CROWN ELECTROKINETICS CORP. 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 condensed financial statements, the Company had an accumulated deficit of approximately$68.3 million atSeptember 30, 2021 , a net loss of approximately$11.1 million , and approximately$5.6 million of net cash used in operating activities for the six months endedSeptember 30, 2021 . The Company expects to continue to incur ongoing administrative and other expenses, including public company expenses. InNovember 2021 , the Company entered into a non-binding term sheet with a financial institution in connection with a$10 million Standby Letter of Credit ("SLOC"). The SLOC accrues interest at a rate of 8% per annum and matures two years from the issuance date of the SLOC. Interest is payable quarterly. Although it is difficult to predict the Company's liquidity requirements as ofSeptember 30, 2021 , based upon the Company's current operating plan, cash on hand, and SLOC funding, 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. Management is constantly monitoring the impact of the COVID-19 pandemic on operations and financials of the Company. To date the main impact has been the delayed evaluation of potential manufacturing partnerships. These delays have been caused by Covid lockdowns i) restricting site tour opportunities by potential partners and ii) driving strong demand for potential partners existing product lines, limiting their capacity to assess new partnership opportunities. The Company has concluded that while it is reasonably possible that the virus could still have a negative effect on the Company's financial position, the specific impact is not readily determinable as of the date of these condensed financial statements. The condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty. 6CROWN ELECTROKINETICS, CORP. Notes to Condensed Financial Statements Three and six months endedSeptember 30, 2021 (Unaudited)
Note 3 - Significant Accounting Policies
For a detailed discussion about the Company's significant accounting policies, see the Company's financial statements included in its Annual Report for the fiscal year endedMarch 31, 2021 . Basis of Presentation The Company's condensed financial statements have been prepared in conformity with accounting principles generally accepted inthe United States of America ("GAAP") and include all adjustments necessary for the fair presentation of the Company's financial position for the periods presented. The results of operations for the three and six months endedSeptember 30, 2021 are not necessarily indicative of the results for the full year or the results for any future periods. These condensed financial statements should be read in conjunction with the audited financial statements and related notes for the fiscal year endedMarch 31, 2021 included in the Company's Form 10-K filed with theSecurities and Exchange Commission (the "SEC") onJune 21, 2021 . Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company's future results of operations will be affected. Net Loss per Share ASC 260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share ("EPS") with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic net loss per share of common stock excludes dilution and is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive. Since the Company has only incurred losses, basic and diluted net loss per share is the same. Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share atSeptember 30, 2021 and 2020 are as follows (unaudited): September 30, 2021 2020 Series A preferred stock 188,311 - Series B preferred stock 2,019,038 - Series C preferred stock 560,757 -
Warrants to purchase common stock (excluding penny warrants) 4,300,177
1,921,452
Options to purchase common stock 10,920,432
4,683,389
Unvested restricted stock awards -
1,000,004
Unvested restricted stock units 2,039,683 -
Convertible notes - 2,805,941
20,028,398 10,410,786
7
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three and six months ended September 30, 2021
(Unaudited)
JOBS Act Transition Period
The Company is considered to be an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, as amended (JOBS Act). The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Securities and Exchange Act of 1934.
Recent Accounting Pronouncements
InMay 2021 , the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning afterDecember 15, 2021 . An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 is not expected to have a material impact on the Company's financial statements or disclosures.
Note 4 - Property & Equipment, Net
Property and equipment, net, consists of the following (in thousands):
September 30, March 31,
2021 2021
(Unaudited)
Equipment $ 563 $ 295
Computers 27 11
Leasehold improvements 20 14
Construction in progress 25 -
Total 635 320Less accumulated depreciation and amortization (151 ) (111 ) Property and equipment, net $ 484 $
209
Depreciation expense for the three months endedSeptember 30, 2021 and 2020 was approximately$21,000 and$5,000 respectively. Depreciation expense for the six months endedSeptember 30, 2021 and 2020 was approximately$40,000 and$15,000 respectively. 8CROWN ELECTROKINETICS, CORP. Notes to Condensed Financial Statements Three and six months endedSeptember 30, 2021 (Unaudited)
Note 5 - Intangible Assets, Net
During the six months endedSeptember 30, 2021 , the Company entered into a Patent Assignment Agreement with International Business Machines Corporation ("IBM") to acquire an ownership interest in assigned patents. As consideration for the patents, the Company paid$231,000 (including legal fees of approximately$6,000 ) during the six months endedSeptember 30, 2021 .
Intangible assets, net, consists of the following (in thousands):
September 30, March 31,
2021 2020
(Unaudited)
Patents $ 1,706 $ 1,475
Research license 375 375
Total 2,081 1,850
Accumulated amortization (298 ) (200 )
Research license, net $ 1,783 $ 1,650
The following table represents the total estimated amortization of intangible
assets for the five succeeding years and thereafter as of September 30, 2021 (in
thousands):
Estimated
Amortization
Expense Rounding Check
(Unaudited)
2022 $ 105 105
2023 211 211
2024 211 211
2025 211 211
2026 and thereafter 1,045 1,045
Total $ 1,783 1,783
For the three months ended September 30, 2021 and 2020, amortization expense was
approximately $51,000 and $10,000 , respectively. For the six months ended
September 30, 2021 and 2020, amortization expense was approximately $98,000 and$20,000 , respectively. Note 6 - Accrued Expenses
As of
September 30, 2021 March 31, 2021 (Unaudited)
Directors and officers insurance financing $ - $ 160
General liability insurance 388 -
Professional fees - 49
Rent 91 -
Other 1 2
Total $ 480 $ 211
9
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three and six months ended September 30, 2021
(Unaudited)
Note 7 - Notes Payable:
Notes payable was approximately
Paycheck Protection Loan OnApril 24, 2020 andMarch 3, 2021 , the Company entered into Promissory Notes (the "PPP Notes") with Newtek Corp AVB as the lender (the "Lender"), pursuant to which the Lender agreed to make loans to the Company under the Paycheck Protection Program (the "PPP Loan") offered by theU.S. Small Business Administration (the "SBA") in principal amounts of$197,200 and$233,300 pursuant to Title 1 of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The PPP Loan proceeds are available to be used to pay for payroll costs, including salaries, commissions, and similar compensation, group health care benefits, and paid leaves; rent; utilities; and interest on certain other outstanding debt. The Loan is subject to forgiveness to the extent proceeds are used for payroll costs, including payments required to continue group health care benefits, and certain rent, utility, and mortgage interest expenses (collectively, "Qualifying Expenses"), pursuant to the terms and limitations of the PPP Loan. The Company used the PPP Loan amounts against Qualifying Expenses and has initiated the process of loan forgiveness for the first tranche of$197,200 . The Company anticipates that both loan principals will be fully forgiven. The interest rate on the PPP Notes is a fixed rate of 1% per annum and the PPP Notes mature in two years.
The PPP Notes include events of default. Upon the occurrence of an event of default, the Lender will have the right to exercise remedies against the Company, including the right to require immediate payment of all amounts due under the PPP Notes.
On
Note 8 - Stockholders' Equity (Deficit)
Preferred Stock
As of
Series A Preferred Sock
As of
Series B Preferred Stock
As of
Series C Preferred Stock
As of
Common Stock Stock Issued for Services During the six months endedSeptember 30, 2021 , the Company issued 64,261 shares of its common stock with a fair value of approximately$0.2 million in exchange for consulting services. 10CROWN ELECTROKINETICS, CORP. Notes to Condensed Financial Statements Three and six months endedSeptember 30, 2021 (Unaudited) Stock Options
During the six months ended
During the year endedMarch 31, 2021 , the Company issued 25,000 shares of its common stock in connection with the exercise of stock options, with an exercise price of$0.15 per share. DuringApril 2021 , the Company received the related proceeds of$3,750 .
Note 9 - Stock-Based Compensation, Restricted Stock and Stock Options:
Equity Compensation Plan Information:
OnDecember 16, 2020 , the Company adopted its 2020 Long-Term Incentive Plan ( the "2020 Plan"). Under the 2020 Plan, there are 5,333,333 shares of the Company's common stock available for issuance and the 2020 Plan has a term of 10 years. The available shares in the 2020 Plan will automatically increase on the first trading day in January of each calendar year during the term of this Plan, commencing withJanuary 2021 , by an amount equal to the lesser of (i) five percent (5%) of the total number of shares of common stock issued and outstanding onDecember 31 of the immediately preceding calendar year, (ii) 1,000,000 shares of common stock or (iii) such number of shares of common stock as may be established by the Company's Board of Directors. The Company grants equity-based compensation under its 2020 Plan and its 2016 Equity Incentive Plan (the "2016 Plan"). The 2020 Plan and 2016 Plan allows the Company to grant incentive and nonqualified stock options, and shares of restricted stock to its employees, directors and consultants. As ofSeptember 30, 2021 , there is a total of 7,333,333 shares of the Company's common stock available under the 2016 Plan. Under the 2016 Plan and the 2020 Plan, upon the exercise of stock options and issuance of fully vested restricted common stock, shares of common stock may be withheld to satisfy tax withholdings. As ofSeptember 30, 2021 , the Company intends to net settle certain employee options to ensure adequate authorized shares under the Incentive Plan. Stock-based compensation: The Company recognized total expenses for stock-based compensation during the three and six months endedSeptember 30, 2021 and 2020, which are included in the accompanying statements of operations, as follows (in thousands): Three months ended Six months ended September 30, September 30, 2021 2020 2021 2020 (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Research and development expenses $ 113 $ 141 $ 145$ 1,293 Selling, general and administrative expenses 2,988 830 5,539 7,757 Total stock-based compensation$ 3,101 $
971$ 5,684 $ 9,050 Restricted stock units:
A summary of the Company's restricted stock activity during the six months ended
Weighted
Average
Number of Grant-Date
Shares Fair Value
Unvested at March 31, 2021 1,061,905 $ 4.50
Granted 1,200,000 $ 4.74
Vested (222,222 ) $ 4.78
Unvested at
11
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three and six months ended September 30, 2021
(Unaudited)
Upon the Company's uplisting to Nasdaq in
During the six months endedSeptember 30, 2021 , the Company granted 800,000 restricted stock units with a fair value of approximately$4.1 million , in exchange for 800,000 restricted stock awards issued to an officer of the Company and a consultant during the fiscal year endedMarch 31, 2021 . The fair value and vesting terms of the restricted stock units are identical to the terms of the restricted stock awards, and therefore, no incremental stock-based compensation has been recognized during the six months endedSeptember 30, 2021 .
During the six months ended
During the three and six months endedSeptember 30, 2021 , the Company recognized stock-based compensation of approximately$2.0 million and$3.8 million , respectively, related to restricted stock. During the three months endedSeptember 30, 2020 , the Company recognized stock-based compensation of approximately$0.2 million and$4.5 million , respectively, related to restricted stock. As ofSeptember 30, 2021 , unrecognized stock-based compensation totaled approximately$4.4 million . Restricted stock awards:
A summary of the Company's restricted stock activity during the six months ended
Number of Weighted Average
Shares Grant-Date Fair Value
Unvested at March 31, 2021 777,778 $ 5.12
Vested (66,666 ) $ 5.12
Canceled (711,112 ) $ 5.12Unvested atSeptember 30, 2021 (unaudited) -
$ 5.12 During the six months endedSeptember 30, 2021 , 66,666 shares of the Company's restricted stock awards vested. During the six months endedSeptember 30, 2021 , the Company exchanged 88,888 shares of its vested restricted stock awards and 711,112 of its unvested restricted stock awards for restricted stock units.
(See Restricted stock units). Stock Options: The Company provides stock-based compensation to employees, directors and consultants under the Plan. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The Company historically has been a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The risk-free interest rate is determined by referencing theU.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. During the six months endedSeptember 30, 2021 , the Company granted 1,227,204 options to purchase shares of the Company's common stock to members of the Company's Board of Directors, employees and consultants. The options have a fair value of approximately$1.9 million . The following was used in determining the fair value of stock options granted during the three and six months endedSeptember 30, 2021 and 2020 (unaudited). Three Months Ended Six Months Ended September 30, September 30, 2021 2020 2021 2020 Dividend yield 0% 0% 0% 0% Expected price volatility 50% 50% 50% 50% Risk free interest rate 0.66%-1.30% 0.16% - 0.44% 0.35%-1.30% 0.16% - 0.44% Expected term 5-7 years 5-6 years 3-7 years 5-6 years 12 CROWN ELECTROKINETICS, CORP. Notes to Condensed Financial Statements Three and six months ended September 30, 2021 (Unaudited)
A summary of activity under the Plan for the six months ended
Weighted
Weighted Average Remaining
Shares Average Contractual Aggregate
Underlying Exercise Term Intrinsic
Options Price (Years) ValueOutstanding at March 31, 2019 1,937,833$ 0.54 9.2$ 3,720,395 Outstanding at March 31, 2020 1,937,833$ 0.54
8.2 $ 4,243,610
Granted 8,949,107 $ 3.23 8.4
Exercised (25,000 ) $ 0.15 -Outstanding at March 31, 2021 10,928,607 *$ 2.73
8.2 $ 17,524
Granted 1,227,204 $ 3.49 9.8
Exercised (419,000 ) $ 0.51 -
Canceled (816,379 ) $ 3.88 -Outstanding at September 30, 2021 (unaudited) 10,920,432$ 2.83 7.8$ 13,089 Exercisable at September 30, 2021 (unaudited) 9,756,406$ 2.73
7.7 $ 12,483 * Options outstanding as of
shares of the Company's common stock granted on
recorded as an out of period adjustment. The related stock-based compensation
of approximately
September 30, 2021 . During the three and six months endedSeptember 30, 2021 , the Company recognized stock-based compensation of approximately$0.3 million and$0.9 million , respectively, related to stock options. During the three and six months endedSeptember 30, 2020 , the Company recognized stock-based compensation of approximately$0.6 million and$4.4 million , respectively, related to stock options. As ofSeptember 30, 2021 , the Company had approximately$1.4 million of unrecognized compensation expense related to options granted under the Company's equity incentive plan, which is expected to be recognized over a weighted-average period of 1.7 years. Warrants: A summary of the Company's warrant activity during the six months endedSeptember 30, 2021 is as follows (in thousands except share and per share amounts): Weighted Weighted Average Remaining Shares Average Contractual Aggregate Underlying Exercise Term Intrinsic Warrants Price (Years) Value
Outstanding at March 31, 2021 3,883,083$ 2.49
4.6$ 7,763 Issued 550,724$ 4.07 5.0 Canceled (133,630 )$ 5.63 -
Outstanding at September 30, 2021 (unaudited) 4,300,177$ 2.60 4.2$ 7,026 Exercisable at September 30, 2021 (unaudited) 3,368,422$ 1.91
4.1$ 6,447
During the six months endedSeptember 30, 2021 , the Company issued 550,724 common stock warrants in exchange for consulting and advisory services. The warrants have a fair value of approximately$0.7 million which is recorded as stock-based compensation in the accompanying condensed statement of operations for the three and six months endedSeptember 30, 2021 . 13CROWN ELECTROKINETICS, CORP. Notes to Condensed Financial Statements Three and six months endedSeptember 30, 2021 (Unaudited)
The following was used in determining the fair value of warrants issued during
the three and six months ended
Three Months Ended Six Months Ended
September 30, September 30,
2021 2021
Dividend yield 0% 0%
Expected price volatility 50% 50%
Risk free interest rate 0.66%-1.30% 0.35%-1.30%
Expected term 5-7 years 3-7 years
Note 10 - Commitments and Contingencies
LeasesOregon State University OnMarch 8, 2016 , the Company entered into a lease agreement withOregon State University , to lease office and laboratory space located atHP Campus Building 11,1110 NE Circle Blvd ,Corvallis, Oregon , for approximately$400 monthly. OnJuly 1, 2016 , the Company entered into the first amendment to the lease agreement which increased the monthly lease expense to approximately$1,200 . OnOctober 1, 2017 , the Company entered into a sublease agreement, which provides for additional office space and the monthly lease payment increased to approximately$1,800 . The lease expired onJune 30, 2018 and the Company extended the lease throughJune 30, 2019 . The monthly lease payment increased to approximately$4,500 for the months endedJune 30 2018 throughNovember 30, 2018 and increased to approximately$7,550 for the months endedDecember 31, 2018 throughJune 30, 2019 .
OnJuly 1, 2019 , the Company entered into the fourth amendment to its lease withOregon State University , which extends the lease expiration date toJune 30, 2022 . Beginning onJuly 1, 2020 , and eachJuly 1 thereafter, the monthly Operating Expense Reimbursement, as defined will be increased by no more than three percent.
OnJuly 1, 2020 , the Company entered into the fifth amendment to its lease withOregon State University which adjusts the Operating Expense Reimbursement payment due dates from monthly to quarterly, with the payments due in advance on the first of July, October, January and April. EffectiveJuly 1, 2020 , the quarterly operating expense will be$23,097 . OnSeptember 1, 2021 , the Company entered into the seventh amendment to its lease withOregon State University which expands the lease to now include approximately 703 square feet of lab space, 576 square feet of cubicle space, 1096 square feet of Highbay lab space, and 376 square feet of High bay storage space in a building commonly known as Building 11. EffectiveSeptember 1, 2021 , the quarterly operating expense will be$31,647 covering all utility and facility tooling costs. The sublease is extended untilJune 30, 2025 . 14CROWN ELECTROKINETICS, CORP. Notes to Condensed Financial Statements Three and six months endedSeptember 30, 2021 (Unaudited)Hudson 11601Wilshire, LLC OnMarch 4, 2021 , the Company entered into a lease agreement withHudson 11601Wilshire, LLC , to lease 3,500 square feet of office space located inLos Angeles, California . The lease term is 39 months and expires onJune 30, 2024 . The monthly lease expense is as follows: ? Months 1-12 -$18,375 ? Months 13-24 -$19,018 ? Months 25-36 -$19,684 ? Months 37-39 -$20,373
The Company paid a security deposit totaling
HP Inc. OnMay 4, 2021 , the Company entered into a lease agreement with HP Inc. to lease office and lab space located inHP Campus Building 11,1110 NE Circle Blvd ,Corvallis, Oregon . The lease term is 5 years and the lease commencement date wasApril 1, 2021 . The monthly lease expense is$7,388 and increases 3% on each anniversary of the lease commencement date. The Company paid a security deposit totaling$8,315 . The Company has the option to extend the lease for an additional 5 years.Pacific N.W. Properties, LLC
OnOctober 5, 2021 , the Company entered into a lease agreement withPacific N.W. Properties, LLC to lease 26,963 square feet of warehouse, manufacturing, production and office space located inSalem Oregon . The commencement date of the lease isOctober 1, 2021 , the lease term is 62 months and expires onNovember 30, 2026 . The monthly lease expense is as follows: ? Months 1-2 -$0 ? Months 3-12 -$21,500 ? Months 13-24 -$22,145 ? Months 25-36 -$22,809 ? Months 37-48 -$23,494 ? Months 49-60 -$24,198 ? Months 61-62 -$24,924
The amounts owed by the Company on the lease inception date is
During the three months endedSeptember 30, 2021 and 2020, the Company recognized rent expense of approximately$0.1 million and$23,000 , respectively. During the six months endedSeptember 30, 2021 and 2020, the Company recognized rent expense of approximately$0.2 million and$47,000 , respectively. 15CROWN ELECTROKINETICS, CORP. Notes to Condensed Financial Statements Three and six months endedSeptember 30, 2021 (Unaudited)
As of
Six months ended March 31, 2022$ 346 Year ended March 31, 2023 601 Year ended March 31, 2024 580 Year ended March 31, 2025 411 Year ended March 31, 2026 and thereafter 543 Total$ 2,481 Litigation InAugust 2019 ,Spencer Clarke LLC ("Spencer Clarke") filed a lawsuit against the Company in theSupreme Court of the State of New York , County ofNew York , Index No. 654592/2019. Spencer Clarke has asserted claims arising from a 2018 Placement Agent Agreement (the "Placement Agent Agreement") under which Spencer Clarke agreed to assist the Company in raising money for a potential public offering. Spencer Clarke claims that the Company failed to make certain payments under that Placement Agent Agreement. OnSeptember 27, 2019 , the Company filed a motion to dismiss the complaint. OnOctober 7, 2019 , Spencer Clarke amended the complaint. OnNovember 8, 2019 , the Company filed an Answer and asserted Counterclaims against Spencer Clarke alleging breach of contract, anticipatory repudiation, and tortious interference with prospective business relations. On or aboutSeptember 22, 2021 , the Company and Spencer Clarke executed a Settlement and Release Agreement, the terms of which are confidential. As a result, onSeptember 24, 2021 , the parties filed a Stipulation of Discontinuance With Prejudice with the Court, and onSeptember 30, 2021 , the Court formally discontinued the action.
From time to time, the Company is also involved in various other claims and legal actions that arise in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company does not believe that the ultimate resolution of these actions will have a material adverse effect on its financial position, results of operations, liquidity or capital resources.
Future litigation may be necessary to defend ourselves and our partners by determining the scope, enforceability and validity of third party proprietary rights or to establish the Company's proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. Note 11 - Subsequent Events
The Company has evaluated all events that occurred after the balance sheet date
of
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Management's plans and basis of presentation:
The Company was incorporated in the
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
Crown's Research & Development operation is located on the HP Inc. campus inCorvallis, Oregon in theAdvanced 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. OnSeptember 1, 2021 , the Company entered into the seventh amendment to its lease withOregon State University , expanding the lease to now include approximately 703 square feet of lab space, 576 square feet of cubicle space, 1096 square feet of Highbay lab space, and 376 square feet of High bay storage space in a building commonly known as Building 11. EffectiveSeptember 1, 2021 , the quarterly operating expense will be$31,647.03 which contemplates overhead utilities and facility tooling costs. The sublease is extended untilJune 30, 2025 .
OnOctober 5, 2021 the Company entered into a lease for 27,000 square feet of manufacturing space located at3350 Pipebend Place NE ,Salem, Oregon , 97301. This building will be used for the manufacture and assembly of the Company's first product, Crown's Smart Window Insert powered by DynamicTintTM. The base monthly rent for the first year of the lease is$21,500 per month, which increases to$22,145 per month for the second year,$22,809 for the third year,$23,494 for the fourth year,$24,198 for the fifth year, and$24,924 for the final month of the lease. The Company paid a security deposit totaling$150,000 . The lease expires onNovember 30, 2026 . OnMarch 4, 2021 , the Company entered into a standard office lease withHudson 11601Wilshire, LLC , to lease 3,500 square feet of office space located at11601 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 per month for the second year,$19,684 for the third year and$20,373 for the final three months of the lease. The lease expires onJune 30, 2024 .
We believe that our administration, R&D, and manufacturing 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.
During the six months endedSeptember 30, 2021 , the Company entered into a Patent Assignment Agreement with International Business Machines Corporation ("IBM") to acquire an ownership interest in assigned patents. As consideration for the patents, the Company paid$231,000 (including legal fees of approximately$6,000 ) during the six months endedSeptember 30, 2021 . 17 Crown's first product will be the Smart Window Insert for commercial buildings. Crown's CommercialBuilding Smart Window Inserts will allow the building owner to quickly convert its single pane window units to a dual pane window unit. Crown's inserts will act as the "second pane" and will allow the building owner to enjoy all the benefits of a dual pane window without having to replace their existing single pane windows. Crown's Inserts can be integrated into the building HVAC control system, thereby optimizing the use of our Smart Window Inserts and reducing the use of the HVAC to heat or cool the rooms utilizing our technology. Initial field tests of Crown's DynamicTintTMtechnology suggests HVAC energy savings of 26% could result from the installation of Smart Window Inserts powered by DynamicTintTM. As Crown's DynamicTint technology requires very little energy to effect that transition from clear to dark state, a rechargeable battery coupled with a built-in solar cell eliminates the need to hardwire the inserts to the building electrical system. Each unit will have wireless communication capability for control of the film and communication with the building HVAC system. Crown believes that the potential retrofit market for its Smart Window Inserts is significant. Crown is developing its manufacturing capabilities to meet anticipated demand for the Smart Window Insert through a combination of in-house tooling at itsCorvallis, Oregon premises as well as via contract manufacturing partnerships which are currently being negotiated. The Company intends to develop and sell our patented EK Technology under the name DynamicTintTM. We intend to generate revenue by selling, and in some cases leasing, DynamicTintTMfilm or Smart Window Inserts powered by DynamicTintTM to our customers. OnSeptember 27, 2021 , Crown entered into a Master Supply Agreement with MetroSpaces Inc. to be the Company's first commercial customer. The Company will install its Smart Window Inserts in MetroSpaces' 70,000 square-footHouston, Texas office building. The agreement provides the master terms and conditions under which Crown will supply units in order to retrofit certain windows at locations indicated in the purchase orders. In the future, the parties may enter into multiple specific transactions by executing purchase orders for additional buildings. 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 andcarbon emissions, continues to build. Results of Operations for the three months endedSeptember 30, 2021 and 2020 (in thousands): Three Months Ended September 30, 2021 2020 Research and development$ 787 $ 423 Selling, general and administrative 4,865 1,659 Other expense 51 3,685 Net loss$ 5,703 $ 5,767 Research and Development Research and development expenses were$0.8 million for the three months endedSeptember 30, 2021 compared to$0.4 million for the three months endedSeptember 30, 2020 . The increase of$0.4 million is primarily related to increased payroll and related expenses.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $4.9 million and $1.7
million for the three months ended September 30, 2021 and 2020, respectively.
The $3.2 million increase in SG&A expenses is primarily attributable to
increased stock-based compensation expense of $2.1 million primarily related to
the issuance of restricted stock units and common stock warrants, increases in
payroll and related benefits of $0.4 million due to increased headcount,
increases in legal, professional and consulting fees of $0.4 million , and
increases in operating overhead of $0.3 million .
Other Expense
Other expense was nominal during the three months ended
18
Results of Operations for the six months ended September 30, 2021 and 2020 (in
thousands):
Six Months Ended
September 30,
2021 2020
Research and development $ 1,221 $ 1,796
Selling, general and administrative 9,827 9,597
Other expense 53 4,836
Net loss $ 11,101 $ 16,229
Research and Development
Research and development expenses were $1.2 million for the six months ended
September 30, 2021 compared to $1.8 million for the six months ended September
30, 2020 . The decrease of $0.6 million is primarily related to lower stock-based
compensation expenses of $0.9 million related to options and $0.2 million
related to restricted stock units, offset by increased payroll and relatedcosts totaling$0.5 million .
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $9.8 million and $9.6
million for the six months ended September 30, 2021 and 2020, respectively. The
$0.2 million increase in SG&A expenses is primarily attributable to lower
stock-based compensation expense of $2.8 million related to stock options and
$4.1 million for restricted stock awards, offset by increased stock compensation
expense of $3.8 million for restricted stock units and $0.8 million for the
issuance of common stock warrants, increases in payroll and related expenses of
$0.7 million due to increased headcount, bonuses paid to our Chief Executive
Officer of $0.4 million , increased professional fees of $1.1 million , and
increases in operating overhead of $0.3 million .
Other Expense
Other expense was nominal during the six months ended September 30, 2021 . Other
expense was $4.8 million for the six months ended September 30, 2020 , and was
primarily due to interest incurred on our convertible notes.
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 condensed financial statements, the Company had an accumulated deficit of approximately$68.3 million atSeptember 30, 2021 , a net loss of approximately$11.1 million , and approximately$5.2 million of net cash used in operating activities for the six months endedSeptember 30, 2021 . The Company expects to continue to incur ongoing administrative and other expenses, including public company expenses. InNovember 2021 , the Company entered into a non-binding term sheet with a financial institution in connection with a$10 million Standby Letter of Credit ("SLOC"). The SLOC accrues interest at a rate of 8% per annum and matures two years from the issuance date of the SLOC. Interest is payable quarterly. Although it is difficult to predict the Company's liquidity requirements as ofSeptember 30, 2021 , based upon the Company's current operating plan, cash on hand, and SLOC funding, 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. 19 Cash Flows (in thousands) Six Months EndedSeptember 30, 2021 2020
Cash and cash equivalents at the beginning of the period
48
Net cash used in operating activities (5,236 ) (2,794 ) Net cash used in investing activities (546 ) (29 ) Net cash provided by financing activities 186
3,376
Cash and cash equivalents at the end of the period
601 Operating Activities
For the six months ended
For the six months endedSeptember 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. Investing Activities For the six months endedSeptember 30, 2021 , net cash used in investing activities was approximately$0.5 million , consisting of$0.3 million related to the purchase of property and equipment and$0.2 million for the purchase of
the IBM patents.
For the six months ended
Financing Activities
For the six months ended
For the six months endedSeptember 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.
Critical accounting policies and significant judgments and estimates
Our financial statements are prepared in accordance with generally accepted accounting principles inthe 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.
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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