DFLIW filing — read by section

Item 2. Management’s Discussion and Analysis

ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

 References
in this report (the “ Quarterly Report ”) to “we,” “us,” “our” or the “Company”
refer to Dragonfly Energy Holdings Corp., a Nevada corporation. References to “Legacy Dragonfly” refer to Dragonfly Energy
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. 

 As
a result of the completion of the Business Combination (as defined herein), the financial statements of Legacy Dragonfly are now the
financial statements of us. Prior to the Business Combination, we had no operating assets but, upon consummation of the Business Combination,
the business and operating assets of Legacy Dragonfly acquired by us became our sole business and operating assets. Accordingly, the
financial statements of Legacy Dragonfly and their respective subsidiaries as they existed prior to the Business Combination and reflecting
the sole business and operating assets of the Company going forward, are now the financial statements of us. 

 The
following discussion and analysis of our financial condition and results of operations should be read together with our financial statements
and the related notes and the other financial information included elsewhere in this Quarterly Report and with our audited consolidated
financial statements (and notes thereto) for the year ended December 31, 2023 included in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission (the “ SEC ”) on April 16, 2024, as amended April 29, 2024 (the “ Annual
Report ”), particularly those under “Risk Factors.” This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result
of various factors, including those discussed below and elsewhere in this Quarterly Report. We undertake no obligation to update these
forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes. 

 Cautionary
Note Regarding Forward Looking-Statements 

 This
Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended (the “ Securities Act ”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”). Forward-looking statements
include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions
and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which
may cause our actual results, performance or achievements to be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that
could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,”
“can,” “anticipate,” “assume,” “should,” “indicate,” “would,”
“believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,”
“plan,” “point to,” “project,” “predict,” “could,” “intend,”
“target,” “potential” and other similar words and expressions of the future. 

 There
are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking
statement made by us. These factors include, but are not limited to: 

 ● 
 our
 ability to successfully increase market penetration into target markets; 

 ● 
 the
 addressable markets that we intend to target do not grow as expected; 

 ● 
 the
 potential for events or circumstances that result in our failure to timely achieve the anticipated benefits of our customer arrangements
 with THOR Industries and its affiliate brands (including Keystone RV Company (“ Keystone ”)), including Keystone’s
 decision in July 2023, 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; 

 ● 
 our
 ability to generate revenue from future product sales and our ability to achieve and maintain profitability; 

 ● 
 the
 loss of any members of our senior management team or other key personnel; 

 ● 
 the
 loss of any relationships with key suppliers, including suppliers in China; 

 ● 
 the
 loss of any relationships with key customers; 

 ● 
 our
 ability to protect our patents and other intellectual property; 

 29 

 ● 
 the
 failure to successfully optimize solid-state cells or to produce commercially viable solid-state cells in a timely manner or at all,
 or to scale to mass production; 

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

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

 ● 
 changes
 in applicable laws or regulations, including changes in the rates of tariffs or any adjustments to the amounts payable by us to customs
 as a result of improperly identifying the applicable tariff rate payable on our products; 

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

 ● 
 the
 possibility that we may be adversely affected by other economic, business and/or competitive factors (including an economic slowdown
 or inflationary pressures); 

 ● 
 our
 ability to sell the desired amounts of shares of common stock at desired prices under our equity facility; 

 ● 
 our
 ability to raise additional capital to fund our operations; 

 ● 
 our
 ability to generate revenue from future product sales and our ability to achieve and maintain profitability; 

 ● 
 the
 accuracy of our projections and estimates regarding our expenses, capital requirements, cash utilization, and need for additional
 financing; 

 ● 
 developments
 relating to our competitors and our industry; 

 ● 
 our
 ability to engage target customers and successfully retain these customers for future orders; 

 ● 
 the
 reliance on two suppliers for our lithium iron phosphate cells and a single supplier for the manufacture of our battery management
 system; 

 ● 
 the
 potential impact of geopolitical events, including the Russia-Ukraine conflict and Hamas’ attack on Israel, and their effects
 on our operations; and 

 ● 
 our
 current dependence on a single manufacturing facility. 

 The
foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or
risk factors that we are faced with that may cause our actual results to differ from those anticipated in such forward-looking statements.
Please see “ Part I-Item 1A-Risk Factors ” of our Annual Report, for additional risks which could adversely impact our
business and financial performance. 

 All
forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue
reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report or the date of the document incorporated
by reference into this report. We have no obligation, and expressly disclaims any obligation, to update, revise or correct any of the
forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs
and projections in good faith and believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs
or projections will result or be achieved or accomplished. 

 30 

 Overview 

 Our
Business 

 We
are a manufacturer of non-toxic deep cycle lithium-ion batteries that are designed to displace lead acid batteries in a number of different
storage applications and end markets including recreational vehicle (“ RV ”), marine vessel, and solar, oil and gas
and off-grid industries, with disruptive solid-state cell technology currently under development. 

 Since
2020, we have sold over 310,000 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. 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. 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 ”). 

 Our
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
rates and inflation. Our RV OEM customers currently include Keystone, THOR, Airstream, and REV, and we are in ongoing discussions with
a number of additional RV OEMs to further increase adoption of our products. Related efforts include seeking to have RV OEMs “design
in” our batteries as original equipment and entering into arrangements with members of the various OEM dealer networks to stock. 

 We
currently source the lithium iron phosphate (“ LFP ”) cells incorporated into our batteries from a limited number of
carefully selected suppliers that can meet our demanding quality standards and with whom we have developed long-term relationships. 

 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
across the oilfield. We expect the first of these systems to be deployed in the third quarter of 2024 and this business line to begin
contributing to net sales by the fourth quarter of 2024. 

 To
supplement our battery offerings, we are also a reseller of accessories for battery systems. These include chargers, inverters, monitors,
controllers and other system accessories from brands such as Victron Energy, Progressive Dynamics, Magnum Energy and Sterling Power.
Pursuant to the Asset Purchase Agreement dated April 22, 2022 by and among us and Thomason Jones Company, LLC (“ Thomason Jones ”)
and the other parties thereto, we also acquired the assets, including the Wakespeed Offshore brand (“ Wakespeed ”) of
Thomason Jones, allowing us to include our own alternator regulator in systems that we sell. 

 In
addition, we have successfully developed innovative manufacturing processes for dry-electrode manufacturing of lithium-ion cells, and
continue development efforts relating to next-generation solid-state technology. Since our inception, we have built a comprehensive patent
portfolio around our proprietary dry-electrode battery manufacturing process, which eliminates the use of harmful solvents and energy-intensive
drying ovens compared to traditional methods. This translates to significant environmental and cost benefits, including reduced energy
consumption, smaller space requirements, and a lower carbon footprint. 

 Moreover,
our solid-state technology in development removes the need for a liquid electrolyte, thereby addressing safety concerns related to flammability.
Our unique competitive edge lies in the combination of solid-state technology with its scalable dry-electrode manufacturing process.
This enables the rapid production of cells having an intercalation anode (like graphite or silicon), unlike many competitors reliant
on less stable lithium metal anodes. We believe this design offers superior cyclability and safety, serving as a key differentiator in
the energy storage market. Furthermore, internal production of both conventional and solid-state cells streamlines our supply chain and
enables vertical integration, ultimately driving down production costs. In October 2023, we announced the successful dry deposition of
anode and cathode electrodes at scale using our patented battery manufacturing process. We are currently producing sample cells for prospective
customers across a variety of chemistries and end-markets and expect to begin scaling production during 2025. 

 31 

 As
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
officers’ liability insurance, director fees and additional internal and external accounting and legal and administrative resources,
including increased audit and legal fees. As discussed under “ Liquidity and Capital Resources ” below, we expect that
we will need to raise additional funds, including through the use of our $150 million equity facility (the “ ChEF Equity Facility ”)
with Chardan Capital Markets LLC (“ CCM LLC ”) and the issuance of equity, equity-related or debt securities or by obtaining
additional credit from financial institutions to fund, together with our principal sources of liquidity, ongoing costs, such as research
and development relating to our solid-state batteries, expansion of our facilities, and new strategic investments. If such financings
are not available, or if the terms of such financings are less desirable than we expect, we may be forced to take actions to reduce our
capital or operating expenditures, including not seeking potential acquisition opportunities, eliminating redundancies, or reducing or
delaying our production facility expansions, which may adversely affect our business, operating results, financial condition and prospects. 

 ChEF
Equity Facility 

 On
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. 

 June
2023 Offering 

 On
June 20, 2023, we entered into an underwriting agreement (the “ Underwriting Agreement ”) with Roth Capital Partners,
LLC, as representative of the several underwriters (the “ Underwriters ”), pursuant to which we sold to the Underwriters,
in a firm commitment underwritten public offering (the “ June 2023 Offering ”), an aggregate of (i) 10,000,000 shares
of our common stock, par value $0.0001, and (ii) accompanying warrants to purchase up to 10,000,000 shares of common stock (the “ Investor
Warrants ”), at the combined public offering price of $2.00 per share and accompanying Investor Warrant, less underwriting discounts
and commissions, and (iii) warrants to purchase up to an aggregate of 570,250 shares of common stock (the “ Underwriters’
Warrants ”). In addition, we granted the Underwriters a 45-day over-allotment option to purchase up to an additional 1,500,000
shares of common stock and/or Investor Warrants to purchase up to an aggregate of 1,500,000 shares of common stock at the public offering
price per security, less underwriting discounts and commissions. 

 The
Investor Warrants are exercisable for five years from the closing date of the Offering, have an exercise price of $2.00 per share and
are immediately exercisable. In the event of certain fundamental transactions, holders of the Investor Warrants will have the right to
receive the Black Scholes Value (as defined in the Investor Warrants) of their Investor Warrants calculated pursuant to the formula set
forth in the Investor Warrants, payable either in cash or in the same type or form of consideration that is being offered and being paid
to the holders of common stock. The Underwriters’ Warrants are exercisable upon issuance and will expire on June 20, 2028. The
initial exercise price of the Underwriters’ Warrants is $2.50 per share, which equals 125% of the per share public offering price
in the Offering. 

 As
part of the June 2023 Offering, the Underwriters partially exercised their over-allotment option in the amount of 1,405,000 shares of
common stock and Investor Warrants to purchase 1,405,000 shares of common stock. The June 2023 Offering closed on June 22, 2023. The
aggregate net proceeds from this offering, including the partial over-allotment option, was approximately $20.7 million. 

 32 

 December
2023 Private Placement 

 On
December 29, 2023, we received a waiver (the “ December 2023 Waiver ”) from the Term Loan Lenders (as defined below)
in regards to our compliance with the fixed charge coverage ratio and maximum senior leverage ratio with respect to the minimum cash
requirements (the “ Tests ”) under the Term Loan (as defined below) as of the last day of the quarter ended December
31, 2023. 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 exercisable
upon issuance and will expire ten years from the date of issuance. 

 June
2024 Private Placement 

 On
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. 

 In
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. 

 Recent
Developments 

 Licensing
Agreement with Stryten 

 On
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. 

 The
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. 

 33 

 Second
Amendment to our Term Loan 

 In
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). 

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

 In
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
2024 Waiver 

 On
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. This
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.

 Key
Factors Affecting Our Operating Results 

 Our
financial position and results of operations depend to a significant extent on the following factors: 

 End
Market Consumers 

 The
demand for our products ultimately depends on demand from consumers in our current end markets. We generate sales through (1) DTC and
(2) through OEMs, particularly in the RV market. 

 An
increasing proportion of our sales has been and is expected to continue to be derived from sales to RV OEMs, driven by continued efforts
to develop and expand sales to RV OEMs with whom we have longstanding relationships. Our RV OEM sales have been on a purchase order basis,
without firm revenue commitments, and we expect that this will likely continue to be the case. Therefore, future RV OEM sales will be
subject to risks and uncertainties, including the number of RVs these OEMs manufacture and sell, which in turn may be driven by the expectations
these OEMs have around end market consumer demand. 

 Demand
from end market consumers is impacted by a number of factors, including fuel costs and energy demands (including an increasing trend
towards the use of green energy), as well as overall macro-economic conditions, such as interest rates and inflation. Sales of our batteries
have benefited from the increased adoption of the RV lifestyle, the demand for and inclusion of additional appliances and electronics
in RVs, and the accelerating trend of solar power adoption among RV customers. However, 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). 

 34 

 Our
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. If we fail
to execute on this growth strategy in accordance with our expectations, our sales growth would be limited to the growth of existing products
and existing end markets. 

 Supply 

 We
currently rely on two carefully selected cell manufacturers located in China, and a single supplier, also located in China, to manufacture
our proprietary battery management system, and we intend to continue to rely on these suppliers going forward. Our close working relationships
with our China-based LFP cell suppliers, reflected in our ability to increase our purchase order volumes (qualifying us for related volume-based
discounts) and order and receive delivery of cells in anticipation of required demand, has helped us moderate increased supply-related
costs associated with inflation, currency fluctuations and U.S. government tariffs imposed on our imported battery cells and to avoid
potential shipment delays. To mitigate against potential adverse production events, we opted to build our inventory of key components,
such as battery cells. However, as many of the supply chain challenges and delays that were prevalent over the last several years have
eased, we are now actively working down our inventory to more appropriate safety stock levels. 

 As
a result of our battery chemistry and active steps we have taken to manage our inventory levels, we have not been subject to the shortages
or price impacts that have been present for manufacturers of nickel manganese cobalt and nickel cobalt aluminum batteries. As we look
toward the production of our solid-state cells, we have signed a Commercial Offtake Agreement with a lithium mining company located in
Nevada for the supply of lithium, which we expect will enable us to further manage our cost of goods over time. 

 Product
and Customer Mix 

 Our
product sales consist of sales of seven different models of LFP batteries, along with accessories for battery systems (individually or
bundled). These products are sold to different customer types (e.g., consumers, OEMs and distributors) and at different prices and involve
varying levels of costs. In any particular period, changes in the mix and volume of particular products sold and the prices of those
products relative to other products will impact our average selling price and our cost of goods sold. Despite our work to moderate increased
supply-related costs, the price of our products may also increase as a result of increases in the cost of components due to inflation,
currency fluctuations and tariffs. OEM sales typically result in lower average selling prices and related margins, which could result
in margin erosion, negatively impact our growth or require us to raise our prices. However, this reduction is typically offset by the
benefits of increased sales volumes. Sales of third-party sourced accessories typically have lower related margin. We expect accessory
sales to increase as we further develop full-system design expertise and product offerings and consumers increasingly demand more sophisticated
systems, rather than simple drop-in replacements. In addition to the impacts attributable to the general sales mix across our products
and accessories, our results of operations are impacted by the relative margins of products sold. As we continue to introduce new products
at varying price points, our overall gross margin may vary from period to period as a result of changes in product and customer mix. 

 35 

 Production
Capacity 

 All
of our battery assembly currently takes place at our 99,000 square foot headquarters and manufacturing facility located in Reno, Nevada.
We currently operate three LFP battery production lines. Consistent with our operating history, we plan to continue to automate additional
aspects of our battery production lines. Our existing facility has the capacity to add up to four additional LFP battery production lines
and construct and operate a pilot production line for domestic cell manufacturing, all designed to maximize the capacity of our manufacturing
facility. Although our automation efforts are expected to reduce our costs of goods, we may not fully recognize the anticipated savings
when planned and could experience additional costs or disruptions to our production activities. 

 In
addition, we entered into a lease on February 8, 2022 for an additional 390,240 square foot warehouse in Reno, Nevada, which is expected
to be completed in the second half of 2024. The commencement date for the lease for this facility was March 25, 2024, based on the construction
project being identified as “substantially complete”. This facility will enable us to consolidate various operations in Reno,
NV and will allow for expected expansion for new markets. 

 On
April 12, 2024, we entered into a lease agreement (the “ Fernley Lease Agreement ”) pursuant to which we agreed to lease
an approximately 64,000 square foot facility (the “ Premises ”) in Fernley, Nevada, to be used for general, warehousing,
assembly/light manufacturing, painting of products, storage fulfillment, distribution of our products, and other uses as permitted under
in the Fernley Lease Agreement. 

 Competition 

 We
compete with traditional lead-acid battery manufacturers and lithium-ion battery manufacturers, who primarily either import their products
or components or manufacture products under a private label. As we continue to expand into new markets, develop new products and move
towards production of our solid-state cells, we will experience competition with a wider range of companies. These competitors may have
greater resources than we do, and may be able to devote greater resources to the development of their current and future technologies.
Our competitors may be able to source materials and components at lower costs, which may require us to evaluate measures to reduce our
own costs, lower the price of our products or increase sales volumes in order to maintain our expected levels of profitability. 

 Research
and Development 

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

 Components
of Results of Operations 

 Net
Sales 

 Net
sales are primarily generated from the sale of our LFP batteries to OEMs and consumers, as well as chargers and other accessories, either
individually or bundled. 

 Cost
of Goods Sold 

 Cost
of goods sold includes the cost of cells and other components of our LFP batteries, labor and overhead, logistics and freight costs,
and depreciation of manufacturing equipment. 

 Gross
Profit 

 Gross
profit, calculated as net sales less cost of goods sold, may vary between periods and is primarily affected by various factors including
average selling prices, product costs, product mix and customer mix. 

 36 

 Operating
Expenses 

 Research
and development 

 Research
and development costs include personnel-related expenses for scientists, experienced engineers and technicians as well as the material
and supplies to support the development of new products and our solid-state technology. As we work towards completing the development
of our solid-state lithium-ion cells and the manufacturing of batteries that incorporate this technology, we anticipate that research
and development expenses will increase significantly for the foreseeable future as we continue to invest in product development and optimizing
and producing solid-state cells. 

 General
and administrative 

 General
and administrative costs include personnel-related expenses attributable to our executive, finance, human resources, and information
technology organizations, certain facility costs, and fees for professional services. 

 Selling
and marketing 

 Selling
and marketing costs include outbound freight, personnel-related expenses, as well as trade show, industry event, marketing, customer
support, and other indirect costs. We expect to continue to make the necessary sales and marketing investments to enable the execution
of our strategy, which includes expanding into additional end markets. 

 Total
Other Income (Expense) 

 Other
income (expense) consists primarily of interest expense, the change in fair value of the warrant liability and amortization of debt issuance
costs. 

 Results
of Operations 

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

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

 Three months ended June 30, 

 2024 
 % Net Sales 
 2023 
 % Net Sales 

 (in thousands) 

 Net Sales 
 $ 13,208 
 100.0 
 $ 19,274 
 100.0 

 Cost of Goods Sold 
 10,041 
 76.0 
 15,350 
 79.6 

 Gross profit 
 3,167 
 24.0 
 3,924 
 20.4 

 Operating expenses 
 
 Research and development 
 1,531 
 11.6 
 1,067 
 5.5 

 General and administrative 
 5,704 
 43.2 
 7,614 
 39.5 

 Sales and marketing 
 2,681 
 20.3 
 3,808 
 19.8 

 Total Operating expenses 
 9,916 
 75.1 
 12,489 
 64.8 

 Loss From Operations 
 (6,749 ) 
 (51.1 ) 
 (8,565 ) 
 (44.4 ) 

 Other Income (Expense) 
 
 Interest expense, net 
 (4,878 ) 
 (37.0 ) 
 (4,138 ) 
 (21.5 ) 

 Other expense 
 (19 ) 
 (0.1 ) 
 - 
 0.0 

 Change in fair market value of warrant liability 
 (1,981 ) 
 (15.0 ) 
 804 
 4.2 

 Total Other Expense 
 (6,878 ) 
 (52.1 ) 
 (3,334 ) 
 (17.3 ) 

 Loss Before Taxes 
 (13,627 ) 
 (103.2 ) 
 (11,899 ) 
 (61.7 ) 

 Income Tax Benefit 
 - 
 - 
 - 
 - 

 Net Loss 
 $ (13,627 ) 
 (103.2 ) 
 $ (11,899 ) 
 (61.7 ) 

 Three months ended June 30, 

 2024 
 2023 

 (in thousands) 

 DTC 
 6,534 
 9,972 

 % Net Sales 
 49.5 
 51.7 

 OEM 
 6,674 
 9,302 

 % Net Sales 
 50.5 
 48.3 

 Net Sales 
 $ 13,208 
 19,274 

 37 

 Net
Sales 

 Net
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. OEM revenue
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. 

 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. 

 Cost
of Goods Sold 

 Cost
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. We expect our Cost of Goods Sold to increase in conjunction with the anticipated increase
in revenue over the next 12 months. 

 Gross
Profit 

 Gross
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. 

 Research
and Development Expenses 

 Research
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,
we expect to do so at a slower rate than in prior years. 

 General
and Administrative Expenses 

 General
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. 

 38 

 Selling
and Marketing Expenses 

 Sales
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. 

 Total
Other (Expense) Income 

 Other
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
million. 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. 

 Income
Tax (Benefit) Expense 

 There
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 three months ended June 30, 2023 or the three months ended June 30, 2024. 

 Net
Loss 

 We
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). 

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

 The
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, 

 2024 
 % Net Sales 
 2023 
 % Net Sales 

 (in thousands) 

 Net Sales 
 $ 25,713 
 100.0 
 $ 38,065 
 100.0 

 Cost of Goods Sold 
 19,495 
 75.8 
 29,474 
 77.4 

 Gross profit 
 6,218 
 24.2 
 8,591 
 22.6 

 Operating expenses 
 
 Research and development 
 2,864 
 11.1 
 1,947 
 5.1 

 General and administrative 
 10,517 
 40.9 
 17,109 
 45.0 

 Sales and marketing 
 5,425 
 21.1 
 7,992 
 21.0 

 Total Operating expenses 
 18,806 
 73.1 
 27,048 
 71.1 

 (Loss) From Operations 
 (12,588 ) 
 (48.9 ) 
 (18,457 ) 
 (48.5 ) 

 Other Income (Expense) 
 
 Interest expense, net 
 (9,638 ) 
 (37.5 ) 
 (7,994 ) 
 (21.0 ) 

 Other expense 
 (23 ) 
 (0.1 ) 
 - 
 0.0 

 Change in fair market value of warrant liability 
 (1,745 ) 
 (6.8 ) 
 19,327 
 50.8 

 Total Other (Expense) Income 
 (11,406 ) 
 (44.4 ) 
 11,333 
 29.8 

 Loss Before Taxes 
 (23,994 ) 
 (93.3 ) 
 (7,124 ) 
 (18.7 ) 

 Income Tax Benefit 
 - 
 - 
 - 
 - 

 Net Loss 
 $ (23,994 ) 
 (93.3 ) 
 $ (7,124 ) 
 (18.7 ) 

 39 

 Six months ended June 30, 

 2024 
 2023 

 (in thousands) 

 DTC 
 11,737 
 20,009 

 % Net Sales 
 45.6 
 52.6 

 OEM 
 13,976 
 18,056 

 % Net Sales 
 54.4 
 47.4 

 Net Sales 
 $ 25,713 
 38,065 

 Net
Sales 

 Net
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. 

 Cost
of Goods Sold 

 Cost
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. 

 Gross
Profit 

 Gross
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. 

 Research
and Development Expenses 

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

 40 

 General
and Administrative Expenses 

 General
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. Professional
services, legal and insurance expenses are lower by $1.2 million as a result of prior year public offering expenses and lower insurance
premiums. Travel expenses in General and Administrative decreased by $0.4 million due to allocation to the other functional areas in
2024. 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. 

 Selling
and Marketing Expenses 

 Sales
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
expense. 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. 

 Total
Other Income (Expense) 

 Other
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. 

 Income
Tax (Benefit) Expense 

 There
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. 

 Net
Loss 

 We
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. 

 Critical
Accounting Estimates 

 Our
condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States. The preparation of these condensed consolidated financial statements requires us to make judgments and estimates that affect
the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our financial
statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
On a recurring basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects
of material revisions in an estimate, if any, will be reflected in the consolidated financial statements prospectively from the date
of the change in the estimate. 

 We
consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were
highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from
period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact
on our financial condition or results of operations. 

 Management
has discussed the development and selection of these critical accounting estimates with the Audit Committee of our board of directors.
In addition, there are other items within our financial statements that require estimation but are not deemed critical as defined above.
Changes in estimates used in these and other items could have a material impact on our financial statements. 

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

 Inventory
Valuation 

 We
periodically review physical inventory for excess, obsolete, and potentially impaired items and reserves. Any such inventory is written
down to net realizable value. The reserve estimate for excess and obsolete inventory is dependent on expected future use and requires
management judgement. The level of the estimate is assessed by considering the recent sales experience, the aging of inventories, and
other factors that affect inventory obsolescence. 

 41 

 Warrants 

 We
apply relevant accounting guidance for warrants to purchase our stock based on the nature of the relationship with the counterparty.
For warrants issued to investors or lenders in exchange for cash or other financial assets, we follow guidance issued within ASC 480,
Distinguishing Liabilities from Equity (“ ASC 480 ”), and ASC 815, Derivatives and Hedging (“ ASC 815 ”),
to assist in the determination of whether the warrants should be classified as liabilities or equity. Warrants that are determined to
require liability classifications are measured at fair value upon issuance and are subsequently remeasured to their then fair value at
each subsequent reporting period with changes in fair value recorded in current earnings. Warrants that are determined to require equity
classifications are measured at fair value upon issuance and are not subsequently remeasured unless they are required to be reclassified.
See “ Note 9-Warrants ” in our accompanying condensed consolidated financial statements for information on the warrants. 

 Equity-Based
Compensation 

 We
use the Black-Scholes option-pricing model to determine the fair value of option grants. In estimating fair value, management is required
to make certain assumptions and estimates such as the expected life of units, volatility of our future share price, risk-free rates,
future dividend yields and estimated forfeitures at the initial grant date. RSU awards are valued based on the closing trading price
of our common stock on the date of grant. Changes in assumptions used to estimate fair value could result in materially different results. 

 Income
Taxes 

 We
account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted
rates. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. 

 We
recognize the financial statement effect of an uncertain income tax position when it is more likely than not, based on the technical
merits, that the position will be sustained upon examination. Recognized income tax positions are measured at the largest amount that
is greater than 50% likely to be realized. A valuation allowance is recorded to reduce deferred income tax assets to an amount, which
in the opinion of management is more likely than not to be realized. 

 Management
judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance
recorded against our deferred tax assets. We consider factors such as the cumulative income or loss in recent years; reversal of deferred
tax liabilities; projected future taxable income exclusive of temporary differences; the character of the income tax asset, including
income tax positions; tax planning strategies and the period over which we expect the deferred tax assets to be recovered in the determination
of the valuation allowance. In the event that actual results differ from these estimates or we adjust our estimates in the future, we
may need to adjust our valuation allowance, which could materially impact our financial position and results of operations. 

 Leases 

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

 Non-GAAP
Financial Measures 

 This
Quarterly Report includes a non-generally accepted account principles within the United States (“ U.S. GAAP ”) measure
that we use to supplement our results presented in accordance with U.S. GAAP. Earnings before interest tax and amortization (“ EBITDA ”)
is defined as earnings before interest and other income (expenses), income taxes, and depreciation and amortization. Adjusted EBITDA
is calculated as EBITDA adjusted for stock-based compensation, employee separation expenses, costs associated with the June 2023 Offering,
promissory note forgiveness, and change in the fair market value of warrant liabilities. Adjusted EBITDA is a performance measure that
we believe is useful to investors and analysts because it illustrates the underlying financial and business trends relating to our core,
recurring results of operations and enhances comparability between periods. 

 Adjusted
EBITDA is not a recognized measure under U.S. GAAP and is not intended to be a substitute for any U.S. GAAP financial measure and, as
calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within
the same industry. Investors should exercise caution in comparing our non-GAAP measure to any similarly titled measure used by other
companies. This non-GAAP measure excludes certain items required by U.S. GAAP and should not be considered as an alternative to information
reported in accordance with U.S. GAAP. 

 The
table below presents our adjusted EBITDA, reconciled to net (loss) income for the three and six months ended June 30, 2024, and June
30, 2023. 

 Three months ended 
 June 30, 
 
 Six months ended 

 June 30, 

 2024 
 2023 
 2024 
 2023 

 (in thousands) 
 (in thousands) 

 Net loss 
 $ (13,627 ) 
 $ (11,899 ) 
 $ (23,994 ) 
 $ (7,124 ) 

 Interest Expense 
 4,878 
 4,138 
 9,638 
 7,994 

 Depreciation and Amortization 
 331 
 296 
 663 
 593 

 EBITDA 
 (8,418 ) 
 (7,465 ) 
 (13,693 ) 
 1,463 

 Adjusted for: 
 
 Stock-Based Compensation (1) 
 237 
 954 
 503 
 5,441 

 Separation Agreement (2) 
 - 
 720 
 - 
 720 

 June Offering Costs (3) 
 - 
 904 
 - 
 904 

 Change in fair market value of warrant liability (4) 
 1,981 
 (804 ) 
 1,745 
 (19,327 ) 

 Adjusted EBITDA 
 $ (6,200 ) 
 $ (5,691 ) 
 $ (11,445 ) 
 $ (10,799 ) 

 (1) 
 Stock-Based
 Compensation is comprised of costs associated with option and RSU grants made to our employees, consultants and board members. 

 42 

 (2) 
 Separation
 Agreement is comprised of $720 in cash severance associated with separation agreement dated April 26, 2023 between us and our former
 Chief Legal Officer. 

 (3) 
 June
 Offering Costs is comprised of fees and expenses, including legal, accounting, and other expenses associated with our secondary offering. 

 (4) 
 Change
 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. 

 Liquidity
and Capital Resources 

 Liquidity
describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including
working capital needs, debt service, acquisitions, contractual obligations and other commitments. We assess liquidity in terms of our
cash flows from operations and their sufficiency to fund our operating and investing activities. As of June 30, 2024, we had cash totaling
$4.7 million. 

 On
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. 

 We
expect our capital expenditures and working capital requirements to increase materially in the near future, as we continue our research
and development efforts (particularly those related to 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. 

 We
expect that we will need to raise additional funds, including through the use of the ChEF Equity Facility and the issuance of equity,
equity-related or debt securities or by obtaining additional credit from financial institutions to fund, together with our principal
sources of liquidity, ongoing costs, such as research and development relating to our solid-state batteries, expansion of our facilities,
and new strategic investments, 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. 

 43 

 Financing
Obligations and Requirements 

 On
November 24, 2021, we issued $45 million of fixed rate senior notes, secured by among other things, a security interest in our intellectual
property. As part of the Business Combination, we entered into a senior secured term loan facility in an aggregate principal amount of
$75 million (the “ Term Loan ”) pursuant to the Term Loan, Guarantee and Security Agreement (the “ 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. 

 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. 

 The
Term Loan proceeds were used to: (i) support the Business Combination, (ii) prepay the fixed rate senior notes at closing of the Business
Combination, (iii) pay fees and expenses in connection with the foregoing, (iv) to provide additional growth capital and (v) for other
general/corporate purposes. The Term Loan will mature on October 7, 2026, or the Maturity Date, and will be subject to quarterly amortization
of 5% per annum beginning 24 months after issuance. The definitive documents for the Term Loan incorporate certain mandatory prepayment
events and certain affirmative and negative covenants and exceptions hereto. The financial covenants for the Term Loan include a maximum
senior leverage ratio covenant, a minimum liquidity covenant, a springing fixed charge coverage ratio covenant, and a maximum capital
expenditures covenant. On March 29, 2023, 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 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, 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. 

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

 (i) Interest
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). 

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

 44 

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

 We
may elect to prepay all or any portion of the amounts owed prior to the Maturity Date, provided that we provide notice to the Administrative
Agent and the amount is accompanied by the applicable prepayment premium, if any. Prepayments of the Term Loan are required to be accompanied
by a premium of 5% of the principal amount so prepaid if made prior to the October 7, 2023, 3% if made on and after October 7, 2023 but
prior to October 7, 2024, 1% if made after October 7, 2024 but prior to October 7, 2025, and 0% if made on or after October 7, 2025.
If the Term Loan is accelerated following the occurrence of an event of default, Legacy Dragonfly is required to immediately pay to lenders
the sum of all obligations for principal, accrued interest, and the applicable prepayment premium. 

 Pursuant
to the Term Loan Agreement, we have guaranteed the obligations of Legacy Dragonfly and such obligations will be guaranteed by any of
Legacy Dragonfly’s subsidiaries that are party thereto from time to time as guarantors. Also pursuant to the Term Loan Agreement,
the Administrative Agent was granted a security interest in substantially all of the personal property, rights and assets of us as and
Legacy Dragonfly to secure the payment of all amounts owed to lenders under the Term Loan Agreement. In addition, we entered into a Pledge
Agreement pursuant to which we pledged to the Administrative Agent our equity interests in Legacy Dragonfly as further collateral security
for the obligations under the Term Loan Agreement. At the closing of the Business Combination, we issued to the Term Loan Lenders (i)
the Penny Warrants exercisable to purchase an aggregate of 2,593,056 shares at an exercise price of $0.01 per share, and (ii) warrants
exercisable to purchase 1,600,000 shares of our common stock at an exercise price of $10.00 per share. 

 Pursuant
to the Purchase Agreement, on the terms of and subject to the satisfaction of the conditions in the Purchase Agreement, including the
filing and effectiveness of a registration statement registering the resale by CCM LLC of the shares of common stock issued to it under
the Purchase Agreement, we will have the right from time to time at our option to direct CCM LLC to purchase up to a specified maximum
amount of shares of common stock, up to a maximum aggregate purchase price of $150 million over the term of the ChEF Equity Facility.
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. 

 45 

 On
March 5, 2023, we issued a note in the principal amount of $1.0 million (the “ Principal Amount ”) to Brian Nelson,
one of our directors, in a private placement in exchange for cash in an equal amount (the “ Note ”). The Note became
due and payable in full on April 1, 2023. We were also obligated to pay a fee in the amount of $100,000 (the “ Loan Fee ”)
to Mr. Nelson on April 4, 2023. The Principal Amount of the Note was paid in full on April 1, 2023 and the Loan Fee was paid in full
on April 4, 2023. 

 On
January 30, 2024, we issued an unsecured convertible promissory note (the “ January Note ”) in the principal amount
of $1.0 million (the “ January Principal Amount ”) to Brian Nelson, one of our directors, in a private placement in
exchange for cash in an equal amount. The January Note became due and payable in full on February 2, 2024. We were also obligated to
pay $50,000 (the “ January Loan Fee ”) to Mr. Nelson on February 2, 2024. We paid the January Principal Amount and the
January Loan Fee in full on February 2, 2024. 

 On
February 27, 2024 we issued a convertible promissory (the “ February Note ”) in the amount of $1.7 million (the “ February
Principal Amount ”) to Mr. Nelson, in a private placement in exchange for cash in an equal amount. The February Note became
due and payable in full on March 1, 2024. We were also obligated to pay a $85,000 loan fee (the “ February Loan Fee ”)
to Mr. Nelson on March 1, 2024. We paid the February Principal Amount and the February Loan Fee on March 1, 2024. 

 In
June 2023, we completed the June 2023 Offering which provided net proceeds to us, including the partial over-allotment option exercise,
of approximately $20.7 million. In July 2023, upon a request from our lenders under the Term Loan Agreement, we repaid $5.3 million to
satisfy a portion of its outstanding principal. 

 In
2024, we identified an underpayment of tariffs to CBP in the amount of approximately $1.67 million in the aggregate, related to the improper
classification and valuation of certain of the products used in our batteries. We have reported the underpayment to CBP. 

 Going
Concern 

 For
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. 

 Under
the Term Loan Agreement, we are obligated to comply with certain financial covenants, which include maintaining a maximum senior leverage
ratio, minimum liquidity, a springing fixed charge coverage ratio, and maximum capital expenditures. On March 29, 2023, 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. On March
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. 

 In
addition, we may need to raise additional debt and/or equity financing to fund our operations and strategic plans and meet our financial
covenants. We have historically been able to raise additional capital through issuance of equity and/or debt financing and we intend
to use the ChEF Equity Facility and raise additional capital as needed. However, we cannot guarantee that we will be able to raise additional
equity, contain expenses, or increase revenue, and comply with the financial covenants under the Term Loan. If such financings are not
available, or if the terms of such financings are less desirable than we expect, we may be forced to take actions to reduce our capital
or operating expenditures, including by not seeking potential acquisition opportunities, eliminating redundancies, or reducing or delaying
our production facility expansions, which may adversely affect our business, operating results, financial condition and prospects. Further,
future debt or equity financings may be dilutive to our current stockholders. 

 46 

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

 Six months ended June 30, 

 2024 
 2023 

 (in thousands) 

 Net Cash (used in)/provided by: 
 
 Operating Activities 
 $ (7,430 ) 
 $ (5,639 ) 

 Investing activities 
 $ (1,324 ) 
 $ (2,571 ) 

 Financing activities 
 $ 740 
 $ 23,381 

 Operating
Activities 

 Net
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. 

 Net
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. 

 Investing
Activities 

 Net
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. 

 Financing
Activities 

 There
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. 

 Contractual
Obligations 

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

 As
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. 

 ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 Not
applicable.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
Dragonfly Energy Holdings Corp. 10-Q

Item 2. Management’s Discussion and Analysis
