Crown Electrokinetics Corp.

Good morning, everyone, and welcome to Crown Electrokinetics Corporation earnings call for the third quarter 2022. At this time, participants are in a listen-only mode. A question and answer session will follow management's remarks. This conference call is being recorded. A replay of today's call will be available on the investor relations section of Crown's website and will remain posted there for the next 30 days. I will now hand the call over to Jason Assad for introductions and the reading of the safe harbor statement. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to Crown's earning call for the third quarter of 2022. With us today on today's call are Doug Croxall, Crown's Chief Executive Officer and Chairman, and Joel Krutz, Chief Financial Officer. Before we begin, I'd like to remind you that today's call contains certain forward-looking statements from our management made within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Words such as may, should, projects, expects, intends, plans, believes, anticipates, hopes, estimates, and variations of such words and similar expressions are intended to identify forward-looking statements. These statements are subject to numerous conditions, many of which are beyond the control of the company, including those set forth in the risk factor section of the company's quarterly report on Form 10-Q for the third quarter of 2022, filed with the SEC. Copies of these documents are available on the SEC's website at www.sec.gov. Actual results may differ materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation to update these statements for revisions or changes after the date of this call, except as required by law. Now, at this time, it's my pleasure to introduce Doug Croxall, CEO and Chairman of Crown. Doug, please go ahead.

Thanks, Jason. Thank you, everyone, for joining us this morning for our Q3 22 earnings call. I'd like to start the call by thanking any veterans who might be listening. today's Veterans Day, as you all know. All right, we're going to begin with a business update. After I give the update, our CFO, Joel Krutz, will review some financial highlights. At Crown, we remain committed to our vision, actively working to become a key sustainability supplier to the U.S.-based office buildings by helping them retrofit their legacy infrastructure to be environmentally responsible and energy efficient, through providing an affordable smart glass solution to the commercial real estate market. That will enable its customers to reduce energy and, in turn, lower carbon emissions. Recently, we announced that we closed on $4 million of fresh capital. That capital will allow Crown to deliver its Gen 1 product while also providing us the runway to continue negotiating our debt capital, which I'll discuss in a few minutes. Our customer acquisition strategy with our first-generation smart window insert is to have three to four customers purchase inserts for three to four different buildings. This initial production can be handled by our existing proto-production line in Corvallis, Oregon, with assembly being completed in our Salem, Oregon facility. We will place our Gen 1 inserts into a limited number of our customers' offices. with the main goal of achieving detailed customer feedback, such as the overall look and feel, how the data gathering is commencing, the battery performance, and the user interface. Throughout calendar year 2023, while our full production line is hopefully being built, we will continue to broaden the number of customers using our Gen 1 inserts, all the while allowing the customer feedback to drive the features for our Gen 2 inserts. If we're successful, we should have a dozen different customers by mid to late 23 with a limited number of Gen 1 inserts installed into their offices. Gen 1 customer base should become the foundation for our revenue growth in 24 and beyond. Crown and the rest of the smart glass industry was recently given another major boost by the passing of the Inflation Reduction Act The IRA has expanded both Section 48 of the Incentive Tax Credit and Section 179D, Energy Efficiency Tax Deductions, enabling Crown's customers to take advantage of tax deductions on their window retrofit investments. Other legislation, such as New York City's Local Law 97, which targets a 40% reduction in building energy use levels by 2020, 2030 is compelling REITs to rapidly upgrade their building envelopes or their window or curtain wall system. The legislation brings immediate and substantial savings for our current and future customers and has the potential to accelerate rapid adoption of our smart window insert in a similar manner to that which kick-started the solar industry. As previously announced and discussed on earlier earnings calls, We've been engaged in discussions for a $30 million debt facility for some time. We actually started this process in March of this year. It's been a very long and comprehensive process, as you all know. We hope to close this facility by the end of the calendar year. We have a line of sight to closing. This will afford us the necessary capital to initiate our next phase of manufacturing and expand our production capabilities. Upon successful closing, we'd be in the position to build our new roll-to-roll line, enabling us to produce film at widths ranging between 12 and 72 inches. Once the new lines are producing at capacity, we expect our smart window insert annualized revenues could reach more than $200 million. Recently, you saw an announcement that we'd begun the application process to dual list our shares on Upstream. a revolutionary trading app for digital securities and NFTs powered by Horizon Fintech and Merge Exchange Limited. It was at the request of some of our largest shareholders that we researched the dual listing on Upstream. Ultimately, our board of directors determined that a dual listing on Upstream could be an excellent way to reach a worldwide market of potential new investors who can learn about Crown and invest in Crown. By dual listing on Upstream, we also have a mechanism for us to potentially issue a digital dividend. Upstream is a revolutionary exchange, a trading app for digital securities that aims to unlock liquidity for investors of all levels on their intuitive app-based market. Upstream introduces what it believes to be the future of trading, featuring some of the highest levels of transparency, accessibility, and investor protections enforced using Ethereum blockchain technology. To close, I want to reiterate that being an innovator is never easy, and current market conditions have only exacerbated difficulty. That said, there is a lot to be optimistic about. Our technology is developed and proven. We now have the capital in hand to deliver the first installations with our marquee partner. Crown's market potential is significant with few, if any, comparable solutions. And finally, we continue to be engaged in ongoing strategic commercial discussions with other potential partners. These discussions continue to affirm a high demand for a solution like ours. I'll now turn the call over to our CFO, Joel.

Thank you, Doug. Good morning, everyone. Today I'll be discussing Crown's third quarter financial results. Ahead of that, though, I just want to address the minimum bid price notification we received from NASDAQ on September the 1st. We have 180 days from that date to trade above $1 for 10 consecutive days in order to regain compliance. We're confident that executing against our operating plan will mean that we meet the compliance standards, but are also preparing alternate options to ensure we retain our NASDAQ listing. Onto the financials. Crown's net loss for the third quarter 22 was 3.1 million, which included 0.5 million of non-cash stock-based compensation expense. This net loss was $2.6 million lower than the $5.7 million recorded during the quarter-ended September 30 last year, which included $3.1 million of non-cash compensation. Operating expenses, excluding non-cash stock-based comp for the third quarter with $2.6 million, consisted of $1.7 million of payroll expense, $0.3 million of professional fees, and $0.6 million of operating overheads. We continue to review and restructure Crown's organization to ensure that our operations and expense base are optimized. As of September, these restructuring efforts have reduced our run rate costs by 3.1 million, or 24%. The benefit of these actions was evident in our reduced cash burn levels, with Q3 cash deployed for operations of 2.1 million, or 0.7 million per month. This is compared to $1.2 million per month when we started our restructuring efforts in Q1. We've complemented this material reduction with our capital raising efforts over the last few months, including the $4 million that Doug mentioned, which we raised subsequent to September 30th. Additionally, we have access to our standing letter of credit and at-the-market facility and are hopeful of closing debt financing before the end of the year. That concludes our prepared remarks. We'd now like to open the call for questions.

Operator, could you please go ahead?

Thank you.

If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, may be necessary to pick up the handset before pressing the star keys. Our first question is from Sean Severson with Water Tower Research. Please proceed.

Thanks. And congratulations on getting the short-term financing here to get to the debt. My first question is regarding the environment when you look at the commercial real estate market. And obviously, recession risks, things like that. And I'm trying to understand, is this environment When a REIT looks at their business, do they think, okay, we're going to really slow down on new construction, but it provides opportunities for retrofit? I'm trying to figure out how retrofit fits into this, you know, this type of an environment for the commercial real estate industry.

Yeah. Thanks, Sean. So, a couple things to note. The cost of our inserts are pretty equivalent, slightly more expensive than the cost of a solar shade. So if you look at like a standard kind of five by five window in an office, like those white solar shades can be priced anywhere from $450 to $580. Our insert is priced, you know, $70 to $100 more expensive than that. So while certainly building owners are concerned about you know, their leasing levels and the vacancy levels and inflation and a potential recession, we're not as expensive as redoing an entire curtain wall. And we're certainly not as expensive as putting a new glass into a new constructed building. So our price point kind of moves us out of some of those typical concerns. It doesn't mean we won't be affected selling our product like anyone else is in a recessionary period. But right now, you know, the indications have been pretty positive. To the extent people are making investments in their building and to the extent they're making investments in making their buildings more sustainable, we're still in that conversation. As a matter of fact, you know, we've got a couple of new customers that we're negotiating current deals with. So we still think that there's a pretty good runway for us, even if, you know, and hopefully it doesn't happen, but even if we move into a recessionary period.

Let me put a scenario in front of you. So if we look at a solar shade, right, and I'm a commercial building owner, I'm going to have a normal level of maintenance, and I'm just going to have to replace those, correct? And if I'm doing that, is there a difference in, like, the IRA benefit, for example, of using your solution versus, you know, a solar shade? Or I'm just trying to understand the dynamics between, like, the incentives and your product and your solution and, you know, the capital spending at the commercial real estate level?

Yeah, so it's a great question. And there's a definite difference and there's a definite benefit. And I, to be honest, most of the building owners don't do an ROI on their solar shades. It's just, you got to do it. You know, I mean, you can't have a window that's not shaded. So they're not looking necessarily at, okay, what's the return on investment if I put these in? Most of the building owners are cycling those out every seven to ten years, the entire building. So it's kind of one of those standard things when you're a new tenant and you're moving into an office, you know, carpet, paint, and blinds typically get replaced as a TI. As a matter of fact, one of our customers that we're dealing with right now, they're looking at replacing blinds in one of their buildings, and we're You know, they'd rather use our inserts because our inserts does provide an energy reduction, which is a carbon reduction, which is important to the building owner. There is an automated feature so that you can actually shade the insert without having to walk, you know, stand up, walk into the office and pull the chain to make the shade move. So, and when our insert is in the dark state, you can still see through the window. You can still see what's on the other side. It's like dark, like limousine glass dark. When the solar shade is deployed, you can't see anything on the other side. You're just staring at, you know, a white shade. So there's a lot of benefit, aesthetic and energy benefit, to the insert versus the solar shade, you know, for pretty much the same cost.

And then my last question is obviously, you know, interest rate environment has changed and just, you know, I understand you still have line of sight on the debt financing, but this must have thrown a little bit of a wrench in that as you've gone through the process, nothing to do with you guys, but the environment. Have you had noticed or any kind of material changes or as you've gone through the process, has there been some major push and pull that you've had to give or feel like you really had the framework set this that, you know, not going to be seriously impacted by the changes?

Yeah, you know, it's kind of embarrassing because we thought we were going to close this debt, you know, sometime in the summer. And then it became sometime in the early fall. And now clearly it's going to be sometime in the winter. And the impact on the rising rate environment is not affected our term sheet or the business terms of the debt. just taken a lot longer to you know kind of find that match and we think we found it we think we actually have two and so we're going to continue with both and you know hopefully one gets to the finish line before the other but it's just look it's a really tough environment to raise any capital equity or debt so but we're still very confident that what we have from a product and technology perspective is very very interesting and to a lot of debt funding sources. And so we're going to, we'll continue to move forward, but we haven't seen that big of an impact, frankly, to the terms. We've kind of had these terms locked down since like August timeframe.

I appreciate it.

Our next question is from Jerry with Ross capital.

Please proceed.

Hey, good morning, Doug and Joel. Thanks for taking my call.

Hi, Jerry.

Just following up on the debt, you know, it sounded like you had some terms in place, and I'm curious, one, if some type of terms in place in August. Are these the two lenders that you had been working with previously and two, you know, what is the sort of the big hurdle between now and closing the potential facilities?

Yeah, these are the same two that we've been talking about. And, you know, the big hurdles were kind of getting through their investment and credit committees, which we've done successfully. Now it's papering and closing. And so, you know, we had hoped to have something to announce for this earnings call. Clearly we don't. But we hope that we will have something to announce, you know, before the end of the calendar year.

Got it. And switching gears to the customer base, how many clients do you have signed up today? And I mean, have you been able to deliver any windows or is it even like sort of prototypes to clients?

Yeah. So, you know, the delays in funding has definitely delayed our product delivery. Our first product delivery was supposed to be this quarter. It's been shifted to the next to Q1 23. And that's really a function of one thing and one thing only, and that's capital resources that we didn't have previously, but we now do have. So we'll have first product delivery in Q1. And we have three, maybe four customers that we'll be delivering product to in Q1, that we expect to in Q1.

Got it. Okay.

That's it for me. Thank you. Thanks, Jerry.

As a reminder to star one on your telephone keypad if you would like to ask a question.

Our next question is from Jeffrey Campbell with Alliance Global. Please proceed.

Hi, Doug. I'll just ask one question surrounding the new capital that you raised and the delayed delivery schedule that you just outlined. Bearing in mind ongoing inflationary pressures and all that good stuff, do you feel secure that you have enough capital to deliver the amount of product that you intended to deliver at the time that you raised that capital? Or is there any chance that as things get delayed out a couple of quarters that costs could continue to increase? Just whatever you've done to be able to secure your costs and to the deliveries you're going to do. Thanks. Sure.

Yeah. So, you know, small companies that are pre-revenue, you can never have enough capital on your balance sheet, I think that's safe to say. But we think we have sufficient capital to get to the first product delivery. We haven't seen a tremendous amount of inflationary pressure on our own bill of materials. I mean, slight, but not anything outrageous at all. And we were kind of predicting that this might be happening. So we've done a pretty good job in locking down some of our pricing and getting some inventory in place already. Doesn't mean that we have everything we need, but we feel comfortable with the amount of capital we have on the balance sheet. We feel comfortable with the amount of runway that gives us to get first product in. And frankly, we feel really comfortable about, you know, the potential of the debt capital coming in. Or frankly, we have a couple of strategics that we've been talking to, and we feel pretty comfortable they're going to be there for us if we need them as well. So we've got multiple paths to finance the company, even beyond what we've already put on the balance sheet. And it really all gets back to the strength of the technology and the product. and what our partners are seeing in the product and what that product can do in the market.

Okay, great. Thank you.

I see no further questions in the queue at this time.

I would like to turn the call over to Mr. Doug Croxell, CEO and Chairman, for closing remarks.

So, I just want to thank everybody for sticking with us. Today is not only Veterans Day, but today is actually the birthday of one of my grandfathers, my Grandpa Croxall, who passed about 30 years ago. My grandfather was a prolific inventor, a named inventor on about 72 chemical patents, some of which is still in use today in Alka-Seltzer, coincidentally. And he was actually the person that had the most influence on me in where my career was going to take me. I don't think he ever thought I would be window salesman for a small public company, but he always told me that innovation and invention is really controlled chaos. You cannot predict when discovery happens. So I know that it's difficult as a public company to try to provide that guidance to our investors and to those who are looking at potentially investing. We're doing everything that we can to get this product ready and get this product out to the market because we know that that impact is pretty important for the environment and for the future generations behind us. I just want to thank everybody for your patience, and we look forward to talking to you again soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect and have a good day.