The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the 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.
Management's plans and basis of presentation:
Crown Electrokinetics Corp. (the "Company" "we", "our", or "us"), was
incorporated in the State of Delaware on April 20, 2015. Effective October 6,
2017, the Company's name was changed to Crown Electrokinetics Corp. from 3D
Nanocolor Corp. ("3D Nanocolor").
The Company is commercializing technology for smart or dynamic glass. The
Company's electrokinetic glass technology is an advancement on microfluidic
technology that was originally developed by Hewlett-Packard Company.
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
and now offers Crown all the space requirements it needs for the foreseeable
future.
On November 15, 2017, the Company entered into a license agreement with Asahi
Glass Co., Ltd. ("Asahi"). The Asahi agreement provides that the Company will
provide samples to be used by Asahi for the sole purpose of determining the
feasibility of integrating the Company's film technology in Asahi's auto and
train glass products. The Company began performing development activities in
April of 2018. On February 1, 2019, the Company and Asahi entered into a new
license agreement, terminating the prior agreement. Under such new license
agreement, the Company will provide samples to be used by Asahi to evaluate the
appearance of and measure optical properties of the Company's film technology.
At Asahi's option, the Company will provide additional samples to be used by
Asahi to measure the durability of such sample for the purpose of determining
the feasibility of integrating the Company's film technology in Asahi's auto and
train glass products. The performance related to the new agreement is a
continuation of the work being performed as of April 2018. On November 14, 2019,
the Company entered into a new agreement with Asahi, which terminates the
February 1, 2019 agreement as of June 16, 2019, (the "Effective Date") of the
new agreement. Under the terms of the new agreement, Asahi will pay the Company
$0.1 million within 60 days of the Effective Date. On December 10, 2019, the
Company received the $0.1 million payment from Asahi and the Company delivered
three pieces of updated samples to Asahi on September 28, 2020.
On August 23, 2017, the Company entered into a collaborative agreement with
Eastman Chemical Company ("Eastman"). The Eastman agreement provides that the
Company and Eastman will jointly develop electrokinetic films and determine
their suitability for commercial use in applied films and interlayers for
automobile windows. The Company and Eastman will be exchanging Intellectual
Property ("IP") for the development of the films. The Company began performing
development activities in April of 2018.
Results of Operations for the three months ended September 30, 2020 and 2019
(income):
Three Months Ended September 30
2020 2019
Revenue $ - $ -
Cost of revenue - 153,500
Research and development 423,174 750,395
Selling, general and administrative 1,659,612 1,492,483
Other expense 3,683,696 404,802
Net Loss $ 5,766,482 $ 2,801,180
26
Revenue
The Company did not recognize revenue for the three months ended September 30,
2020 and 2019. We are not able to estimate the total amount of development
service under an efforts-based perspective and, therefore, the amount of
performance that will be required in our contracts cannot be reliably estimated
under the proportional performance revenue recognition model. Accordingly, we
recognize revenue up to the amount of costs incurred.
Cost of Revenue
There was no cost of revenue recognized during the three months ended September
30, 2020. The cost of revenue for the three months ended September 30, 2019, was
approximately $154,000 and consists of approximately $125,000 related to the
costs incurred with respect to our contract with Eastman and approximately
$29,000 with respect to our contract with Asahi.
Research and Development
Research and development expenses were $0.4 million for the three months ended
September 30, 2020 compared to $0.8 million for the three months ended September
30, 2019. The decrease of $0.4 million is primarily related to lower stock-based
compensation expenses recognized for stock options granted to our employees and
officers.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $1.7 million and $1.5
million for the three months ended September 30, 2020 and 2019, respectively.
The $0.2 million increase in SG&A expenses is primarily due to $0.6 million of
stock-based compensation expense related to stock options granted during the
three months ended September 30, 2020 to an officer of the Company and to an
advisor, $0.1 million of increased payroll and related expenses for new hires,
offset by lower stock-based compensation expense related to our restricted stock
of approximately $0.6 million.
Other Expense
Other expense was approximately $3.7 million and $0.4 million for the three
months ended September 30, 2020 and 2019, respectively. The $3.3 million
increase is primarily due to increased interest expense of $0.6 million related
to our convertible notes, loss on exchange of our convertible notes for common
stock and warrants of $1.5 million, change in fair value of our warrant
liability of $0.9 million, loss on extinguishment of debt of $0.2 million, and
$0.1 million of other expenses.
Results of Operations for the six months ended September 30, 2020 and 2019
(income):
Six Months Ended
September 30,
2020 2019
Revenue $ - $ -
Cost of revenue - (307,000 )
Research and development (1,795,696 ) (1,070,766 )
Selling, general and administrative (9,597,169 ) (2,868,391 )
Other expense (4,835,647 ) (780,273 )
Net Loss $ (16,228,512 ) $ (5,026,430 )
27
Revenue
The Company did not recognize revenue for the six months ended September 30,
2020 and 2019. We are not able to estimate the total amount of development
service under an efforts-based perspective and, therefore, the amount of
performance that will be required in our contracts cannot be reliably estimated
under the proportional performance revenue recognition model. Accordingly, we
recognize revenue up to the amount of costs incurred.
Cost of Revenue
There was no cost of revenue recognized during the six months ended September
30, 2020. The cost of revenue for the six months ended September 30, 2019, was
$307,000 and consists of approximately $249,000 related to the costs incurred
with respect to our contract with Eastman and approximately $58,000 with respect
to our contract with Asahi.
Research and Development
Research and development expenses were $1.8 million for the six months ended
September 30, 2020 compared to $1.1 million for the six months ended September
30, 2019. The increase of $0.7 million is primarily related to stock-based
compensation expenses recognized for stock options granted to our employees and
officers.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $9.6 million and $2.9
million for the six months ended September 30, 2020 and 2019, respectively. The
$7.0 million increase in SG&A expenses is primarily attributable to stock-based
compensation of $3.6 million recognized with the issuance of 4,000,000 shares of
restricted stock to our chief executive officer, $3.2 million of stock-based
compensation related to stock options granted to our employees and officers and
$0.1 million of increased payroll and related expenses for new hires.
Other Expense
Other expense was approximately $4.8 million and $0.8 million for the six months
ended September 30, 2020 and 2019, respectively. The $4.0 million increase is
primarily due to increased interest expense of $1.4 million related to our
convertible notes, loss on exchange of our convertible notes for common stock
and warrants of $1.5 million, change in fair value of our warrant liability of
$0.7 million, loss on extinguishment of debt of $0.2 million, and $0.1 million
of other expenses.
Liquidity
Going Concern
We have incurred substantial operating losses since our inception, and we expect
to continue to incur significant operating losses for the foreseeable future,
and may never become profitable. We had an accumulated deficit of approximately
$32.7 million at September 30, 2020, a net loss of approximately $16.2 million,
and approximately $2.8 million of net cash used in operating activities for the
six months ended September 30, 2020.
We anticipate incurring additional losses until such time, if ever, that we can
obtain marketing approval to sell, and then generate significant sales, of our
technology that is currently in development. Substantial additional financing
will be needed by the Company to fund our operations and to develop and
commercialize our technology. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
We will seek to obtain additional capital through the sale of debt or equity
financings or other arrangements to fund operations; however, there can be no
assurance that we will be able to raise needed capital under acceptable terms,
if at all. The sale of additional equity may dilute existing stockholders and
newly issued shares may contain senior rights and preferences compared to
currently outstanding shares of common stock. Issued debt securities may contain
covenants and limit our ability to pay dividends or make other distributions to
stockholders. If we are unable to obtain such additional financing, future
operations would need to be scaled back or discontinued. Due to the uncertainty
in the Company's ability to raise capital, we believe that there is substantial
doubt in our ability to continue as a going concern for twelve months from the
date of issuance of the financial statements.
28
Cash Flows
Six Months Ended
September 30,
2020 2019
Cash and cash equivalents at the beginning of the period $ 48,307 $ 99,447
Net cash used in operating activities
(2,794,232 ) (732,051 )
Net cash used in investing activities (29,051 ) (26,603 )
Net cash provided by financing activities 3,375,900 659,207
Cash and cash equivalents at the end of the period $ 600,924 $ -
Operating Activities
For the six months ended September 30, 2020, net cash used in operating
activities was $2.8 million, which primarily consisted of our net loss of $16.2
million, adjusted for non-cash expenses of $13.9 million including, $9.3 million
of stock-based compensation expenses, $2.0 million of amortization related to
the debt discount recognized for our convertible notes payable, $1.5 million
recognized for the loss on exchange of our convertible notes for common stock
and warrants, $0.7 million for the change in fair value of our warrant
liability, $0.2 million for the loss on extinguishment of debt, and $0.1 million
of other non-cash expenses. The net change in operating assets and liabilities
was $0.4 million and was primarily due to decreases in accounts payable and
accrued expenses totaling $0.6 million, offset by a $0.3 million increase in
accrued interest related to our convertible notes and a 0.1 million increase to
prepaid expenses and other current assets.
For the six months ended September 30, 2019, net cash used in operating
activities was $0.7 million, which primarily consisted of our net loss of $5.0
million, adjusted for non-cash expenses of $3.5 million including, $2.9 million
of stock-based compensation expenses, $0.7 million of amortization related to
the debt discount recognized for our convertible notes payable, off-set by $0.1
million for the change in fair value of our warrant liability. The net change in
operating assets and liabilities was $0.8 million and was primarily due to the
increases in in accounts payable and accrued expenses totaling $0.7 million and
increased accrued interest of $0.2 million related to our convertible notes.
Investing Activities
For the six months ended September 30, 2012, net cash used in investing
activities was approximately $29,000, related to the purchase of computer
equipment and computer software.
For the six months ended September 30, 2019, net cash used in investing
activities was approximately $27,000, related to the purchase of computer
equipment and computer software.
Financing Activities
For the six months ended September 30, 2020, net cash provided by financing
activities was $3.4 million. The net cash provided is primarily related to $2.1
million of proceeds received from the issuance of our senior secured convertible
notes and the related stock warrants, $1.6 million related to the net proceeds
received from the issuance of the Company's common stock and warrants, and $0.2
million of proceeds received from our PPP loan, offset by $0.2 million for the
repurchase of shares of our common stock and $0.2 million for the repayment of
our senior secured promissory note.
For the six months ended September 30, 2019, net cash provided by financing
activities was $0.7 million. The net cash provided is primarily related to $0.6
million of proceeds received from the issuance of our senior secured convertible
notes and the related stock warrants.
Critical accounting policies and significant judgments and estimates
Our financial statements are prepared in accordance with generally accepted
accounting principles in the United States, or GAAP. The preparation of our
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.
29
Recent accounting pronouncements
See Note 3 to our condensed financial statements for a description of recent
accounting pronouncements applicable to our 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
financial statements may not be comparable to the financial statements of other
public companies.
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