What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-15 · 498 added, 253 removed, 485 unchanged (61% of the section changed)

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References to “Legacy Dragonfly” refer to Dragonfly Energy

Corp., a Nevada corporation and our wholly-owned subsidiary.

The following discussion and analysis of the Company’s financial condition

and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes

thereto contained elsewhere in this Quarterly Report.

Certain information contained in the discussion and analysis set forth below includes

forward-looking statements that involve risks and uncertainties.

Corp., a Nevada corporation, one of our wholly-owned subsidiaries.

The following discussion and analysis of the Company’s financial

condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and

the notes thereto contained elsewhere in this Quarterly Report.

Certain information contained in the discussion and analysis set forth

below includes forward-looking statements that involve risks and uncertainties.

a result of the completion of the Business Combination (as defined herein), the financial statements of Legacy Dragonfly are now the

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or to scale to mass production;

failure to timely achieve the anticipated benefits of our recent licensing arrangement with Stryten Energy LLC;

failure to produce lithium battery cells in the United States in a timely manner or at all, or to scale to mass production;

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as a result of improperly identifying the applicable tariff rate payable on our products;

ability to maintain the listing of our common stock on the Nasdaq Global Market and our public warrants on the Nasdaq Capital Market;

ability to maintain the listing of our common stock and our public warrants on the Nasdaq Capital Market;

possibility that we may be adversely affected by other economic, business and/or competitive factors (including an economic slowdown

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or projections will result or be achieved or accomplished.

are a manufacturer of non-toxic deep cycle lithium-ion batteries that are designed to displace lead acid batteries in a number of

different storage applications and end markets including recreational vehicle (“ RV ”), marine vessel, and solar,

oil and gas and off-grid industries, with disruptive solid-state cell technology currently under development.

are a manufacturer of non-toxic deep cycle lithium-ion batteries that are designed to displace lead acid batteries in a number of different

storage applications and end markets including recreational vehicle (“ RV ”), marine vessel, and solar, oil and gas

and off-grid industries, with disruptive solid-state cell technology currently under development.

2020, we have sold over 310,000 batteries.

For the quarters ended March 31, 2024, and March 31, 2023, we sold 11,098 and 20,331 batteries,

For the quarters ended June 30, 2024, and June 30, 2023, we sold 11,526 and 20,966 batteries,

respectively, and had $13.2 million and $19.3 million in net sales, respectively.

We currently offer a line of batteries across our “Battle

Born” and “Dragonfly” brands, each differentiated by size, power and capacity, consisting of seven different models,

four of which come with a heated option.

We primarily sell “Battle Born” branded batteries directly to consumers (“ DTC ”)

and “Dragonfly” branded batteries to original equipment manufacturers (“ OEMs ”).

For the six months ended June 30, 2024 and June 30,

2023, we sold 22,624 and 41,297 batteries, respectively, and had $25.7 million and $38.1 million in net sales, respectively.

offer a line of batteries across our “Battle Born” and “Dragonfly” brands, each differentiated by size, power

and capacity, consisting of seven different models, four of which come with a heated option.

We primarily sell “Battle Born”

branded batteries directly to consumers (“ DTC ”) and “Dragonfly” branded batteries to original equipment

manufacturers (“ OEMs ”).

decrease in sales is a reflection of weaker demand from both OEM and DTC customers in our core RV and marine markets due to rising interest

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carefully selected suppliers that can meet our demanding quality standards and with whom we have developed long-term relationships.

In May 2024, we announced that we achieved full certification for our energy storage products to be deployed for

use in oil & gas operations in North America.

As a result of this certification, we are working Connexa Energy Company (“ Connexa ”)

to deliver a power product to Alegacy Equipment, a market leading natural gas compressor package company, and their affiliate Agnes Systems.

The power system, which Connexa expects to integrate, are expected to be used in natural gas compression equipment to reduce methane emissions

May 2024, we announced that we achieved full certification for our energy storage products to be deployed for use in oil & gas operations

in North America.

As a result of this certification, we are working Connexa Energy Company (“ Connexa ”) to deliver

a power product to Alegacy Equipment, a market leading natural gas compressor package company, and their affiliate Agnes Systems.

power system, which Connexa expects to integrate, are expected to be used in natural gas compression equipment to reduce methane emissions

across the oilfield.

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We are currently producing sample cells for prospective

customers across a variety of chemistries and end-markets and expect to begin scaling production in the second half of 2024.

of March 31, 2024, we had cash totaling $8.5 million.

Our net loss for the quarter ended March 31, 2024 was $10.4 million and our net

income for the quarter ended March 31, 2023 was $4.8 million.

As a result of becoming a publicly traded company, we continue to need

to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices.

customers across a variety of chemistries and end-markets and expect to begin scaling production during 2025.

of June 30, 2024, we had cash totaling $4.7 million.

Our net loss for the quarter ended June 30, 2024 was $13.6 million and our net loss

for the quarter ended June 30, 2023 was $11.9 million.

As a result of becoming a publicly traded company, we continue to need to hire

additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices.

We have incurred and expect to continue to incur additional expenses as a public company for, among other things, directors’ and

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Equity Facility

intend to opportunistically use the ChEF Equity Facility to help maintain minimum cash balances required by the lenders as we

continue to execute on growing the business through product releases, customer/market expansion, and R&D milestones.

to use the ChEF Equity Facility as a regular source of funds over the next twelve months and our available share balance increases,

allowing for more consistent purchases under the ChEF Equity Facility.

Use of the ChEF Equity Facility may adversely affect us,

including the market price of our common stock and future issuances may be dilutive to existing stockholders.

October 7, 2022, we entered into a purchase agreement with CCM LLC in connection with the ChEF Equity Facility, which was subsequently

amended on May 20, 2024 (as amended, the “ Purchase Agreement ”).

We intend to opportunistically use the ChEF Equity

Facility to help maintain minimum cash balances required by the lenders as we continue to execute on growing the business through product

releases, customer/market expansion, and R&D milestones.

We expect to use the ChEF Equity Facility as a regular source of funds over

the next twelve months and our available share balance increases, allowing for more consistent purchases under the ChEF Equity Facility.

Use of the ChEF Equity Facility may adversely affect us, including the market price of our common stock and future issuances may be dilutive

to existing stockholders.

2023 Offering

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The December 2023 Waiver provided for a one-time issuance of penny warrants (the “ December 2023 Penny Warrants ”)

to purchase up to 1,286,671 shares of our common stock, at an exercise price of $0.01 per share, in connection with the Term Loan Lenders’ agreement to waive the

Tests under the Term Loan for the quarter ended December 31, 2023.

The December 2023 Penny Warrants were immediately exercisable upon

issuance and will expire ten years from the date of issuance.

May 2024 Private Placement

On May 13, 2024, we received a waiver (the “ May 2024 Waiver ”) from the Term Loan Lenders in regards

to our compliance with the Tests as of the last day of the quarter ended March 31, 2024.

The May 2024 Waiver provided for a one-time issuance

of penny warrants (the “ May 2024 Penny Warrants ”) to purchase up to 2,550,000 shares of our common stock (the “ May

2024 Penny Warrant Shares ”), at an exercise price of $0.01 per share, in connection with the Term Loan Lender’s

agreement to waive the Tests under the Term Loan for the quarter ended March 31, 2024.

The May 2024 Penny Warrants were immediately

to purchase up to 1,286,671 shares of our common stock, at an exercise price of $0.01 per share, in connection with the Term Loan Lenders’

agreement to waive the Tests under the Term Loan for the quarter ended December 31, 2023.

The December 2023 Penny Warrants were immediately

exercisable upon issuance and will expire ten years from the date of issuance.

2024 Private Placement

May 13, 2024, we received a waiver (the “ May 2024 Waiver ”) from the Term Loan Lenders in regards to our compliance

with the Tests as of the last day of the quarter ended March 31, 2024.

The May 2024 Waiver provided for a one-time issuance of penny

warrants (the “ May 2024 Penny Warrants ”) to purchase up to 2,550,000 shares of our common stock (the “ May

2024 Penny Warrant Shares ”), at an exercise price of $0.01 per share, in connection with the Term Loan Lender’s agreement

to waive the Tests under the Term Loan for the quarter ended March 31, 2024.

The May 2024 Penny Warrants were immediately exercisable

upon issuance and will expire ten years from the date of issuance.

2024 Private Placement

June 28, 2024, we received a limited waiver and first amendment (the “ Amendment ”) from the Term Loan Lenders in regards

to our compliance with the Tests as of the last day of the quarter ended June 30, 2024.

The Amendment provided for a one-time issuance

of penny warrants (the “ June 2024 Penny Warrants ”) to purchase up to 2,100,000 shares of our common stock (the “ June

2024 Penny Warrant Shares ”), at an exercise price of $0.01 per share, in connection with the Term Loan Lender’s agreement

to waive the Tests under the Term Loan for the quarter ended June 30, 2024.

The June 2024 Penny Warrants were immediately exercisable

upon issuance and will expire ten years from the date of issuance.

addition, the Amendment (i) reduced the liquidity requirement under the Term Loan to be $3.5 million as of the last day of the month

ended June 30, 2024, and $10.0 million as of the last day of each fiscal month thereafter commencing with the fiscal month ending July

31, 2024 and (ii) provided for the interest to be paid on the Payment Date (as defined in the Term Loan) occurred on July 1, 2024 to

be solely payable-in-kind.

Agreement with Stryten

July 29, 2024, us, Legacy Dragonfly and Battle Born Battery Products, LLC (“ Battle Born LLC ”), a newly formed wholly-owned

subsidiary of Legacy Dragonfly, entered into a License Agreement (the “ License Agreement ”) with Stryten Energy LLC

(“ Stryten ”).

Pursuant to the License Agreement, Battle Born LLC granted Stryten an exclusive, worldwide license to

use certain trademarks relating to Legacy Dragonfly’s lithium-ion battery brand, Battle Born Batteries® (the “ Licensed

Trademarks ”) for business-to-business sales of batteries to customers within the following markets:

(i) automative, (ii) marine,

(iii) powersports, (iv) lawn and garden, (v) golf cart, and (vi) military and defense (such industries, the “ Stryten Market ”).

In exchange for the licensing rights, Stryten agreed to pay Battle Born LLC an initial licensing fee of five million dollars ($5,000,000)

(the “ Initial Licensing Fee ”).

The License Agreement provides for mid-single digit royalty payments based on net sales

using the Licensed Trademarks, with a tiered structure reaching up to twenty-five million dollars ($25,000,000), at which point Stryten

will be required to pay a nominal annual license fee.

Additional fees will apply for battery design and contract manufacturing services

outside of the License Agreement.

License Agreement is perpetual in term, unless terminated by:

(i) Battle Born LLC if Stryten fails to pay the royalty payments required

by the License Agreement and such royalty payments remain unpaid thirty (30) days after notice of such overdue payments (provided that

Battle Born LLC uses reasonable efforts to discuss such overdue payments with Stryten), or (ii) either party (x) if the other party materially

breaches the License Agreement and fails to cure such material breach within thirty (30) days of notice of such breach, (y) upon the

occurrence of certain bankruptcy-related events, or (z) under certain circumstances, if the aggregate royalty payments received by Battle

Born LLC under the License Agreement are less than fifteen million dollars ($15,000,000) after five (5) years.

Amendment to our Term Loan

connection with the License Agreement, on July 29, 2024, us, Legacy Dragonfly and Battle Born LLC entered into a Limited Waiver, Consent

and Second Amendment to the Term Loan, Guarantee and Security Agreement (the “ Second Amendment ”) with the Term Loan

Lenders (defined below) under our Original Term Loan (defined below).

to the Second Amendment, the Term Loan Lenders (i) consented to the transactions contemplated by the License Agreement and the Trademark

Transfer Agreement and (ii) agreed to waive the mandatory prepayment under the Loan Agreement that would have been due to the Term Loan

Lenders under the Loan Agreement upon Battle Born LLC’s receipt of the Initial Licensing Fee.

connection with the Amendment, Battle Born LLC entered into a Joinder Agreement with the Term Loan Lenders (the “ Joinder ”)

whereby Battle Born LLC became a guarantor and credit party to the Loan Agreement.

July 31, 2024, we received a waiver (the “ July 2024 Waiver ”) from the Term Loan Lenders in regards to our compliance

with the liquidity tests as of the last day of the fiscal month ended July 31, 2024.

Trucking Market Milestones

We have made significant

progress in developing our distribution channels.

Our batteries have now received approval for installation at Daimler Truck CTS, Rush

Enterprises CVS, and Fontaine Modification, all of which are PDI or modification and upfit centers.

This development ensures the ready

availability of batteries for shipment on new trucks and allows for their inclusion in the tractor’s purchase price.

On August 12, 2024, we announced

that we would be partnering with Highway Transport, a leader in North American liquid chemical transportation, to transition Highway Transport’s

entire fleet of over 500 trucks to our Battle Born all-electric APUs.

As part of the partnership, Highway Transport is expected to install

the Battle Born all-electric APUs on new tractors in addition to retrofitting current models in Highway Transport’s fleet.

partnership with Highway Transport marks a major step forward for our reach in the commercial trucking sector.

We believe the planned

integration of the Battle Born all-electric APU into Highway Transport’s fleet paves the way for wider adoption of our clean energy

solutions, accelerating the transition towards a more sustainable transportation landscape.

On July 1, 2024, we announced that we are now a provider of lithium based liftgate power solutions for Refreshment

Services Pepsi, a privately-held independent bottler and distributor for Pepsi-Cola® products.

With distribution centers across the

U.S., Refreshment Services Pepsi will begin integrating our Battle Born Batteries products into their fleet to power liftgate operations.

The expansion of our lithium-based power solutions to liftgate applications broadens sales opportunities within the trucking market.

Factors Affecting Our Operating Results

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in RVs, and the accelerating trend of solar power adoption among RV customers.

However, rising fuel costs and other

macro-economic conditions have caused a downward shift in decisions taken by end market consumers around spending in the RV market and

in July 2023, we were notified by our largest RV OEM customer that, due to weaker demand for its products and their subsequent focus

on reducing costs, it would no longer install our storage solutions as standard equipment, but rather return to offering those solutions

as an option to dealers and consumers.

While this customer is not moving to a different solution or competitor, as a result in this change

in strategy there was a material limiting effect on our revenue in 2023.

Based on our discussions with customers and current forecast

projections, we expect our revenue in the RV market to increase in the second half of 2024.

While a significant portion of our sales come from the RV market, we also offer targeted solutions using the same

products for the marine market.

These solutions cater to OEMs and consumers alike, addressing the power needs of various vessels like

sailboats, powerboats, and fishing boats (center console and bass).

We have worked closely to follow ABYC (American Boat & Yacht Council)

Standards to develop systems that adhere to the recent ABYC E-13 Guidelines (Standards for Lithium Batteries).

strategy includes plans to expand into new end markets that we have identified as opportunities for our LFP batteries, including

medium and heavy duty trucking, specialty and work vehicles, solar integration, oil and gas, industrial, rail, material handling, and emergency and standby power in the medium term, and data centers, telecom and

distributed on-grid storage in the longer term.

We believe that our current LFP batteries and, eventually, our solid-state

batteries, will be well-suited to supplant traditional lead-acid batteries as a reliable power source for the variety of low power

density uses required in these markets (such as powering the increasing number of on-board tools needed in emergency vehicles).

success of this strategy requires (1) continued growth of these addressable markets in line with our expectations and (2) our

ability to successfully enter these markets.

We expect to incur significant marketing costs understanding these new markets, and

researching and targeting customers in these end markets, which may not result in sales.

If we fail to execute on this growth

strategy in accordance with our expectations, our sales growth would be limited to the growth of existing products and existing end

However, rising fuel costs and other macro-economic conditions

have caused a downward shift in decisions taken by end market consumers around spending in the RV market and in July 2023, we were notified

by our largest RV OEM customer that, due to weaker demand for its products and their subsequent focus on reducing costs, it would no

longer install our storage solutions as standard equipment, but rather return to offering those solutions as an option to dealers and

While this customer is not moving to a different solution or competitor, as a result in this change in strategy there was

a material limiting effect on our revenue in 2023.

Based on our discussions with customers and current forecast projections, we expect

our revenue in the RV market to increase in the second half of 2024.

a significant portion of our sales come from the RV market, we also offer targeted solutions using the same products for the marine market.

These solutions cater to OEMs and consumers alike, addressing the power needs of various vessels like sailboats, powerboats, and fishing

boats (center console and bass).

We have worked closely to follow ABYC (American Boat & Yacht Council) Standards to develop systems

that adhere to the recent ABYC E-13 Guidelines (Standards for Lithium Batteries).

strategy includes plans to expand into new end markets that we have identified as opportunities for our LFP batteries, including medium

and heavy-duty trucking, specialty and work vehicles, solar integration, oil and gas, industrial, rail, material handling, and emergency

and standby power in the medium term, and data centers, telecom and distributed on-grid storage in the longer term.

We believe that our

current LFP batteries and, eventually, our solid-state batteries, will be well-suited to supplant traditional lead-acid batteries as

a reliable power source for the variety of low power density uses required in these markets (such as powering the increasing number of

on-board tools needed in emergency vehicles).

The success of this strategy requires (1) continued growth of these addressable markets

in line with our expectations and (2) our ability to successfully enter these markets.

We expect to incur significant marketing costs

understanding these new markets, and researching and targeting customers in these end markets, which may not result in sales.

to execute on this growth strategy in accordance with our expectations, our sales growth would be limited to the growth of existing products

and existing end markets.

currently rely on two carefully selected cell manufacturers located in China, and a single supplier, also located in China, to manufacture

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and Development

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

The next stage in our technical development is to construct the battery to optimize performance and longevity to meet and exceed

industry standards for our target storage markets.

Ongoing testing and optimizing of more complicated batteries incorporating layered

pouch cells will assist us in determining the optimal cell chemistry to enhance conductivity and increase the number of cycles (charge

and discharge) in the cell lifecycle.

This is expected to require significant additional expense, and we may need to raise additional

funds to continue these research and development efforts.

research and development is primarily focused on the advanced manufacturing of Lithium ion batteries using a dry-electrode process.

are focused on scaling the process to allow for the low-cost domestic manufacturing of cells.

We are also applying the dry-electrode

process to the production of solid-state lithium-ion batteries having an LFP catholyte, a solid electrolyte and an intercalation-based

anolyte (intercalation being the reversible inclusion of a molecule or ion into layered solids).

The next stage in our technical development

is to construct the battery to optimize performance and longevity to meet and exceed industry standards for our target storage markets.

Ongoing testing and optimizing of more complicated batteries incorporating layered pouch cells will assist us in determining the optimal

cell chemistry to enhance conductivity and increase the number of cycles (charge and discharge) in the cell lifecycle.

This is expected

to require significant additional expense, and we may need to raise additional funds to continue these research and development efforts.

of Results of Operations

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of Operations

for the Three months ended March 31, 2024, and March 31, 2023

following table sets forth our results of operations for the three months ended March 31, 2024 and March 31, 2023.

for the Three months ended June 30, 2024, and June 30, 2023

following table sets forth our results of operations for the three months ended June 30, 2024 and June 30, 2023.

This data should be

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by reference to such financial statements and related notes.

Three months ended March 31,

Three months ended June 30,

(in thousands)

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Change in fair market value of warrant liability

Total Other Income (Expense)

Total Other Expense

Loss Before Taxes

Income Tax Benefit

Net (Loss) Income

Three months ended March 31,

Three months ended June 30,

(in thousands)

sales decreased by $6.3 million, or 33.5%, to $12.5 million for the quarter ended March 31, 2024, as compared to $18.8 million for

the quarter ended March 31, 2023.

This decrease was primarily due to lower DTC and OEM battery and accessory sales offset by a

higher average sales price.

For the quarter ended March 31, 2024, DTC revenue decreased by $4.8 million due to decreased customer

demand for our products related to rising interest rates and inflation.

OEM revenue decreased by $1.5 million primarily due to our

largest Recreation Vehicle (RV) customers changing our product from a standard offering to an option.

Excluding this customer our RV OEM sales

were up 69% year over year.

We expect our sales to increase as the cyclical recovery of the RV market gains momentum in the

second half of 2024.

We expect our deployment of products for use in oil and gas operations in North America to begin

contributing to net sales by the fourth quarter of 2024.

sales decreased by $6.1 million, or 31.5%, to $13.2 million for the three months ended June 30, 2024, as compared to $19.3 million for

the three months ended June 30, 2023.

This decrease was primarily due to lower DTC and OEM battery and accessory sales offset by a higher

average sales price.

For the three months ended June 30, 2024, DTC revenue decreased by $3.5 million to $6.5 million, compared to $10.0

million in the second quarter of 2023 due to decreased customer demand for our products, rising interest rates, and inflation.

decreased by $2.6 million to $6.7 million, compared to $9.3 million in the second quarter of 2023 primarily due to our largest RV customer

changing our product from a standard offering to an option, in addition to lower order volumes by key customers, primarily due to a weather

event at our largest customer’s production facility, combined with persisting weakness in the motorized RV market.

Excluding this

customer our RV OEM sales were up 36% year over year for the three months ended June 30, 2024.

expect our deployment of products for use in oil and gas operations in North America to begin contributing to net sales by the fourth

quarter of 2024.

of Goods Sold

of revenue decreased by $4.7 million, or 33.1%, to $9.5 million for the quarter ended March 31, 2024, as compared to $14.1 million for

the quarter ended March 31, 2023.

This decrease was primarily due to lower unit volume and lower material costs associated with consuming

lower-priced inventory resulting in a $4.6 million decrease of product cost and $0.1 million decrease in overhead expense associated

of revenue decreased by $5.3 million, or 34.6%, to $10.0 million for the three months ended June 30, 2024, as compared to $15.4 million

for the three months ended June 30, 2023.

This decrease was primarily due to lower unit volume and lower material costs associated with

consuming lower-priced inventory resulting in a $5.2 million decrease of product cost and $0.1 million decrease in overhead expense associated

with lower labor costs due to reduced headcount.

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in revenue over the next 12 months.

profit decreased by $1.6 million, or 34.6%, to $3.1 million for the quarter ended March 31, 2024, as compared to $4.7 million for the

quarter ended March 31, 2023.

The decrease in gross profit was primarily due to a lower unit volume of sales.

profit decreased by $0.7 million, or 19.3%, to $3.2 million for the three months ended June 30, 2024, as compared to $3.9 million for

the three months ended June 30, 2023.

The decrease in gross profit was primarily due to a lower unit volume of sales offset by higher

average selling price and lower material cost.

and Development Expenses

and development expenses increased by $0.4 million, or 51.5%, to $1.3 million for the quarter ended March 31, 2024, as compared to $0.9

million for the quarter ended March 31, 2023.

The increase was primarily due to higher wage expense in the amount of $0.3 million and

$0.1 million for increased patent and material expenses.

and development expenses increased by $0.4 million, or 43.5%, to $1.5 million for the three months ended June 30, 2024, as compared to

$1.1 million for the three months ended June 30, 2023.

The increase was primarily due to higher wage expense in the amount of $0.3 million

and $0.1 million for increased lease expense for new lease.

While we expect to continue to grow the Research and Development headcount,

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and Administrative Expenses

and administrative expenses decreased by $4.7 million, or 49.3%, to $4.8 million for the quarter ended March 31, 2024, as compared to

$9.5 million for the quarter ended March 31, 2023.

This decrease was primarily due to the issuance of stock-based compensation in the

prior year in the amount of $3.5 million along with lower employee related costs in the amount of $0.5 million due to decreased headcount.

In addition, legal and compliance costs decreased by $0.6 million due to reduced support required for Exchange Act reporting and compliance,

including the preparation of our Annual Report.

Travel expenses in General and Administrative decreased by $0.2 million due to allocation

to the other functional areas in 2024.

We expect General and Administrative Expenses, as a percentage of revenue, to decline over the

next 12 months.

and administrative expenses decreased by $1.9 million, or 25.1%, to $5.7 million for the three months ended June 30, 2024, as compared

to $7.6 million for the three months ended June 30, 2023.

This decrease was primarily due to employee-related costs in the amount of

$2.0 million.

Impacting this is a severance package in the amount of $0.7 million and higher stock-based compensation in the amount of

$0.7 million both in the prior year along with lower employee related costs in the amount of $0.6 million due to decreased headcount.

Professional services, legal, insurance expenses and travel are lower by $0.6 million.

Offsetting these lower costs is an increase in

rent expense in the amount of $0.7 million for our new facility which is fully allocated to general and administrative expenses since

we have not occupied the building as of June 30, 2024.

We expect General and Administrative Expenses, as a percentage of revenue, to

decline over the next 12 months.

and Marketing Expenses

and marketing expenses decreased by $1.4 million, or 34.4%, to $2.7 million for the quarter ended March 31, 2024, as compared to $4.2

million for the quarter ended March 31, 2023.

This decrease was primarily due to lower employee-related costs in the amount of $1.3 million

of which $0.8 million is due to the prior year stock- based compensation.

Lower shipping costs in the amount of $0.4 million is related

to a reduction in units sold is offset by $0.3 million other marketing expense which includes travel expenses allocated from general

and administrative to selling and marketing in 2024.

We expect our Selling and Marketing Expenses to be relatively stable over the next

and marketing expenses decreased by $1.1 million, or 29.6%, to $2.7 million for the three months ended June 30, 2024, as compared to

$3.8 million for the three months ended June 30, 2023.

This decrease was primarily due to lower employee-related costs in the amount

of $0.9 million of which $0.8 million is due to the prior period expense of the Wakespeed earnout accrual.

Lower shipping costs in the

amount of $0.3 million was related to a reduction in units sold.

We expect our Selling and Marketing Expenses to be relatively stable

over the next 12 months.

Other (Expense) Income

expense totaled $4.5 million for the quarter ended March 31, 2024 as compared to total other income of $14.7 million for the quarter

ended March 31, 2023.

Other expense of $4.5 million in quarter ended March 31, 2024 was comprised primarily of interest expense of $4.8

million related to our debt securities offset by a change in fair market value of warrant liability in the amount of $0.2 million.

$14.8 million of other income in quarter ended March 31, 2023 is comprised of the change in fair market value of warrant liability of

$18.5 million offset by interest expense of $3.9 million related to our debt securities.

expense totaled $6.9 million for the three months ended June 30, 2024 as compared to total other expense of $3.3 million for the three

months ended June 30, 2023.

Other expense of $6.9 million in three months ended June 30, 2024 was comprised primarily of interest expense

of $4.9 million related to our debt securities and a change in fair market value of warrant liability in the amount of negative $2.0

The $3.3 million of other expense in three months ended June 30, 2023 was comprised $4.1 million in interest expense related

to our debt securities partial offset by the positive change in fair market value of warrant liability of $0.8 million.

Tax (Benefit) Expense

was no tax expense recorded for the three months ended March 31, 2024 or March 31, 2023.

Based on available evidence as of March 31,

2024 and March 31, 2023, management believes it is more likely than not that some or all the deferred tax assets will not be realized.

was no tax expense recorded for the three months ended June 30, 2024 or the three months ended June 30, 2023.

Based on available

evidence as of June 30, 2024 and June 30, 2023, management believes it is more likely than not that some or all the deferred tax

assets will not be realized.

Accordingly, we established a 100% valuation allowance.

As a result of the full valuation allowance, we did not record a tax benefit

during the quarter ended March 31, 2023 or 2024.

(Loss) Income

experienced a net loss of $10.4 million for the quarter ended March 31, 2024, as compared to net income of $4.8 million for the quarter

ended March 31, 2023.

As described above, this result was driven by lower sales partially offset by lower cost of goods sold, and lower

operating expenses, and a decrease in other income (due to the change in fair market value of our warrants).

As a result of the full valuation allowance, we

did not record a tax benefit during the three months ended June 30, 2023 or the three months ended June 30, 2024.

experienced a net loss of $13.6 million for the three months ended June 30, 2024, as compared to net loss of $11.9 million for the three

months ended June 30, 2023.

As described above, this result was driven by lower sales partially offset by lower cost of goods sold, and

lower operating expenses, and an increase in other income (due to the change in fair market value of our warrants).

for the Six months ended June 30, 2024 and June 30, 2023

following table sets forth our results of operations for the six months ended June 30, 2024, and the six months ended June 30, 2023.

This data should be read together with our financial statements and related notes included elsewhere in this Quarterly Report, and

is qualified in its entirety by reference to such financial statements and related notes.

Six months ended June 30,

(in thousands)

Cost of Goods Sold

Operating expenses

Research and development

General and administrative

Sales and marketing

Total Operating expenses

(Loss) From Operations

Other Income (Expense)

Interest expense, net

Other expense

Change in fair market value of warrant liability

Total Other (Expense) Income

Loss Before Taxes

Income Tax Benefit

Six months ended June 30,

(in thousands)

sales decreased by $12.4 million, or 32.4%, to $25.7 million for the six months ended June 30, 2024, as compared to $38.1 million

for the six months ended June 30, 2023.

This decrease was primarily due to lower DTC and OEM battery and accessory sales offset by a

higher average sales price.

For the six months ended June 30, 2024, DTC revenue decreased by $8.3 million to $11.7 million due to

decreased customer demand for our products related to rising interest rates and inflation.

OEM revenue decreased by $4.1 million to

$14.0 million primarily due to our largest RV customer changing our product from a standard offering to an option, in addition to

lower order volumes by key customers, primarily due to a weather event at our largest customer’s production facility, combined

with persisting weakness in the motorized RV market.

Excluding this customer our RV OEM sales were up 38% year over year for the six

months ended June 30, 2024.

We expect our deployment of products for use in oil and gas operations in North America to begin contributing to net

sales by the fourth quarter of 2024.

of Goods Sold

of revenue decreased by $10.0 million, or 33.9%, to $19.5 million for the six months ended June 30, 2024, as compared to $29.5 million

for the six months ended June 30, 2023.

This decrease was primarily due to lower unit volume and lower material costs associated with

consuming lower-priced inventory resulting in a $9.8 million decrease of product cost and $0.2 million decrease in overhead expense associated

with lower labor costs due to reduced headcount.

We expect our Cost of Goods Sold to increase in conjunction with the anticipated increase

in revenue over the next 12 months.

profit decreased by $2.4 million, or 27.6%, to $6.2 million for the six months ended June 30, 2024, as compared to $8.6 million for the

six months ended June 30, 2023.

The decrease in gross profit was primarily due to a lower unit volume of sales offset by higher average

sales price and consumption of lower-priced inventory.

and Development Expenses

and development expenses increased by $1.0 million or 47.0%, to $2.9 million for the six months ended June 30, 2024, as compared to $1.9

million for the six months ended June 30, 2023.

The increase was primarily due to higher wage expense in the amount of $0.5 million and

$0.1 million for increased lease expense for new building in Fernley.

Other costs including product development, supplies, the allocation

of travel from general and administrative expenses and depreciation related to increase in assets were higher by $0.3 million.

we expect to continue to grow the Research and Development headcount, we expect to do so at a slower rate than in prior years.

and Administrative Expenses

and administrative expenses decreased by $6.6 million, or 38.5%, to $10.5 million for the six months ended June 30, 2024, as compared

to $17.1 million for the six months ended June 30, 2023.

This decrease was primarily due to lower employee related costs in the amount

of $6.0 million.

Impacting this is a prior year severance package in the amount of $0.7 million and lower stock-based compensation in

the amount of $4.1 million along with lower employee related costs in the amount of $1.2 million due to decreased headcount.

services, legal and insurance expenses are lower by $1.2 million as a result of prior year public offering expenses and lower insurance

Travel expenses in General and Administrative decreased by $0.4 million due to allocation to the other functional areas in

Offsetting these lower expenses is an increase in rent expense in the amount of $1.0 million for our new facility which fully allocated

to general and administrative expenses since we have not occupied the building as of June 30, 2024.

We expect General and Administrative

Expenses, as a percentage of revenue, to decline over the next 12 months.

and Marketing Expenses

and marketing expenses decreased by $2.6 million, or 32.1%, to $5.4 million for the six months ended June 30, 2024, as compared to $8.0

million for the six months ended June 30, 2023.

This decrease was primarily due to a $2.2 million decrease in wage-related expenses of

which $1.1 million is related to the prior year expense for the Wakespeed earnout and $0.8 million is due to lower Stock Compensation

Lower shipping costs in the amount of $0.7 million was related to a reduction in units sold.

Offsetting these lower expenses

is an increase of $0.3 million other marketing expense includes travel expenses allocated from general and administrative to selling

and marketing in 2024.

Other Income (Expense)

expense totaled $11.4 million for the six months ended June 30, 2024 as compared to total other income of $11.3 million for the six months

ended June 30, 2023.

Other expense for the six months ended June 30, 2024 is comprised of a negative change in fair market value of our

warrants in the amount of $1.7 million and $9.6 million in interest expense related to our debt securities.

Other income for the six

months ended June 30, 2023 was comprised of a positive change in fair market value of our warrants in the amount of $19.3 million partially

offset by $8.0 million in interest expense related to our debt securities.

Tax (Benefit) Expense

was no tax expense recorded for the six months ended June 30, 2024 or the six months ended June 30, 2023.

Based on available

evidence as of June 30, 2024 and June 30, 2023, management believes it is more likely than not that some or all the deferred tax

assets will not be realized.

Accordingly, we established a 100% valuation allowance.

As a result of the full valuation allowance, we

did not record a tax benefit during the six months ended June 30, 2024 or the six months ended June 30, 2023.

generated a net loss of $24.0 million for the six months ended June 30, 2024, as compared to net loss of $7.1 million for the six months

ended June 30, 2023.

This was a result of an increase in other expense (primarily as a result of a change in fair market value of our

warrants) and lower sales offset by decreased cost of goods sold and lower operating expenses.

Accounting Estimates

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Changes in estimates used in these and other items could have a material impact on our financial statements.

believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our

believe that the following accounting estimates are those most critical to the judgments and estimates used in the preparation of our

financial statements.

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right-of-use assets and assumed lease liabilities are measured based on the remaining lease payments over the remaining portion of the

As our leases do not provide an implicit rate, our incremental borrowing rate is used as a discount rate in determining

the present value of lease payments.

Our incremental borrowing rate was determined by comparing current low- and high-end mortgage loan

rates and calculating an average.

For our new Damonte lease, to be conservative in our estimate, we chose to use the high-end average

as our incremental borrowing rate.

As our leases do not provide an implicit rate, our incremental borrowing rate is used as a discount rate in determining the

present value of lease payments.

Our incremental borrowing rate was determined by comparing current low- and high-end mortgage loan rates

and calculating an average.

For our new Damonte lease, to be conservative in our estimate, we chose to use the high-end average as our

incremental borrowing rate.

Financial Measures

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reported in accordance with U.S.

table below presents our adjusted EBITDA, reconciled to net loss for the three months ended March 31, 2024, and March 31, 2023.

Three months ended March 31,

table below presents our adjusted EBITDA, reconciled to net (loss) income for the three and six months ended June 30, 2024, and June

Three months ended

Six months ended

(in thousands)

Net income (loss)

(in thousands)

Interest Expense

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Stock-Based Compensation (1)

Separation Agreement (2)

June Offering Costs (3)

Change in fair market value of warrant liability (4)

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Compensation is comprised of costs associated with option and RSU grants made to our employees, consultants and board members.

in fair market value of warrant liabilities represents the change in fair value for the three months ended March 31, 2024 and March

Agreement is comprised of $720 in cash severance associated with separation agreement dated April 26, 2023 between us and our former

Chief Legal Officer.

Offering Costs is comprised of fees and expenses, including legal, accounting, and other expenses associated with our secondary offering.

in fair market value of warrant liabilities represents the change in fair value from January 1, 2023 through June 30, 2023 and January

1, 2024 through June 30, 2024, respectively.

and Capital Resources

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cash flows from operations and their sufficiency to fund our operating and investing activities.

As of March 31, 2024, we had cash totaling

As of June 30, 2024, we had cash totaling

$4.7 million.

July 29, 2024, us, Legacy Dragonfly and Battle Born LLC entered into a License Agreement (the “ License Agreement ”)

with Stryten Energy LLC (“ Stryten ”).

In exchange for the licensing rights, Stryten agreed to pay Battle Born LLC an

initial licensing fee of five million dollars ($5,000,000).

Per the License Agreement, payment for the initial licensing fee is due within

30 days of the effective date of the license agreement.

The Company anticipates receiving the $5.0 million dollars for the initial licensing

fee by the end of August 2024.

expect our capital expenditures and working capital requirements to increase materially in the near future, as we continue our research

and development efforts (particularly those related to solid-state lithium-ion battery development), expand our production lines, scale

up production operations and look to enter into adjacent markets for our batteries (with operating expenses expected to increase across

all major expense categories).

We expect to deploy a significant amount of capital to continue our optimization and commercialization

efforts dedicated to our solid-state technology development, as well as continued investment to automate and increase the production

capacity of our existing assembly operation, expansion of our facilities and new strategic investments.

To date, our focus has been on

seeking to prove the fundamental soundness of our manufacturing techniques and our solid-state chemistry.

Moving forward, our solid-state

related investments will focus on chemistry optimization and establishing a pilot line for pouch cell production.

Over the next two to

three years, we expect to spend in excess of $50 million on solid-state development and cell manufacturing technologies.

In connection

with the contraction of our business and uncertainty around the timing of future needs, we reduced our purchase activities in 2023.

a result, our inventory balance at March 31, 2024 decreased by $5.2 million to $33.6 million, compared to $38.8 million at December 31,

and development efforts (particularly those related to lithium-ion cell manufacturing and battery development), expand our production

lines, scale up production operations and look to enter into adjacent markets for our batteries.

We expect to deploy a significant amount

of capital to continue our development and optimization of our solid-state battery technology, as well as continued investment to automate

and increase the production capacity of our existing assembly operation, expansion of our facilities and new strategic investments, including

deployment and scaling of our dry-electrode cell manufacturing processes.

To date, our focus has been on seeking to prove the fundamental

soundness of our manufacturing techniques and our solid-state chemistry.

Moving forward, our solid-state related investments will focus

on chemistry optimization and establishing a pilot line for pouch cell production.

Over the next two to three years, we expect to spend

in excess of $50 million on solid-state development and cell manufacturing technologies.

In connection with the contraction of our business

and uncertainty around the timing of future needs, we reduced our purchase activities in 2024.

As a result, our inventory balance at

June 30, 2024 decreased by $10.1 million to $28.7 million, compared to $38.8 million at December 31, 2023.

expect that we will need to raise additional funds, including through the use of the ChEF Equity Facility and the issuance of equity,

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sources of liquidity, ongoing costs, such as research and development relating to our solid-state batteries, expansion of our facilities,

and new strategic investments.

If such financings are not available, or if the terms of such financings are less desirable than we expect,

we may be forced to take actions to reduce our capital or operating expenditures, including by not seeking potential acquisition opportunities,

eliminating redundancies, or reducing or delaying our production facility expansions, which may adversely affect our business, operating

results, financial condition and prospects.

Further, any future debt or equity financings may be dilutive to our current stockholders.

and new strategic investments, and strategic initiatives.

If such financings are not available, or if the terms of such financings are

less desirable than we expect, we may be forced to take actions to reduce our capital or operating expenditures, including by not seeking

potential acquisition opportunities, eliminating redundancies, or reducing or delaying our production facility expansions, which may

adversely affect our business, operating results, financial condition and prospects.

Further, any future debt or equity financings may

be dilutive to our current stockholders.

Obligations and Requirements

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As part of the Business Combination, we entered into a senior secured term loan facility in an aggregate principal amount of

$75 million (the “ Term Loan ”) pursuant to the Term Loan, Guarantee and Security Agreement (the “ Term Loan

Agreement ”), the proceeds of which were used to repay the $45 million fixed rate senior notes, and ChEF Equity Facility.

$75 million (the “ Term Loan ”) pursuant to the Term Loan, Guarantee and Security Agreement (the “ Original

Term Loan ”) by and among, us, Legacy Dragonfly, Alter Domus (US) LLC, as the Agent to the lenders time-to-time party thereto

(such lenders, the “ Term Loan Lenders ”), the proceeds of which were used to repay the $45 million fixed rate senior

notes, and ChEF Equity Facility.

On June 28, 2024, we entered into a Limited Waiver and First Amendment to the Term Loan (the “ First

Term Loan Amendment ”) with the lenders in regards to our compliance with the Tests as of the last day of the quarter ended

June 30, 2024 and certain amendments to the Original Term Loan.

The First Term Loan Amendment provided for a one-time issuance of June

2024 Penny Warrants to purchase up to 2,100,000 shares, in connection with the lenders’ agreement to waive the Tests under the

Term Loan for the quarter ended June 30, 2024 and to amend the Term Loan.

The June 2024 Penny Warrants are immediately exercisable upon

issuance and will expire ten years from the date of issuance.

connection with the License Agreement, on July 29, 2024, us, Legacy Dragonfly and Battle Born LLC entered into the Second Amendment (together

with the Original Term Loan and the First Term Loan Amendment, the “ Term Loan Agreement ”).

to the Second Amendment, the Term Loan Lenders (i) consented to the transactions contemplated by the License Agreement and the Trademark

Transfer Agreement and (ii) agreed to waive the mandatory prepayment under the Loan Agreement that would have been due to the Lenders

under the Loan Agreement upon Battle Born LLC’s receipt of the Initial Licensing Fee.

connection with the Second Amendment, Battle Born LLC entered into the Joinder.

Term Loan proceeds were used to:

(i) support the Business Combination, (ii) prepay the fixed rate senior notes at closing of the

Business Combination, (iii) pay fees and expenses in connection with the foregoing, (iv) to provide additional growth capital and

(v) for other general/corporate purposes.

The Term Loan will mature on October 7, 2026, or the Maturity Date, and will be subject to

quarterly amortization of 5% per annum beginning 24 months after issuance.

The definitive documents for the Term Loan incorporate

certain mandatory prepayment events and certain affirmative and negative covenants and exceptions hereto.

The financial covenants

for the Term Loan include a maximum senior leverage ratio covenant, a minimum liquidity covenant, a springing fixed charge coverage

ratio covenant, and a maximum capital expenditures covenant.

On March 29, 2023, September 29, 2023, December 29, 2023 and May 13,

2024, we obtained waivers from Alter Domus (US) LLC, as the administrative agent for the lenders (the “ Administrative

Agent ”) and EICF Agent LLC and certain third-party financing source of our failure to satisfy the Tests under the Term

Loan during the quarters ended March 31, 2023, September 30, 2023, December 31, 2023 and March 31, 2024.

On March 31, 2024 and April 29, 2024, we

received additional waivers from the Administrative Agent and the Term Loan Lenders in regard to our compliance with the liquidity

requirement under the Term Loan as of the last day of the fiscal quarter ended March 31, 2024 and as of the last fiscal day for the

month ended April 30, 2024.

However, it is probable that we will fail to meet these covenants within the next twelve months.

accordance with U.S.

(i) support the Business Combination, (ii) prepay the fixed rate senior notes at closing of the Business

Combination, (iii) pay fees and expenses in connection with the foregoing, (iv) to provide additional growth capital and (v) for other

general/corporate purposes.

The Term Loan will mature on October 7, 2026, or the Maturity Date, and will be subject to quarterly amortization

of 5% per annum beginning 24 months after issuance.

The definitive documents for the Term Loan incorporate certain mandatory prepayment

events and certain affirmative and negative covenants and exceptions hereto.

The financial covenants for the Term Loan include a maximum

senior leverage ratio covenant, a minimum liquidity covenant, a springing fixed charge coverage ratio covenant, and a maximum capital

expenditures covenant.

On March 29, 2023, September 29, 2023, December 29, 2023, May 13, 2024 and June 28, 2024, we obtained waivers

from Alter Domus (US) LLC, as the administrative agent for the lenders (the “ Administrative Agent ”) and EICF Agent

LLC and certain third-party financing source of our failure to satisfy the Tests under the Term Loan during the quarters ended March

31, 2023, September 30, 2023, December 31, 2023, March 31, 2024, and June 30, 2024.

On March 31, 2024, April 29, 2024, and June 28, 2024,

we received additional waivers from the Administrative Agent and the Term Loan Lenders in regard to our compliance with the liquidity

requirement under the Term Loan as of the last day of the fiscal quarters ended March 31, 2024 and June 30, 2024, and as of the last

fiscal day for the months ended April 30, 2024 and June 30, 2024.

However, it is probable that we will fail to meet these covenants within

the next twelve months.

In accordance with U.S.

GAAP, we reclassified our notes payable from a long-term liability to a current liability.

The Term Loan

accrues interest (i) until April 1, 2023 at a per annum rate equal to adjusted secured overnight financing rate

(“ SOFR ”) is a margin equal to 13.5%, of which 7% will be payable in cash and 6.5% will be paid in-kind, (ii)

The Term Loan accrues interest as follows:

(i) until April 1, 2024, at a per annum rate equal to adjusted secured overnight financing

rate (“ SOFR ”) plus 7% payable in cash plus an amount ranging from 4.5% to 6.5%, depending on our senior leverage ratio;

(ii) effective April 1, 2024 and thereafter, interest payable to certain lenders subject to regulations of the U.S.

Small Business Administration

(“ SBA ”) with outstanding principal on that date of $30,846 will be limited to 14.0% per annum (except for default

interest permitted under SBA regulations, as applicable);

and (iii) the other outstanding principal will accrue interest from April 1,

2024 thereafter until October 1, 2024, at a per annum rate equal to adjusted SOFR plus 7% payable in cash plus an amount ranging from

4.5% to 6.5%, depending on the senior leverage ratio of the consolidated company.

In each of the foregoing case, adjusted SOFR will

be no less than 1%.

4.5% to 6.5%, depending on the senior leverage ratio of the consolidated company, and at all times thereafter, at a per annum rate equal

to adjusted SOFR plus a margin ranging from 11.5% to 13.5%, depending on our senior leverage ratio.

of interest based on the Term Loan, are as follows:

payable on April 1, 2024, was paid in cash.

(ii) Interest

payable on July 1, 2024, became payable-in-kind.

(iii) Interest

payable on October 1, 2024, will be payable partly in cash and partly in-kind, at a per annum rate equal to adjusted SOFR plus 7% payable

in cash plus an amount ranging from 4.5% to 6.5% paid-in-kind, depending on the senior leverage ratio of the consolidated company (subject

to the 14.0% limit for lenders subject to SBA regulations).

For each payment date occurring on or after January 1, 2025, interest will be payable in cash.

each of the foregoing cases, adjusted SOFR will be no less than 1%.

may elect to prepay all or any portion of the amounts owed prior to the Maturity Date, provided that we provide notice to the Administrative

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amount of shares of common stock, up to a maximum aggregate purchase price of $150 million over the term of the ChEF Equity Facility.

In connection with the ChEF Equity Facility, we filed a registration statement registering the resale of up to 21,512,027 shares that

may be resold into the public markets by CCM LLC, which represented approximately 36% of the shares of our common stock outstanding as

of December 31, 2023.

During the year ended December 31, 2022, we did not sell any shares of our common stock under the ChEF Equity Facility.

During the year ended December 31, 2023, we issued and sold approximately 588,500 shares of our common stock under this facility, resulting

in net cash proceeds of $1,278,566.

From January 1, 2024 through May 14, 2024, we did not issue any shares of common stock under this

Any sales of such shares into the public market could have a significant negative impact on the trading price of our common

This impact may be heightened by the fact that sales to CCM LLC will generally be at prices below the current trading price of

our common stock.

If the trading price of our common stock does not recover or experiences a further decline, sales of shares of common

stock to CCM LLC pursuant to the Purchase Agreement may be a less attractive source of capital and/or may not allow us to raise capital

at rates that would be possible if the trading price of our common stock were higher.

The purchase price of the shares of common stock that we elect to sell to CCM pursuant to the Purchase Agreement will be determined by

reference to the VWAP of the common stock during the applicable VWAP Purchase Date (as defined in the Purchase Agreement) on which we

have timely delivered written notice to CCM directing it to purchase shares of common stock under the Purchase Agreement, less a fixed

3.5% discount to such VWAP.

As consideration for its commitment to purchase shares of our common stock under the Purchase Agreement,

we have agreed to pay a commitment fee of $1 million to CCM (the “Commitment Fee”), payable by way of an additional 3.0%

discount to such VWAP until the Commitment Fee has been paid in full.

In connection with the ChEF Equity Facility, we filed a registration

statement registering the resale of up to 21,512,027 shares that may be resold into the public markets by CCM LLC, which represented

approximately 36% of the shares of our common stock outstanding as of December 31, 2023.

During the year ended December 31, 2022, we

did not sell any shares of our common stock under the ChEF Equity Facility.

During the year ended December 31, 2023, we issued and sold

approximately 588,500 shares of our common stock under this facility, resulting in net cash proceeds of $1,278,566.

During the six months

ended June 30, 2024, we issued and sold approximately 850,000 shares of our common stock under the ChEF Equity Facility, resulting in

net cash proceeds of $737,481.

From July 1, 2024 through the August 13, 2024, we issued and sold approximately 1,092,578 shares of our

common stock under the ChEF Equity Facility, resulting in additional net cash proceeds of $774,740.62.

Any sales of such shares into the public

market could have a significant negative impact on the trading price of our common stock.

This impact may be heightened by the fact that

sales to CCM LLC will generally be at prices below the current trading price of our common stock.

If the trading price of our common

stock does not recover or experiences a further decline, sales of shares of common stock to CCM LLC pursuant to the Purchase Agreement

may be a less attractive source of capital and/or may not allow us to raise capital at rates that would be possible if the trading price

of our common stock were higher.

March 5, 2023, we issued a note in the principal amount of $1.0 million (the “ Principal Amount ”) to Brian Nelson,

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We have reported the underpayment to CBP.

the quarter ended March 31, 2024, we generated a net loss of $10.4 million and had a negative cash flow from operations.

31, 2024, we had approximately $8.5 million in cash and cash equivalents and working capital of $4.2 million.

the Term Loan Agreement, we are obligated to comply with certain financial covenants, which include maintaining a maximum senior

leverage ratio, minimum liquidity, a springing fixed charge coverage ratio, and maximum capital expenditures.

On March 29, 2023,

September 29, 2023, December 29, 2023 and May 13, 2024, we obtained waivers from our Administrative Agent and Term Loan Lenders of our failures to

satisfy the fixed charge coverage ratio and maximum senior leverage ratio with respect to the minimum cash requirements under the

Term Loan for the quarters ended, March 31, 2023, September 30, 2023, December 31, 2024 and March 31, 2024.

On March 31, 2024 and April 29, 2024, we

received additional waivers from our Administrative Agent and Term Loan Lenders in regard to our compliance with our liquidity

requirement under the Term Loan as of the last day of the fiscal quarter ended March 31, 2024 and as of the last day of the fiscal

month ended April 30, 2024.

It is probable that we will fail to meet these covenants within the next twelve months.

If we are unable

to comply with the financial covenants in our loan agreement, the Term Loan Lenders have the right to accelerate the maturity of the

These conditions raise substantial doubt about our ability to continue as a going concern.

the quarter ended June 30, 2024, we generated a net loss of $13.6 million and had a negative cash flow from operations.

As of June 30,

2024, we had approximately $4.7 million in cash and cash equivalents and working capital deficit of $4.6 million.

the Term Loan Agreement, we are obligated to comply with certain financial covenants, which include maintaining a maximum senior leverage

ratio, minimum liquidity, a springing fixed charge coverage ratio, and maximum capital expenditures.

On March 29, 2023, September 29,

2023, December 29, 2023, May 13, 2024 and June 28, 2024, we obtained waivers from our Administrative Agent and Term Loan Lenders of our

failures to satisfy the fixed charge coverage ratio and maximum senior leverage ratio with respect to the minimum cash requirements under

the Term Loan for the quarters ended, March 31, 2023, September 30, 2023, December 31, 2024, March 31, 2024 and June 30, 2024.

31, 2024, April 29, 2024 and June 28, 2024, we received additional waivers from our Administrative Agent and Term Loan Lenders in regard

to our compliance with our liquidity requirement under the Term Loan as of the last day of the fiscal quarters ended March 31, 2024 and

June 30, 2024 and as of the last day of the fiscal months ended April 30, 2024 and June 30, 2024.

In connection with the License Agreement,

on July 29, 2024, us, Legacy Dragonfly and Battle Born LLC entered into the Second Amendment (together with the Original Term Loan and

the First Term Loan Amendment, the “ Term Loan Agreement ”).

Pursuant to the Second Amendment, the Term Loan Lenders

(i) consented to the transactions contemplated by the License Agreement and the Trademark Transfer Agreement and (ii) agreed to waive

the mandatory prepayment under the Loan Agreement that would have been due to the Lenders under the Loan Agreement upon Battle Born LLC’s

receipt of the Initial Licensing Fee.

In connection with the Second Amendment, Battle Born LLC entered into the Joinder.

It is probable

that we will fail to meet these covenants within the next twelve months.

If we are unable to comply with the financial covenants in our

loan agreement, the Term Loan Lenders have the right to accelerate the maturity of the Term Loan.

These conditions raise substantial

doubt about our ability to continue as a going concern.

addition, we may need to raise additional debt and/or equity financing to fund our operations and strategic plans and meet our financial

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future debt or equity financings may be dilutive to our current stockholders.

Flows for the Three months ended March 31, 2024, and March 31, 2023

Three months ended March 31,

Flows for the Six months ended June 30, 2024, and June 30, 2023

Six months ended June 30,

(in thousands)

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Financing activities

cash used in operating activities was $3.4 million for the three months ended March 31, 2024, primarily due to a net loss of $10.4 million

cash used in operating activities was $7.4 million for the six months ended June 30, 2024, primarily due to a net loss of $24.0 million

partially offset by $4.6 million of payment in-kind interest accrued on the term loan and $10.1 million decrease in inventory as a result

of management’s decision to lower overall stocking levels to adjust for more modest demand.

cash used in operating activities was $3.8 million for the three months ended March 31, 2023.

Net income of $4.8 million was offset by

$12.1 million in operating adjustments, primarily due to a $18.5 million change in the fair market value of warrant liability and an

increase in working capital of $3.5 million as a result of an increase accounts payable offset by an increase in inventory and accounts

cash used in investing activities was $0.8 million for the three months ended March 31, 2024, as compared to net cash used in investing

activities of $0.6 million for the three months ended March 31, 2023.

The increase in cash used in investing activities was primarily

due to an increase in capital equipment expenses to support our core battery business and ongoing efforts to develop solid-state battery

technology and manufacturing process.

was zero net cash provided in financing activities, proceeds of $2.7 million note payable was subsequently repaid for the three months ended March 31, 2024, as compared to net cash provided by financing

activities of $2.4 million for the three months ended March 31, 2023 which consisted of $1.0 million note payable and proceeds related

to public warrants.

cash used in operating activities was $5.6 million for six months ended June 30, 2023, primarily due to a net loss of $7.1 million and

negative change of $19.3 million in the fair market value of our warrant liability during the period offset by lower inventory levels

an increase in accounts payable and accrued expenses as a result of extended payments for the large influx of cells received late in

2022 and early 2023.

cash used in investing activities was $1.3 million for the six months ended June 30, 2024, as compared to net cash used in investing

activities of $2.6 million for the six months ended June 30, 2023.

The decrease in cash used in investing activities was primarily

due to a decrease in capital equipment expenses.

was $0.7 million net cash provided in financing activities, primarily from proceeds of issuing and selling shares under ChEF Equity Facility

for the six months ended June 30, 2024, as compared to net cash provided by financing activities of $23.4 million for the six months

ended June 30, 2023 was primarily due to net proceeds of $21.1 million from the June 2023 Offering.

estimated future obligations consist of short-term and long-term operating lease liabilities.

As of March 31, 2024, we had $1.7 million

As of June 30, 2024, we had $2.8 million

in short-term operating lease liabilities and $24.0 million in long-term operating lease liabilities.

disclosed above, we have a Term Loan and as of March 31, 2024, the principal amount outstanding under the Term Loan was $69.7 million.

disclosed above, we have a Term Loan and as of June 30, 2024, the principal amount outstanding under the Term Loan was $69.7 million.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis