The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed financial statements
and related notes thereto included elsewhere in this report. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those discussed below. Factors that
could cause or contribute to such differences include, but are not limited to,
those identified below and those discussed in the section titled "Risk Factors"
included elsewhere in this report.
As an "emerging growth company" under the Jumpstart Our Business Startups Act of
2012, we can take advantage of an extended transition period for complying with
new or revised accounting standards. This allows an emerging growth company to
delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. We are electing to delay our adoption of
such new or revised accounting standards. As a result of this election, our
condensed financial statements may not be comparable to the condensed financial
statements of other public companies.
Management's plans and basis of presentation:
The Company was incorporated in the State of Delaware on April 20, 2015.
Effective January 14, 2016, the Company's name was changed to 3D Nanocolor Corp.
("3D Nanocolor") from 2D Nanocolor Corp. Subsequently, effective October 6,
2017, the Company's name was changed to Crown Electrokinetics Corp. from 3D
Nanocolor Corp.
The Company is commercializing technology for smart or dynamic glass with its
first product being the Smart Window Insert by DynamicTint. The Company's
electrokinetic glass technology is an advancement on microfluidic technology
that was originally developed by Hewlett-Packard Company.
On January 26, 2021, the Company completed its public offering, and its common
stock began trading on the Nasdaq Capital Market (Nasdaq) under the symbol CRKN.
On January 22, 2021, the Company's Board of Directors authorized a reverse stock
split at an exchange ratio of one (1) share of common stock for every three (3)
shares of common stock. The reverse stock split was effective on January 25,
2021, such that every three (3) shares of common stock have been automatically
converted into one (1) share of common stock. The Company will not issue
fractional certificates for post-reverse split shares in connection with the
reverse stock split. Rather, all shares of common stock that are held by a
stockholder will be aggregated and each stockholder shall be entitled to receive
the number of whole shares resulting from the combination of the shares so
aggregated. Any fractions resulting from the reverse stock split computation
shall be rounded up to the next whole share.
Public Offerings
On January 26, 2021, the Company entered into an underwriting agreement relating
to the Company's public offering of its common stock, par value $0.0001 per
share. The Company agreed to sell 4,150,000 shares of its common stock to the
underwriters, at a purchase price per share of $4.14 (the offering price to the
public of $4.50 per share minus the underwriters' discount), pursuant to the
Company's registration statement on Form S-1 (File No. 333-249833), as amended,
under the Securities Act of 1933, as amended, and the related registration
statement on Form S-1 (File No. 333-252418) that was filed by the Company under
Rule 462(b) under the Securities Act. The Company has also granted the
underwriters a 30-day option to purchase up to 622,500 additional shares of
common stock to cover over-allotments. On January 28, 2021, the Company received
net proceeds from its public offering of approximately $19.3 million, net of
underwriter fees and commissions of approximately $1.7 million, and offering
costs of $0.4 million.
Additionally, there were 251 shares of our Series A Preferred Stock issued and
outstanding, 1,443 shares of our Series B Preferred Stock issued and 500,756
shares of our Series C Preferred Stock issued, with one shareholder of record of
each such series of our preferred stock.
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On July 19, 2022, the Company entered into an underwriting agreement relating to
the Company's public offering of its common stock, par value $0.0001 per share.
The Company agreed to sell 1,250,000 shares of its common stock to the
underwriters, at a purchase price per share of $0.744 (the offering price to the
public of $0.80 per share minus the underwriters' discount), pursuant to the
Company's registration statement on Form S-3 (File No. 333-262122), under
the Securities Act of 1933, as amended. The Company has also granted the
underwriters a 30-day option to purchase up to 187,500 additional shares of
common stock to cover over-allotments. On July 22, 2022, the Company received
net proceeds of $855,000, net of underwriter fees and commissions of
approximately $70,000, and offering costs of $75,000.
In connection with the Company's public offering, the Company issued a warrant
to the underwriters to purchase 62,500 shares of its common stock. The warrant
may be exercised beginning on the date that is 180 days after July 22, 2022
until July 19, 2027. The exercise price of the warrant is $0.80 per share.
ATM Offering
The Company entered into a Sales Agreement with A.G.P./Alliance Global Partners
(the "Sales Agents") dated March 30, 2022 (the "Sales Agreement"), pursuant to
which the Company may, from time to time, sell up to $5 million in shares (the
"Placement Shares") of the Company's common stock through the Sales Agents,
acting as the Company's sales agent and/or principal, in a continuous
at-the-market offering (the "ATM Offering"). The Company will pay the Sales
Agents a commission of up to 3.0% of the aggregate gross proceeds the Company
receives from all sales of the Company's common stock under the Sales Agreement.
The Placement Shares will be offered and sold pursuant to the Company's shelf
registration statement on Form S-3 (Registration No. 333- 262122) and the
related base prospectus included in the registration statement, as supplemented
by the prospectus supplement dated March 30, 2022.
On October 5, 2022, the Company and the Sales Agents filed the first amendment
to the Sales Agreement (the "First Amendment to the Sales Agreement"). Pursuant
to the First Amendment to the Sales Agreement, the Company may from time to
time, sell up to $3.5 million in Placement Shares of the Company's common stock
through the Sales Agents in a continuous At-the-Market Offering (the Amended ATM
Offering"). According to the First Amendment to the Sales Agreement, the Company
will pay the Sales Agents a commission of up to 3.0% of the aggregate gross
proceeds the Company receives from all sales of its common stock in the Amended
ATM Offering.
As of September 30, 2022, the Company has received net proceeds on sales of
1,647,709 shares of common stock under the Sales Agreement of approximately
$706,000 (after deducting $26,000 in commissions and expenses) at a weighted
average price of $0.44 per share.
Subsequent to September 30, 2022, the Company received net proceeds on sales of
1,720,437 shares of common stock under the Sales Agreement of approximately
$540,000 (after deducting approximately $20,000 in commissions and expenses) at
a weighted average price of $0.32 per share.
Series D Preferred Stock
On July 8, 2022, the Company's Board of Directors authorized 7,000 shares of
Series D preferred stock with a par value of $0.0001 per share. Each preferred
share of Series D preferred stock will have a stated valued of $1,000 per share,
will be convertible into shares of the Company's common stock at an initial
conversion price of $1.30 per share and will be entitled to a dividend of 12%.
The Company may redeem all, but not less than all, of the Series D preferred
stock for cash, at a price per share of Series D Preferred Stock equal to 125%
of the stated value. The Series D preferred stock has no voting rights. As of
June 30, 2022, the Company recorded $1.1 million of shares liability in its
condensed balance sheet related to cash received for 1,058 shares of Series D
preferred stock that were issued in July 2022. In connection with the issuance
of the 1,058 shares of Series D preferred stock, the Company issued 814,102
warrants to purchase shares of the Company's common stock with an exercise price
of $1.30 per share.
Leases
Crown's Research & Development Operation currently occupies 1,700 square feet of
space, located on the HP Inc. campus in Corvallis, Oregon in the Advanced
Technology and Manufacturing Institute (ATAMI). ATAMI is an academic-industrial
research center and business incubator designed to provide an advanced materials
development environment to private sector partner tenants performing research
and development. The facility includes access to shared state-of-the-art tooling
capabilities. ATAMI has grown to 80,000 square feet since its inception in 2004.
22
On March 4, 2021, the Company entered into a standard office lease with Hudson
11601 Wilshire, LLC, to lease 3,500 square feet of office space located at 11601
Wilshire Boulevard, Los Angeles, California 90025. The base monthly rent for the
first year of the lease is $18,375 per month, which increases to $19,018.13 per
month for the second year, $19,683.76 for the third year and $20,372.69 for the
final three months of the lease. The lease expires on June 30, 2024. We believe
that our facilities are adequate to meet our needs for the immediate future and
that, should it be needed, we will be able to secure additional space to
accommodate the expansion of our operations. This office space, along with
ATAMI, offers Crown all the space requirements it needs for the foreseeable
future.
On October 5, 2021, the Company entered into a lease agreement with Pacific N.W.
Properties, LLC to lease 26,963 square feet of warehouse, manufacturing,
production and office space located in Salem Oregon. The commencement date of
the lease is October 1, 2021, the lease term is 62 months and expires on
November 30, 2026.
Master Supply Agreements
On March 25, 2022, Crown executed a Master Supply Agreement (the "BDN MSA") with
Brandywine Operating Partnerships L.P. to install its Smart Window Inserts
powered by DynamicTintTM in Brandywine office buildings. The BDN MSA provides
the master terms and conditions under which purchase orders will be executed for
Crown to supply units to retrofit windows at certain locations.
On December 27, 2021, Crown executed a Master Supply Agreement (the "HPP MSA")
with Hudson Pacific Properties L.P. for the installation of Crown's energy
saving Smart Window Inserts in several office properties across its West Coast
portfolio. The HPP MSA provides the master terms and conditions under which
purchase orders will be executed for Crown to supply units to retrofit windows
at certain locations.
Prior to this, on September 27, 2021, Crown had entered into a Master Supply
Agreement with MetroSpaces Inc., Crown's first commercial customer, install its
Smart Window Inserts in MetroSpaces' 70,000 square-foot Houston, Texas office
building.
Additionally, discussions with multiple other building owners to buy Crown Smart
Window Inserts are progressing as the regulatory and consumer pressure to reduce
the level of energy consumption and carbon emissions, continues to build.
Purchase Orders
On August 12, 2022, the Company entered into two Purchase Orders (PO's) with
Hudson Pacific Properties, L.P. ("Hudson") for the purchase of the Company's
Smart Window Inserts™ ("Inserts"). Hudson is a unique provider of end-to-end
real estate solutions for tech and media tenants. The PO's have a value of
$85,450 and represent the first orders the Company has received prior to the
launch of its Inserts. Delivery and installation are expected to begin in
December 2022.
On August 12, 2022, as additional consideration for the PO's, the Company issued
a warrant to Hudson to purchase 300,000 shares of the Company's common stock at
$0.75 per share. The warrant has a five year life and expires on August 12,
2027.
Results of Operations for the three months ended September 30, 2022 compared to
the three months ended September 30, 2021 (in thousands):
Three Months Ended
September 30,
2022 2021
Research and development $ 955 $ 787
Selling, general and administrative 2,160 4,866
Other (income)/expense 1 51
Net loss $ 3,116 $ 5,703
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Research and Development
Research and development expenses were $1.0 million for the three months ended
September 30, 2022 compared to $0.8 million for the three months ended September
30, 2021. The increase of $0.2 million is primarily related to additional
salaries and benefits ($0.3 million), offset by a decrease in stock compensation
($0.1 million).
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $2.2 million and $4.9
million for the three months ended September 30, 2022 and 2021, respectively.
The $2.7 million decrease in SG&A expenses is primarily due to decrease in
stock-based compensation of $2.6 million and other G&A expense ($0.2 million),
offset by an increase in lease expense of $0.1 million.
Other (Income) Expense
Other (income) expense was immaterial for the three months ended September 30,
2022. Other (income) expense for the three months ended September 30, 2021 was a
$0.05 million loss.
Results of Operations for the nine months ended September 30, 2022 compared to
the nine months ended September 30, 2021 (in thousands):
Nine months ended
September 30,
2022 2021
Research and development $ 3,523 $ 2,127
Selling, general and administrative 8,634 14,184
Other (income)/expense 6 15,463
Net loss $ 12,163 $ 31,774
Research and Development
Research and development expenses were $3.5 million for the nine months ended
September 30, 2022 compared to $2.1 million for the nine months ended September
30, 2021. The increase of $1.4 million is primarily related to additional
salaries and benefits of $1.6 million offset by a decrease in stock compensation
of $0.2 million.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $8.6 million and
$14.2 million for the nine months ended September 30, 2022 and 2021,
respectively. The $5.6 million decrease in SG&A expenses is primarily due to
decrease in stock-based compensation of $5.9 million, offset by an increase in
rent and other G&A expenses of $0.3 million.
Other (Income) Expense
Other (income) expense was immaterial for the nine months ended September 30,
2022. Other (income) expense for the nine months ended September 30, 2021 was a
$15.5 million loss, which primarily consisted of a loss on extinguishment of
debt in the amount of $13.8 million, interest expense of $0.5 million recorded
in connection with our convertible notes, the change in fair value of our
warrant liability of $1.0 million and the change in fair value of our derivative
liability of $0.05 million.
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Liquidity
Nine months ended
September 30,
2022 2021
Cash and cash equivalents at the beginning of the period $ 6,130 $ 36
Net cash used in operating activities
(8,049 ) (8,137 )
Net cash used in investing activities (339 ) (2,098 )
Net cash provided by financing activities 2,600 19,900
Cash and cash equivalents at the end of the period $ 342 $ 9,701
The Company had an accumulated deficit of approximately $85.9 million, and a net
loss of $12.2 million, and used approximately $8.0 million in net cash in
operating activities for the nine months ended September 30, 2022. The Company
expects to continue to incur ongoing administrative and other expenses,
including public company expenses.
On March 23, 2022, the Company entered into an Irrevocable $10 million Standby
Letter of Credit ("SLOC"). The SLOC accrues interest at a rate of 12% per annum
and matures 2 years from the issuance date of the SLOC. Interest is payable
quarterly. In connection with the SLOC, the Company issued a warrant for 200,000
shares of common stock with an exercise price of $2. Additionally, the Company
will issue 50,000 shares of its restricted common stock with each cash draw of
$1.0 million. Drawdowns are capped at a maximum of $5 million in the first six
months. The Company intends to sign and drawdown on the available funds as
necessary in 2022 and 2023.
The Company entered into a Sales Agreement with A.G.P./Alliance Global Partners
(the "Sales Agents") dated March 30, 2022 (the "Sales Agreement"), pursuant to
which the Company may, from time to time, sell up to $5 million in shares (the
"Placement Shares") of the Company's common stock through the Sales Agents,
acting as the Company's sales agent and/or principal, in a continuous
at-the-market offering (the "ATM Offering"). The Company will pay the Sales
Agents a commission of up to 3.0% of the aggregate gross proceeds the Company
receives from all sales of the Company's common stock under the Sales Agreement.
The Placement Shares will be offered and sold pursuant to the Company's shelf
registration statement on Form S-3 (Registration No. 333- 262122) and the
related base prospectus included in the registration statement, as supplemented
by the prospectus supplement dated March 30, 2022. As of September 30, 2022 the
Company has received net proceeds on sales of 1,647,709 shares of common stock
under the Sales Agreement of approximately $706,000 (after deducting $26,000 in
commissions and expenses) at a weighted average price of $0.44 per share.
Subsequent to September 30, 2022, the Company received net proceeds of
approximately $0.5 million on sales of 1,720,437 shares of common stock under
the Sales Agreement at a weighted average price of $0.32 per share.
Additionally, the Company received $3.2 million in funding related to the
issuance of Convertible Notes on October 19, 2022. This issuance was reported by
the Company in the 8-K filed October 20, 2022.
Although it is difficult to predict the Company's liquidity requirements as of
September 30, 2022, based upon the Company's current operating plan, cash on
hand, SLOC funding, and ATM facility, management believes that the Company will
have sufficient cash to meet its projected operating requirements for at least
the next 12 months following the issuance of these condensed financial
statements.
Cash Flows
Operating Activities
For the nine months ended September 30, 2022, net cash used in operating
activities was $8.0 million, which primarily consisted of our net loss of $12.2
million, adjusted for non-cash expenses of $3.8 million which primarily
consisted of stock-based compensation expenses totaling $3.0 million,
amortization of right of use assets of $0.4 million, and depreciation and
amortization of $0.4 million. The net change in operating assets and liabilities
was $0.3 million, primarily consisting of a decrease in prepaid and other
current assets.
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For the nine months ended September 30, 2021, net cash used in operating
activities was $8.1 million, which primarily consisted of our net loss of $31.8
million, adjusted for non-cash expenses of $24.7 million which primarily
consisted of loss on extinguishment of debt of $13.8 million, stock-based
compensation totaling $8.9 million, and depreciation and amortization of $0.2
million, change in fair value of our warrant liability of $1.0 million and
amortization of debt discount of $0.5 million, and change in fair value of
derivative liability of $0.05 million. The net change in operating assets and
liabilities was $1.0 million and primarily consisted of an increase in prepaid
and other assets totaling $0.5 million and a decrease in accounting payable and
accrued expenses of $0.5 million.
Investing Activities
For the nine months ended September 30, 2022, net cash used in investing
activities was approximately $0.3 million
For the nine months ended September 30, 2021, net cash used in investing
activities was approximately $2.1 million, consisting of $1.7 million related to
the purchase of for the purchase of the HP patents and $0.4 million for the
purchase of equipment.
Financing Activities
For the nine months ended September 30, 2022, net cash provided by financing
activities was $2.6 million, and consisted of proceeds of the issuance of common
stock and warrants of $0.8 million, $1.0 million received in connection with the
issuance of our Series D preferred stock and $0.7 million received from the
issuance of common stock in connection with our ATM Offering.
For the nine months ended September 30, 2021, net cash provided by financing
activities was $19.9 million, related to the proceeds of issuance of common
stock and warrants.
Off-balance sheet arrangements
We did not have any off-balance sheet arrangements during the periods presented,
and we do not currently have any off-balance sheet arrangements, as defined in
the SEC rules and regulations.
Revenue Recognition
We adopted the new revenue standard, ASC 606, on March 31, 2019 using the full
retrospective approach. The adoption did not have an effect on 2020 or 2019
revenue recognition or a cumulative effect on opening equity, as the timing and
measurement of revenue recognition is materially the same as under ASC 605. The
core principle of the new revenue standard is that a company should recognize
revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the company expects to be
entitled in exchange for those goods or services. The following five steps are
applied to achieve that core principle:
? Step 1: Identify the contract with the customer
? Step 2: Identify the performance obligations in the contract
? Step 3: Determine the transaction price
? Step 4: Allocate the transaction price to the performance obligations in the
contract
? Step 5: Recognize revenue when the company satisfies a performance obligation
For contracts where the period between when we transfer a promised good or
service to the customer and when the customer pays is one year or less, we have
elected the practical expedient to not adjust the promised amount of
consideration for the effects of a significant financing component.
Our performance obligation is to provide a development service that enhances an
asset that the customer controls. We receive upfront payments in advance of
providing services and payment upon reaching milestones.
We are not able to reasonably measure the outcome of our performance obligations
that are satisfied over time because we are in the early stages of the
contracts. Therefore, the amount of performance that will be required in our
contracts cannot be reliably estimated and we recognize revenue up to the amount
of costs incurred.
No revenue was recognized by the Company during the nine months ended September
30, 2022 and 2021.
26
Stock-based compensation
We measure and recognize compensation expense for all options based on the
estimated fair value of the award on the grant date. We use the Black-Scholes
option-pricing model to estimate the fair value of option awards. The fair value
is recognized as expense on a straight-line basis over the requisite service
period. We account for forfeitures as they occur. We recognize expense for
awards where vesting is subject to a market or performance condition based on
the derived service period. Expense for awards with performance conditions would
be estimated and adjusted on a quarterly basis based upon our assessment of the
probability that the performance condition will be met.
The determination of the grant date fair value of options using an option
pricing model is affected principally by our estimated fair value of shares of
our common stock and requires management to make a number of other assumptions,
including the expected life of the option, the volatility of the underlying
shares, the risk-free interest rate and expected dividends. The assumptions used
in our Black-Scholes option-pricing model represent management's best estimates
at the time of measurement. These estimates are complex, involve a number of
variables, uncertainties and assumptions and the application of management's
judgment, as they are inherently subjective. If any assumptions change, our
stock-based compensation expense could be materially different in the future.
These assumptions are estimated as follows:
? Expected Term. The expected term of options represents the period that our
stock-based awards are expected to be outstanding based on the simplified
method, which is the half-life from vesting to the end of its contractual term.
The simplified method was used because we do not have sufficient historical
exercise data to provide a reasonable basis for an estimate of expected term.
? Expected Volatility. We historically have lacked company-specific historical
and implied volatility information. Therefore, we estimate our expected stock
volatility based on the historical volatility of a publicly traded set of peer
companies and expect to continue to do so until such time as we have adequate
historical data regarding the volatility of our own traded stock price.
? Risk-Free Interest Rate. We base the risk-free interest rate on the implied
yield available on U. S. Treasury zero-coupon issues with an equivalent
remaining term.
? Expected Dividend Yield. We have never declared or paid any cash dividends on
our common shares and do not plan to pay cash dividends in the foreseeable
future, and, therefore, we use an expected dividend yield of zero in our
valuation models.
We account for forfeited awards as they occur.
27
Fair Value of Common Stock
Historically, the fair values of the shares of common stock underlying our
options were estimated on each grant date by our board of directors. In order to
determine the fair value, our board of directors considered, among other things,
contemporaneous valuations of our common stock and preferred stock prepared by
unrelated third-party valuation firms in accordance with the guidance provided
by the American Institute of Certified Public Accountants 2013 Practice Aid,
Valuation of Privately-Held- Company Equity Securities Issued as Compensation,
or the Practice Aid. Given the absence of a public trading market of our capital
stock, our board of directors exercised reasonable judgment and considered a
number of objective and subjective factors to determine the best estimate of the
fair value of our common stock, including:
? contemporaneous third-party valuations of our common stock;
? the prices, rights, preferences and privileges of our preferred stock relative
to our common stock;
? our business, financial condition and results of operations, including related
industry trends affecting our operations;
? the likelihood of achieving a liquidity event, such as an initial public
offering or sale of our company, given prevailing market conditions;
? the lack of marketability of our common stock;
? the market performance of comparable publicly traded companies; and
? U.S. and global economic and capital market conditions and outlook.
Critical accounting policies and significant judgments and estimates
Our condensed financial statements are prepared in accordance with generally
accepted accounting principles in the United States, or GAAP. The preparation of
our condensed financial statements requires us to make estimates, assumptions
and judgments that affect the reported amounts of assets, liabilities, costs and
expenses. We base our estimates and assumptions on historical experience and
other factors that we believe to be reasonable under the circumstances. We
evaluate our estimates and assumptions on an ongoing basis. Our actual results
may differ from these estimates. Our most critical accounting policies are
summarized below. See Note 3 to our condensed financial statements for a
description of our other significant accounting policies.
Recent accounting pronouncements
See Note 3 to our condensed financial statements for a description of recent
accounting pronouncements applicable to our condensed financial statements.
JOBS Act Transition Period
As an "emerging growth company" under the Jumpstart Our Business Startups Act of
2012, we can take advantage of an extended transition period for complying with
new or revised accounting standards. This allows an emerging growth company to
delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. We are electing to delay our adoption of
such new or revised accounting standards. As a result of this election, our
condensed financial statements may not be comparable to the condensed financial
statements of other public companies.
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