Item 1A. Risk Factors 21
Item 1B. Unresolved Staff Comments 41
Item 2. Properties 41
Item 3. Legal Proceedings 41
Item 4. Mine Safety Disclosures 41
Item 6. [Reserved] 42
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 54
Item 8. Financial Statements and Supplementary Data 54
Item 9A. Controls and Procedures 55
Item 9B. Other Information 56
Item 9C. Disclosure Regarding Foreign Jurisdiction that Prevent Inspections 56
Part III 57
Item 10. Directors, Executive Officers and Corporate Governance 57
Item 11. Executive Compensation 57
Item 14. Principal Accountant Fees and Services 57
Item 15. Exhibit and Financial Statement Schedules 58
SIGNATURES 60
i
Cautionary
Note Regarding Forward-Looking Statements
This
Annual Report on Form 10-K 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. 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 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 customers;
● our ability to protect our patents and other intellectual property;
● changes in applicable laws or regulations;
● our ability to raise additional capital to fund our operations;
● developments relating to our competitors and our industry;
● 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” 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 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.
ii
Part
I
Item
1. Business
All
references in this report to “Dragonfly,” the “Company,” “we,” “us,” or “our”
mean Dragonfly Energy Holdings Corp. and its subsidiaries unless stated otherwise or the context otherwise indicates.
Overview
We
are a manufacturer of non-toxic deep cycle lithium-ion batteries that caters to customers in the consumer (including the recreational
vehicle (“RV”), marine vessel and off-grid residence industries), industrial and energy storage markets, with disruptive
solid-state cell technology currently under development. Our goal is to develop technology to deliver environmentally impactful solutions
for energy storage to everyone globally. We believe that the innovative design of our lithium-ion batteries is ideally suited for the
demands of modern customers who rely on consumer electronics, connected devices and smart appliances that require continuous, reliable
electricity, regardless of location.
Our
deep cycle lithium iron phosphate (“LFP”) batteries provide numerous advantages compared to incumbent products, such
as lead-acid batteries. LFP batteries are non-toxic and environmentally friendly, do not rely on scarce or controversial metals and are
a highly cost-effective storage solution. LFP batteries use lithium iron phosphate (LiFePO4) as the cathode material for lithium-ion
cells rather than nickel or cobalt. Although the energy density of LFP batteries is lower, they have a longer cycle life and experience
a slower rate of capacity loss. LFP is also intrinsically safer than sulfide gases due to its thermal and chemical stability, meaning
our LFP batteries are less flammable than alternative products. As we develop our proprietary solid-state cell technology, we believe
our use of LFP will continue to provide significant advantages over the lithium-ion technology in development by most other companies
that still incorporate less stable components in their chemistries (such as sulfide glasses, which are chemically unstable and form hydrogen
sulfide when exposed to air).
We
have a dual-brand strategy for battery products, Dragonfly Energy (“Dragonfly Energy”) and Battle Born Batteries (“Battle
Born”). Battle Born branded products are primarily sold direct to consumers, while the Dragonfly Energy brand is primarily
sold to original equipment manufacturers (“OEMs”). However, with the growing popularity and brand recognition of Battle
Born, these batteries have become increasingly popular with our OEM customers. Based on the extensive research and optimization undertaken
by our team, we have developed a line of products with features including a proprietary battery management system and an internal battery
heating feature for cold temperatures, and we have recently launched our unique battery communication system. We currently source the
LFP cells incorporated into our batteries from a limited number of carefully selected suppliers that can meet our demanding quality standards
and with whom we have developed long-term relationships.
We
began as an aftermarket-focused business initially targeting direct-to-consumer sales in the RV market. Since 2020, we have sold over
226,000 batteries. For the years ended December 31, 2022 and 2021, we sold 96,034 and 74,652 batteries, respectively, and had $86.3
million and $78.0 million in sales, respectively. Over time, we have increased total sales through a combination of: increasing direct-to-consumer
sales of batteries for RV applications; expanding into the marine vessels and off-grid storage markets with related direct-to-consumer
sales; selling batteries to RV OEMs; increasing sales to distributors; and reselling accessories for battery systems. Our RV OEM customers
currently include Keystone RV Company (“Keystone”), who fulfills certain of its LFP battery requirements exclusively
through us (with potential annual renewals), THOR Industries (“THOR”), who has made a strategic investment in our
business and with whom we intend to enter into a future, mutually agreed exclusive North American distribution agreement with an initial
term of two years (with potential annual renewals), Airstream, and REV, and we are in ongoing discussions with a number of additional
RV OEMS to further increase adoption of our products.
We
currently offer a line of batteries across our two brands, each differentiated by size, power and capacity, consisting of seven different
models, four of which come with a heated option. To supplement our battery offerings, we are also a reseller of accessories for battery
systems. These include chargers, inverters, monitors, controllers and other system accessories from brands such as Victron Energy, Progressive
Dynamics, Magnum Energy and Sterling Power. Pursuant to the Asset Purchase Agreement dated April 22, 2022 by and among us and Thomason
Jones Company, LLC (“Thomason Jones”) and the other parties thereto, we also acquired the assets, including the Wakespeed
Offshore brand (“Wakespeed”) of Thomason Jones, allowing us to include our own alternator regulator in systems that
we sell.
Our
battery packs are designed and assembled in-house in the United States. In April 2021, we opened our new 99,000 square foot facility
in Reno, Nevada, allowing us to increase our production capacity and giving us the ability to increase sales to existing customers and
penetrate new markets. Our facility provides a streamlined, partially autonomous production process for our current batteries, which
comprises module assembly and battery assembly, with the availability to expand the number of lines to handle increased volumes and the
additional battery modules we intend to introduce in the near future. We plan to continue to expand our production capacity as needed
and estimate that our current production facility will allow for over $500 million in manufacturing sales capacity once fully utilized.
We
currently focus on three main consumer end markets: RVs, marine vessels and off-grid storage and, in the medium- to longer-term, we plan
on expanding into several new markets. Within our current markets, our aim is to replace incumbent lead-acid batteries. Our batteries
are primarily designed to provide consumers with a long-lasting, highly efficient power source for powering appliances, consumer electronics
and other smart devices located inside RVs, marine vessels or off-grid residences and, other than for certain smaller marine vessels,
are not intended for propulsion. Our batteries are powertrain agnostic with the ability to operate on internal combustion engine vehicles
or electric vehicles.
Our
proven sales and marketing strategy has allowed us to penetrate our current end markets efficiently. We use a variety of methods to educate
consumers on the benefits of LFP batteries and why they are a better investment compared to the legacy lead-acid batteries currently
found in our target end markets today. We also have an extensive social media program, where we partner with content creators in our
target markets to share with consumers the benefits of our products. Lastly, we participate in a variety of industry productions, including
features on RV podcasts and TV shows, and attend sponsored industry events such as the Bassmaster Classic, RV rallies and boat shows.
In
addition to our conventional LFP batteries, our experienced research and development team, headed by our founder and Chief Executive
Officer, is currently developing the next generation of LFP solid-state cells. Since our inception, we have been developing proprietary
solid-state cell technology and manufacturing processes for which we have issued patents and pending patent applications, where appropriate.
Solid-state lithium-ion technology eliminates the use of a liquid electrolyte, which addresses the residual heat and flammability issues
arising from lithium-ion batteries. The unique competitive advantage of our solid-state battery cell is highlighted by our dry deposition
technology, which completely displaces the need for toxic solvents in the manufacturing process and allows for the rapid and scalable
production of solid-state cells having an intercalation anode, like graphite or silicon. Many other solid-state technology companies
are focused on a denser lithium metal anode, which tends to form icicle-like dendrites inside the cell and lacks the cyclability of an
intercalation anode. Our design allows for a much safer, more efficient cell that we believe will be a key differentiator in the energy
storage market. Additionally, our internal production of solid-state cells will streamline our supply chain, allowing us to vertically
integrate our cells into our batteries, thereby lowering our production costs.
As
businesses, organizations and individuals increasingly seek improved clean energy use and energy storage, we believe we are well-positioned
to achieve our objectives of developing innovative technology to make clean energy accessible and affordable for everyone globally. We
will continue to focus on our core competencies of providing innovative technology, expanding our brand portfolio and providing affordable,
sustainable and accessible energy, all while being designed and manufactured in the United States.
Industry
Background
For
decades, lead-acid batteries have been the dominant player in power and energy markets worldwide. Since the introduction of the absorbed
glass mat (“AGM”) lead-acid battery in the mid-1970s, the technological advancements in lead-acid battery technology
have been limited. LFP batteries have numerous advantages over the incumbent lead-acid batteries used in today’s markets:
End
Markets
Current
Markets
According
to a Frost and Sullivan report commissioned by us (“Frost & Sullivan”), the total addressable market (“TAM”)
of our three current end markets is estimated to be approximately $12 billion by 2025.
Addressable
Adjacent Markets
Our
addressable markets are areas with significant growth potential that we will be positioned to penetrate as customers turn towards LFP
and other lithium-ion batteries as replacements for traditional lead-acid batteries. As these medium- and long-term markets mature, we
intend to deploy our solid-state technology, once developed, while concurrently continuing to further displace the incumbent lead-acid
technology. According to Frost & Sullivan, our TAM is estimated to be $85 billion by 2025.
Our
Competitive Strengths
We
believe that we possess the largest share in the markets we operate in due to our following business strengths, which distinguish us
in this competitive landscape and position us to capitalize on the anticipated continued growth in the energy storage market:
Our
Growth Strategy
We
intend to leverage our competitive strengths, technology leadership and market share position to pursue our growth strategy through the
following:
Our
Products and Technology
Chemistry
Comparison
Lead-acid
batteries were the first form of rechargeable battery to be developed and modified across different platforms for a variety of uses,
from powering small electronics to use for energy storage in back-up power supplies in cell phone towers. Since the development in the
1970s of AGM lead-acid batteries, a form of sealed lead-acid battery that enables operation in any position, there has been limited innovation
in lead-acid battery technology. The push to develop longer-lasting, lower-cost, more environmentally-friendly and faster-charging batteries
has led to the development of lithium-ion batteries and, within the lithium-ion battery market, different chemistries.
There
are several dominant battery chemistries in the lithium-ion market that can be used for different purposes. Two widely adopted chemistries
found in the market today are nickel manganese cobalt (“NMC”), and nickel cobalt aluminum (“NCA”).
The higher energy density and shorter cycle life found in NMC and NCA batteries are suitable for markets where fast charging and high
energy density are required, such as electric vehicle (“EV”) powertrains and consumer electronics. LFP batteries are
best suited for energy storage markets where long life and affordability are paramount, such as RV, marine vessel, off-grid storage,
onboard tools, material handling, utility-grade storage, telecom, rail and data center markets.
NMC
batteries are highly dependent on two metals that present significant constraints — nickel, which is facing an industry-wide
shortage, and cobalt, a large percentage of which comes from conflict-ridden countries. According to an article by McKinsey & Company
titled “Lithium and Cobalt: A tale of two commodities”, global forecasts for cobalt show supply shortages arising
as early as 2022, slowing down NMC battery growth. Both of these elements are also subject to commodity price fluctuations, making NMC
and NCA batteries less cost-effective than LFP batteries. LFP batteries do not contain these elements and materials can be sourced domestically,
and are therefore not subject to these shortages, geopolitical concerns or commodity price fluctuations. In fact, LFP batteries have
no toxic elements, offering a much safer environmental alternative. The temperature threshold for thermal runaway (i.e., lithium-ion
battery overheating that can result in an internal chemical reaction) is roughly 700 degrees Fahrenheit for LFP batteries, compared to
350 degrees Fahrenheit for NMC and NCA batteries, making LFP batteries less flammable and safer.
LFP
batteries have a useful life of approximately 10 to 15 years compared to one to two years for lead-acid batteries, and typically charge
up to five times faster. LFP batteries are also not constrained by weight (having the same energy capacity at one-fifth of the weight)
or temperature (having the ability to generate power even in low temperatures and to not swell or heat up when charging or discharging)
and are generally maintenance free.
In
the electric vehicle market, the race to provide the highest energy density facilitating frequent, rapid acceleration, greatest range
and fastest charging battery — all while competing on cost — is where many new battery companies
are prioritizing their efforts. Success in the electric vehicle market requires use of chemistries capable of optimization to these requirements.
In our targeted stationary storage markets, the ideal solution requires a safe, long-lasting battery in terms of discharge/charge cycles
with a focus on providing a steady power stream. LFP batteries are better suited for the stationary storage market compared to NMC and
NCA batteries, as LFP batteries are safer and have a significantly longer life cycle making them more cost-effective. The market for
utility grade storage, particularly for clean energy projects, and the related adoption of lithium-ion batteries (including LFP batteries)
is expected to increase as the fully-loaded cost of energy (production and storage) approaches cost parity with inexpensive fossil fuel
energy provided through the electric grid. Compared to NMC and NCA batteries, LFP batteries are at or much closer to grid parity.
Solid-State
Cells
LFP
batteries are not without their disadvantages. While less flammable than other chemistries, the existence of a flammable liquid electrolyte
still poses safety risks. Like all liquid-based lithium-ion batteries, LFP batteries have a potential to produce solid lithium dendrites,
icicle-like formations which can pierce the physical separators in LFP batteries, which are necessary in LFP batteries to separate the
positively charged liquid electrolyte from the negatively charged liquid electrolyte, and which, over time, will degrade the performance
of LFP batteries and potentially result in fire-related risks. The next phase in the development of lithium-ion batteries is solid-state
cell development, which contains a solid, rather than a liquid, electrolyte, eliminating many of the current disadvantages to LFP batteries
while increasing the safety of the battery cells. We believe that the development of our solid-state technology will provide us with
a unique competitive advantage.
Compared
to current lithium-ion technology, where lithium-ions cross a liquid electrolyte barrier between a battery’s anode (negative electrode)
and cathode (positive electrode), solid-state batteries aim to use a solid electrolyte to regulate the lithium-ions. As a battery charges
and discharges, an electrochemical reaction occurs creating a flow of electrical energy between the cathode, electrolyte and anode as
the electrodes lose and reacquire electrons. In addition to the use of non-toxic electrode components, the removal of a liquid electrolyte
will eliminate the risk of fire, making solid-state cells inherently safe. The move to a non-liquid electrolyte also means that solid-state
batteries will be, on average, smaller and lighter than existing lithium-ion batteries. The process for manufacturing our solid-state
cells is described below under “— Research and Development”.
Our
Products
We
currently offer non-toxic deep cycle LFP batteries for use in the RV, marine vessel and off-grid storage markets. We believe that the
innovative design of our LFP batteries is ideally suited for the demands of modern customers who rely on consumer electronics, connected
devices and smart appliances that require continuous, reliable electricity. We also offer chargers and other accessories either individually
or as part of bundled packages.
Our
core products are LFP battery modules with a built-in battery management system offered under two brand names: Dragonfly Energy, which
sells primarily to OEMs, and Battle Born Batteries, which sells primarily direct to consumers and increasingly to OEMs. We currently
offer seven LFP battery models across our two brands, each differentiated by size, power and capacity, consisting of seven different
models, four of which come with a heated option. The following chart highlights the key features of each of our models:
Each
battery model is capable of being discharged to a 100% depth of discharge and takes approximately five hours to charge to full capacity,
which is five times faster than a traditional lead-acid battery. Each module is designed to last between 3,000 and 5,000 cycles, at which
point the battery still holds 75% to 80% of its energy capacity. This equates to approximately 10 to 15 years of use (under typical conditions),
which is why each battery comes with an industry-leading 10-year full replacement manufacturers’ defect warranty. Our battery modules
are largely designed to be “drop-in replacements” for traditional lead-acid batteries, which means that they are designed
to fit standard RV or marine vessel configurations without any adjustments. Our LFP batteries are versatile and designed to be compatible
not just with standard chargers, but also with wind and solar power systems, and to be modular, and can be combined in series or in parallel
depending on customer needs.
We
also offer certain of our battery models as an internally heated battery, which utilizes our proprietary technology to maintain optimal
internal settings in cold weather conditions, allowing customers to charge the battery even in low temperatures. The unique heating technology
does not require an external energy source and the self-regulating internal heater is only activated when needed, minimizing energy drain
and extending the useful life of the battery. Unlike traditional batteries, our batteries are maintenance free and do not require cleaning,
adding of water or venting for “off gassing”.
In
April of 2022, we acquired the assets and intellectual property portfolio of Thomason Jones Company, LLC, including Wakespeed, in a move
that provides our OEM arm and consumer brand, Battle Born Batteries, the ability to offer complete alternator-connected systems for marine
and RV consumers and manufacturers. Wakespeed offers a unique alternator regulator and several other devices focused on energy systems
that are charged by a vehicle alternator. Wakespeed’s product line continues to be offered to specialty OEM manufacturers and customers
but is now additionally offered alongside the innovative product lines of Dragonfly Energy and Battle Born Batteries.
In
addition to our core battery products, we offer customers a number of adjacent products and accessories manufactured by third parties.
We offer a range of charging components that are designed for every application: inverter chargers (which allow users to recharge a DC
battery bank with AC power and also turn DC battery power into AC power), converter chargers (which allow users to charge from an AC
power source) and solar charge controllers (which manage power transfer from solar arrays to battery banks).
We
also offer customers a full suite of accessories and components to facilitate the installation of our products. These include plugs,
fuses, cables, adapters, sensors and interfaces pictured below.
We
offer specially designed bundled packages of battery modules and accessories tailored to specific applications for both RVs, marine vessels
and off-grid residences, ranging in price from $675 to over $19,000, as shown below.
With
our batteries being designed and assembled exclusively in-house, we are able to guarantee that we deliver high-quality batteries to customers.
We test our products to ensure they meet federal and local governmental regulations for both performance and safety. Our testing and
compliance with required standards and measurements are validated by a third-party lab, which includes UL Standard 2054, IEC 62133 and
the UN 38.3 shipping certification.
Battery
Management System
Our
proprietary battery management system is developed and tested in-house. It offers a complete solution for monitoring and controlling
our complex battery systems and is designed to protect battery cells from damage in various scenarios. We believe our battery management
system is industry-leading for a number of reasons:
● it enables batteries to recharge even if completely drained;
Battery
Communication System
We
have developed a complete communication system branded Dragonfly IntelLigence, for which a U.S. non-provisional patent application and
an international PCT patent application have been filed, to be used with Dragonfly Energy OEM systems and Battle Born batteries and bundles.
This communication system will enable end customers to monitor each battery in real time, providing information on energy input and output
and current or voltage imbalances. The communication system will be able to communicate with up to 24 batteries in a bank at one time
and aggregate the data received from these batteries into a central system such as a phone or tablet. We expect to begin offering the
Dragonfly IntelLigence product line to customers as an adjacent component and in our product bundles during the first half of 2023.
Alternator
Regulation
Charging
batteries in a vehicle, such as a boat or RV, often requires pulling electrical current off of the vehicle’s alternator. Alternator
regulation is important to ensure that the alternator does not get unduly stressed during the current delivery to the batteries, and
that the current delivery remains within the operating limits of the onboard battery bank. The acquisition of the assets of Wakespeed
allows us to deliver our own proprietary solution to alternator regulation while also leveraging an established brand name. Wakespeed
is especially popular in the marine industry, and our ability to offer this complete solution sets the stage for further penetration
into marine markets.
Product
Pipeline
Beyond
our current battery modules, we have several LFP products in development that will enable us to access additional end markets.
Research
and Development
Our
research and development is primarily focused on the advanced manufacturing of solid-state lithium-ion batteries using an LFP catholyte,
a solid electrolyte and an intercalation-based anolyte (intercalation being the reversible inclusion of a molecule or ion into layered
solids). We believe that solid-state batteries present a significant advantage to all products currently on the market, with the potential
to be lighter, smaller, safer and cheaper. Since our founding, our research team, led by our founder and CEO, has been developing solid-state
cell manufacturing technology and we aim to be a fully vertically integrated solid-state battery manufacturer. We have successfully tested
and are currently in the process of optimizing the composite materials that comprise the cathode, anode and electrolyte of the all-solid-state
battery. In addition, we are one of the only companies to focus on a true solid-state chemistry that conducts lithium with sufficiently
high conductivity and cycles lithium phosphate against graphite with positive results, and are in the process of testing more complicated
layered electrolyte compositions to maximize our cycling and power results. Our aim is to begin producing solid-state pouch cells from
a pilot production line by early 2024.
Compared
to current lithium-ion technology, where lithium-ions cross a liquid electrolyte barrier between a battery’s anode (negative electrode)
and cathode (positive electrode), solid-state batteries aim to use a solid electrolyte to regulate the lithium-ions. Our solid-state
batteries are designed to be multilayered pouch cells comprised of highly integrated layers of catholyte, electrolyte and anolyte contained
within industry standard aluminum foil at the cathode and industry standard copper or nickel foil at the anode, which are then combined
into larger battery packs. An illustrative solid-state cell is shown below.
We
have developed proprietary processes, systems and materials that are protected by issued patents and pending patent applications that
we believe place us at the forefront of solid-state storage-focused battery technology. Our cells utilize a layered electrolyte design,
which increases stability by forming a stable solid electrolyte interface at both electrodes. Rather than requiring a solid-state separator,
we have designed a patent-pending spray drying process that encapsulates each grain of cathode (LFP) or anode (graphite) with a solid
electrolyte, which completely integrates the solid-state component, creating higher interface density and, therefore, more effective
connectivity. In addition, our cathodes and anodes do not require any liquid component, making this truly solid-state. In lieu of lithium
metal, our cathode component incorporates an intercalation material, such as graphite or silicon. This mitigates the risk of forming
lithium dendrites, which degrades cell performance and could potentially cause an internal short circuit.
The
utilization of our innovative, completely dry powder deposition technology in our manufacturing process is expected to result in faster
manufacturing times with lower upfront capital costs due to the elimination of expensive dryers and vacuum ovens. We believe this will
allow our production process to shift from batch production and convert to continuous production faster than our competitors. Our spray
powder coating application is highly automated, allowing us to utilize less space and fix overhead costs while increasing the precision
of our products and manufacturing capacity of the facility. Our manufacturing process is modular, allowing us to scale up depending upon
demand.
The
next stage in our technical development is to construct the battery to optimize performance and longevity to meet and exceed industry
standards for our target storage markets. Ongoing testing and optimizing of more complicated batteries incorporating layered pouch cells
will assist us in determining the optimal cell chemistry to enhance conductivity and increase the number of cycles (charge and discharge)
in the cell lifecycle.
We
intend to integrate our initial solid-state cells into Dragonfly Energy and Battle Born batteries and eventually scale to mass production
of solid-state cells. We aim to be a vertically integrated LFP solid-state cell manufacturer with our technology incorporated into our
own-branded products for sale to our own customers (including our OEM customers) but also other battery manufacturers.
Headquarters,
Manufacturing and Production
Our
headquarters is located in our 99,000 square foot manufacturing facility in Reno, Nevada. The lease for this building was entered into
on March 1, 2021 and expires on April 30, 2026. We do not own any real property.
Our
facility provides a streamlined, partially autonomous production process for our current batteries, which comprises module assembly and
battery assembly. We currently have two production lines, with the availability to expand the number of lines to handle increased volumes
and the additional battery modules we intend to introduce in the near future. We plan to continue to expand our production capacity as
needed and estimate that our current production facility will allow for over $500 million in manufacturing sales capacity once fully
utilized.
Our
manufacturing process is set out below:
Our
manufacturing process is divided into two aspects: (i) module assembly and (ii) battery assembly. We use a combination of trained employees
and automated processes to increase production capacity and lower costs while maintaining the same level of quality our customers expect
from our products. Module assembly is a significantly automated process, implementing custom-designed equipment and systems to suit our
production needs. This includes cycling of individual cells to detect faulty components and to enable sorting by capacity. Our custom-designed
automated welders spot weld individual cells that are assembled into specified module jigs based on the desired amp hour. Completed modules
are then discharged to empty, recharged to full charge and sorted by capacity. Battery assembly is performed largely by hand by our trained
employees, although we continue to look for innovative ways to integrate automation into this process. Our proprietary battery management
system is thoroughly tested for quality cutoffs, then mounted onto individual modules, before the modules are bolted into its casing.
We aim to automate the battery management system testing and installation process, which we expect could increase production capacity
fourfold. We are currently implementing an automated process for the gluing and sealing process, which would incorporate a two-robot
system for gluing and epoxying, as well as a glue pallet system to move finished batteries. After the assembled batteries are tested
and sealed, they are processed for outbound distribution.
On
February 8, 2022, we entered into a 124-month lease for an additional 390,240 square foot warehouse, which, once built, we intend to
utilize for the manufacture of our solid-state batteries.
Supplier
Relationships
We
have a well-established, global supply chain that underlies the sourcing of the components for our products, although we source domestically
wherever possible. We aim to maintain approximately six months’ worth of all components, other than cells, which we pre-order in
advance for the year to ensure adequate supply. For nearly all of our components, other than our battery management system, we ensure
that we have alternative suppliers available. Our battery management system is sourced from a single supplier based in China who we have
a nearly 10-year relationship with and who manufactures this component exclusively for us based on our proprietary design. Our cells
are sourced from two different, carefully selected cell manufacturers in China who are able to meet our demanding quality standards.
As a result of our long-standing relationships with these suppliers, we are able to source LFP cells on favorable terms and within reasonable
lead-times.
As
we look toward the production of our solid-state cells, we have signed a non-binding Memorandum of Understanding with a lithium
mining company and a lithium recycling company, both located in Nevada for the supply of lithium.
Customers;
RV OEM Strategic Arrangements
We
currently serve more than 15,000 customers in North America. Our existing customers consist of leading OEMs (such as Keystone, Thor,
REV Group and Airstream); distributors (who purchase large quantities of batteries from us and sell to consumers); upfitters (who augment
or customize vehicles for specific needs); and retail customers (who purchase from us directly). For the years ended December 31, 2022
and 2021, OEM sales represented 39.2% and 10.5% of our total revenues, respectively.
We
have deep, long-standing relationships with many of our customers. We also have a diverse customer base, with our top 10 customers accounting
for 36.3% of our revenue for the year ended December 31, 2022. Our customers primarily utilize our products for RVs, marine vessels
and off-grid residences. We work directly with OEMs to ensure compatibility with existing designs and also collaborate on custom designs
for new applications.
The
RV market is characterized by low barriers to entry. In North America, there are two large publicly traded RV companies, THOR Industries
and REV Group, in addition to a number of independent RV OEMs. THOR and REV each own a number well-known RV OEM brands and their related
companies. These brands compete on a number of factors such as format (e.g., motorized or towable), price, design, value, quality and
service. On November 19, 2021, we entered into a long-term Manufacturing Supply Agreement with Keystone, a member of the THOR group and
the largest towable RV OEM in North America (the “Supply Agreement”). Under the Supply Agreement, we will be the exclusive
supplier to Keystone for certain of its future LFP battery requirements, solidifying our long-standing relationship with Keystone.
In
July 2022, we strengthened our ties with the THOR group of RV OEMs when (i) THOR Industries made a $15,000,000 strategic investment in
us and (ii) we agreed to enter into a future, mutually agreed distribution arrangement and joint IP development arrangement. This arrangement
and the Keystone arrangement facilitate our ongoing efforts to drive adoption of our products (leveraging the trend of LFP batteries
increasingly replacing lead-acid batteries) by, among other things, increasing the number of RV OEMs that “design in” our
batteries as original equipment and entering into arrangements with members of the various OEM dealer networks to stock our batteries
for service and for aftermarket replacement sales. Once the distribution agreement has been negotiated and signed, during a to-be-agreed
transition period, we will use commercially reasonable efforts to cease marketing and selling our products to other RV OEMs and suppliers
to RV OEMs in North America. Although the full distribution agreement with THOR has not been executed and is subject to negotiation in the future,
its terms are expected to include: (i) an initial term of 24 months, which THOR may renew for successive one-year periods; (ii) a requirement
that we be the sole provider of lithium-ion batteries to the US-based THOR family of companies for THOR sales in the United States, subject
to agreed exceptions; (iii) favored pricing for products and negotiated rebates or other incentives; (iv) a requirement that THOR and
its North American OEMs be our exclusive RV OEM customers for our products in North America, subject to agreed exceptions; and (v) agreeable
terms with respect to registered and unregistered intellectual property rights and technology rights (which do not include our existing
intellectual property, including our solid-state battery technologies and related IP rights), including necessary licenses between the
parties, third party licenses, and allocation of ownership of any intellectual property rights and/or technology rights developed as
a result of development efforts jointly undertaken between THOR and us, subject to certain limitations.
We
continue to seek to grow our customer base within our existing segments; however, we also believe that our products are well suited to
address the needs in additional segments, including residential, commercial and/or industrial standby power, industrial vehicles (such
as forklifts, material handling equipment and compact construction equipment) and specialty vehicles (such as emergency vehicles, utility
vehicles and municipal vehicles) and we will seek to expand our market share in these segments in the future.
Sales
and Marketing
Our
proven sales and marketing strategy has allowed us to penetrate our current end markets efficiently. We use a variety of methods to educate
consumers on the benefits of LFP batteries and why they are a better investment compared to the legacy lead-acid batteries found in our
target end markets today. Through informational videos found on our website and social media platforms that educate consumers on the
benefits of LFP batteries and various “DIY” videos, we assist consumers on what they need for their battery system and how
to install and use batteries and accessories.
We
utilize a multi-pronged sales and marketing strategy to ensure that the Dragonfly Energy, Battle Born and Wakespeed brands are at the
forefront of their respective end markets. We have established strong relationships, particularly in the RV industry, through participation
in trade shows and other sponsored industry events, which have allowed us to reach both OEMs and retail customers and ensure we are aware
of evolving customer preferences. We are then able to leverage this customer feedback to collaborate with major OEMs to custom design
products for new and existing applications.
In
addition to traditional print and media advertising, we have leveraged the growing influence of social media (such as YouTube, Instagram
and Facebook) and professional influencers to increase market awareness of our brands. We work closely with these influencers to create
a lasting relationship that showcases the performance of our products, rather than one-off promotions. Our products have also been featured
in television shows and on podcasts that cater specifically to RV enthusiasts.
We
also value our direct relationships with retail customers. Our website and our customer service are key elements to our sales strategy.
Our website enables customers to purchase Wakespeed and Battle Born products directly and provides access to a range of videos covering
product information, technological benefits and installation guides. We have a team of experts dedicated to supporting our customers’
sales, technical and service needs.
Competition
Our
key competitors are principally traditional lead-acid battery and lithium-ion battery manufacturers, such as Samsung, CATL and Enovix,
in North America. We also compete against smaller LFP companies, who primarily either import their products or manufacture products under
a private label. Of these companies, there is no other company that has penetrated our core end markets to the same extent as we have,
and we believe that this is in large part due to the technological advantages that our products offer compared to other products in the
market. Our batteries are purpose-built to enhance the power and performance in any application or setting. We have specifically designed
our battery cases to fit into existing AGM battery racks and cabinets and offer a suite of compatible components and accessories in order
to make the replacement process simple enough for customers to do it themselves. We have optimized our technology to produce a lighter,
yet higher performing battery with a longer lifespan than incumbent lead-acid batteries. Our propriety battery management system and
internal heat technology enables our batteries to outperform not only traditional lead-acid batteries, but other lithium-ion products.
With
regard to solid-state technology, we have two main competitors, QuantumScape and Solid Power. While both of these competitors are focused
on the development of solid-state technology for use in the propulsion of electric vehicles, we are focused on power storage applications,
which has different requirements. We believe that our proprietary processes, systems and materials provide us with a significant competitive
advantage in developing a fully solid-state, non-toxic and highly cost-effective energy solution.
As
our solid-state technology comes to fruition and we begin to commercialize this product, we intend to become a vertically integrated
battery company, internalizing all aspects of the manufacturing and assembly process. This is comparable to companies such as Tesla,
BYD Limited and Li-Cycle. Our solid-state technology will also enable us to further penetrate the energy storage market, and we expect
to compete with technology-focused energy storage companies such as EOS Energy, ESS and STEM.
Intellectual
Property
The
success of our business and our technology leadership is supported by our proprietary battery technology. We have received patents and
filed patent applications in the United States and other jurisdictions to provide protection for our technology. We rely upon a combination
of patent, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements and other contractual
protections, to establish, maintain and enforce rights in our proprietary technologies. In addition, we seek to protect our intellectual
property rights through non-disclosure and invention assignment agreements with our employees and consultants and through non-disclosure
agreements with business partners and other third parties.
As
of December 31, 2022 we owned 26 issued patents and 22 pending patent applications. The patents and patent applications cover the United
States, China, Europe (with individual patents in Germany, France and the United Kingdom), Australia, Canada and other regions. We periodically
review and update our patent portfolio to protect our products and newly developed technologies. Currently, we have a combination of
issued patents and pending patent applications covering the ornamental design of our GC2 and GC3 batteries, a device and method for monitoring
battery systems, pre-coated solid-state electrolyte and electroactive powders and their methods of manufacture, methods and systems for
the dry spray deposition of materials in an electrochemical cell; a thermal fuse; battery systems implementing a mesh network communication
protocol; a power charging system for use during towing of a vehicle; and a power charging system with temperature based charging control.
These patents are expected to have expired or expire between May 2023 and 2043, absent any patent term adjustments or extensions.
We
periodically review our development efforts to assess the existence and patentability of new intellectual property. We pursue the registration
of our domain names and trademarks and service marks in the United States and other jurisdictions. In an effort to protect our brand,
as of December 31, 2022, we own four trademark registrations to cover our house marks in the United States and we have seven pending
trademark applications relating to our design logos and slogans in the United States.
Government
Regulation and Compliance
We
currently operate from a dedicated leased manufacturing facility, a leased warehouse and a podcast studio, each located in Reno, Nevada
as well as a leased R&D facility in Sparks, Nevada. We have never owned any facility at which we operated. Operations at our facilities
are subject to a variety of environmental, health and safety regulations, including those governing the generation, handling, storage,
use, transportation, and disposal of hazardous materials. To conduct our operations, we have to obtain environmental, health, and safety
permits and registrations and prepare plans. We are subject to inspections and possible citations by federal, state, and local environmental,
health, and safety regulators. In transit, lithium-ion batteries are subject to rules governing the transportation of “dangerous
goods.” We have policies and programs in place to assure compliance with our obligations, such as policies relating to workplace
safety, fire prevention, hazardous material management and other emergency action plans. We train our employees and conduct audits of
our operations to assess our fulfillment of these policies.
We
are also subject to laws imposing liability for the cleanup of releases of hazardous substances. Under the law, we can be liable even
if we did not cause a release on real property that we lease. We believe we have taken commercially reasonable steps to avoid such liability
with respect to our current leased facilities.
Employees
and Human Capital Resources
As
of December 31, 2022, we have 177 employees; 171 full-time, 2 part-time and 4 seasonal. We have adopted our Code of Ethics to support
and protect our culture, and we strive to create a workplace culture in line with our values: “Tell the Truth,” “Be
Fair,” “Keep Your Promises,” “Respect Individuals,” and “Encourage Intellectual Curiosity.”
As part of our initiative to retain and develop our talent, we focus on these key areas:
Attracting
and retaining high quality talent at every level of our business is crucial to our continuing success. We have developed relationships
with the University of Nevada Reno and the Nevada System of Higher Education to further our recruitment reach. We provide competitive
compensation and benefits packages, including performance-based compensation that rewards individual and organizational achievements.
The
Business Combination
On
October 7, 2022 (the “Closing Date”), Chardan NexTech 2 Acquisition Corp., a Delaware company (“Chardan”),
and Dragonfly Energy Corp, a Nevada corporation (together with its consolidated subsidiaries, “Legacy Dragonfly”),
consummated the merger (the “Closing”) pursuant to the Agreement and Plan of Merger, dated as of May 15, 2022 (as
amended, the “Business Combination Agreement”), by and among Chardan, Bronco Merger Sub, Inc., a Delaware corporation
and wholly-owned subsidiary of Chardan (“Merger Sub”), and Legacy Dragonfly. Pursuant to the Business Combination
Agreement, Merger Sub merged with and into Legacy Dragonfly (the “Merger” and, together with the other transactions
contemplated by the Business Combination Agreement, the “Business Combination”), with Legacy Dragonfly continuing
as the surviving corporation in the Merger and as our wholly owned subsidiary. In connection with the Business Combination, Chardan changed
its name to Dragonfly Energy Holdings Corp.
Prior
to the completion of the Business Combination, Chardan was a shell company. Chardan was incorporated in the state of Delaware on June
23, 2020. Chardan consummated its initial public offering at a price of $10 per unit on August 13, 2021 (the “Chardan IPO”).
Legacy Dragonfly was incorporated as a limited liability company in the State of Nevada on October 15, 2012 and reorganized as a corporation
under the laws of the State of Nevada on April 11, 2016. Following the Business Combination, our business is the business of Legacy Dragonfly.
Merger
Consideration
At
the Closing, by virtue of the Merger and without any action on the part of Chardan, Merger Sub, Legacy Dragonfly or the holders of any
of the following securities:
(a)
Each outstanding share of Legacy Dragonfly’s common stock, par value $0.001 per share (“Legacy Dragonfly Common
Stock”), converted into (i) a certain number of shares of our common stock, totaling 41,500,000 shares (including the
conversion and assumption of the options to purchase shares of Legacy Dragonfly Common Stock described below), which is equal to (x)
$415,000,000 divided by (y) $10.00 (the “Merger Consideration”) and (ii) the contingent right to receive Earnout
Shares (as defined below) (which may be zero) following the Closing.
(b)
Each option to purchase shares of Legacy Dragonfly Common Stock, was assumed and converted into options to acquire shares of our
common stock. The portion of the Merger Consideration reflecting the conversion of the Legacy Dragonfly options was calculated
assuming that all of our options are net-settled. With respect to Company options received in respect of Legacy Dragonfly options
that are outstanding immediately prior to the Closing and cash exercised after the Closing, up to 627,498 additional shares of our
common stock may be issued. At the Closing, approximately 38,576,648 shares of the Merger Consideration was allocated to holders of
outstanding shares of Legacy Dragonfly Common Stock and 3,664,975 shares of the Merger Consideration was allocated to holders of the
assumed Legacy Dragonfly options.
Earnout
Merger Consideration
In
addition to the Merger Consideration set forth above, additional contingent shares (“Earnout Shares”) may be payable
to each holder of shares of Legacy Dragonfly Common Stock in the Merger, subject to achieving specified milestones, up to an aggregate
of 40,000,000 additional shares of our common stock in three tranches.
The
first tranche of 15,000,000 shares is issuable if our 2023 total audited revenue is equal to or greater than $250 million and our 2023
audited operating income is equal to or greater than $35 million. The second tranche of 12,500,000 shares is issuable upon achieving
a volume-weighted average trading price threshold of our common stock over any 20 trading days (which may or may not be consecutive)
within any 30 consecutive trading day period of at least $22.50 on or prior to December 31, 2026, and the third tranche of 12,500,000
shares is issuable upon achieving a volume-weighted average trading price threshold of common stock over any 20 trading days (which may
or may not be consecutive) within any 30 consecutive trading day period of at least $32.50 on or prior to December 31, 2028. To the extent
not previously earned, the second tranche is issuable if the $32.50 price target is achieved by December 31, 2028.
Upon
the consummation of a change of control transaction during either the second milestone earnout period or the third milestone earnout
period, any earnout milestone with respect to such earnout period that has not yet been achieved shall automatically be deemed to have
been achieved if a change of control transaction is announced with an imputed share price of common stock of at least $22.50 on or prior
to the end of second earnout period or $32.50 on prior to the third earnout period.
PIPE
Investment
Pursuant
to the subscription agreement, dated as of May 15, 2022 (the “Subscription Agreement”), by and between Chardan and
Chardan NexTech Investments 2 LLC (or an affiliate thereof if assigned pursuant to the Subscription Agreement, the “Sponsor”),