Business Context and Reporting Period
This Form 8-K, dated October 7, 2022, reports the consummation of a business combination between Chardan NexTech Acquisition 2 Corp. (a special purpose acquisition company) and Dragonfly Energy Corp. (Legacy Dragonfly). Upon closing, the registrant changed its name to Dragonfly Energy Holdings Corp. and ceased to be a shell company. The combined entity is now a Delaware corporation with its principal executive offices in Reno, Nevada.
Key Financial Metrics and Capital Structure
Merger Consideration: Legacy Dragonfly shareholders received 41,500,000 shares of the Company's common stock, valued at $10.00 per share, totaling $415,000,000. This included approximately 38,576,648 shares allocated to common stockholders and 3,664,975 shares allocated to option holders.
Debt Financing: The Company entered into a senior secured term loan facility with an aggregate principal amount of $75 million. Proceeds were used to refinance prior indebtedness, support the transaction, and fund working capital.
Equity and Liquidity:
- Redemptions: Approximately 2,071,910 public shares were redeemed for approximately $21,216,358 (approx. $10.24 per share).
- Trust Account: The remaining trust account balance of approximately $10,978,873 was used to fund transaction expenses and general corporate purposes.
- Outstanding Shares: Immediately following the transaction, 44,848,686 shares of Common Stock were issued and outstanding.
- PIPE Investment: The original $5 million PIPE commitment was offset by open market purchases by the Sponsor, resulting in zero net new shares issued under the subscription agreement.
Warrants Issued to Lenders:
- Penny Warrants: 2,593,056 shares exercisable at $0.01 per share.
- $10 Warrants: 1,600,000 shares exercisable at $10.00 per share.
Equity Facility: The Company established a $150 million equity facility (ChEF) with Chardan Capital Markets LLC (CCM LLC), allowing the Company to sell shares up to that aggregate purchase price over time.
Material Changes and Agreements
Debt Covenants: The $75 million Term Loan includes significant financial covenants:
- Liquidity: Minimum unrestricted cash of $10,000,000 required monthly starting December 31, 2022.
- Leverage Ratio: Senior leverage ratio caps ranging from 6.75:1.00 (Q4 2022) down to 3.00:1.00 (Q2 2025 and thereafter) if liquidity falls below $17.5 million.
- Interest: Interest accrues at SOFR plus a margin (initially 13.5%, with 6.5% paid in-kind) until April 1, 2023, with rates adjusting based on leverage ratios thereafter.
Earnout Shares: Up to 40,000,000 additional shares may be issued to Legacy Dragonfly shareholders in three tranches based on:
- Tranche 1 (15M shares): 2023 audited revenue $\ge$ $250M and operating income $\ge$ $35M.
- Tranche 2 (12.5M shares): VWAP of $\ge$ $22.50 over 20 trading days within 30 days by Dec 31, 2026.
- Tranche 3 (12.5M shares): VWAP of $\ge$ $32.50 over 20 trading days within 30 days by Dec 31, 2028.
Guidance, Outlook, and Risks
Management Commentary: The Company intends to use proceeds from the equity facility for working capital and general corporate purposes. The filing includes extensive forward-looking statements regarding market penetration, product commercialization (specifically solid-state cells), and the ability to achieve profitability.
Risks and Contingencies:
- Operational Risks: Reliance on a single manufacturing facility and limited suppliers (two for LFP cells, one for battery management systems).
- Financial Risks: Inability to access the equity line at desired prices; high leverage ratios requiring strict cash flow management; potential dilution from earnout shares and warrants.
- Market Risks: Failure to optimize solid-state cells for mass production; competition; and economic slowdowns.
- Regulatory Risks: Changes in laws affecting the energy storage industry.
Important Facts for Investor Verification
- Debt Service Obligations: Verify the Company's ability to meet the $10 million minimum liquidity covenant and the high initial interest rate (SOFR + 13.5%) with a significant portion paid in-kind.
- Earnout Feasibility: Assess the likelihood of achieving the 2023 revenue ($250M) and operating income ($35M) targets required for the first tranche of 15 million earnout shares.
- Dilution Potential: Monitor the issuance of up to 40 million earnout shares and the exercise of 4.2 million warrants issued to lenders, which could significantly dilute existing shareholders.
- Equity Facility Utilization: Track the Company's ability to sell shares under the $150 million ChEF facility, noting the 9.9% beneficial ownership cap for the buyer (CCM LLC).
- Supplier Concentration: Confirm the stability of supply chains given the reliance on a single supplier for battery management systems and two for LFP cells.