8-K: Dragonfly Energy Subsidiary Licenses Battery Trademarks to Stryten Energy for $5 Million Upfront

Dragonfly Energy's subsidiary, Battle Born LLC, has granted Stryten Energy an exclusive license for its battery trademarks in several key markets, receiving a $5 million initial fee and potential royalties.

Summary

• Dragonfly Energy Holdings Corp. through its subsidiary, Battle Born LLC, has entered into a license agreement with Stryten Energy LLC.
• Stryten has been granted an exclusive worldwide license to use the 'Battle Born Batteries' trademarks for business-to-business sales in automotive, marine, powersports, lawn and garden, golf cart, and military/defense markets.
• Battle Born LLC will receive an initial licensing fee of $5 million from Stryten.
• The agreement includes mid-single digit royalty payments based on net sales, potentially reaching up to $25 million, after which a nominal annual fee applies.
• Additional fees will be charged for battery design and contract manufacturing services outside the license agreement.
• The license agreement is perpetual unless terminated due to unpaid royalties, material breach, bankruptcy events, or if royalties are less than $15 million after five years.
• Dragonfly Energy also transferred its intellectual property rights in the licensed trademarks to Battle Born LLC and licensed back the rights outside of the Stryten market.
• Lenders have waived a mandatory prepayment that would have been due upon receipt of the initial licensing fee.
• Battle Born LLC has become a guarantor and credit party to the existing loan agreement.

Sentiment

Score: 7

Explanation: The agreement is a positive development for Dragonfly Energy, providing immediate cash and potential for future revenue. However, the reliance on Stryten's sales performance and the termination clauses introduce some risk.

Positives

• Dragonfly Energy secures an immediate $5 million cash inflow through the licensing agreement.
• The potential for up to $25 million in royalty payments provides a significant revenue opportunity.
• The perpetual nature of the license agreement ensures long-term revenue potential.
• The waiver of the mandatory prepayment provides financial flexibility.
• The agreement allows Dragonfly to focus on markets outside of the Stryten Market.

Negatives

• The agreement is subject to termination if royalty payments are not met or if the total royalties are less than $15 million after five years.
• The company is now reliant on Stryten's sales performance to realize the full potential of the royalty payments.
• The company has transferred its intellectual property rights in the licensed trademarks to Battle Born LLC.

Risks

• Stryten's failure to achieve significant sales could limit the royalty payments received by Battle Born LLC.
• There is a risk of termination if Stryten fails to meet its payment obligations or if the total royalties are less than $15 million after five years.
• The company is now a guarantor and credit party to the existing loan agreement.

Future Outlook

The company anticipates ongoing revenue from royalty payments based on Stryten's sales performance in the licensed markets. Additional revenue is expected from battery design and contract manufacturing services outside of the license agreement.

Management Comments

• Denis Phares, President, Chief Executive Officer and interim Chief Financial Officer, signed the report on behalf of the company.

Industry Context

This agreement reflects a trend in the battery industry where companies are leveraging their intellectual property through licensing agreements to expand market reach and generate revenue. It also highlights the growing demand for lithium-ion batteries across various sectors.

Comparison to Industry Standards

• Licensing agreements are common in the battery industry, with companies like LG Chem and Panasonic often licensing their technology to other manufacturers.
• The initial licensing fee of $5 million is significant, but the long-term value will depend on the royalty payments, which are structured as a percentage of net sales, similar to other licensing deals in the sector.
• The tiered royalty structure, reaching up to $25 million, is designed to incentivize Stryten to maximize sales, which is a common practice in licensing agreements.
• The perpetual nature of the agreement is beneficial for long-term revenue generation, but the termination clauses are standard to protect the licensor's interests.

Stakeholder Impact

• Shareholders will benefit from the immediate cash inflow and potential for future revenue.
• Employees may see increased job security due to the new revenue stream.
• Customers may see wider availability of Battle Born Batteries through Stryten's distribution network.
• Suppliers may see increased demand for battery components.

Next Steps

• The company will file copies of the License Agreement, the Trademark Transfer Agreement, the Amendment and the Joinder as exhibits to an amendment to this Form 8-K.
• Dragonfly Energy will monitor Stryten's sales performance to ensure royalty payments are received.

Key Dates

Keywords

licensing agreement, lithium-ion batteries, trademarks, royalty payments, Stryten Energy, Battle Born Batteries, intellectual property, loan agreement, Dragonfly Energy