UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from __________ to __________
Commission file number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | Accelerated Filer | ☐ |
| ☒ | Smaller Reporting Company | ||
| Emerging Growth Company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
Indicate by check mark whether registrant is
a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No
The number of shares of common stock, $0.0001
par value per share, outstanding as of May 13, 2022 was
| Title of each class: | Trading Symbol | Name of each exchange on which registered: | ||
| The |
CROWN ELECTROKINETICS CORP.
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties.
All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.
ii
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements.
CROWN ELECTROKINETICS CORP.
Condensed Balance Sheets
(in thousands, except share and per share amounts)
| March 31, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Prepaid & other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Right of use asset | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Lease liability - current portion | ||||||||
| Notes payable | ||||||||
| Total current liabilities | ||||||||
| Lease liability | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 10) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, par value $ | ||||||||
| Series A preferred stock, par value $ | ||||||||
| Series B preferred stock, par value $ | ||||||||
| Series C preferred stock, par value $ | ||||||||
| Common stock, par value $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements.
1
CROWN ELECTROKINETICS CORP.
Condensed Statements of Operations
Three Months Ended March 31, 2022 and 2021
(Unaudited)
(in thousands, except share and per share amounts)
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating expenses: | ||||||||
| Research and development | $ | $ | ||||||
| Selling, general and administrative | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Other income | ||||||||
| Other expense | ( | ) | ||||||
| Interest expense | ( | ) | ( | ) | ||||
| Loss on exchange of notes payable for common stock and warrants | ( | ) | ||||||
| Gain (loss) on extinguishment of debt | ( | ) | ||||||
| Change in fair value of warrant liability | ( | ) | ||||||
| Change in fair value of derivative liability | ( | ) | ||||||
| Total other income (expense) | ( | ) | ( | ) | ||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax expense | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss per share, basic and diluted: | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares outstanding, basic and diluted: | ||||||||
The accompanying notes are an integral part of these condensed financial statements.
2
CROWN ELECTROKINETICS CORP.
Condensed Statements of Stockholders’ Equity (Deficit)
Three Months Ended March 31, 2022 and 2021
(Unaudited)
(in thousands, except share and per share amounts)
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Number | Amount | Number | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | - | $ | - | $ | - | $ | | $ | $ | ( | ) | $ | | ||||||||||||||||||||||||||||||
| Delivery of restricted common stock | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock warrants in connection with SLOC | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 (Unaudited) | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Number | Amount | Number | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2021 | - | $ | - | $ | - | $ | $ | | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Issuance of common stock and warrants, net of fees | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock and preferred stock in connection with conversion of notes | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchased beneficial conversion feature in connection with conversion of notes payable | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock warrants in connection with note exchange agreements | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Exercise of common stock warrants | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock to consultants | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Stock option exercise | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Canceled restricted stock awards | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Reclassification of warrant liabilities | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
3
CROWN ELECTROKINETICS CORP.
Condensed Statements of Cash Flows
Three Months Ended March 31, 2022 and 2021
(Unaudited)
(in thousands)
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Issuance of common stock to consultants | ||||||||
| Depreciation and amortization | ||||||||
| (Gain) loss on extinguishment of debt | ||||||||
| Loss on exchange of notes payable for common stock and warrants | ||||||||
| Amortization of debt discount | ||||||||
| Change in fair value of warrant liability | ||||||||
| Change in fair value of derivative liability | ||||||||
| Amortization of right of use assets | ||||||||
| Loss on disposal of equipment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid and other assets | ( | ) | ( | ) | ||||
| Account payable | ( | ) | ( | ) | ||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Accrued interest | ||||||||
| Lease liability | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of equipment | ( | ) | ( | ) | ||||
| Purchase of patents | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from the issuance of common stock, net of fees | ||||||||
| Proceeds from the exercise of common stock warrants | ||||||||
| Proceeds from PPP loan | ||||||||
| Repayment of related party non interest bearing advance | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash — beginning of period | ||||||||
| Cash — end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of common stock warrants in connection with SLOC | $ | $ | ||||||
| Issuance of common stock and preferred stock in connection with conversion of notes | $ | $ | ||||||
| Repurchase beneficial conversion feature in connection with conversion of notes payable | $ | $ | ||||||
| Reclassification of warrant liabilities | $ | $ | ||||||
| Issuance of common stock warrants in connection with note exchange agreements | $ | $ | ||||||
| Unpaid equipment included in accounts payable | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid income taxes | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements.
4
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three Months Ended March 31, 2022 and 2021
(Unaudited)
Note 1 - Organization and Description of Business Operations
Crown Electrokinetics Corp. (the “Company”) 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”).
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.
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 HP Inc.
On November 10, 2021, the Board of Directors of the Company approved a change in its fiscal year end from March 31 to December 31 which was effective January 1, 2022.
Note 2 - Liquidity and Financial Condition
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 $
On March 23, 2022, the Company entered into an Irrevocable $
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 $
Although it is difficult to predict the Company’s liquidity requirements as of March 31, 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.
Risks and Uncertainties
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 Company is currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine. The Company’s financial condition and results of operations may be materially adversely affected by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical tensions.
The condensed financial statements do not include any adjustments that might result from the outcome of these uncertainties.
5
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three Months Ended March 31, 2022 and 2021
(Unaudited)
Note 3 - Significant Accounting Policies
Basis of Presentation
The Company’s condensed financial statements have been prepared in conformity with accounting principles generally accepted in the 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 months ended March 31, 2022 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 ended December 31, 2021 included in the Company’s Form 10-KT filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2022.
Use of Estimates
The preparation of condensed 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 condensed 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.
Significant Accounting Policies:
For a detailed discussion about the Company’s significant accounting policies, see the Company’s December 31, 2021 financial statements included in its 2021 Annual Report.
Leases
The Company accounts for its leases under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the condensed consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term.
In calculating the right of use asset and lease liability, the Company elects to combine lease and non-lease components as permitted under ASC 842. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.
Warrants
The Company accounts for its warrants related to the SLOC in accordance with ASC 815-40, Contracts in Entity’s Own Equity. The warrants to purchase the Company’ common stock should be classified within stockholders’ equity and the warrants are indexed to the Company’s own stock under ASC 815-40. As such, the warrants meet the scope exception in ASC 815-10-15-74(a) to derivative accounting and; therefore, the warrants should be classified in stockholders’ equity. The Company will use a Black-Scholes model to value the warrants at issuance.
Under the guidance of ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, the Company concluded the warrants should be recorded as a deferred asset. At issuance and as of March 31, 2022, since no loan amounts were drawn down, the SLOC warrant is recorded as a deferred asset at fair value and will be amortized over the life of the SLOC. Upon a draw down, the remaining balance of the deferred asset would be reclassified to debt discount and amortized under the effective interest method over the one-year term of the loan.
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.
6
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three Months Ended March 31, 2022 and 2021
(Unaudited)
Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at March 31, 2022 and 2021 are as follows:
| March 31, | March 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Series A preferred stock | ||||||||
| Series B preferred stock | ||||||||
| Series C preferred stock | ||||||||
| Warrants to purchase common stock (excluding penny warrants) | ||||||||
| Options to purchase common stock | ||||||||
| Unvested restricted stock awards | ||||||||
| Unvested restricted stock units | ||||||||
Emerging Growth Company
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
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) which supersedes FASB Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842, which amends ASU 2016-02 to provide entities an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 842. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. The standard will be effective for non-public entities for fiscal years beginning after December 15, 2022 and interim periods beginning after December 15, 2023. The Company adopted this standard on January 1, 2022, and the adoption did not have a material impact on the Company’s financial statements or disclosures.
In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. On January 1, 2022, the adoption of ASU 2020-06 did not have a material impact on the Company’s condensed financial statements or disclosures.
7
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three Months Ended March 31, 2022 and 2021
(Unaudited)
In May 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 after December 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. On January 1, 2022, the adoption of ASU 2021-04 did not have a material impact on the Company’s condensed financial statements or disclosures.
Note 4 - Property & Equipment, Net
Property and equipment, net, consists of the following (in thousands):
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Equipment | $ | $ | ||||||
| Computers | ||||||||
| Leasehold improvements | ||||||||
| Total | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation expense for the three months ended
March 31, 2022 and 2021 was $
Note 5 - Intangible Assets, Net
IBM Patents
On July 23, 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 $
Intellectual Property
On January 31, 2016,
Under the guidance of ASC 350, Intangibles
- Goodwill and Other Intangibles, the Company recorded the research license at the cost to acquire the license. The Company has paid
$
8
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three Months Ended March 31, 2022 and 2021
(Unaudited)
HP Patents
On February 4, 2021, the Company entered into the fourth amendment to the IP agreement with HP. Under the terms of the amendment, the parties agreed to amend the list of patent and patent applications, which includes two additional patents that are assignable to the Company by HP. The Company exercised the option to purchase the assignable patents and paid HP $1.55 million dollars on February 9, 2021. Upon assignment of the patents, the Company will pay HP a royalty fee based on the cumulative gross revenue received by the Company from the patents as follows:
| 1. | Prior to December 31, 2029: |
| ● | Less than $70,000,000, royalty rate of 0.00% |
| ● | $70,000,000 - $500,000,000, royalty rate of 1.25% |
| ● | $500,000,000 and beyond, royalty rate of 1.00% |
| 2. | After January 1, 2030 and onward, royalty rate of 0.00% |
Under the terms of the amendment, HP waived any interest that would have been accrued on the open payable of $75,000 which was due from the Company related to the license agreement dated January 31, 2016.
9
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three Months Ended March 31, 2022 and 2021
(Unaudited)
Intangible assets, net, consists of the following (in thousands):
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Patents | $ | $ | ||||||
| Research license | ||||||||
| Total | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
The following table represents the total estimated amortization of intangible assets for the five succeeding years and thereafter as of March 31, 2022 (in thousands):
| Estimated Amortization Expense | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 and thereafter | ||||
| Total | $ | |||
For the three months ended March 31, 2022 and
2021, amortization expense was approximately $
Note 6 - Accrued Expenses
As of March 31, 2022 and December 31, 2021, the Company’s accrued expenses consisted of the following (in thousands):
| March 31, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| General liability insurance | $ | | $ | | ||||
| Professional fees | ||||||||
| Rent | ||||||||
| Total | $ | $ | ||||||
10
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three Months Ended March 31, 2022 and 2021
(Unaudited)
Note 7 - Stockholders’ Deficit
Preferred Stock
As of March 31, 2022 and December 31, 2021, there
were
Series A Preferred Sock
As of March 31, 2022 and December 31, 2021, the
Company had
Series B Preferred Stock
As of March 31, 2022 and December 31, 2021, the
Company had
Series C Preferred Stock
As of March 31, 2022 and December 31, 2021, the
Company had
Common Stock
Restricted Stock
During the three months ended March 31, 2022,
the Company issued
Note 8 - Stock Options, Restricted Stock Units and Warrants:
On December 16, 2020, the Company adopted its
2020 Long-Term Incentive Plan ( the “2020 Plan”). Under the 2020 Plan, there are
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. On June 14, 2019,
the Board of Directors of the Company approved increasing the number of shares allocated to the Company’s 2016 Equity Incentive
Plan from
11
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three Months Ended March 31, 2022 and 2021
(Unaudited)
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. 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 months ended March 31, 2022 and 2021, which are included in the accompanying statements of operations, as follows (in thousands):
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Research and development expenses | $ | $ | ||||||
| Selling, general and administrative expenses | ||||||||
| Total stock-based compensation | $ | $ | ||||||
Stock Options:
The Company provides stock-based compensation to employees, directors and consultants under both the 2016 and 2020 Plans. 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 the U.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.
A summary of activity under the 2016 and 2020 Plans for the three months ended March 31, 2022 is as follows:
| Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2021 | $ | $ | ||||||||||||||
| Canceled | ( | ) | $ | - | ||||||||||||
| Outstanding at March 31, 2022 | $ | |||||||||||||||
| Exercisable at March 31, 2022 | $ | $ | ||||||||||||||
12
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three Months Ended March 31, 2022 and 2021
(Unaudited)
During the three months ended March 31, 2022,
the Company cancelled
Restricted stock units:
A summary of the Company’s restricted stock activity during the three months ended March 31, 2022 is as follows:
During the three months ended March 31, 2022,
| Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Unvested at March 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Unvested at December 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Unvested at March 31, 2022 | $ | |||||||
Warrants:
In connection with the SLOC, the Company issued
a warrant for
| Shares Underlying Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2021 | $ | $ | ||||||||||||||
| Issued | $ | |||||||||||||||
| Outstanding at March 31, 2022 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2022 | $ | $ | ||||||||||||||
13
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three Months Ended March 31, 2022 and 2021
(Unaudited)
The Company estimated the fair value of the warrants using the Black-Scholes pricing model as follows:
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Expected price volatility | % | |||||||
| Risk free interest rate | % | . | ||||||
| Expected term (years) | ||||||||
Note 9 - Commitments and Contingencies
Leases
Oregon State University
On March 8, 2016, the Company entered into a lease
agreement with Oregon State University, to lease office and laboratory space located at HP Campus Building 11, 1110 NE Circle Blvd, Corvallis,
Oregon, for approximately $
On July 1, 2019, the Company entered into the fourth amendment to its lease with Oregon State University, which extends the lease expiration date to June 30, 2022. Beginning on July 1, 2020, and each July 1 thereafter, the monthly Operating Expense Reimbursement, as defined will be increased by no more than three percent.
On July 1, 2020, the Company entered into the
fifth amendment to its lease with Oregon 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. Effective July 1, 2020, the quarterly
operating expense will be $
On July 1, 2021, the Company entered into the
sixth amendment to its lease with Oregon State University which adjusts the Operating Expense Reimbursement to a quarterly payment of
$
On September 1, 2021,
On January 24, 2022,
Hudson 11601 Wilshire, LLC
On March 4, 2021, the Company entered into a lease agreement with Hudson 11601 Wilshire, LLC, to lease 3,500 square feet of office space located in Los Angeles, California. The lease term is 39 months and expires on June 30, 2024. The monthly lease expense is as follows:
| ● | Months 1-12 | - | $18,375 |
| ● | Months 13-24 | - | $19,018 |
| ● | Months 25-36 | - | $19,683 |
| ● | Months 37-39 | - | $20,372 |
14
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three Months Ended March 31, 2022 and 2021
(Unaudited)
The Company paid a security deposit totaling $20,373 at the lease inception date.
HP Inc.
On May 4, 2021, the Company entered into a lease
agreement with HP Inc. to lease office and lab space located in Corvallis, Oregon.
Pacific N.W. Properties, LLC
On October 5, 2021,
On December 9, 2021,
| ● | Months 1-2 | - | $15,357 | |
| ● | 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 |
As of March 31, 2022, the Company had operating
lease liabilities of approximately $
The components of lease expense were as follows:
| Three months ended March 31, 2022 | ||||
| Operating leases: | ||||
| Operating lease cost | $ | | ||
| Variable lease cost | ||||
| Operating lease expense | $ | |||
Supplemental cash flow information related to leases were as follows:
| Three months ended March 31, 2022 | ||||
| Operating cash flows - operating leases | $ | |||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | |||
| Weighted-average remaining lease term – operating leases (in years) | ||||
| Weighted-average discount rate – operating leases | % | |||
15
CROWN ELECTROKINETICS, CORP.
Notes to Condensed Financial Statements
Three Months Ended March 31, 2022 and 2021
(Unaudited)
As of March 31, 2022, future minimum payments are as follows (in thousands):
| Operating | ||||
| Leases | ||||
| Nine months ended December 31, 2022 | $ | |||
| Year ended December 31, 2023 | ||||
| Year ended December 31, 2024 | ||||
| Year ended December 31, 2025 | ||||
| Year ended December 31, 2026 | ||||
| Year ended December 31, 2027 | ||||
| Total | ||||
| Less present value discount | ( | ) | ||
| Operating lease liabilities | $ | |||
During the three months ended March 31, 2022 and
2021, the Company recognized rent expense of approximately $
Litigation
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 10 - Subsequent Events
The Company has evaluated all subsequent events through the date of filing of this Quarterly Report on Form 10-Q with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the condensed financial statements as of March 31, 2022, and events which occurred after March 31, 2022, but which were not recognized in the condensed financial statements.
Subsequent to March 31, 2022, in connection with
the Company’s ATM Offering (see Note 2), the Company received gross proceeds of approximately $
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.
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.
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.
17
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.
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.
In the future, Crown and each of these customers 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 and carbon emissions, continues to build.
Results of Operations for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 (in thousands):
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Research and development | $ | 1,096 | $ | 905 | ||||
| Selling, general and administrative | 3,471 | 4,357 | ||||||
| Other income (expense) | (3 | ) | (15,410 | ) | ||||
| Net loss | $ | (4,570 | ) | $ | (20,672 | ) | ||
Research and Development
Research and development expenses were $1.1 million for the three months ended March 31, 2022 compared to $0.9 million for the three months ended March 31, 2021. The increase of $0.2 million is primarily related to additional salaries and benefits.
18
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses were $3.4 million and $4.4 million for the three months ended March 31, 2022 and 2021, respectively. The $1.0 million decrease in SG&A expenses is primarily due to decrease in stock-based compensation of $1.8 million, offset by an increase of salaries of $0.4 million, professional fees of $0.2 million, rent expense of $0.2 million, loss on disposal of equipment of $0.1 million and other SG&A expenses.
Other (Income) Expense
Other (income) expense was immaterial for the three months ended March 31, 2022.$. Other (income) expense for the three months ended March 31, 2021 was $15.4 million loss, which primarily consisted of a loss on extinguishment of debt in the amount of $13.8 million, a loss due to the change in fair value of warrant liability of $1.0 million and a loss due to a change in fair value of derivative liability of $0.1 million.
Liquidity
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||
| Cash and cash equivalents at the beginning of the year | $ | 6,130 | $ | 36 | ||||
| Net cash used in operating activities | (3,552 | ) | (2,870 | ) | ||||
| Net cash used in investing activities | (65 | ) | (1,583 | ) | ||||
| Net cash provided by financing activities | 19,714 | |||||||
| Cash and cash equivalents at the end of the year | $ | 2,513 | $ | 15,297 | ||||
The Company had an accumulated deficit of approximately $78.2 million, and a net loss of $4.6 million, and used approximately $3.6 million in net cash in operating activities for the three months ended March 31, 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 March 31, 2022 the Company did not receive any proceeds from the ATM Offering. Subsequent to March 31, 2022, and as of the date of this filing, the Company received net proceeds on sales of 20,891 shares of common stock under the Sales Agreement of approximately $27,216 (after deducting $816 in commissions and expenses) at a weighted average price of $1.30.
Although it is difficult to predict the Company’s liquidity requirements as of December 31, 2021, 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.
19
Cash Flows
Operating Activities
For the three months ended March 31, 2022, net cash used in operating activities was $3.6 million, which primarily consisted of our net loss of $4.6 million, adjusted for non-cash expenses of $1.4 million which primarily consisted of stock-based compensation expenses totaling $1.0 million, and depreciation and amortization of $0.1 million, The net change in operating assets and liabilities was $0.3 million, primarily consisting of an increase in prepaid and other assets.
For the three months ended March 31, 2021, net cash used in operating activities was $2.9 million, which primarily consisted of our net loss of $20.7 million, adjusted for non-cash expenses of $19.0 million which primarily consisted of stock-based compensation expenses totaling $3.5 million, and depreciation and amortization of $0.1 million, offset by gain on extinguishment of debt of $14.0 million, a change in warrant liability of $1.0 million, amortization of debt discount of $0.5 million, and change in fair value of derivative liability of $0.1 million. The net change in operating assets and liabilities was $1.0 million.
Investing Activities
For the three months ended March 31, 2022, net cash used in investing activities was approximately $0.1 million
For the three months ended March 31, 2021, net cash used in investing activities was approximately $1.6 million, consisting of $1.5 million related to the purchase of for the purchase of the HP patents.
Financing Activities
For the three months ended March 31, 2021, net cash provided by financing activities was $19.7 million, related to the proceeds of issuance of common stock.
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 |
20
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 three months ended March 31, 2022 and 2021.
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.
21
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for a Smaller Reporting Company.
22
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.
The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
With respect to the quarter ended March 31, 2022, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer has concluded that our disclosure controls and procedures are effective.
Management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.
Changes in Internal Control over Financial Reporting:
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended March 31, 2022 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are 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, we do not believe that the ultimate resolution of these actions will have a material adverse effect on our 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 our 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 us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Other than those previously disclosed by the Company in its current reports on Form 8-K as filed with the SEC, there have been no unregistered sales of the Company’s equity securities during the period covered by this Quarterly Report.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
N/A
Item 5. Other Information
N/A
Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
| Crown Electrokinetics Corp. | |
| Dated: May 16, 2022 | /s/ Doug Croxall |
| Doug Croxall | |
| Chief Executive Officer and | |
| Principal Executive Officer | |
| Dated: May 16, 2022 | /s/ Joel Krutz |
| Joel Krutz | |
| Chief Financial Officer and | |
| Principal Financial Officer |
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