Crown Electrokinetics Corp.

Good morning, everyone, and welcome to the Crown Electrokinetics Corporation third quarter 2023 conference call. At this time, participants are in a listen-only mode. A question and answer will not be following the management's remarks. This conference call is being recorded. A play of today's call will be available on the investor relations sections of the Crown's website. I will now hand the conference over to Jason Assad, Director of Corporate Communications for Introductions and the Reading of the Safe Harbor Statements. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to Crown's third quarter 2023 conference call. With us today on the call are Doug Croxall, Crown's Chief Executive Officer and Chairman, and Joel Krutz, Chief Financial Officer, in addition to Mike Sullivan, David Martinez, and Jeremy Hubbard from our Fiber Optics Division. 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 factors section of the company's quarterly report on Form 10-Q for the third quarter ended 2023, filed with the SEC. Copies of these documents are available on the SEC 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?

Thank you, Jason, and welcome, everybody, to our third quarter earnings call. We're going to do things a little bit different than our traditional earnings call, which typically is just myself and Joel Kruse speaking. We had an investor call a little about a month or two months ago, I guess, and you got to hear from Dave Martinez and Mike Sullivan. So today I'm going to give a general corporate update, putting on a couple of highlights, and then I'm going to hand the call over to Dave Martinez, who will go through a customer update, Mike Sullivan, who will go over a construction update, and And newest to our team is Jeremy Hubbard, who runs recruiting for us, and he will go through a recruiting and personnel update. So as you saw from our recent announcement, we've added our third MSA, our Our third customer, Andy started work on customer number two, so we have two active projects now in the field. Both of these are in Arizona, in the Phoenix area. One is microtrenching, and one is traditional directional drilling. As we had mentioned before, we're going to continue to focus on the Arizona market. I spent time with our customers last week, and there's significant work for us to do. We will continue to add customers, and we'll continue to add more and more projects with the customers that we've already announced. We do think that there will be some opportunities to move out of the state of Arizona, and when those arise, we will look at those as long as they're within the general vicinity of Arizona or, you know, the southwest, west coast area. We also expect that we should be adding another, hopefully, two to three MSAs before the end of the calendar year. I know that we get a lot of requests as to who the customer actually is. And while we are precluded from putting our customer's name in press release, I do want to give some insight as to whose fiber optic network we're building and who the prime contractors are that we're working with. So the work that we're doing in Arizona currently is for fiber optic networks that are going to be owned by Google Fiber, Verizon, and Gigafiber. Some of the prime contractors that we're working with are Kilson, Moss Tech, Mears, and Blue Edge. So while we can't go into specifics, at least not today, as to what each of those customers are going to represent, those are the type of customers that we're working with. Some of the best construction companies in the country and obviously some of the best fiber optic networks in the country as well. So I want to move quickly on to the EK film side because the rest of the team is going to bring you up to speed on the rest of the fiber optic side. On the film side, we actually just got word yesterday that some of our mastering that was being done with our vendor in Europe has come back positive. So we're looking to go to the next step in our mastering phase. We expect that we should have – 12-inch masters done sometime before the end of the calendar year and be able to cycle that into our production with product coming hopefully towards the end of Q1. next year or early Q2. We will continue to provide updates on the film business and the film mastering as those occur. One of the things that we also want to do this year, which we've not done in the past, is that after today's earnings call, you don't typically hear from our company until our 10K earnings call, which isn't until typically the end of March. And so that's, you know, that's obviously four months, four and a half months. So what we're going to do sometime in mid-January is another investor call like the one that we did in mid-September, where you're going to get to hear from the team. We're going to give you an update on customers, revenue, EBITDA, and all the things that you're going to hear about today. So with that said, I'd like to turn the call over to Dave Martinez, who's going to walk through some of our customers.

Thank you, Doug. Hello, good morning, everyone. It's my pleasure to be here again today. I want to share with you a few of our new opportunities that we have been able to secure with three of our key customers since our last update. The first customer is a Houston-based company focused on developing fiber network infrastructure solutions and is a premier provider of engineering, design, construction services to the pipeline and utility industries. It is a subsidiary of a much larger parent company consisting of over 200 companies that service North America. With this customer, we have been able to secure three HGD horizontal directional drill projects in the Phoenix, Arizona market. But more products are expected to be awarded as the permits and work is available. In this market, it seems to be an almost weekly basis. Just this last week, we met with this customer to discuss a partnership for a project in Northern Arizona that is over 1.2 million feet of directional drilling and another 600 feet of aerial. Although this is still in the early stages, we are working diligently with the customer to secure this award. The second customer has been involved in some of the largest and most complex infrastructure construction projects across the country. With offices across North America, 80 plus years of experience and nearly 32,000 employees, this customer has become a leader in the infrastructure construction. We recently secured an MSA Master Service Agreement with this customer. During a recent meeting we had with them in their Phoenix office, they shared with us some of their projects, timelines, and their need for partners with microtrend capabilities. They were very excited to hear that we have those microtrenchers and we can place them on their projects immediately. We will be following up with this team this week to further discuss the logistics and the timing of the project and awards. They have also shared with us that this project is expected to run seven to 10 years. The third customer that I would like to share with you today is an established networking communications infrastructure company providing network infrastructure design, engineering, development solutions to the leading communication firms throughout the United States. Just this past week, we have signed an MSA with this customer, and through this customer, we have secured a project that includes work from microcontent, fire replacement, and fire resplicing for a global internet service provider that's providing the services to a local municipality through this customer. This project is expected to run five to seven years. As I say, we are excited about this customer relationship as they are to have our crews, skill set, and equipment as part of the development offering. so much so that we will be discussing future local projects and multi-state projects with this customer. For our future pipeline, our team has been working diligently to expand our customer base and grow our teams to meet and exceed the current and future needs of our customers. Over the next month, we will be speaking with three nationwide companies and one international company about their needs and how Crown Fiber Offers can be part of their solution in building better communications. We look forward to everything that's coming down the pipeline. It's going to be an exciting adventure. I'm glad that we're here. With this, I would like to go ahead and pass the call over to Mike for our construction updates.

Thank you, Dave. And hello. Good morning. It's a pleasure to meet with you today and provide an update on our status. Currently, we have established a yard, office, and shop facilities in Arizona. This location is close to our workload in Mesa and Chandler, as Dave described with the current contracts we have. This eliminates a lot of windshield time and gets us on the job efficiently and effectively. Additionally, we'll be adding fuel storage to our yard, which, again, increases our efficiency, and cement silos. And I'll go over that later as we discuss volumetric trucks. For production equipment, we have three directional drills ready to go. We have the crews established to manage those machines. Total production between all three machines is around 2,200 feet per day. We have microtrenters in market. Two units are here right now, capable of producing 4,400 feet per day. And we have three additional units ordered. As I said, volumetric cement trucks, we've ordered two. One is on its way here. Second one is in manufacture right now. And the reason we're going with that is that increases our effectiveness and efficiency in the field. Rather than ordering ready mix, we can produce our own grade of concrete or slurry and clean up our job site. This allows us to continue production because our cleanup is done and that puts more permits and more work in front of us. Additionally, we have three vac units. and three additional units coming in. Vac unit is a piece of support equipment that is required with both directional boring and microtrenching. We've established direct relationships with the manufacturers of this equipment and have a projected pipeline and production reserve as we increase contracts and production goals. As Dave described, the pipeline of work is ongoing and increasing as we move along here. The market is huge right now for telecommunications infrastructure, and we anticipate five to eight years of growth in this market. Therefore, we've coordinated the efforts of equipment procurement and staffing such that we can address the needs of our clients. With that, I'm going to introduce Jeremy Hubbard, Director of Recruiting.

Thanks, Mike. Thanks, Dave. It's a pleasure to be a part of this team. As the Director of Recruiting here at Crown, I lead the talent acquisition strategy and execution for our growing and dynamic organization. Behind me, I have over 15 years of experience in the staffing and recruiting industry, working with clients across various sectors, disciplines, and geographies. I'm born and raised here in Arizona. I hold a great market behind me, and I hold core competencies in business planning, sales, consultation, as well as employee benefits and new business development. I hold two degrees in international business and marketing from the University of North Florida, as well as studied abroad in three different countries to gain a global perspective of cultural awareness in our market and a variety of other industries. I'm very passionate about finding and retaining the best talent for Crown Fiber and empowering them to succeed and thrive in their roles. So what I'd love to share with you today is just our current status, where we're moving, where we're grooving, and where we're growing. here in the near future. So currently we have five crews established in just one month. I was able to design five crews comprised of skilled labor, general labor, equipment operators, foreman and leadership, of course. This has been instrumental in breaking ground on our first project, which we did break ground on time and is currently in process. We're very excited about that. In addition to my recruiting efforts, I've also brought on three subcontractors to help us with the added business that we'll be bringing on board. That way, as I build out this squad and multiple other teams, we can also grab other business that may come upon us. I do have additional subcontractors in process as well to tag into whenever we need. So very, very good on that side. I also want to foreshadow some expected growth due to these new clients that David and Mike shared with you. I'll be building out teams for our fiber slicing division, engineering teams, microtrench teams, and then continuing to build out our directional drill teams. Part of my recruiting process is working hand-in-hand with Dave and Mike. It's identifying the need in regards to the equipment that Mike has gotten for us, as well as what talent do I need to bring in charge with that equipment to achieve Dave's project. So it's posting, recruiting, interviewing, hiring, onboarding, then training these individuals with our given clients and then getting them on the ground. I also have enlisted virtual HR partner, as well as standard industry recruiting tools, and I'm utilizing a variety of referrals from our current workforce as well as through my own network to build out these squads. Building a culture is extremely important to me as we build out these teams. How we're defining that culture, of course, is finding individuals that are self-thinking, motivated, that want to work as a team, and Developing a sense of teamwork and family within this workforce is really what we're after. And then showing these employees that we genuinely care about them. We want this to be a job. We want this to be a career. And I'm making that evident on day one and following it through the interview process so that David and Mike can keep that flow and culture rolling as they hit the ground. So outside of that, I am doing a variety of team-building events, family-building events. Our benefits are top-notch as far as a competitive wage, health benefits, 401K, ESPP, and really just branding us outside of that is another option we're going into, which is community events, networking through local councils and business executives as well as getting our faces out to conferences throughout the nation, primarily in the southwest region. We've already identified four conferences that will be in attendance in the following year. So very, very bullish on the employment market. While it does remain highly competitive here in Arizona in regards to a ton of business, I feel very confident in our market that I will be able to provide and deliver every person we need to get every one of these projects moving. and .

Thank you, Dave, Mike, and Jeremy for those updates. And good morning, everyone. And today I'll be discussing Crown's third quarter financial results. But just ahead of that, though, I wanted to address the minimum price notification which we received from NASDAQ on October the 19th. We have 180 days from that date to, again, trade above a dollar for 10 consecutive days to regain compliance. We are confident that the progress we're making, as you've just heard, against our strategic plans will mean that we again meet the compliance standards, but we will also prepare alternate options to ensure that we retain our NASDAQ listing. Onto the financials. Crown's pre-tax loss the third quarter of 2023 was $2.9 million. This loss was $0.3 million lower than the same quarter ended September 30th, 2022. We did not record any revenue or cost of revenue in Q3 as we focused on building out our organization and equipment in preparation for the Q4 projects, which are now underway. And as you've heard, there's a huge amount of work that's gone into that and a huge amount of progress that's been made. Operating expenses for the third quarter were $3.4 million. Of that, research and development expenses were $1. 0.5 million, a decrease of 0.5 million compared to the three months ended September 30th, 2022, primarily due to a decrease in salaries and benefits. SG&A expenses were 2.9 million for the quarter, which represents a 0.7 million dollar increase versus Q3 of last year. This was primarily due to an increase of half a million dollars in professional fees related to Crown's significant transactional levels. Other income was $0.6 million for the three months ended September 30th, and that was compared to zero in the prior year's quarter. Other income consisted of a $3 million change in the fair value of our warrants, notes, and derivative liabilities, which was related to remeasurement. This other income was offset by interest expense of $2.4 million, primarily consisting of amortization expense from our lines of credit. Crown's net cash increased by $2 million in Q3. $5.5 million was provided from financing activities with $4.5 million from the equity line of credit and $1.8 million from our ATM. This was offset by $0.7 million of debt repayment as we eliminated debt from our balance sheet. Net cash used in operations for the three months ended September 30th was $2.8 million. $7 million higher than the same quarter in 2022, driven primarily again by the increase in professional fees. Net cash used in investing activities was $7.7 million. This was dedicated to fiber optics equipment acquisition. Overall, this infusion of equity-driven capital has been very important for Crown's shareholder equity levels, which increased by $4.7 million in Q3 to $9.3 million, leaving Crown comfortably above the $2.5 million NASDAQ compliance threshold. That concludes the financial section. I'll now throw it back to Doug.

Thank you, Joel. And again, thank you, Mike, Dave, and Jeremy. for all your contributions both to this call and to the efforts behind Crown Fiber Optics. I just want to remind people that if you look back one year from this day, we had no business in the fiber optic industry. We had no customers. We had no equipment. We had no personnel. Today, we have three very large customers with lots of work for us to do. We'll have more customers as well. Those customers will provide us revenue. We have equipment to handle the current customer need, and we will have more equipment as the customer needs grow. And we have personnel to handle the customers today, and we'll have more personnel as we grow our customer base. And I want to thank everyone for their patience, and we will have some communication in the next month indicating which day in January we'll do our next investors call, and we look forward to talking to everyone at that time. Thank you.

This conference is now concluded. Thank you for attending today's presentation.

You may now disconnect your lines.