Dragonfly Energy Holdings Corp. 10-Q

Item 1. Financial Statements. DRAGONFLY ENERGY HOLDINGS CORP. Unaudited Condensed Consolidated Balance Sheets (in thousands, except share and per share data) June 30, 2023 December 31, 2022 As of June 30, 2023 December 31, 2022 Current Assets Cash $ 32,952 $ 17,781 Accounts receivable, net of allowance for credit losses 2,172 1,444 Inventory 44,198 49,846 Prepaid expenses 1,199 1,624 Prepaid inventory 2,942 2,002 Prepaid income tax 529 525 Other current assets 239 267 Total Current Assets 84,231 73,489 Property and Equipment Machinery and equipment 15,932 10,214 Office furniture and equipment 275 275 Leasehold improvements 1,727 1,709 Vehicle 33 195 Total 17,967 12,393 Less accumulated depreciation and amortization ( 2,180 ) ( 1,633 ) Property and Equipment, Net 15,787 10,760 Operating lease right of use asset 3,912 4,513 Total Assets $ 103,930 $ 88,762 Current Liabilities Accounts payable 19,990 13,475 Accrued payroll and other liabilities 9,758 6,295 Customer deposits 152 238 Uncertain tax position liability 128 128 Notes payable, current portion, net of deferred financing fees 22,372 19,242 Operating lease liability, current portion 1,239 1,188 Total Current Liabilities 53,639 40,566 Long-Term Liabilities Warrant liabilities 14,637 32,831 Accrued expenses-long term 551 492 Operating lease liability, net of current portion 2,890 3,541 Total Long-Term Liabilities 18,078 36,864 Total Liabilities 71,717 77,430 Commitments and Contingencies (See Note 5) - - Equity Common stock, 170,000,000 shares at $ 0.0001 par value, authorized, 58,504,541 and 43,272,728 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively 6 4 Preferred stock, 5,000,000 shares at $ 0.0001 par value, authorized, no shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively - - Additional paid in capital 66,148 38,461 Retained deficit ( 33,941 ) ( 27,133 ) Total Equity 32,213 11,332 Total Liabilities and Shareholders’ Equity $ 103,930 $ 88,762 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 $ 19,274 $ 21,622 $ 38,065 $ 39,925 Cost of Goods Sold 15,176 14,594 29,224 27,402 Gross Profit 4,098 7,028 8,841 12,523 Operating Expenses Research and development 1,067 859 1,947 1,198 General and administrative 7,614 3,816 17,109 7,442 Selling and marketing 3,808 2,881 7,992 5,973 Total Operating Expenses 12,489 7,556 27,048 14,613 Loss From Operations ( 8,391 ) ( 528 ) ( 18,207 ) ( 2,090 ) Other (Expense) Income Interest expense ( 4,113 ) ( 1,228 ) ( 7,928 ) ( 2,491 ) Change in fair market value of warrant liability 804 - 19,327 - Total Other (Expense ) Income ( 3,309 ) ( 1,228 ) 11,399 ( 2,491 ) Loss Before Taxes ( 11,700 ) ( 1,756 ) ( 6,808 ) ( 4,581 ) Income Tax (Benefit) Expense - ( 287 ) - ( 814 ) Net Loss $ ( 11,700 ) $ ( 1,469 ) $ ( 6,808 ) $ ( 3,767 ) Loss Per Share- Basic $ ( 0.25 ) $ ( 0.04 ) $ ( 0.15 ) $ ( 0.10 ) Loss Per Share- Diluted $ ( 0.25 ) $ ( 0.04 ) $ ( 0.15 ) $ ( 0.10 ) Weighted Average Number of Shares- Basic 47,418,269 36,616,430 46,263,591 36,579,990 Weighted Average Number of Shares- Diluted 47,418,269 36,616,430 46,263,591 36,579,990 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) Shares Amount Shares Amount Capital (Deficit) Total Redeemable Preferred Stock Common Stock Additional Paid-In Retained Earnings Shares Amount Shares Amount Capital (Deficit) Total Balance -January 1, 2022 10,000,000 $ 2,000 20,875,475 $ 4 $ 1,619 $ 12,438 $ 14,061 Retroactive application of recapitalization ( 10,000,000 ) ( 2,000 ) 15,621,523 - 2,000 - 2,000 Adjusted balance, beginning of period - - 36,496,998 4 3,619 12,438 16,061 Net loss - - - - - ( 2,298 ) ( 2,298 ) Stock compensation expense - - - - 288 - 288 Exercise of stock options - - 100,374 - 113 - 113 Balance – March 31, 2022 - $ - 36,597,372 4 4,020 10,140 14,164 Net loss - - - - - ( 1,469 ) ( 1,469 ) Stock compensation expense - - - - 431 - 431 Exercise of stock options - - 152,366 - 89 - 89 Balance – June 30, 2022 - $ - 36,749,738 4 4,540 8,671 13,215 Balance -January 1, 2023 - - 43,272,728 4 38,461 ( 27,133 ) 11,332 Net income - - - - - 4,892 4,892 Common stock issued in public offering (ATM), net of costs - - 73,500 - 597 - 597 Exercise of stock options - - 36,009 - 93 - 93 Exercise of public warrants - - 64,971 - 747 - 747 Cashless exercise of liability classified warrants - - 2,348,294 1 10,166 - 10,167 Stock compensation expense - - - - 4,487 - 4,487 Balance – March 31, 2023 - $ - 45,795,502 $ 5 $ 54,551 $ ( 22,241 ) $ 32,315 Net income - - - - - ( 11,700 ) ( 11,700 ) Net income (loss) - - - - - ( 11,700 ) ( 11,700 ) Common stock issued in public offering, net of costs - - 11,405,000 1 7,877 - 7,878 Common stock issued in public offering (ATM), net of costs - - 25,000 - 74 - 74 Exercise of stock options - - 69,012 - 230 - 230 Cashless exercise of liability classified warrants - - 748,029 - 2,462 - 2,462 Shares issued for vested restricted stock units - - 461,998 - - - - Stock compensation expense - - - - 954 - 954 Balance - June 30, 2023 - $ - 58,504,541 $ 6 $ 66,148 $ ( 33,941 ) $ 32,213 Balance - $ - 58,504,541 $ 6 $ 66,148 $ ( 33,941 ) $ 32,213 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 $ ( 6,808 ) $ ( 3,767 ) Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities Stock based compensation 5,441 719 Amortization of debt discount 620 1,196 Change in fair market value of warrant liability ( 19,327 ) - Deferred tax liability - ( 819 ) Non-cash interest expense (Paid-in Kind) 2,510 - Provision for doubtful accounts 93 - Depreciation and amortization 593 389 Loss on disposal of property and equipment 116 62 Changes in Assets and Liabilities Accounts receivable ( 821 ) ( 3,876 ) Inventories 5,648 ( 15,141 ) Prepaid expenses 425 ( 1,236 ) Prepaid inventory ( 940 ) 4,308 Other current assets 28 ( 1,962 ) Other assets 601 551 Income taxes payable ( 4 ) ( 973 ) Accounts payable and accrued expenses 6,272 820 Customer deposits ( 86 ) ( 183 ) Total Adjustments 1,169 ( 16,145 ) Net Cash Used in Operating Activities ( 5,639 ) ( 19,912 ) Cash Flows from Investing Activities Purchase of property and equipment ( 2,571 ) ( 4,819 ) Net Cash Used in Investing Activities ( 2,571 ) ( 4,819 ) 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 22,002 - Payment of offering costs ( 362 ) - Proceeds from public offering (ATM), net 671 - Proceeds from note payable, related party 1,000 - Repayment of note payable, related party ( 1,000 ) - Proceeds from exercise of public warrants 747 - Proceeds from exercise of options 323 200 Net Cash Provided by Financing Activities 23,381 200 Net Increase (Decrease) in Cash 15,171 ( 24,531 ) Beginning cash 17,781 28,630 Ending cash $ 32,952 $ 4,099 Supplemental Disclosures of Cash Flow Information: Cash paid for income taxes $ 237 $ - Cash paid for interest $ 4,361 $ 1,254 Supplemental Non-Cash Items Receivable of options exercised $ - $ 2 Purchases of property and equipment, not yet paid $ 3,583 $ - Cashless exercise of liability classified warrants $ 12,628 $ - 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 $ 32,952 in cash and working capital of $ 30,592 . The Company’s ability to achieve profitability and positive cash flow depends on its ability to increase revenue, contain its expenses and maintain compliance with the financial covenants in its outstanding indebtedness agreements. In connection with the Company’s senior secured term loan facility in an aggregate principal amount of $ 75,000 (the “Term Loan”), the Company is obligated to comply with certain financial covenants, which include maintaining a maximum senior leverage ratio, minimum liquidity, a springing fixed charge coverage ratio, and maximum capital expenditures (See Note 6). On March 29, 2023, the Company obtained a waiver from the Term Loan administrative agent and lenders of its failures to satisfy the fixed charge coverage ratio and maximum senior leverage ratio with respect to the minimum cash requirements under the Term Loan during the quarter ended March 31, 2023. While the Company was in compliance with its covenants for the quarter ended June 30, 2023, it is probable that the Company will fail to meet these covenants within the next twelve months. If the Company is unable to obtain a waiver or if the Company is unable to comply with such covenants, the lenders have the right to accelerate the maturity of the Term Loan. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. In addition, the Company may need to raise additional debt and/or equity financings to fund 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 30 – 90 days of the invoice date and the contracts do not have significant financing components. Trade accounts receivables are recorded gross and are net of any applicable allowance. The Company has an allowance for doubtful accounts as of June 30, 2023 and December 31, 2022 of $ 131 and $ 90 , respectively. 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 $ 593 and $ 389 , respectively. Depreciation expense for the three months ended June 30, 2023 and 2022 was $ 296 and $ 197 , respectively. The various classes of property and equipment and estimated useful lives are as follows: SCHEDULE OF VARIOUS CLASSES OF PROPERTY AND EQUIPMENT AND ESTIMATED USEFUL LIVES Office furniture and equipment 3 to 7 years Vehicles 5 years Machinery and equipment 3 to 7 years Leasehold improvements Remaining Term of Lease Use of Estimates The preparation of financial statements, in conformity with 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 30 - 90 days after shipment. In such instances, the Company records a customer deposit liability. The Company recognizes these contract liabilities as sales after the revenue criteria are met. As of June 30, 2023 and December 31, 2022, the contract liability related to the Company’s customer deposits approximated $ 152 and $ 238 , respectively. The Company recognized $ 221 of the contract liability pertaining to the year ended December 31, 2022 during the six months ended June 30, 2023. The entire contract liability balance of $ 434 as of January 1, 2022 was recognized as revenue during the six months ended June 30, 2022. Disaggregation of Revenue The following table present our disaggregated revenues by distribution channel: SCHEDULE OF DISAGGREGATED REVENUES BY DISTRIBUTION CHANNEL Sales 2023 2022 2023 2022 For The Three Months Ended June 30, For The Six Months Ended June 30, Sales 2023 2022 2023 2022 Retail 5,829 11,850 $ 12,898 $ 24,885 Distributor 4,143 2,534 7,111 4,621 Original equipment manufacture 9,302 7,238 18,056 10,419 Total $ 19,274 $ 21,622 $ 38,065 $ 39,925 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 $ 1,958 and $ 2,534 for the six months ended June 30, 2023 and 2022, respectively. Shipping and handling costs associated with outbound freight totaled $ 951 and $ 1,306 for the three months ended June 30, 2023 and 2022, respectively. Product Warranty The Company offers assurance type warranties from 5 to 10 years on its products. The Company estimates the costs associated with the warranty obligation using historical data of warranty claims and costs incurred to satisfy those claims. The Company estimates, based upon a review of historical warranty claim experience, the costs that may be incurred under our warranties and record a liability in the amount of such estimate at the time a product is sold. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liability and adjust the accrual as claims data and historical experience warrants. The Company has assessed the costs of fulfilling its existing assurance type warranties and has determined that the estimated outstanding warranty obligation on June 30, 2023 and December 31, 2022 to be $ 329 and $ 328 , respectively. 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 two customers comprised approximately 22 % and 20 %, respectively, of accounts receivable as of June 30, 2023. Receivables from three customers comprised approximately 18 %, 10 % and 10 %, respectively, of accounts receivable as of December 31, 2022. There are no other significant accounts receivable concentration. Sales from one customer comprised approximately 26 % of revenue for the six months ended June 30, 2023. One customer accounted for approximately 11 % of the Company’s total revenue for the six months ended June 30, 2022. Sales from one customer comprised approximately 27 % of revenue for the three months ended June 30, 2023. One customer accounted for approximately 15 % of the Company’s total revenue for the three months ended June 30, 2022. Payables to two vendors comprised approximately 56 % and 10 %, respectively, of accounts payables as of June 30, 2023. Payables to one vendor comprised approximately 61 % of accounts payables as of December 31, 2022. For the six months ended June 30, 2023, one vendor accounted for approximately 22 % of the Company’s total purchases. For the six months ended June 30, 2022, one vendor accounted for approximately 26 % of the Company’s total purchases. For the three months ended June 30, 2023, one vendor accounted for approximately 10 % of the Company’s total purchases. For the three months ended June 30, 2022, two vendors accounted for approximately 17 % and 15 %, respectively, of the Company’s total purchases. Advertising The Company expenses advertising costs as they are incurred and are included in selling and marketing expenses.. Advertising expenses amounted to $ 1,270 and $ 1,262 for the six months ended June 30, 2023 and 2022, respectively. Advertising expenses amounted to $ 683 and $ 481 for the three months ended June 30, 2023 and 2022, respectively. Stock-Based Compensation The Company accounts for stock-based compensation arrangements with employees and non-employee consultants using a fair value method which requires the recognition of compensation expense for costs related to all stock-based payments, including stock option s (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 $ 0.0001 , 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 $ 128 as of June 30, 2023, and December 31, 2022 of uncertain tax positions. The Company’s accounting policy is to include penalties and interest related to income taxes if any, in selling, general and administrative expenses. Segment Reporting Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the Company’s Chief Executive Officer to make decisions with respect to resource allocation and assessment of performance. To date, the Company has viewed its operations and manages its business as one operating segment. 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: SCHEDULE OF FAIR VALUE, ASSETS AND LIABILITIES Carrying Amount Fair Value (Level 1) (Level 2) (Level 3) As of June 30, 2023 Liabilities Warrant liability- Term Loan $ 875 $ 875 $ - $ - $ 875 Warrant liability- June public offering 13,612 13,612 - - 13,612 Warrant liability- Private placement warrants 150 150 - 150 - Total liabilities $ 14,637 $ 14,637 $ - $ 150 $ 14,487 The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheets on a recurring basis as of December 31, 2022: Carrying Amount Fair Value (Level 1) (Level 2) (Level 3) As of December 31, 2022 Liabilities Warrant liability- Term Loan $ 30,841 $ 30,841 $ - $ - $ 30,841 Warrant liability- Private placement warrants 1,990 1,990 - 1,990 - Total liabilities $ 32,831 $ 32,831 $ - $ 1,990 $ 30,841 The carrying amounts of accounts receivable and accounts payable are considered level 1 and approximate fair value as of 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: SCHEDULE OF INVENTORY June 30, 2023 December 31, 2022 Raw material $ 38,713 $ 42,586 Finished goods 5,485 7,260 Total inventory $ 44,198 $ 49,846 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 $ 111 to $ 128 . On February 2, 2022, the Company entered into a 124-month lease agreement in Reno, Nevada. The lease calls for monthly base rent of $ 230 , $ 23 of fixed operating expense costs, and estimated monthly property taxes of $ 21 . The monthly base rent and fixed operating expense costs are subject to escalation of 3 % and 2.4 %, respectively, on an annual basis. The first payment is due upon substantial completion of construction of the building which is expected to be within 2 years from the effective date. As of June 30, 2023, the lease has not commenced as the Company does not have control over the asset. The following table presents the breakout of the operating leases as of: SCHEDULE OF TABLE REPRESENTING THE BREAKOUT OF THE OPERATING LEASES June 30, 2023 December 31, 2022 Operating lease right-of-use assets $ 3,912 $ 4,513 Short-term operating lease liabilities 1,239 1,188 Long-term operating lease liabilities 2,890 3,541 Total operating lease liabilities $ 4,129 $ 4,729 Weighted average remaining lease term 3.1 years 3.6 years Weighted average discount rate 5.2 % 5.2 % Assumptions used in determining our incremental borrowing rate include our implied credit rating and an estimate of secured borrowing rates based on comparable market data. 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: SCHEDULE OF THE FUTURE MINIMUM LEASE PAYMENTS UNDER THE OPERATING LEASES Fiscal Years Ending Amount December 31, 2023 (1) $ 704 December 31, 2024 1,435 December 31, 2025 1,435 December 31, 2026 893 Total lease payments 4,467 Less imputed interest 338 Total operating lease liabilities $ 4,129 (1) Represents scheduled payments for the remaining six-month period ending December 31, 2023 SCHEDULE OF LEASE COST 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 $ 348 $ 355 $ 695 $ 527 Operating lease cost Research and development 23 40 45 59 Operating lease cost General and administration 12 20 24 30 Operating lease cost Selling and marketing 12 20 24 30 Total lease cost $ 395 $ 435 $ 788 $ 646 Earnout The former holders of shares of Legacy Dragonfly common stock (including shares received as a result of the conversion of Legacy Dragonfly Preferred Stock into New Dragonfly Common Stock) are entitled to receive their pro rata share of up to 40,000,000 additional shares of common stock (the “Earnout Shares”). The Earnout Shares are issuable in three tranches. The first tranche of 15,000,000 shares is issuable if New Dragonfly’s 2023 total audited revenue is equal to or greater than $ 250,000 and New Dragonfly’s 2023 audited operating income is equal to or greater than $ 35,000 . The second tranche of 12,500,000 shares is issuable upon achieving a volume-weighted average trading price threshold of at least $ 22.50 on or prior to December 31, 2026 and the third tranche of 12,500,000 is issuable upon achieving a volume-weighted average trading price threshold of at least $ 32.50 on or prior to December 31, 2028. To the extent not previously earned, the second tranche is issuable if the $ 32.50 price target is achieved by December 31, 2028. 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 $ 45,000 in fixed rate senior notes (Series 2021-6 Notes) pursuant to a Trust Indenture held by UMB Bank, as trustee and disbursing agent, and Newlight Capital, LLC as servicer. The trust and debt documents also require a Lender Collateral Residual Value Insurance Policy (the “Insurance Policy”, with UMB Bank as named insured for $ 45,000 ), and a placement agent, which is Tribe Capital Markets, LLC. 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 $ 4,824 was recognized upon settlement. During the six months ended June 30, 2022, a total of $ 1,254 of interest expense was incurred under the debt. Amortization of the debt issuance costs amounted to $ 1,197 during the six months ended June 30, 2022. During the three months ended June 30, 2022, a total of $ 635 of interest expense was incurred under the debt. Amortization of the debt issuance costs amounted to $ 584 during the three months ended June 30, 2022. 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 5 % per annum (or $ 937.5 on the first day of each calendar quarter) beginning 24 months after the Closing Date and matures on the fourth anniversary of the Closing Date (“Maturity Date”). The Term Loan accrues interest (i) until April 1, 2023, at a per annum rate equal to the adjusted Secured Overnight Financing Rate (“SOFR”) plus a margin equal to 13.5 %, of which 7 % will be payable in cash and 6.5 % will be paid in kind, (ii) thereafter until October 1, 2024, at a per annum rate equal to adjusted SOFR plus 7 % payable in cash plus an amount ranging from 4.5 % to 6.5 %, depending on the senior leverage ratio of the consolidated company, which will be paid in kind and (iii) at all times thereafter, at a per annum rate equal to adjusted SOFR plus a margin ranging from 11.5 % to 13.5 % payable in cash, depending on the senior leverage ratio of the consolidated company. In each of the foregoing cases, adjusted SOFR will be no less than 1 %. In addition to optional prepayments by the Company upon written notice, the Term Loan Agreement provides for mandatory prepayments upon receipt of proceeds from certain transactions or casualty events. 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 $ 3,651 and $ 7,147 , respectively, of interest expense was incurred under the debt. Amortization of the debt issuance costs amounted to $ 401 and $ 620 , respectively, during the three and six months ended June 30, 2023. The carrying balance of $ 22,372 on June 30, 2023 consisted of $ 75,000 in principal, plus $ 3,702 Paid-in-Kind (PIK) interest, less $ 56,330 in unamortized debt discount related to the debt issuance costs. Financial Covenants Maximum Senior Leverage Ratio The Senior Leverage Ratio is the ratio of (a) consolidated indebtedness, as defined, on such date minus 100% of the unrestricted cash and cash equivalents held (subject to adjustment) to (b) Consolidated earnings before interest, tax and amortization (“EBITDA”) for the trailing twelve (12) fiscal month period most recently ended. If liquidity, as defined, for any fiscal quarter is less than $17,500, the Senior Leverage Ratio shall not be permitted , as of the last day of any fiscal quarter ending during any period set forth below, to exceed the ratio set forth opposite such period in the table below: SCHEDULE OF LEVERAGE RATIO Test Period Ending Leverage Ratio December 31, 2022 - March 31, 2023 6.75 to 1.00 June 30, 2023 - September 30, 2023 6.00 to 1.00 December 31, 2023 - March 31, 2024 5.00 to 1.00 June 30, 2024 - September 30, 2024 4.00 to 1.00 December 31, 2024 - March 31, 2025 3.25 to 1.00 June 30, 2025 and thereafter 3.00 to 1.00 Liquidity The Company shall not permit their Liquidity (determined on a consolidated basis) to be less than $10,000 as of the last day of each fiscal month (commencing with month ending December 31, 2022) . Fixed Charge Coverage Ratio The Fixed Charge Coverage Ratio is the ratio of consolidated EBITDA (less capital expenditures and certain other adjustments) to consolidated fixed charges, as defined in the agreement. If Liquidity is less than $17,500 as of the last day of any fiscal quarter (commencing with the quarter ending December 31, 2022), then the Company shall not permit the Fixed Charge Coverage Ratio for the trailing four quarterly periods ending on the last day of any such quarter to be less than 1.15 to 1.00. Capital Expenditures If consolidated EBITDA for the trailing twelve-month period ending on the most recently completed fiscal quarter is less than $15,000, then the level of capital expenditures is limited . 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: SCHEDULE OF FUTURE DEBT MATURITIES For Year Ended December 31, 2023 (1) $ - 2024 938 2025 3,750 2026 80,620 Total 85,308 Less: Estimated interest paid-in-kind ( 6,606 ) Total debt 78,702 Less: Unamortized debt issuance costs, noncurrent ( 56,330 ) Total carrying amount 22,372 Less: Current portion of debt ( 22,372 ) Total long-term debt $ - (1) Represents scheduled payments for the remaining six-month period ending December 31, 2023 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 $ 197 which approximated fair market value. 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 $ 700 cash plus contingent payments of $ 1,000 each to William Thomason and Richard Jones (the “Earn Out”). The Company determined the contingent consideration to be recognized as contingent compensation to Mr. Thomason and Mr. Jones. The Company concluded the purchase price to be $ 444 and was allocated in its entirety to inventory. Contingent Compensation If, within twenty-four months of the Agreement the Company realizes $ 3,000 in gross sales of product either (a) sold under the Wakespeed brand and/or (b) which incorporates any portion of Purchased IP as listed within the agreement, then the Company will pay to Thomason and Jones each the amount of $ 1,000 as soon as reasonably practicable. This payment may be made in cash or common stock, in the sole discretion of the Company. As a result, the Company determined that a liability should be recorded ratably over the 24-month period. The Company recognized immediate compensation expense within sales and marketing of $ 417 on October 1, 2022 for amounts that should have been accrued for during the period April 2022 through September 2022. In October 2022, the Company determined the sales goals will most likely be achieved within 18 months. As a result, the Company changed its estimate prospectively and accelerated the accrual as if the sales goals would be achieved within an 18-month period from the date of acquisition. As a result, the Company recorded an accrual related to the Earn Out in the amount of $ 1,909 and $ 782 as of June 30, 2023 and December 31, 2022, respectively. 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 $ 469 to repay amounts owed by him to his former employer and entered into a related Promissory Note with a maturity date of March 1, 2026. The loan was forgiven in full in March of 2022 and was recorded within general and administrative expense. On October 25, 2022, the Company entered into a separation and release of claims agreement with its Chief Operating Officer (“COO”). As consideration for the COO’s execution of the agreement, the Company agreed to pay the employee a lump sum payment of $ 100 which is included in general and administrative expenses in the statements of operations, payments equivalent to $ 1,000 divided into 24 monthly payments commencing on December 1, 2022, and all outstanding equity-based compensation awards to become fully vested and exercisable. The COO shall have 12 months from the termination date to exercise outstanding options. 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 $ 1,000 , or the Principal Amount. Upon execution of the Note and funding of the original principal sum, a payment of $ 100 (the “Loan Fee”) was fully earned as of the date of the Note and was due and payable in full in cash on April 4, 2023. The Company paid the Principal Amount and the Loan Fee on April 1, 2023 and April 4, 2023, respectively. On April 26, 2023, the Company entered into a separation and release of claims agreement with its Chief Legal Officer (“CLO”). As consideration for the CLO’s execution of the agreement, the Company agreed to pay the employee payments equivalent to $ 720 for wages and benefits divided into 24 monthly payments commencing on June 1, 2023, and all outstanding equity-based compensation awards to become fully vested and exercisable resulting in an expense of $ 76 . The CLO shall have 3 months from the termination date to exercise outstanding options. The three-month period ended on July 26, 2023 in which the options were not exercised and the options were forfeited as a result. 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 $ 11.50 per share. No fractional shares will be issued upon exercise of the Public Warrants. The Company may elect to redeem the Public Warrants subject to certain conditions, in whole and not in part, at a price of $ 0.01 per Public Warrant if (i) 30 days’ prior written notice of redemption is provided to the holders, and (ii) the last reported sale price of the Company’s common stock equals or exceeds $ 16.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending on the third business day prior to the date on which the Company sends the notice of redemption to the warrant holders. Upon issuance of a redemption notice by the Company, the warrant holders have a period of 30 days to exercise for cash, or on a cashless basis. On the Closing Date, there were 9,487,500 Public Warrants issued and outstanding. The Public Warrants are not precluded from equity classification and are accounted for as such on the date of issuance, and each balance sheet date thereafter. 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 $ 747 in exchange for 64,971 common shares. The Company did not receive any proceeds from public warrants during the three months ended June 30, 2023. 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 570,250 shares of Common Stock (the “Underwriters’ Warrants”) which are exercisable upon issuance and will expire on June 20, 2028. The initial exercise price of the Underwriters’ Warrants is $ 2.50 per share, which equals 125 % of the per share public offering price in the June 2023 Offering and (ii) warrants to purchase up to 10,000,000 shares of Common Stock to the investors in the offering together with shares of Common Stock (the “Investor Warrants”), at the combined public offering price of $ 2.00 per share of Common Stock and accompanying Warrant, less underwriting discounts and commissions . The Company also granted the underwriters a 45-day over-allotment option to purchase up to an additional 1,500,000 shares of Common Stock and/or Investor Warrants to purchase up to 1,500,000 shares of Common Stock at the public offering price per security, less underwriting discounts and commissions. The underwriters exercised its over-allotment option to purchase an additional 1,405,000 shares of Common Stock and Investor Warrants to purchase up to 1,405,000 shares of Common Stock. The Company accounts for the Investor Warrants issued in connection with the Offering in accordance with the guidance contained in ASC 815-40. Such guidance provides that because the Investor Warrants do not meet the criteria for equity treatment thereunder, each warrant must be recorded as a liability. This liability is subject to re-measurement at each balance sheet date. With each such re-measurement, the warrant liabilities will be adjusted to its current fair value, with the change in fair value recognized in the Company’s statement of operations. The Company will reassess the classification at each balance sheet date. It was determined that the Underwriters’ Warrants were not precluded from equity treatment and have been accounted for as such. Underwriter Warrants: SCHEDULE OF UNDERWRITER WARRANTS Common Stock Warrants Warrants Outstanding, January 1, 2023 - Warrants issued 570,250 Warrants Outstanding, June 30, 2023 570,250 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 3,126,472 warrants on a cashless basis, with the Company agreeing to issue 1,100,000 shares of common stock in connection with such exercise. There were 1,501,386 and 4,627,858 private warrants issued and outstanding as of June 30, 2023 and December 31, 2022, respectively. The Company accounts for the Private Warrants issued in connection with the Initial Public Offering in accordance with the guidance contained in ASC 815-40. Such guidance provides that because the private warrants do not meet the criteria for equity treatment thereunder, each private warrant must be recorded as a liability. This liability is subject to re-measurement at each balance sheet date. With each such re-measurement, the warrant liabilities will be adjusted to its current fair value, with the change in fair value recognized in the Company’s statement of operations. The Company will reassess the classification at each balance sheet date. The Private Placement Warrants are classified as Level 2 as the transfer of private placement warrants to anyone who is not a permitted transferee would result in the Private Placement Warrants having substantially similar terms as the Public Warrants (with the exception of a different remaining life). We determined, through use of a Binomial Lattice model, that the fair value of each Private Placement Warrant less a discount for the difference in remaining life is equivalent to that of each Public Warrant. Term Loan Warrants In connection with the entry into the Term Loan Agreement, and as a required term and condition thereof, the Company issued (i) the penny warrants to the Term Loan Lenders exercisable to purchase an aggregate of 2,593,056 shares (the “Penny Warrants”) and (ii) the $10 warrants to issue warrants to the Term Loan Lenders exercisable to purchase an aggregate of 1,600,000 shares of common stock at $ 10 per share (the “$10 Warrants” and, together with the Penny Warrants, the “Term Loan Warrants”). The $10 Warrants were exercised on a cashless basis on October 10, 2022, with the Company issuing 457,142 shares of Common Stock in connection with such exercise. During the three months ended June 30, 2023, penny warrant holders exercised 750,000 warrants on a cashless basis, with the Company agreeing to issue 748,029 shares of common stock in connection with such exercise. The Company concluded the warrants are not considered indexed to the Company’s stock and to be accounted for as liabilities under ASC 815. As such, the estimated fair value is recognized as a liability each reporting period, with changes in the fair value recognized within income each period. 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) The following table provides the significant inputs to the Black-Scholes method for the fair value of the Penny Warrants: SCHEDULE FAIR VALUE WARRANTS As of June 30, 2023 As of December 31, 2022 Common stock price $ 1.48 $ 11.09 Exercise price 0.01 0.01 Dividend yield 0 % 0 % Term (in years) 9.27 9.77 Volatility 119.00 % 90.00 % Risk-free rate 3.80 % 3.90 % Fair value $ 1.48 $ 11.89 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 $ 1.48 $ 1.50 Exercise price $ 2.00 $ 2.00 Dividend yield 0 % 0 % Term (in years) 4.98 5 Volatility 119.00 % 118.00 % Risk-free rate 4.10 % 4.00 % Fair value $ 1.19 $ 1.21 The following table presents a roll-forward of the Company’s warrants from January 1, 2023 to June 30, 2023: SCHEDULE OF ROLL FORWARD IN WARRANTS Private Warrants: Common Stock Warrants Warrants Outstanding, January 1, 2023 4,627,858 Exercise of warrants ( 3,126,472 ) Warrants Outstanding, June 30, 2023 1,501,386 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 9,487,500 Exercise of warrants ( 64,971 ) Warrants Outstanding, June 30, 2023 9,422,529 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 2,593,056 Exercise of warrants ( 2,000,000 ) Warrants Outstanding, June 30, 2023 593,056 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 11,405,000 Warrants Outstanding, June 30, 2023 11,405,000 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 $ 30,841 Issuance of warrants 13,762 Exercise of warrants ( 11,284 ) Change in fair value of warrants ( 18,832 ) Balances, June 30, 2023 $ 14,487 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 170,000,000 shares of common stock with $ 0.0001 par value. Common stockholders are entitled to dividends if and when declared by the Board of Directors subject to the rights of the preferred stockholders. As of June 30, 2023 and December 31, 2022, there were 58,504,541 and 43,272,728 shares issued and outstanding. No dividends on common stock had been declared by the Company. For the six months ended June 30, 2023 and 2022, the Company had reserved shares of common stock for issuance as follows: SUMMARY OF RESERVED SHARES OF COMMON STOCK FOR ISSUANCE June 30, 2023 June 30, 2022 Options issued and outstanding 3,443,099 4,008,139 Common stock outstanding 58,504,541 36,749,738 Warrants outstanding 23,492,221 - Earnout shares 40,000,000 - Shares available for future issuance 4,434,916 622,491 Total 129,874,777 41,380,368 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 $ 150 million, pursuant to the terms of the Purchase Agreement. In addition, the Company appointed LifeSci Capital, LLC as “qualified independent underwriter” with respect to the transactions contemplated by the Purchase Agreement. Under the terms of the Purchase Agreement, the Company issued 98,500 shares pursuant to the Purchase Agreement with CCM LLC for aggregate net proceeds to the Company of $ 671 from the period January 1, 2023 through June 30, 2023. June 2023 Offering In the June 2023 Offering, the Company sold an aggregate of (i) 10,000,000 shares of its Common Stock and, (ii) accompanying Investor Warrants to purchase up to 10,000,000 shares of Common Stock, at the combined public offering price of $ 2.00 per share and accompanying Investor Warrant, less underwriting discounts and commissions, and (iii) the Underwriters’ Warrants. In addition, the Company granted the underwriters a 45-day over-allotment option to purchase up to an additional 1,500,000 shares of Common Stock and/or Investor Warrants to purchase up to an aggregate of 1,500,000 shares of Common Stock at the public offering price per security, less underwriting discounts and commissions. The Investor Warrants are exercisable for five years from the closing date of the June 2023 Offering, have an exercise price of $ 2.00 per share and are immediately exercisable. In the event of certain fundamental transactions, holders of the Investor Warrants will have the right to receive the Black Scholes Value (as defined in the Investor Warrants) of their Investor Warrants calculated pursuant to the formula set forth in the Investor Warrants, payable either in cash or in the same type or form of consideration that is being offered and being paid to the holders of Common Stock. The Underwriters’ Warrants are exercisable upon issuance at an exercise price of $ 2.50 per share and will expire on June 20, 2028 . The Company granted the underwriters a 45-day over-allotment option to purchase up to an additional 1,500,000 shares of Common Stock and/or Warrants to purchase up to an aggregate of 1,500,000 shares of Common Stock at the public offering price per security, less underwriting discounts and commissions, of which the underwriters exercised for 1,405,000 shares of Common Stock and Investor Warrants to purchase up to 1,405,000 shares of Common Stock and the remaining was not exercised within the 45-day window. The Company received gross proceeds of $ 22,810 and incurred $ 2,074 of offering related costs. The gross proceeds were first allocated to the liability classified warrants based upon the transaction date fair value and then to the equity classified warrants with the residual allocated to the common shares. The offering related costs were allocated based on the relative fair value of all instruments, of which $ 1,169 was accounted for as a reduction of additional-paid-in-capital and $ 905 was recorded within general and administrative expenses. The Company accounted for the investor warrants issued in connection with the Public Offering and the exercise of the underwriters’ over-allotment option in accordance with the guidance contained in ASC 815-40. Such guidance provides that the warrants described above are precluded from equity classification. The fair value of the warrants were recorded as a liability in the amount of $ 13,762 on issuance and are being fair valued at each reporting period. 24 Dragonfly Energy Holdings Corp. Notes to Unaudited Condensed Consolidated Financial Statements (in thousands, except share and per share data) Note 11 - STOCK-BASED COMPENSATION Share-based compensation expense for options and RSUs totaling $ 5,441 and $ 719 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 $ 954 and $ 431 was recognized in the Company’s consolidated statements of operations for the three months ended June 30, 2023 and 2022, respectively. Share-based compensation for the six months ended June 30, 2023 and 2022 was allocated as follows: SCHEDULE OF STOCK BASED COMPENSATION 2023 2022 June 30, 2023 2022 Cost of goods sold $ 75 $ 143 Research and development 49 171 Selling and marketing 971 192 General and administrative expense 4,346 213 Total $ 5,441 $ 719 Share-based compensation for the three months ended June 30, 2023 and 2022 was allocated as follows: 2023 2022 June 30, 2023 2022 Cost of goods sold $ 39 $ 46 Research and development 20 134 Selling and marketing 115 132 General and administrative expense 780 119 Total $ 954 $ 431 A summary of the Company’s option activity and related information follows: SCHEDULE OF OPTION ACTIVITY AND RELATED INFORMATION Number of Options (1) Weighted-Average Exercise Price Weighted-Average Grant Date Fair Value Weighted-Average Remaining Contractual Life (in years) Aggregate intrinsic value Balances, January 1, 2022 3,690,955 $ 1.98 $ 1.38 8.52 $ 6,550 Options granted 602,275 4.08 1.81 - Options forfeited ( 30,468 ) 2.93 2.32 - Options exercised ( 254,623 ) 0.94 2.39 - Balances, June 30, 2022 4,008,139 $ 2.36 $ 1.72 8.43 $ 5,845 Balances, January 1, 2023 3,642,958 $ 2.02 $ 1.21 7.90 $ 35,989 Options granted 143,607 7.50 3.82 632 Options forfeited ( 238,345 ) 3.53 1.62 369 Options exercised ( 105,121 ) 3.07 5.91 298 Balances, June 30, 2023 3,443,099 $ 2.11 $ 1.27 6.16 $ 1,520 At June 30, 2023 Vested and Exercisable 2,164,874 $ 1.55 4.89 $ 1,389 Vested and expected to vest 3,443,099 $ 2.11 6.16 $ 1,520 (1) Number of options and weighted average exercise price has been adjusted to reflect the exchange of Legacy Dragonfly’s stock options for New Dragonfly stock options at an exchange ratio of approximately 1.182 as a result of the merger. See Note 1 for additional information. Restricted Stock Units On October 7, 2022, the Company granted 180,000 restricted stock units under the 2022 plan which vest one year from the grant date. The fair value of the restricted stock units on the date of grant was $ 2,520 , which is recognized as compensation expense over the requisite service period based on the value of the underlying shares on the date of grant. On February 10, 2023, the Company granted 461,998 restricted stock units under the 2022 plan which vested immediately. The fair value of the restricted stock units on the date of grant was $ 3,464 and was recorded as compensation expense during the six months ended June 30, 2023. During the first six months of 2023, the Company granted an additional 28,000 restricted stock units which have not vested. The fair value of the 28,000 unvested restricted stock units was $ 105 and an expense of $ 7 was recorded during the six months ended June 30, 2023. 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: SCHEDULE OF RESTRICTED STOCK UNITS ACTIVITY Number of Shares Weighted-Average Fair Market Value Unvested shares at January 1, 2023 180,000 $ 14.00 Granted and unvested 489,998 7.29 Vested ( 461,998 ) 7.50 Unvested shares, June 30, 2023 208,000 $ 14.00 Vested and exercisable as of June 30, 2023 - $ - As of June 30, 2023, there were 4,434,916 shares of unissued authorized and available for future awards under the 2022 Equity Incentive Plan and Employee Stock Purchase Plan. 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. Note 13 - LOSS PER SHARE 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: SCHEDULE OF INFORMATION NEEDED TO COMPUTER BASIC AND DILUTED EARNINGS PER SHARE 2023 2022 2023 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 $ ( 11,700 ) $ ( 1,469 ) $ ( 6,808 ) $ ( 3,767 ) Denominator Weighted average common shares outstanding used to compute net loss per share, basic and diluted 47,418,269 36,616,430 46,263,591 36,579,990 Weighted average common shares outstanding,basic 47,418,269 36,616,430 46,263,591 36,579,990 Net loss per share of common stock, basic and diluted $ ( 0.25 ) $ ( 0.04 ) $ ( 0.15 ) $ ( 0.10 ) Net loss per share of common stock, basic $ ( 0.25 ) $ ( 0.04 ) $ ( 0.15 ) $ ( 0.10 ) 26 Dragonfly Energy Holdings Corp. Notes to Unaudited Condensed Consolidated Financial Statements (in thousands, except share and per share data) The following table sets forth the number of potential shares of common stock that have been excluded from diluted net loss per share because their effect was anti-dilutive: SCHEDULE OF POTENTIAL SHARES OF COMMON STOCK EXCLUDED FROM DILUTED NET (LOSS) INCOME PER SHARE June 30, 2023 June 30, 2022 Warrants 23,492,221 - Restricted stock units 208,000 - Options 3,443,099 4,008,139 Weighted average number of common shares-basic 27,143,320 4,008,139 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 $ 0 and ($ 814 ) during the six months ended June 30, 2023 and 2022, respectively. The effective tax rate differs from the U.S. statutory tax rate primarily due to the valuation allowances on the Company’s deferred tax assets as it is more likely than not that some or all the Company’s deferred tax assets will not be realized. The Company’s policy is to recognize interest and penalties associated with uncertain tax benefits as part of the income tax provision and include accrued interest and penalties with the related income tax liability on the Company’s condensed consolidated balance sheets. The Company has not recognized any interest and penalties in its condensed consolidated statements of operations, nor has it accrued for or made payments for interest and penalties. NOTE 15 – SUBSEQUENT EVENTS Subsequent to the period ending June 30, 2023, and through August 8, 2023, 273,100 investor warrants were exercised for net proceeds of $ 546 . In July 2023, upon a request from the Company’s lenders under the term loan agreement, the Company repaid $ 5,275 of principal to satisfy a portion of its outstanding principal under the term loan agreement. On July 6, 2023, the Company opened a 12-month time deposit account at Wells Fargo Commercial Banking amounting to $ 315 with fixed interest rate of 2 %, payable on a monthly basis. The time deposit account has a current maturity date of July 6, 2024 and is subject to automatic annual renewal. 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