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:
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. 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.
34
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.
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.
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 November 15, 2017, the Company entered into a license agreement with Glass
Manufacturer. The Glass Manufacturer agreement provides that the Company will
provide samples to be used by Glass Manufacturer for the sole purpose of
determining the feasibility of integrating the Company's film technology in
Glass Manufacturer's auto and train glass products. The Company began performing
development activities in April of 2018. On February 1, 2019, the Company and
Glass Manufacturer entered into a new license agreement, terminating the prior
agreement, which was further extended on November 14, 2019. Under such new
license agreement, the Company will provide samples to be used by Glass
Manufacturer to evaluate the appearance of and measure optical properties of the
Company's film technology. At Glass Manufacturer's option, the Company will
provide additional samples to be used by Glass Manufacturer to measure the
durability of such sample for the purpose of determining the feasibility of
integrating the Company's film technology in Glass Manufacturer'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 Glass Manufacturer, 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, Glass Manufacturer 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 Glass Manufacturer and
the Company delivered three pieces of updated samples to Glass Manufacturer on
September 28, 2020.
On August 23, 2017, the Company entered into a collaborative agreement with Film
Manufacturer. The Film Manufacturer agreement provides that the Company and Film
Manufacturer will jointly develop electrokinetic films and determine their
suitability for commercial use in applied films and interlayers for automobile
windows. The Company and Film Manufacturer will be exchanging IP for the
development of the films. The Company began performing development activities in
April of 2018.
Results of Operations for the years ended March 31, 2021 and 2020
Years Ended March 31,
2021 2020
Revenue $ - $ 100,000
Cost of revenue - (620,000 )
Research and development (3,539,857 ) (1,826,140 )
Selling, general and administrative (15,812,365 ) (5,491,769 )
Other expense (21,402,903 ) (1,765,962 )
Net Loss $ (40,755,125 ) $ (9,603,871 )
35
Revenue
The Company did not recognize revenue for the year ended March 31, 2021 and
recognized $0.1 million of revenue for the year ended March 31, 2020. The
revenue recognized during the year ended March 31, 2020 was related to our new
agreement with Glass Manufacturer and represents the cash received for our
continuing development activities. 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 year ended March 31, 2021.
The cost of revenue for the year ended March 31, 2020, was $0.6 million and
consists of approximately $0.5 million related to the costs incurred with
respect to our contract with Film Manufacturer and approximately $0.1 million
with respect to our contract with Glass Manufacturer.
Research and Development (including licenses acquired)
Research and development expenses were $3.5 million for the year ended March 31,
2021 compared to $1.8 million for the year ended March 31, 2020. The increase of
$1.7 million is primarily related to increased stock-based compensation expenses
of approximately $1.8 million recognized for stock options granted to our
employees and officers, offset by lower stock-based compensation expenses of
approximately $0.7 million related to canceled shares of restricted stock in
December 2020 which were exchange for stock options, increased payroll and
related expenses of approximately $0.3 million for new hires, and increased
costs of approximately $0.1 million for the purchase of lab supplies used in our
development activities.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $15.8 million and
$5.5 million for the years ended March 31, 2021 and 2020, respectively. The
$10.3 million increase in SG&A expenses is primarily due to increased
stock-based compensation expense of approximately $8.7 million. The increase in
stock-based compensation consisted primarily of $0.8 million related to 1.1
million restricted stock units granted to the Company's chief executive officer
in connection with the Company's public offering in January 2021, $4.8 million
related to stock options granted to officers and employees of the Company, and
increased stock-based compensation expense of approximately $3.1 million related
to our restricted stock, primarily comprised of $3.6 million of stock-based
compensation recognized for 1.6 million shares of restricted stock issued to our
chief executive officer, offset by $0.7 million of lower stock-based
compensation due to shares of restricted stock exchanged for stock options in
December 2020, increased payroll and related expenses of approximately $1.0
million for the Company's officers and new hires, increased legal and
professional fees of approximately $0.4 million and increased insurance expenses
of $0.2 million.
Other Income (Expense)
Other expense was $21.4 million for the year ended March 31, 2021 compared with
other expense of $1.8 million for the year ended March 31, 2020. The $19.6
million increase is primarily due to increases to loss on extinguishment of debt
of approximately $14.0 million, primarily related to our note exchange
agreements entered into during the fiscal quarter ended March 31, 2021,
increased interest expense of $1.7 million related to our convertible notes,
loss on exchange of our convertible notes for common stock and warrants of $1.5
million and the change in fair value of our warrant liability of $2.4 million.
Liquidity
The Company has incurred substantial operating losses since its inception, and
expects to continue to incur significant operating losses for the foreseeable
future and may never become profitable. As reflected in the financial
statements, the Company had an accumulated deficit of approximately $57.2
million at March 31, 2021, a net loss of approximately $40.8 million, and
approximately $6.6 million of net cash used in operating activities for the year
ended March 31, 2021. The Company expects to continue to incur ongoing
administrative and other expenses, including public company expenses.
Although it is difficult to predict the Company's liquidity requirements as of
March 31, 2021, based upon the Company's current operating plan and completion
of its public offering, 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 financial statements.
36
Cash Flows
Years Ended March 31,
2021 2020
Cash and cash equivalents at the beginning of the year $ 48,307 $ 99,447
Net cash used in operating activities (6,584,383 ) (1,044,278 )
Net cash used in investing activities (1,633,857 ) (26,603 )
Net cash provided by financing activities 23,466,857 1,019,741
Cash and cash equivalents at the end of the year $ 15,296,924 $ 48,307
Operating Activities
For the year ended March 31, 2021, net cash used in operating activities was
$6.6 million, which primarily consisted of our net loss of $40.8 million,
adjusted for non-cash expenses of $35.5 million including, $14.4 million of
stock-based compensation expenses, $14.3 million for the loss on extinguishment
of debt, $2.7 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, $2.4 million
for the change in fair value of our warrant liability and $0.2 million of other
expenses. The net change in operating assets and liabilities was $1.3 million
and was primarily due to decreases in accounts payable and accrued expenses
totaling $1.4 million, offset by a $0.4 million increase in accrued interest
related to our convertible notes and a $0.4 million increase to prepaid expenses
and other current assets.
For the year ended March 31, 2020, net cash used in operating activities was
$1.0 million, which primarily consisted of our net loss of $9.6 million,
adjusted for non-cash expenses of $6.8 million including, $5.1 million of
stock-based compensation expenses, $1.2 million of amortization related to the
debt discount recognized for our convertible notes payable, $0.3 million of loss
on extinguishment of debt related to the issuance of our common stock in
connection with our note amendments and $0.2 million of expenses related to our
public offering. The net change in operating assets and liabilities was $1.7
million and was primarily due to increases in accounts payable and accrued
expenses totaling $1.3 million and increased accrued interest of $0.3 million
related to our convertible notes.
Investing Activities
For the year ended March 31, 2021, net cash used in investing activities was
approximately $1.6 million. The net cash used is primarily related to the
purchases of the HP patents and related license fees of $1.5 million, and the
purchase of lab equipment totaling $0.1 million.
For the year ended March 31, 2020, net cash used in investing activities was
approximately $27,000, related to the purchase of computer equipment and
computer software.
Financing Activities
For the year ended March 31, 2021, net cash provided by financing activities was
$23.5 million. The net cash provided is primarily related to $20.9 million
related to the net proceeds received from the issuance of the Company's common
stock and warrants, $2.7 million of proceeds received from the issuance of our
senior secured convertible notes and the related stock warrants, $0.2 million
received from the exercise of common stock warrants, and $0.4 million of
proceeds received from our PPP loan, offset by $0.5 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 year ended March 31, 2020, net cash provided by financing activities was
$1.0 million. The net cash provided is primarily related to $1.0 million of
proceeds received from the issuance of our senior secured convertible notes and
the related stock 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.
37
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.
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.
38
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.
Fair Value of Common Stock
Historically, for all periods prior to this offering, 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.
39
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 financial statements for a description of our other
significant accounting policies.
Recent accounting pronouncements
See Note 3 to our 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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CROWN ELECTROKINETICS CORP. 
