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 22, 2023 was
| 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 Consolidated Balance Sheets
(in thousands, except share and per share amounts)
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Right of use asset | ||||||||
| Goodwill | ||||||||
| Deferred debt issuance costs | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Lease liability - current portion | ||||||||
| Warrant liability | ||||||||
| Notes payable at fair value | ||||||||
| Notes payable | ||||||||
| Total current liabilities | ||||||||
| Lease liability - non-current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 14) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, par value $ | ||||||||
| Series A preferred stock, par value $ | ||||||||
| Series B preferred stock, par value $ | ||||||||
| Series C preferred stock, par value $ | ||||||||
| Series D preferred stock, par value $ | ||||||||
| Series E 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 consolidated financial statements.
1
CROWN ELECTROKINETICS CORP.
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2023 and 2022
(Unaudited)
(in thousands, except share and per share amounts)
| Three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | $ | $ | ||||||
| Cost of revenue | ||||||||
| Gross loss | ( | ) | ||||||
| Operating expenses: | ||||||||
| Research and development | ||||||||
| Selling, general and administrative | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Loss on extinguishment of warrant liability | ( | ) | ||||||
| Gain on issuance of convertible notes | ||||||||
| Change in fair value of warrants | ||||||||
| Change in fair value of notes | ( | ) | ||||||
| Other income | ||||||||
| Other expense | ( | ) | ||||||
| Total other income (expense) | ( | ) | ||||||
| Net loss | ( | ) | ( | ) | ||||
| Deemed dividend on Series D preferred stock | ( | ) | ||||||
| Cumulative dividends on Series A preferred stock | ( | ) | ||||||
| Cumulative dividends on Series B preferred stock | ( | ) | ||||||
| Cumulative dividends on Series D preferred stock | ( | ) | ||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Net loss per share attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
CROWN ELECTROKINETICS CORP.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands, except share and per share amounts)
Three Months Ended March 31, 2023
| Series
A Preferred Stock | Series
B Preferred Stock | Series
C Preferred Stock | Series
D Preferred Stock | Series
E Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | - | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of common stock warrants | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with conversion of notes | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock/At-the-market offering, net of offering costs | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series E preferred stock in connection with LOC | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitment to issue shares of common stock in connection with March waiver agreement | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend for repricing of Series D preferred stock | - | - | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2022
| 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) | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CROWN ELECTROKINETICS CORP.
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2023 and 2022
(Unaudited)
(in thousands)
| Three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Loss on extinguishment of warrant liability | ||||||||
| Change in fair value of warrant liability | ( | ) | ||||||
| Change in fair value of notes | ||||||||
| Amortization of deferred debt issuance costs | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of right of use assets | ||||||||
| Gain on issuance of convertible note | ( | ) | ||||||
| Other expenses | ||||||||
| Loss on disposal of equipment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid and other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash paid for acquisition of Amerigen 7 | ( | ) | ||||||
| Purchase of equipment | ( | ) | ( | ) | ||||
| Purchase of patents | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from the exercise of warrants | ||||||||
| Proceeds from the issuance of common stock / At-the-market offering | ||||||||
| Offering costs for the issuance of common stock / At-the-market offering | ( | ) | ||||||
| Proceeds from the issuance of notes in connection with Line of Credit | ||||||||
| Proceeds from issuance of January promissory notes, net of fees paid | ||||||||
| Repayment of notes payable | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase / decrease in cash | ( | ) | ||||||
| Cash — beginning of period | ||||||||
| Cash — end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of Series E preferred stock in connection with LOC | $ | $ | ||||||
| Issuance of common stock in connection with conversion of notes | $ | $ | ||||||
| Issuance of common stock warrants in connection with SLOC | $ | $ | ||||||
| Commitment to issue shares of common stock in connection with March waiver agreement | $ | $ | ||||||
| Deemed dividend for repricing of Series D preferred stock | $ | $ | ||||||
| Unpaid equipment included in accounts payable | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Notes to the Condensed Consolidated Financial Statements
(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 December 20, 2022, the Company incorporated Crown Fiber Optics Corp., a Delaware based entity, to own and operate its acquired business from the acquisition of Amerigen 7, LLC (“Amerigen 7”) in January 2023. Crown Fiber Optics Corp. is accounted for as a wholly- owned subsidiary of Crown Electrokinetics, Corp.
Preferred Stock
Subsequent to December 31, 2022, the Company
filed the first amendment to its Series D preferred stock, which modifies the conversion price of the Series D preferred stock from $
On February 1, 2023, the Company’s Board
of Directors authorized
Business Combination
On January 3, 2023, the Company acquired certain
assets related to the construction of 5G fiber optics infrastructure and distributed antenna systems from Amerigen 7 (the “Asset
Acquisition”), for cash consideration of approximately $
Reverse Stock Split
On December 22, 2022, the Company’s stockholders approved a reverse stock split of its common stock at a ratio of not more than 1-for-15, such ratio to be determined by the Company’s Board of Directors on or prior to December 22, 2023.
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 consolidated financial statements, the Company had an accumulated deficit
of approximately $
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
5
The Company will seek to obtain additional capital
through the sale of debt or equity financings or other arrangements to fund operations including through its existing At-The-Market offering,
$
At-the-Market Offerings
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 $
On October 5, 2022, the Company and the Sales
Agents filed the first amendment to the Sales Agreement (the “First Amendment to the Sales Agreement”). Pursuant to the First
Amendment to the Sales Agreement, the Company may from time to time, sell up to $
During the three months ended March 31, 2023,
the Company received net proceeds on sales of
Senior Secured Notes
On January 3, 2023, the Company received net proceeds
of $
Line of Credit
On February 2, 2023, the Company entered into
a line of credit agreement (the “Line of Credit”) securing a line of credit up to $
As consideration for entering into the Line of
Credit, the Company issued
6
The warrant to purchase
Warrants
During the three months ended March 31, 2023,
the Company received net proceeds of approximately $
Risks and Uncertainties
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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Note 3 - Significant Accounting Policies
Basis of Presentation
The Company’s condensed consolidated 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 condensed consolidated results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results for the full year or the results for any future periods. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes for the fiscal year ended December 31, 2022 included in the Company’s Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2023.
Use of Estimates
Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies, see the Company’s December 31, 2022 financial statements included in its 2022 Annual Report.
7
Revenue Recognition
The Company adopted the new revenue standard, ASC 606, on March 31, 2019 using the full retrospective approach. The adoption did not have an effect on 2021 or 2020 revenue recognition or a cumulative effect on opening equity, as the timing and measurement of revenue recognition is materially the same as under ASC 605. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
| ● | Step 1: Identify the contract with the customer |
| ● | Step 2: Identify the performance obligations in the contract |
| ● | Step 3: Determine the transaction price |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract |
| ● | Step 5: Recognize revenue when the company satisfies a performance obligation |
For contracts where the period between when the Company transfers a promised good or service to the customer and when the customer pays is one year or less, the Company has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component.
The Company’s performance obligation is to provide fiber splicing services as required based on short-term work orders as work is assigned by the Customer. The Company is required to complete the description of work described in the work order and test the service provided prior to any recognition of revenue and invoicing. The short-term work orders are for very specific performance obligations which are performed from start to finish within two weeks or less, and more often, within one week. The Company is required to adhere to the rules and regulations that are outlined in the Agreement between the Company and the Customer.
Cost for the work performed is outlined in the individual work orders based on the detailed description of work to be performed. All of the revenue is recognized immediately upon completion of the work in each work order. A 5% retainage will be withheld by the Customer upon payment of invoices and will be paid to the Company within one year after termination of the contract. The retainage can be utilized by Customer for any claims that may arise after work is completed up through one year after completion.
Revenue recognized during the three months ended March 31, 2023 was generated by the Company’s wholly-owned subsidiary, Crown Fiber Optics Corporation, and was immaterial. No revenue was recognized by the Company during the three months ended March 31, 2022.
Financial Instruments – Credit Losses
Measurements of Credit Losses on Financial Instruments (“ASC 326”), which replaces the existing incurred loss model with a current expected credit loss (“CECL”) model that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company would be required to use a forward-looking CECL model for accounts receivables, guarantees and other financial instruments. The Company adopted ASC 326 on January 1, 2023 and ASC 326 did not have a material impact on its financial statements.
Segment and Reporting Unit Information
Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive Officer is determined to be the CODM. On January 3, 2023 the Company acquired Crown Fiber Optics, Corp. (see Note 1) and is currently in the process of integrating this new business line including identifying leadership, and aligning management reporting and allocation methodologies. The Company is assessing its current segment structure in conjunction with the integration efforts.
8
Business Combinations
The Company accounts for business combinations using the guidance provided by Accounting Standards Codification (“ASC”) 805, Business Combinations. ASC 805 requires the Company to use the acquisition method of accounting by recognizing the identifiable tangible and intangible assets acquired and liabilities assumed, and any non-controlling interest in the acquired business, measured at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the aforementioned amounts.
Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets. Although the Company believes the assumptions and estimates made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain intangible assets we have acquired include future expected cash flows from customer contracts. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results. The initial purchase price may be adjusted as needed per the terms of the arrangement agreement. The allocation of purchase price, including any fair value the assets acquired and liabilities assumed as of the acquisition date has not been completed.
Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Deferred Debt Issuance Costs
The Company accounts for debt issuance costs related to its Line of Credit as a deferred asset which is amortized over the life of the Line of Credit. Since the Company has elected the fair value option for its convertible notes (see below), upon a draw down, a portion of the deferred asset balance will be amortized to other expense. On the issuance date of the Company’s Line of Credit, since no loan amounts are drawn down, the cost related to issuance of the Series E preferred shares and the warrant to purchase Series E preferred shares are recorded as a deferred asset.
Goodwill
The Company performs a goodwill impairment analysis on October 1st of each year. When conducting its annual goodwill impairment assessment, the Company initially performs a qualitative evaluation to determine if it is more likely than not that the fair value of its reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test.
Convertible Notes
In accordance with Accounting Standards Codification 825, Financial Instruments (“ASC 825”), the Company has elected the fair value option for recognition of its convertible notes. In accordance with ASC 825, the Company recognizes these notes at fair value with changes in fair value recognized in the statements of operations. The fair value option may be applied instrument by instrument, but it is irrevocable. As a result of applying the fair value option, direct costs and fees related to the convertible notes were recognized in other expense. The Company will include the interest expense as a component of the notes fair value.
9
Warrants
The Company accounted for certain common stock warrants outstanding as a liability at fair value and adjusted the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statements of operations. The fair value of the warrants issued by the Company have been estimated using the Black Scholes Methodology.
SLOC
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’s common stock meet the criteria in ASC 815-40 to be classified within stockholders’ equity, and therefore, the warrants are not revalued after issuance. The Company uses 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, 2023, 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.
Purchase Order Warrants
The Company accounts for its warrants issued in connection with purchase orders in accordance with ASC 606, Revenue Recognition. With respect to the warrant, the Company accounts for it as consideration payable to a customer under ASC 606, as it relates to the future purchase of the Company’s Smart Window Inserts™. Pursuant to ASC 718 Compensation - Stock Compensation (“ASC 718”), the Company measured the fair value of the warrant using the Black-Scholes valuation model on the issuance date, with the value being recognized as a prepaid asset up to the recoverable value represented by the value of the contract.
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.
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, 2023 and 2022 are as follows:
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Series A preferred stock | ||||||||
| Series B preferred stock | ||||||||
| Series C preferred stock | ||||||||
| Series D preferred stock | ||||||||
| Series E preferred stock | ||||||||
| Convertible notes | ||||||||
| Warrants to purchase common stock (excluding penny warrants) | ||||||||
| Warrants to purchase Series E preferred stock | ||||||||
| Options to purchase common stock | ||||||||
| Unvested restricted stock units | ||||||||
| Commitment shares | ||||||||
10
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.
Note 4 – Acquisitions
On January 3, 2023, the Company completed its
Asset Acquisition as described in Note 1. In accordance with the terms of the Asset Acquisition the Company paid cash consideration of
approximately $
The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed for the Amerigen 7 acquisition (in thousands):
| Property and equipment | $ | |||
| Intangible assets | ||||
| Security deposits | ||||
| Accrued expenses | ( | ) | ||
| Notes payable | ( | ) | ||
| Total identifiable assets and liabilities acquired | ( | ) | ||
| Goodwill | ||||
| Total purchase consideration | $ |
The Company engaged an independent valuation specialist to conduct a valuation analysis of the identifiable intangible assets acquired by the Company with the objective of estimating the fair value of such assets as of January 3, 2023. The valuation specialist utilized the Income Approach, specifically the Multi-Period Excess Earnings Method, to value the existing customer relationship.
Note 5 - Prepaid and Other Current Assets
Prepaid and other current assets consist of the following (in thousands):
| March 31, 2023 | December 31, 2022 | |||||||
| License fees | $ | $ | ||||||
| Notes receivable | ||||||||
| Professional fees | ||||||||
| Insurance | ||||||||
| Hudson warrant * | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
| * |
11
Note 6 - Property & Equipment, Net
Property and equipment, net, consists of the following (in thousands):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Equipment | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Vehicles | ||||||||
| Computers | ||||||||
| Other | ||||||||
| Total | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
During the three months ended March 31, 2023,
the Company recorded $
Depreciation expense for the three months ended
March 31, 2023 and 2022 was $
Note 7 - Intangible Assets, Net
Intangible assets, net, consists of the following (in thousands):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Patents | $ | $ | ||||||
| Research license | ||||||||
| Customer relationships | ||||||||
| Total | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
During the three months ended March 31, 2023,
the Company recorded $
The following table represents the total estimated amortization of intangible assets for the five succeeding years and thereafter as of March 31, 2023 (in thousands):
| Estimated Amortization Expense | ||||
| Nine months ended December 31, 2023 | $ | |||
| Year ended December 31, 2024 | ||||
| Year ended December 31, 2025 | ||||
| Year ended December 31, 2026 | ||||
| Year ended December 31, 2027 and thereafter | ||||
| Total | $ | |||
For the three months ended March 31, 2023 and
2022, amortization expense was approximately $
12
Note 8 – Deferred Debt Issuance Costs
Deferred debt issuance costs consist of the following (in thousands):
| March 31, 2023 | December 31, 2022 | |||||||
| SLOC | $ | $ | ||||||
| Line of Credit | ||||||||
| Total | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Deferred debt issuance costs, net | $ | $ | ||||||
Line of Credit
On February 2, 2023, the Company entered into
its Line of Credit and recorded deferred debt issuance costs of approximately $
SLOC
For the three months ended March 31, 2023 and
2022, in connection with its SLOC, the Company recognized amortization expense of approximately $
Note 9 - Fair Value Measurements
The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of March 31, 2023 and December 31, 2022:
| Fair value measured at March 31, 2023 | ||||||||||||||||
| Total carrying value at March 31, 2023 | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Liabilities: | ||||||||||||||||
| Convertible notes | $ | $ | $ | $ | ||||||||||||
| Warrant liability | $ | $ | $ | $ | ||||||||||||
| Fair value measured at December 31, 2022 | ||||||||||||||||
| Total carrying value at December 31, 2022 | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Liabilities: | ||||||||||||||||
| Convertible notes | $ | $ | $ | $ | ||||||||||||
| Warrant liability | $ | $ | $ | $ | ||||||||||||
13
For the three months ended March 31, 2023 there
was a change of approximately $
The fair value of the convertible notes may change significantly as additional data is obtained, impacting the Company’s assumptions used to estimate the fair value of the liabilities. In evaluating this information, considerable judgment is required to interpret the data used to develop the assumptions and estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts, and such changes could materially impact the Company’s results of operations in future periods.
The following table presents changes in Level 3 liabilities measured at fair value for the three months ended March 31, 2023. Unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable to unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
| Convertible Notes | Warrant Liability | |||||||
| Balance at December 31, 2022 | $ | $ | ||||||
| Conversion of October convertible notes | ( | ) | ||||||
| Issuance of convertible note in connection with Line of Credit | ||||||||
| Warrants issued in connection with January promissory note | ||||||||
| Warrants issued in connection with Line of Credit | ||||||||
| Warrants issued in connection with inducement agreement | ||||||||
| Warrants issued in connection with February waiver agreement | ||||||||
| Change in fair value of convertible notes in connection with March waiver agreement | ||||||||
| Fair value of warrants exercised | ( | ) | ||||||
| Loss on extinguishment of warrant liability | ||||||||
| Gain on issuance of convertible note | ( | ) | ||||||
| Change in fair value | ( | ) | ( | ) | ||||
| Balance at March 31, 2023 | $ | $ | ||||||
Convertible Notes
During the year ended December 31, 2022, the Company issued convertible promissory notes (the “2022 Notes”). The fair value of the Notes on the issuance dates, and as of March 31, 2023 and December 31, 2022 were estimated using a Monte Carlo simulation to capture the path dependencies intrinsic to their terms. The significant unobservable inputs used in the fair value measurement of the Company’s convertible notes are the common stock price, volatility, and risk-free interest rates. Significant changes in these inputs may result in significantly lower or higher fair value measurement. The Company elected the fair value option when recording its 2022 Notes and the 2022 Notes were classified as liabilities and measured at fair value on the issuance date, with changes in fair value recognized as other income (expense) on the statements of operations and disclosed in the condensed consolidated financial statements.
During the three months ended March 31, 2023,
two noteholders converted a portion of their 2022 Notes into
February Waiver Agreement
On February 28, 2023, the Company entered into waiver agreements with holders of the 2022 Notes (See Note 11). In connection with this waiver agreement, the 2022 Notes were revalued as of the amendment date.
14
March Waiver Agreement
On March 24, 2023, the Company entered into the
second waiver agreements with holders of the 2022 Notes (See Note 11). A select number of holders elected to increase the principal balance
of their notes. The Company revalued the respective notes on the date prior to the amendment date, and again on the amendment date. The
change in fair value related to the amendment of these 2022 Notes was approximately $
As of March 31, 2023, the fair value of the 2022
Notes was approximately $
Line of Credit
On February 3, 2023 the Company drew down $
Warrants
Senior Secured Notes
In connection with the issuance of its senior
secured notes on January 3, 2023 (See Note 11), the Company issued
Line of Credit
On February 2, 2023, in connection with the issuance
of its Line of Credit, the Company issued
Warrant Inducement and Exercise Agreement
During the year ended December 31, 2022, in connection
with the 2022 Notes, the Company issued
During the three months ended March 31, 2023,
in connection with its 2022 Notes, the Company entered into a warrant inducement and exercise agreement with certain holders. Under the
terms of the agreement, the holders exercised
February Waiver Agreement
As consideration for the February waiver
agreement, the Company issued
As of March 31, 2023, there are
15
The warrants were classified as liabilities and measured at fair value on the grant date, with changes in fair value recognized as other income (expense) on the statements of operations and disclosed in the condensed consolidated financial statements.
A summary of significant unobservable inputs (Level 3 inputs) used in measuring warrants on the issuance dates and as of March 31, 2023 and December 31, 2022 is as follows:
| January 2023 | February 2023 | March 31, 2023 | December 31, 2022 | |||||||||||||
| Dividend yield | % | % | % | % | ||||||||||||
| Expected price volatility | % | % | % | % | ||||||||||||
| Risk free interest rate | % | % | % | % | ||||||||||||
| Expected term (in years) | ||||||||||||||||
Significant changes in the expected price volatility and expected term would result in significantly lower or higher fair value measurement of the warrants, respectively.
Note 10 - Accrued Expenses
As of March 31, 2023 and December 31, 2022, the Company’s accrued expenses consisted of the following (in thousands):
| March 31, 2023 | December 31, 2022 | |||||||
| Payroll and related expenses | $ | $ | ||||||
| Bonus | ||||||||
| Taxes | ||||||||
| Insurance | ||||||||
| Other expenses | ||||||||
| Total | $ | $ | ||||||
Note 11 - Notes Payable
Convertible Notes
2022 Notes
On October 19, 2022, the Company issued its
2022 Notes with a principal balance of approximately $
During the three months ended March 31, 2023, in connection with its 2022 Notes, the Company entered into a warrant inducement and exercise agreement with certain holders of the 2022 Notes (See Notes 7 and 13).
On February 28, 2023, the Company entered into
waiver agreements with holders of the 2022 Notes which extended the maturity date of the 2022 Notes from October 19, 2023 to April 18,
2024. As consideration for this agreement, the Company issued
On March 24, 2023, the Company entered into the
waiver agreements with holders of the 2022 Notes to eliminate the minimum pricing covenant as it relates to Company's At-The-Market facility.
As consideration for this agreement, the Company provided the holders with two options to choose from i) to take an additional
During the three months ended March 31, 2023,
two noteholders converted a portion of their 2022 Notes into
16
2023 Note
On February 3, 2023, upon drawing down on the
Line of Credit, the Company issued its 2023 Note totaling $
As of March 31, 2023, the fair value of the 2022
Notes and the 2023 Notes was approximately $
Senior Secured Notes
On January 3, 2023, the Company issued senior
secured notes with a principal balance of approximately $
The senior secured notes and warrants were not registered under the Securities Act of 1933, as amended (the “Securities Act”) or the securities laws of any state and were offered and sold in reliance upon the exemption from registration afforded by Section 4(a)(2) under the Securities Act and Regulation D promulgated thereunder and corresponding provisions of state securities laws, which exempt transactions by an issuer not involving any public offering. The Investors are “accredited investors” as such term is defined in Regulation D promulgated under the Securities Act.
Note 12 - Stockholders’ Equity
Preferred Stock
As of March 31, 2023 and December 31, 2022, there
were
Series A Preferred Sock
As of March 31, 2023 and December 31, 2022,
Series B Preferred Stock
As of March 31, 2023 and December 31, 2022,
17
Series C Preferred Stock
As of March 31, 2023 and December 31, 2022,
Series D Preferred Stock
On July 8, 2022, the Company’s Board of
Directors authorized
In July 2022, the Company issued
In connection with the issuance of the
The Company entered into a Registration Rights
Agreement (“RRA”) with the holders of the Series D preferred stock, whereby the Company was to use its best efforts to file
a registration statement registering the resale of the shares of common stock issuable upon conversion of the Series D preferred stock
and upon exercise of the warrants within thirty (30) calendar days following the closing of the Series D preferred stock offering. The
Company was to use its best efforts to have the registration statement declared “effective” within ninety (90) calendar days
from closing, or one hundred and twenty (120) from closing in the event the registration statement is reviewed by the SEC. If the Company
fails to meet these requirements, the RRA states that the Company shall pay to each holder an amount in cash, as partial liquidated damages
and not as a penalty, equal to the product of
Using the guidance provided by ASC 825-20 Financial Instruments, the Company determined that the RRA should be accounted for as a separate unit of account from the Series D preferred stock. Accordingly, under ASC 825-20, a financial instrument that is both within the scope of ASC 825-20 and subject to a registration payment arrangement shall be recognized and measured in accordance with ASC 825-20 without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement.
The RRA called for the Company to file a registration
statement by August 25, 2022 and declare it effective within 90 days of July 26, 2022. The Company filed its registration statement on
November 17, 2022, and the holders of the Series D preferred stock waived the related registration rights penalty of approximately $
The Series D preferred stock and warrants sold were not registered under the Securities Act of 1933, as amended (the “Securities Act”) or the securities laws of any state and were offered and sold in reliance on the exemption from registration afforded by Section 4(a)(2) under the Securities Act and Regulation D promulgated thereunder and corresponding provisions of state securities laws, which exempt transactions by an issuer not involving any public offering. The holders of Series D preferred stock are “accredited investors” as such term is defined in Regulation D promulgated under the Securities Act.
During the three months ended March 31, 2023,
the Company filed the first amendment to its Series D preferred stock, which modifies the conversion price of the Series D preferred stock
from $
18
Series E Preferred Stock
On February 1, 2023, the Company’s Board
of Directors authorized
Holders of Series E preferred stock are prohibited
from converting shares of Series E preferred stock into shares of common stock if, as a result of such conversion, such holder, together
with its affiliates, would beneficially own more than a specified percentage (to be initially set at
On February 2, 2023, in connection with its Line
of Credit, the Company issued
As of March 31, 2023,
Common Stock
Change in Authorized Shares
On December 22, 2022, the Company’s Board
of Directors approved increasing the Company’s authorized shares of common stock from
Reverse Stock Split
On December 22, 2022, the Company’s stockholders approved a reverse stock split of its common stock at a ratio of not more than 1-for-15, such ratio to be determined by the Company’s Board of Directors on or prior to December 22, 2023.
Warrant Exercises
During the three months ended March 31, 2023,
the Company issued shares of its common stock in connection with the exercise of
During the three months ended March 31, 2023,
the Company issued
Notes
During the three months ended March 31, 2023,
the Company issued
19
ATM Offering
As of March 31, 2023, the Company has received
net proceeds on sales of
Consulting
During the three months ended March 31, 2023,
the Company issued
Restricted Stock
During the three months ended March 31, 2023,
the Company issued
Public Offering
On July 19, 2022, the Company entered into an
underwriting agreement relating to the Company’s public offering of its common stock, par value $
In connection with the Company’s public
offering, the Company issued a warrant to the underwriters to purchase
Note 13 - Stock-Based Compensation, Stock Options, Restricted Stock Units and Warrants:
On December 22, 2022, the Company adopted its
2022 Long-Term Incentive Plan (the “2022 Plan”). Under the 2022 Plan, there are
The available shares in the 2022 Plan will automatically
increase on the first trading day in January of each calendar year during the term of 2022 Plan, commencing with January 2023, by such
number of shares of common stock as are necessary so that the total number of shares reserved for issuance under the 2022 Plan shall be
equal to
20
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
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, 2023 and 2022, which are included in the accompanying statements of operations, as follows (in thousands):
| Three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| (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 nine three months ended March 31, 2023 is as follows:
| Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Forfeited | ( | ) | $ | |||||||||||||
| Outstanding at March 31, 2023 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2023 | $ | $ | ||||||||||||||
21
Restricted stock units:
A summary of the Company’s restricted stock activity during the three months ended March 31, 2023 is as follows:
| Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
| Unvested at January 1, 2023 | $ | |||||||
| Vested | ( | ) | $ | |||||
| Unvested at March 31, 2023 | $ | |||||||
Warrants:
A summary of the Company’s warrant (excluding penny warrants) activity during the three months ended March 31, 2023 is as follows:
| Shares Underlying Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Issued | $ | |||||||||||||||
| Exercised | ( | ) | $ | |||||||||||||
| Outstanding at March 31, 2023 | $ | $ | ||||||||||||||
2023 Liability Classified Warrants
Senior Secured Note
During the three months ended March 31, 2023,
in connection with the issuance of its senior secured notes on January 3, 2023 (See Note 11), the Company issued
Line of Credit
During the three months ended March 31, 2023,
in connection with its Line of Credit, the Company issued
2022 Notes
During the year ended December 31, 2022, in connection
with the 2022 Notes, the Company issued
During the three months ended March 31, 2023,
in connection with its 2022 Notes, the Company entered into a warrant inducement and exercise agreement with certain holders. Under the
terms of the agreement, the holders exercised
On February 28, 2023, the Company entered into
waiver agreements with holders of the 2022 Notes and issued
22
2022 Equity Classified Warrants
Hudson Pacific Properties, L.P.
On August 12, 2022, the Company entered into two
Purchase Orders (PO’s) with Hudson Pacific Properties, L.P. (“Hudson”) for the purchase of the Company’s Smart
Window Inserts™ (“Inserts”). Hudson is a unique provider of end-to-end real estate solutions for tech and media tenants.
The PO’s have a value of $
On August 12, 2022,
Because Hudson is a customer, the Company accounts for the PO’s and warrants under Accounting Standards Codification (“ASC”) 606 Revenue Recognition (“ASC 606”). As the performance obligations have not yet been satisfied, the Company has not recognized any revenue during the three months ended March 31, 2023.
The Company accounts for the equity-classified
warrant as consideration payable to a customer under ASC 606, as it relates to the future purchase of the Inserts. Pursuant to ASC 718
Compensation - Stock Compensation (“ASC 718”), the Company measured the fair value of the warrant using the
Black-Scholes valuation model on the issuance date, with the value being recognized as a prepaid asset up to the recoverable value represented
by the value of the contract. The fair value of the warrant on the issuance date totaled $
SLOC
In connection with the SLOC, on March 17, 2022
the Company issued a warrant for
Note 14 - 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 January 24, 2022,
On January 20, 2023, the Company entered into
the ninth amendment to its lease with Oregon State University which reduces the amount of cubicle space from
23
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 |
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. The lease term is
Pacific N.W. Properties, LLC
On October 5, 2021, the Company entered into a
lease agreement with Pacific N.W. Properties, LLC to lease
On December 9, 2021, the Company entered into the first amendment to its lease agreement with Pacific N.W. Properties, LLC. The lease amendment revises the lease commencement date to December 9, 2021 and the lease expiration date to February 28, 2027. The revised monthly lease expense is as follows:
| ● | 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 |
24
As of March 31, 2023, the Company had operating
lease liabilities of approximately $
The components of lease expense were as follows:
| Three Months Ended March 31, | ||||||||
| 2023 | 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, | ||||||||
| 2023 | 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 | % | % | ||||||
As of March 31, 2023, future minimum payments are as follows (in thousands):
| Operating | ||||
| Leases | ||||
| Nine months 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, 2023 and
2022, the Company recognized rent expense of approximately $
On April 27, 2023 the Company terminated the Pacific NW lease and exited the building on May 10th, 2023. (See note 15)
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.
25
Note 15 - Subsequent Events
The Company has evaluated all subsequent events through the date of filing, May 22, 2023, 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 consolidated financial statements as of March 31, 2023, and events which occurred after March 31, 2023, but which were not recognized in the financial statements. The Company has determined that there were no subsequent events which required recognition, adjustment to or disclosure in the financial statements.
Lease Termination
On April 27, 2023 the Company terminated the Pacific
NW lease and exited the building on May 10th, 2023. As part of the termination agreement, the Company agreed to pay fees to the landlord
for rent in arrears and re-tenanting costs. The fees will be covered by forfeiting Crowns $
Convertible Note Repricing
On May 12, 2023, the Company entered into letter agreements (the “Inducement Agreements”) with certain of the October Investors, pursuant to which such October Investors agreed to reduce the conversion price of October Notes in an aggregate principal amount equal to $1,500,000, to $0.1547 per share, which are now convertible into 9,693,681 shares of the Company’s common stock, representing an increase of 5,030,951 shares in excess of the number of shares into which such October Notes were convertible prior to the Company’s entry into the Inducement Agreements.
On May 17, 2023, the Company entered into Inducement Agreements with the remaining October Investors, pursuant to which such October Investors agreed to reduce the conversion price of October Notes in an aggregate principal amount equal to $1,392,657, to $0.1822 per share, which are now convertible into 7,643,560 shares of the Company’s common stock, representing an increase of 3,314,506 shares in excess of the number of shares into which such October Notes were convertible prior to the Company’s entry into the Inducement Agreements.
Line of Credit Promissory Note Extension
On May 15, 2023, the Company entered into that certain Third Amendment to the Convertible Promissory Note (the “LOC Note Amendment”) with the lender, pursuant to which the lender agreed to extend the maturity date of the LOC Note until June 7, 2023 in exchange for, subject to stockholder approval, 4,000 shares of the Company’s SeriesE Preferred Stock, which are convertible into 4,000,000 shares of the Company’s common stock.
January Senior Secured Note Extension
On May 15, 2023, the lead lender and collateral agent for the January Notes agreed to grant the Company an extension of the maturity date thereof until May 23, 2023 in exchange for the issuance by the Company to the January Investors, on a pro rata basis, of 4,000,000 shares of the Company’s common stock, subject to approval by the Company’s stockholders.
May Demand Notes
Between May 17, 2023 and May 18, 2023, the Company issued secured demand promissory notes (the "Demand Notes") to certain investors (the “Holders”) in an aggregate principal amount equal to $429,877. The Demand Notes are due and payable at any time upon demand by a Holder after the earlier of (i) the consummation of the Company’s first securities offering after the issuance of the Demand Notes and (ii) July 16, 2023. The Demand Notes do not bear interest. In connection with the issuance of the Demand Notes, subject to stockholder approval, the Company agreed to issue to the Holders an aggregate of 8,597,539 shares of the Company’s common stock.
26
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 consolidated 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 consolidated financial statements may not be comparable to the condensed financial statements of other public companies.
Management’s plans and basis of presentation:
Crown Electrokinetics Corp. 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.
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.
Business Combination
On December 20, 2022, the Company incorporated Crown Fiber Optics Corp., a Delaware based entity, to own and operate its acquired business from the acquisition of Amerigen 7, LLC (“Amerigen 7) in January 2023. Crown Fiber Optics Corp. will be accounted for as a wholly- owned subsidiary of Crown Electrokinetics, Corp.
On January 3, 2023, the Company acquired certain assets related to the construction of 5G fiber optics infrastructure and distributed antenna systems from Amerigen 7 (the “Asset Acquisition”), for cash consideration of approximately $0.65 million. The Asset Acquisition included approximately 12 employees, customer contracts, and certain operating liabilities. The Asset Acquisition will be accounted for as a business combination in accordance with Accounting Standards Codification 805, Business Combinations. The initial purchase price may be adjusted as needed per the terms of the arrangement agreement. The allocation of purchase price, including any fair value of the assets acquired and liabilities assumed as of the acquisition date has not been completed.
Preferred Stock
On February 1, 2023 the Company filed the first amendment to its Series D preferred stock, which modifies the conversion price of the Series D preferred stock from $1.30 to $0.50 per share.
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On February 1, 2023, the Company’s Board of Directors authorized 77,000 shares of Series E preferred stock with a par value of $0.0001 per share. Each share of Series E Preferred Stock is convertible into 1,000 shares of the Company’s common stock at the option of the holders.
On February 2, 2023, as consideration for entering into its Line of Credit (see below), the Company issued 5,000 shares of Series E Preferred Stock as a commitment fee with a fair value of $1.45 million and issued a warrant to purchase 45,000 shares of the Company’s Series E preferred stock. In addition, the Company agreed to issue an additional 5,000 shares of Series E preferred stock on both the first and second anniversary date of the Line of Credit, or 10,000 shares on the first anniversary, if the Company does not elect to extend the maturity date of the Line of Credit. The fair value of the additional 10,000 shares of Series E preferred stock on the issuance date totaled $2.9 million. The Company recorded the total fair value of $4.35 million as additional paid-in capital with the offsetting debit to deferred debt issuance costs. The deferred debt issuance costs will be amortized over the term of the Line of Credit.
The warrant to purchase 45,000 shares of the Company’s Series E preferred stock is exercisable for five years at an exercise price of the greater of $0.50 per share multiplied by 1,000, and subject to adjustment under certain circumstances described in the warrant.
Common stock
Change in Authorized Shares
On December 22, 2022, the Company’s Board of Directors approved increasing the Company’s authorized shares of common stock from 200,000,000 to 800,000,000 shares.
Reverse Stock Split
On December 22, 2022, the Company’s stockholders approved a reverse stock split of its common stock at a ratio of not more than 1-for-15, such ratio to be determined by the Company’s Board of Directors on or prior to December 22, 2023.
Warrant Exercises
During the three months ended March 31, 2023, the Company issued 6,405,844 shares of its common stock in connection with the exercise of 6,405,844 warrants, receiving net proceeds of approximately $2.06 million at a weighted average price of $0.32 per share.
ATM Offering
The Company entered into a Sales Agreement with A.G.P./Alliance Global Partners (the “Sales Agents”) dated March 30, 2022 (the “Sales Agreement”), pursuant to which the Company may, from time to time, sell up to $5 million in shares (the “Placement Shares”) of the Company’s common stock through the Sales Agents, acting as the Company’s sales agent and/or principal, in a continuous at-the-market offering (the “ATM Offering”). The Company will pay the Sales Agents a commission of up to 3.0% of the aggregate gross proceeds the Company receives from all sales of the Company’s common stock under the Sales Agreement. The Placement Shares will be offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (Registration No. 333- 262122) and the related base prospectus included in the registration statement, as supplemented by the prospectus supplement dated March 30, 2022.
On October 5, 2022, the Company and the Sales Agents filed the first amendment to the Sales Agreement (the “First Amendment to the Sales Agreement”). Pursuant to the First Amendment to the Sales Agreement, the Company may from time to time, sell up to $3.5 million in Placement Shares of the Company’s common stock through the Sales Agents in a continuous At-the-Market Offering (the Amended ATM Offering”). According to the First Amendment to the Sales Agreement, the Company will pay the Sales Agents a commission of up to 3.0% of the aggregate gross proceeds the Company receives from all sales of its common stock in the Amended ATM Offering.
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During the three months ended March 31, 2023, the Company has received net proceeds on sales of 12,700,000 shares of common stock under the Sales Agreement of approximately $2.1 million (after deducting $0.1 million in commissions and expenses) at a weighted average price of $0.173 per share.
Line of Credit and Convertible Promissory Note
On February 2, 2023, the Company entered into a line of credit agreement (the “Line of Credit”) securing a line of credit up to $100.0 million. The Line of Credit will be used to fund expenses related to the fulfillment of contracts with customers of the Company’s wholly-owned subsidiary, Crown Fiber Optics Corporation. The Line of Credit expires February 2, 2024, unless the Line of Credit is extended for one or two additional years in accordance with its terms. On February 3, 2023, upon drawing down on the Line of Credit, the Company issued a convertible promissory note (the “2023 Note”) totaling $2.0 million, which is due and payable 60 days from the issuance date. The 2023 Note is non-interest bearing and secured by the Company’s assets. The 2023 Note issued with the initial $2.0 million draw down is convertible into shares of the Company’s common stock, at a conversion price per share of $0.50 per share, subject to adjustment under certain circumstances described in the 2023 Note. Notes evidencing future withdrawals, if any, will be convertible into common stock only upon the declaration of an event of default under such promissory note. As of the date of this report the Company is in discussions to extend the Maturity of the 2023 Note.
Senior Secured Convertible Notes
On October 19, 2022, the Company issued senior secured convertible notes (the “2022 Notes”) with a principal balance of approximately $5.4 million, and warrants to purchase 21,749,402 shares of the Company’s common stock for net proceeds of $3.5 million. The Notes were issued with a conversion price at a 54% premium to the most recent closing price, an original issue discount of 35%, do not bear interest, and mature upon the earlier of twelve months from the date of issuance or the closing of a change of control transaction (as defined in the notes). The 2022 Notes are convertible into shares of the Company’s common stock at a conversion price of $0.49 per share, subject to adjustment under certain circumstances described in the 2022 Notes. The 2022 Notes are secured by all of the Company’s assets (subject to exceptions for certain strategic transactions). The warrants have an exercise price of $0.32 per share and expire five years from the issuance date (subject to adjustment under certain circumstances described in the warrants).
As of December 31, 2022, the fair value of the 2022 Notes was approximately $1.7 million. During the year ended December 31, 2022, the Company recorded a change in fair value of the Notes totaling $0.15 million.
During the three months ended March 31, 2023, in connection with its 2022 Notes, the Company entered into a warrant inducement and exercise agreement with certain note holders. The Company received net proceeds of approximately $2.06 million in connection with the exercise of 6,405,844 warrants, and the Company issued 6,405,844 shares of its common stock. Under the terms of the agreement, the Company issued 6,405,844 new warrants to purchase shares of its common stock with an exercise price of $0.32 per share. The warrants expire 5 years from the issuance date.
On February 28, 2023, the Company entered into waiver agreements with the investors of the Notes issued in October 2022, which extended the maturity date of the Notes from October 18, 2023 until April 18, 2023. In connection with the waiver agreements, the Company issued 5,813,414 warrants to purchase shares of the Company’s common stock, which are exercisable at $0.32 per share and expire five years from the issuance date.
On March 24, 2023, the Company entered into waiver agreements with holders of the 2022 Notes to eliminate the minimum pricing covenant as it relates to Company’s At-The-Market facility. As consideration for this agreement, the Company provided the holders with two options i) take an additional 5% OID on the October note principal or ii) pending shareholder approval, be issued shares of common stock with a value equal to the 5% OID value, and issue total shares of 1,903,429 as converted using the Nasdaq minimum price of $0.157. During the three months ended March 31, 2023, six of the note holders elected option i), and the Company increased the respective principal balance of the notes by approximately $0.15 million. The remaining note holders elected option ii), and as of the date of this report, no shares of common stock have been issued.
Senior Secured Notes
On January 3, 2023, the Company issued senior secured notes with a principal balance of approximately $1.2 million and warrants to purchase 2,500,000 shares of the Company’s common stock for net proceeds of $1.0 million. The senior secured notes were issued with an original issue discount of 16.7%, do not bear interest, and mature three months from the date of issuance (unless extended pursuant to the terms of the notes). The warrants are exercisable for five years at an exercise price of $0.322, subject to adjustment under certain circumstances described in the warrants. As of the date of this report the Company is in discussions to extend the maturity of this note.
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Leases
Crown’s Research & Development Operation currently occupies 1,700 square feet of space, located on the HP Inc. campus in Corvallis, Oregon in the Advanced Technology and Manufacturing Institute (ATAMI). ATAMI is an academic-industrial research center and business incubator designed to provide an advanced materials development environment to private sector partner tenants performing research and development. The facility includes access to shared state-of-the-art tooling capabilities. ATAMI has grown to 80,000 square feet since its inception in 2004.
Hudson 11601 Wilshire, LLC
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.
Pacific N.W. Properties, LLC
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 December 9, 2021, the Company entered into the first amendment to its lease agreement with Pacific N.W. Properties, LLC. The lease amendment revises the lease commencement date to December 9, 2021 and the lease expiration date to February 28, 2027.
On April 27, 2023 the Company terminated the Pacific NW lease and exited the building on May 10th, 2023. (See note 15)
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. The lease term is 5 years, and the lease commencement date is April 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. On January 26, 2022, the Company entered into the first amendment to its lease with HP Inc., which amends the lease commencement date to January 26, 2022 and the lease expiration date to January 31, 2027.
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.
Master Supply Agreements
As part of the January 4, 2023, Amerigen 7 asset purchase agreement, Crown Fiber Optics acquired an MSA with Charter Spectrum which covered the five Great Lakes states. Subsequent to the acquisition, Crown has now entered into three further MSA’s, with two of the agreements covering the Northwest United States and the other contemplating a Southwest United States footprint. Of the four MSA’s, two are direct agreements with Internet Service Providers (ISP’s) and the others with infrastructure solution providers.
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.
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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, Crown had entered into a Master Supply Agreement with MetroSpaces Inc., Crown’s first commercial customer, install its Smart Window Inserts in MetroSpaces’ 70,000 square-foot Houston, Texas office building.
Additionally, discussions with multiple other building owners to buy Crown Smart Window Inserts are progressing as the regulatory and consumer pressure to reduce the level of energy consumption and carbon emissions, continues to build.
Hudson Purchase Orders
On August 12, 2022, the Company entered into two Purchase Orders (PO’s) with Hudson Pacific Properties, L.P. (“Hudson”) for the purchase of the Company’s Smart Window Inserts™ (“Inserts”). Hudson is a unique provider of end-to-end real estate solutions for tech and media tenants. The PO’s have a value of $85,450 and represent the first orders the Company has received prior to the launch of its Inserts. Delivery and installation are expected to begin in in the fourth quarter of 2023.
On August 12, 2022, as additional consideration for the PO’s, the Company issued a warrant to Hudson to purchase 300,000 shares of the Company’s common stock at $0.75 per share. The warrant has a five year life and expires on August 12, 2027.
Results of Operations for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 (in thousands):
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | $ | 22 | $ | - | ||||
| Cost of revenue | 31 | - | ||||||
| Gross loss | (9 | ) | - | |||||
| Research and development | 541 | 1,096 | ||||||
| Selling, general and administrative | 3,576 | 3,471 | ||||||
| Other (income) expense: | (1,826 | ) | 3 | |||||
| Net loss | $ | (2,300 | ) | $ | (4,570 | ) | ||
Revenue
Revenue is generated by the Company’s wholly-owned subsidiary, Crown Fiber Optics Corporation, and was immaterial for the three months ended March 31, 2023. No revenue was recognized by the Company during the three months ended March 31, 2022.
Cost of Revenue
Cost of revenue is generated by the Company’s wholly-owned subsidiary, Crown Fiber Optics Corporation, and was immaterial for the three months ended March 31, 2023. No cost of revenue was recognized by the Company during the three months ended March 31, 2022.
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Research and Development
Research and development expenses were $0.5 million and $1.1 million for the three months ended March 31, 2023 and 2022, respectively. The decrease of $0.6 million is primarily related to a decrease in salaries and benefits of $0.5 million, and a decrease in lab supplies and other expenses of $0.1 million.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses were $3.6 million and $3.5 million for the three months ended March 31, 2023 and 2022, respectively. The $0.1 million increase in SG&A expenses is primarily due to an increase in salaries and benefits of $0.5 million, an increase in professional fees of $0.2 million, and an increase in other SG&A expenses related to the acquisition of Crown Fiber Optics Corp in December 2022 of $0.3 million, offset by a decrease in stock-based compensation of approximately $0.9 million.
Other (Income) Expense
Other income was $1.8 million for the three months ended March 31, 2023 and was immaterial for the three months ended March 31, 2022. Other income for the three months ended March 31, 2023 primarily consisted of a gain related to the change in fair value of warrants of $5.6 million, offset by interest expense of $2.0 million, loss on extinguishment of warrant liabilities of $0.5 million, and other expenses of $1.3 million which primarily consisted of expenses incurred in connection with our February and March waiver agreements.
Liquidity and Going Concern
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash and cash equivalents at the beginning of the period | $ | 821 | $ | 6,130 | ||||
| Net cash used in operating activities | (4,728 | ) | (3,552 | ) | ||||
| Net cash used in investing activities | (1,080 | ) | (65 | ) | ||||
| Net cash provided by financing activities | 7,125 | - | ||||||
| Cash and cash equivalents at the end of the period | $ | 2,138 | $ | 2,513 | ||||
The Company had an accumulated deficit of approximately $90.3 million, and a net loss of $2.3 million, and used approximately $4.7 million in net cash in operating activities for the three months ended March 31, 2023. The Company expects to continue to incur ongoing administrative and other expenses, including public company expenses.
During the three months ended March 31, 2023, the Company received net proceeds on sales of 12,700,000 shares of common stock under the Sales Agreement of approximately $2.1 million (after deducting $0.1 million in commissions and expenses) at a weighted average price of $0.173 per share.
On January 3, 2023, the Company received net proceeds of $1.0 million from the issuance of senior secured notes with a principal balance of $1.2 million and a debt discount of $0.2 million.
On February 2, 2023, the Company withdrew $2.0 million under the Line of Credit. Upon drawing down on the Line of Credit, the Company issued the 2023 Note which is due and payable 60 days from the issuance date.
During the three months ended March 31, 2023, the Company issued 6,555,095 shares of its common stock in connection with the exercise of 6,555,095 warrants, receiving net proceeds of approximately $2.06 million at a weighted average price of $0.32 per share.
The Company will seek to obtain additional capital through the sale of debt or equity financings or other arrangements including through its existing At-The-Market, $10 million Standing Letter of Credit $10, and $100 million Line of Credit facilities to fund operations; however, there can be no assurance that the Company will be able to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing stockholders and newly issued shares may contain senior rights and preferences compared to currently outstanding shares of common stock. Issued debt securities may contain covenants and limit the Company’s ability to pay dividends or make other distributions to stockholders. If the Company is unable to obtain such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in the Company’s ability to raise capital, management believes that there is substantial doubt in the Company’s ability to continue as a going concern for twelve months from the issuance of these condensed consolidated financial statements.
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Cash Flows
Operating Activities
For the three months ended March 31, 2023, net cash used in operating activities was $4.7 million, which primarily consisted of our net loss of $2.3 million, adjusted for non-cash expenses of $1.3 million, which primarily consisted of a gain related to the change in fair value of warrant liabilities of $5.6 million, offset by the amortization of deferred debt issuance costs of $1.6 million, a loss on extinguishment of warrant liabilities of $0.5 million, amortization of debt discount of $0.4 million, stock-based compensation of $0.2 million, depreciation and amortization of $0.2 million, and other expenses of $1.4 million which primarily consisted of expenses incurred in connection with our February and March waiver agreements. The net change in operating assets and liabilities was $0.8 million, primarily consisting of an increase in accrued expenses.
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.
Investing Activities
For the three months ended March 31, 2023, net cash used in investing activities was approximately $1.1 million, consisting of cash paid for the acquisition of Amerigen 7 of approximately $0.6 million, and purchases of equipment totaling $0.5 million.
For the three months ended March 31, 2022, net cash used in investing activities was approximately $0.1 million and primarily consisted of purchases of equipment.
Financing Activities
For the three months ended March 31, 2023, net cash provided by financing activities was $7.1 million, consisting of net proceeds received from the issuance of common stock in connection with our ATM agreement totaling $2.1 million, proceeds from the exercise of common stock warrants of $2.1 million, proceeds from the issuance of our 2023 Note (in connection with the Line of Credit) of $2.0 million, and proceeds from the issuance of senior secured notes of $0.9 million.
There were no financing activities during the three months ended March 31, 2022.
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 |
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| ● | Step 2: Identify the performance obligations in the contract |
| ● | Step 3: Determine the transaction price |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract |
| ● | Step 5: Recognize revenue when the company satisfies a performance obligation |
For contracts where the period between when we transfer a promised good or service to the customer and when the customer pays is one year or less, we have elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component.
Our performance obligation is to provide fiber splicing services as required based on short-term work orders as work is assigned by the Customer. We are required to complete the description of work described in the work order and test the service provided prior to any recognition of revenue and invoicing. The short-term work orders are for very specific performance obligations which are performed from start to finish within two weeks or less, and more often, within one week. We are required to adhere to the rules and regulations that are outlined in the Agreement between the Company and the Customer.
Cost for the work performed is outlined in the individual work orders based on the detailed description of work to be performed. All of the revenue is recognized immediately upon completion of the work in each work order. A 5% retainage will be withheld by the Customer upon payment of invoices and will be paid to the Company within one year after termination of the contract. The retainage can be utilized by Customer for any claims that may arise after work is completed up through one year after completion.
Revenue recognized during the three months ended March 31, 2023 was generated by the Company’s wholly-owned subsidiary, Crown Fiber Optics Corporation, and was immaterial for the three months ended March 31, 2023. No revenue was recognized by the Company during the three months ended March 31, 2022.
Segment and Reporting Unit Information
Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive Officer is determined to be the CODM. On January 3, 2023 we acquired Crown Fiber Optics, Corp and are currently in the process of integrating this new business line including identifying leadership, and aligning management reporting and allocation methodologies. We are assessing our current segment structure in conjunction with the integration efforts.
Business Combinations
We account for business combinations using the guidance provided by Accounting Standards Codification (“ASC”) 805, Business Combinations. ASC 805 requires us to use the acquisition method of accounting by recognizing the identifiable tangible and intangible assets acquired and liabilities assumed, and any non-controlling interest in the acquired business, measured at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the aforementioned amounts.
Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets. Although we believe the assumptions and estimates made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain intangible assets we have acquired include future expected cash flows from customer contracts. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results. The initial purchase price may be adjusted as needed per the terms of the arrangement agreement. The allocation of purchase price, including any fair value the assets acquired and liabilities assumed as of the acquisition date has not been completed.
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Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Deferred Debt Issuance Costs
We account for debt issuance costs related to our Line of Credit as a deferred asset which is amortized over the life of the Line of Credit. Since we have elected the fair value option for our convertible notes (see below), upon a draw down, a portion of the deferred asset balance will be amortized to other expense. On the issuance date of our Line of Credit, since no loan amounts are drawn down, the issuance of the Series E preferred shares and the warrant to purchase Series E preferred shares are recorded as a deferred asset.
Goodwill
We perform a goodwill impairment analysis on October 1st of each year. When conducting our annual goodwill impairment assessment, we initially perform a qualitative evaluation to determine if it is more likely than not that the fair value of our reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test.
Convertible Notes
In accordance with Accounting Standards Codification 825, Financial Instruments (“ASC 825”), we have elected the fair value option for recognition of our convertible notes. In accordance with ASC 825, we recognize these notes at fair value with changes in fair value recognized in the statements of operations. The fair value option may be applied instrument by instrument, but it is irrevocable. As a result of applying the fair value option, direct costs and fees related to the convertible notes were recognized in other expense. The Company will include the interest expense as a component of the notes fair value.
Warrants
We account for certain common stock warrants outstanding as a liability at fair value and adjusted the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statements of operations. The fair value of the warrants issued by us has been estimated using the Black Scholes Methodology.
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; |
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| ● | 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 consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our condensed consolidated 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 consolidated financial statements for a description of our other significant accounting policies.
Recent accounting pronouncements
See Note 3 to our condensed consolidated 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 condensed consolidated 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.
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, 2023, 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, 2023 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 22, 2023 | /s/ Doug Croxall |
| Doug Croxall | |
| Chief Executive Officer and | |
| Principal Executive Officer | |
| Dated: May 22, 2023 | /s/ Joel Krutz |
| Joel Krutz | |
| Chief Financial Officer and | |
| Principal Financial Officer |
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