from his position as our Chief Financial Officer. Mr. Marchetti will continue in the role of Senior Vice President, Operations. In connection with Mr. Marchetti’s resignation, on August 20, 2023, our board of directors appointed Denis Phares, our President, Chief Executive Officer, and Chairman of the Board, to succeed Mr. Marchetti as our interim Chief Financial Officer. Dr. Phares will continue his duties as President, Chief Executive Officer, and Chairman of the Board. We intend to commence a search for a full time Chief Financial Officer.
Dr. Phares has served as our Chief Executive Officer and Chairman of our Board since October 2022. Dr. Phares is the co-founder of Dragonfly Energy Corp., a Nevada corporation (“Legacy Dragonfly”) and has served as Legacy Dragonfly’s Chief Executive Officer and Chairman of the board of directors since 2012. From 2005 until 2012, Dr. Phares served as a faculty member of the Aerospace & Mechanical Engineering Department at the University of Southern California, where he worked extensively on renewable energy technologies and received tenure in 2010. Dr. Phares holds an M.B.A. from the University of Nevada — Reno, a Ph.D. in Engineering from the California Institute of Technology and a B.S. in Physics from Villanova University.
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ITEM 6. EXHIBITS
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| * | Filed herewith. |
| ** | Furnished. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dragonfly Energy Holdings Corp.. | ||
| Date: August 21, 2023 | By: | /s/ Denis Phares |
| Denis Phares | ||
| Chief Executive Officer, President and Interim Chief Financial Officer | ||
| (Principal Executive Officer and Principal Financial Officer) | ||
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