Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
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 in the
January 2023 (See Note 14). Crown Fiber Optics Corp. will be accounted for as a wholly- owned subsidiary of Crown Electrokinetics, Corp.
Reverse Stock Split
On January 22, 2021, the Company’s Board
of Directors authorized a reverse stock split at an exchange ratio of one (1) share of common stock for every three (3) shares of common
stock. The reverse stock split was effective on January 25, 2021, such that every three (3) shares of common stock have been automatically
converted into one (1) share of common stock. The Company did not issue fractional certificates for post-reverse split shares in connection
with the reverse stock split. Rather, all shares of common stock that are held by a stockholder were aggregated and each stockholder
received the number of whole shares resulting from the combination of the shares so aggregated. Any fractions resulting from the reverse
stock split computation were rounded up to the next whole share.
All of the Company’s share and per share
amounts of common stock included in this Form 10-K for the nine months ended December 31, 2021 and as of December 31, 2021 have been
retroactively adjusted to reflect the reverse stock split.
Public Offering
On January 26, 2021, the Company entered into
an underwriting agreement relating to the public offering of its common stock, par value $0.0001 per share. The Company issued 4,772,500
shares of its common stock to the underwriters, at a purchase price per share of $4.14 (the offering price to the public of $4.50 per
share minus the underwriters’ discount). On January 28, 2021, the Company received net proceeds from its public offering of approximately
$19.3 million, net of underwriter fees and commissions of approximately $1.7 million, and offering costs of $0.5 million.
In connection with the Company’s public
offering, the Company issued a warrant to the underwriters to purchase 381,800 shares of its common stock. The warrant is exercisable
beginning on the date that is 180 days after the date on which the Registration Statement becomes effective until the date that is five
years after the date on which the Registration Statement becomes effective. The exercise price of the warrant is $5.625.
On July 19, 2022, the Company entered into an
underwriting agreement relating to the Company’s public offering of its common stock, par value $0.0001 per share. The Company
agreed to sell 1,250,000 shares of its common stock to the underwriters, at a purchase price per share of $0.744 (the offering price
to the public of $0.80 per share minus the underwriters’ discount), pursuant to the Company’s registration statement on Form
S-3 (File No. 333-262122), under the Securities Act of 1933, as amended. The Company has also granted the underwriters a 30-day option
to purchase up to 187,500 additional shares of common stock to cover over-allotments. On July 22, 2022, the Company received net proceeds
of $855,000, net of underwriter fees and commissions of approximately $70,000, and offering costs of $75,000.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
In connection with the Company’s public
offering, the Company issued a warrant to the underwriters to purchase 62,500 shares of its common stock. The warrant may be exercised
beginning on the date that is 180 days after July 22, 2022 until July 19, 2027. The exercise price of the warrant is $0.80 per share.
Common stock
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.
Series E Preferred
Stock
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 (See
Note 14).
Change in Fiscal Year
On November 10, 2021, the Board of Directors
of the Company approved a change in its fiscal year end from March 31st to December 31st. As a result, the Company’s
results of operations, cash flows, and all transactions impacting shareholders equity presented in this Annual Report on Form 10-K are
for the calendar year ended December 31, 2022 and the nine months ended December 31, 2021. As such, the Company’s calendar year
end 2021, refers to the period from April 1, 2021, to December 31, 2021.
Note 2 – Liquidity, Financial Condition,
and Going Concern
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 consolidated financial statements, the Company had an accumulated deficit of approximately $88.0 million
and negative working capital of approximately $3.3 million at December 31, 2022, a net loss of approximately $14.3 million, approximately
$11.1 million of net cash used in operating activities, and $0.8 million of net cash used in investing activities for the year ended December
31, 2022. The Company expects to continue to incur ongoing administrative and other expenses, including public company expenses.
The accompanying 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 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.
The Company will seek to obtain additional capital through the sale of
debt or equity financings or other arrangements to fund operations including through it’s existing At-The-Market, $10 million Standing
Letter of Credit, and $100 million Line of Credit facilities; 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 financial statements.
Standby Letter of Credit
On March 23rd, 2022, the Company entered
into an Irrevocable $10 million Standby Letter of Credit (“SLOC”). The SLOC accrues interest at a rate of 12% per annum and
matures 2 years from the issuance date of the SLOC. Interest is payable quarterly. In connection with the SLOC, the Company will issue
50,000 shares of its restricted common stock with each cash draw of $1.0 million. Drawdowns are capped at a maximum of $5 million in
the first six months. The Company did not drawdown any SLOC funds during the year ended December 31, 2022, and intends to drawdown on
the available funds only as necessary in 2023.
Series D Preferred Stock
The Company settled $1.0 million of shares liability,
by issuing 1,058 shares of Series D preferred stock in July 2022 (See Note 10).
Senior Convertible Notes and Warrants
On October 19, 2022, the Company issued senior
secured convertible notes (the “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 (See Note 9).
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
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 $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.
As of December 31, 2022, the Company has received
net proceeds on sales of 3,368,146 shares of common stock under the Sales Agreement of approximately $1.25 million (after deducting $0.05
million in commissions and expenses) at a weighted average price of $0.385 per share.
2023 Line of Credit
On February 2, 2023, the Company entered into
a line of credit (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 2, 2023, the Company withdrew $2.0 million under the Line of Credit.
Although it is difficult to predict the Company’s
liquidity requirements as of December 31, 2022, based upon the Company’s current operating plan, cash on hand, the proceeds from
the issuance of its senior secured convertible notes payable and warrants, and its SLOC and Letter of Credit funding, management believes
that the Company will have sufficient cash to meet its projected operating requirements for at least the next 12 months following the
issuance of these financial statements.
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 consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
Note 3 – Basis of Presentation and Significant
Accounting Policies
Basis of Presentation and Principles of
Consolidation
The Company’s consolidated financial statements
have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) as
determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and
include all adjustments necessary for the fair presentation of its balance sheet, results of operations and cash flows for the periods
presented. The accompanying consolidated financial statements of the Company include the accounts of the Company and its wholly or majority
owned and controlled subsidiaries. Consolidated subsidiaries results are included from the date the subsidiary was formed or acquired.
Intercompany investments, balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting
period. The most significant estimates in the Company’s consolidated financial statements relate to the valuation of its senior
secured convertible notes and warrants, and equity based awards. These estimates and assumptions are based on current facts, historical
experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources.
Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates
and actual results, the Company’s future results of operations will be affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments
purchased with original maturities of 90 days or less at acquisition to be cash equivalents. There were no cash equivalents as of December
31, 2022 and 2021.
Concentrations of Credit Risk and Off-balance
Sheet Risk
Cash and cash equivalents are financial instruments
that are potentially subject to concentrations of credit risk. The Company’s cash and cash equivalents are deposited in accounts
at large financial institutions, and amounts may exceed the standard federally insured limits totaling $250,000. The Company believes
it is not exposed to significant credit risk due to the the adoption of new banking products that provide additional federal insurance
with coverage up to $125 million per entity in the depository institutions in which the cash and cash equivalents are held. The Company
has no financial instruments with off-balance sheet risk of loss as of December 31, 2022 and 2021.
Property and Equipment
Property and equipment are stated at cost and
depreciated over the estimated useful lives of the assets. Depreciation is recorded using the straight-line method over the estimated
useful lives of the respective assets, generally three to ten years.
Definite-lived Intangible Assets
Intangible assets with finite lives are comprised
of patents and licenses for developed technology, which are amortized on a straight-line basis over their expected useful lives, which
is their contractual term or estimated useful life. Patents consist of filing and legal fees incurred, which are initially recorded at
cost.
Impairment of Long-lived Assets and Definite-lived
intangibles
The Company reviews long-lived assets (including
property and equipment, lease related ROU Assets, and definite-lived intangible assets) for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable. Recoverability of assets is determined by first grouping the
long-lived assets at the lowest level for which there are identifiable cash flows, and then comparing the carrying value of each asset
group to its forecasted undiscounted cash flows. If the evaluation of the forecasted cash flows indicates that the carrying value of
the assets is not recoverable, an impairment test of the asset group is performed. Impairment is recognized if the carrying amount of
the asset group exceeds its fair value. The Company performed a test for recoverability at December 31, 2022 and concluded that the carrying
value of its long-lived assets was recoverable.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
Fair Value Measurement
The Company follows the accounting guidance in
Accounting Standards Codification (“ASC”) 820 for its fair value measurements of financial assets and liabilities measured
at fair value on a recurring basis. Under this accounting guidance, fair value is defined as an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would
use in pricing an asset or a liability.
The accounting guidance requires fair value measurements
be classified and disclosed in one of the following three categories:
Level 1: Quoted prices in active markets
for identical assets or liabilities.
Level 2: Observable inputs other than
Level 1 prices, for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level 3: Unobservable inputs which
are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted
cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant
judgment or estimation.
The fair value hierarchy also requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities
measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
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 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 general and administrative expense. The convertible
notes issued during the year ended December 31, 2022 are non-interest bearing.
Warrant Liability
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 Monte Carlo simulation.
Research and Development
Research and development costs, including in-process
research and development acquired as part of an asset acquisition for which there is no alternative future use, is expensed as incurred.
Advance payments for goods and services that will be used in future research and development activities are expensed when the activity
has been performed or when the goods have been received rather than when the payment is made.
Stock-Based Compensation
The Company expenses stock-based compensation
to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. The Company
estimates the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating
the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application
of management’s judgment.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
Expected Term - The expected term of options
represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method, which
is the half-life from vesting to the end of its contractual term. The simplified method was used because the Company does not have sufficient
historical exercise data to provide a reasonable basis for an estimate of expected term.
Expected Volatility - The Company uses
a blended volatility that includes its common stock trading history and supplements the remaining historical information
with the trading history from the common stock of a set of comparable publicly traded companies.
Risk-Free Interest Rate – The Company
bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Dividend - The Company has never
declared or paid any cash dividends on its common shares and does not plan to pay cash dividends in the foreseeable future, and, therefore,
uses an expected dividend yield of zero in its valuation models.
The Company accounts for forfeited awards as
they occur.
Income taxes
Deferred tax assets and liabilities are computed
based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax
rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are
based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some
portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to
the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for
deferred income taxes in the period of change.
ASC Topic 740, Income Taxes, (“ASC 740”),
also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes
a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination
by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim
period, disclosure and transition. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain
tax positions requiring recognition in the Company’s consolidated financial statements. The Company believes that its income tax
positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in material changes to
its financial position.
In its consolidated financial statements, the
Company utilizes an expected annual effective tax rate in determining its income tax provisions for the interim periods. That rate differs
from U.S. statutory rates primarily as a result of valuation allowance related to the Company’s net operating loss carryforward
as a result of the historical losses of the Company.
Leases
The Company accounts for its leases under the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, Leases. Under
this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the
consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease
term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest
and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the
lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term.
In calculating the right of use asset and lease
liability, the Company elects to combine lease and non-lease components as permitted under ASC 842. The Company excludes short-term leases
having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line
basis over the lease term.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
Warrants
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 December 31, 2022, since no loan amounts were drawn down, the SLOC warrant
is recorded as a deferred asset at fair value and will be amortized over the life of the SLOC. Upon a draw down, the remaining balance
of the deferred asset would be reclassified to debt discount and amortized under the effective interest method over the one-year term
of the loan (See Note 11).
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 (See Note 11).
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 and is
computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net
loss per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of
the entity unless inclusion of such shares would be anti-dilutive. Since the Company has only incurred losses, basic and diluted net
loss per share is the same.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
The following table presents the computation
of basic and diluted net loss per common share (in thousands, except share and per share amounts):
| |
Year Ended
December 31,
2022 | | |
Nine Months Ended
December 31,
2021 | |
Numerator | |
| | |
| |
Net loss | |
$ | (14,315 | ) | |
$ | (16,487 | ) |
Cumulative dividends on Series D preferred stock | |
| (55 | ) | |
| - | |
Numerator for basic and diluted net loss per share | |
$ | (14,370 | ) | |
$ | (16,487 | ) |
| |
| | | |
| | |
Denominator | |
| | | |
| | |
Weighted-average common shares outstanding | |
| 17,552,451 | | |
| 15,669,636 | |
Less: weighted-average shares subject to repurchase | |
| (116,278 | ) | |
| (1,073,617 | ) |
Denominator for basic and diluted net loss per share | |
| 17,436,173 | | |
| 14,596,019 | |
Shares used to compute pro forma net loss per share, basic and diluted | |
| | | |
| | |
Net loss per share: | |
| | | |
| | |
Basic and diluted | |
$ | (0.82 | ) | |
$ | (1.13 | ) |
Securities that could potentially dilute loss
per share in the future that were not included in the computation of diluted loss per share at December 31, 2022 and 2021 are as follows:
| |
December 31, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
Series A preferred stock | |
| 188,311 | | |
| 188,311 | |
Series B preferred stock | |
| 2,019,038 | | |
| 2,019,038 | |
Series C preferred stock | |
| 560,757 | | |
| 560,757 | |
Series D preferred stock | |
| 814,102 | | |
| - | |
Warrants to purchase common stock (excluding penny warrants) | |
| 27,661,181 | | |
| 4,525,177 | |
Options to purchase common stock | |
| 9,513,624 | | |
| 11,135,432 | |
Unvested restricted stock units | |
| 628,780 | | |
| 1,939,683 | |
| |
| 41,385,793 | | |
| 20,368,398 | |
Emerging Growth Company
The Company is considered to be an “emerging
growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (JOBS Act). The JOBS Act provides that
an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards.
Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to
private companies. The Company has elected to use the extended transition period for complying with any new or revised financial accounting
standards pursuant to Section 13(a) of the Securities and Exchange Act of 1934.
Recent Accounting Pronouncements
In February 2016, the
Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) which supersedes FASB Topic 840,
Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees
and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based
on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether
lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively.
A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months
regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating
leases. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic
842, which amends ASU 2016-02 to provide entities an optional transition practical expedient to not evaluate under Topic 842 existing
or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 842. An entity that
elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts
Topic 842. The standard will be effective for non-public entities for fiscal years beginning after December 15, 2022 and interim periods
beginning after December 15, 2023. The Company adopted ASC 842 as of January 1, 2022 using the optional transition method to apply the
standard as of the effective date. Accordingly, previously reported financial statements, including footnote disclosures, have not been
recast to reflect the application of the new standard to all comparative periods presented. Adoption of the new lease standard on January
1, 2022 had a material impact on the Company’s consolidated financial statements. The most significant impacts related to the recognition
of ROU assets of $1.8 million and lease liabilities of $1.8 million for operating leases on the consolidated balance sheet.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s
obligation to make lease payments arising from the lease. The standard did not materially impact the Company’s consolidated statement
of operations and consolidated statement of cash flows.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
In August 2020, the FASB issued Accounting Standards
Update (“ASU”) No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts
in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,
which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes
certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies
the diluted earnings per share calculation in certain areas. This ASU is effective for annual reporting periods beginning after December
15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning
after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition.
On January 1, 2022, the adoption of ASU 2020-06 did not have a material impact on the Company’s consolidated financial statements
or disclosures.
In May 2021, the FASB issued ASU 2021-04, Earnings
Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic
718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s
accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity
classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified
written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification
of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after
modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified
written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of
a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification
or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the
amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted,
including adoption in an interim period. On January 1, 2022, the adoption of ASU 2021-04 did not have a material impact on the Company’s
consolidated financial statements or disclosures.
Note 4 – Prepaid and Other Current Assets
Prepaid and other current assets as of December
31, 2022 and 2021 consist of the following:
| |
December 31,
2022 | | |
December 31,
2021 | |
License fees | |
$ | 300 | | |
$ | - | |
General liability insurance | |
| 142 | | |
| 397 | |
Legal and professional fees | |
| - | | |
| 71 | |
Rent | |
| - | | |
| 86 | |
Hudson warrant * | |
| 85 | | |
| - | |
Other | |
| 63 | | |
| 133 | |
| |
$ | 590 | | |
$ | 687 | |
| * | Fair value of warrant issued to Hudson Pacific Properties, L.P.
(See Note 11) |
Note 5 – 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 December 31, 2022:
| |
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 | |
$ | 1,654 | | |
$ | - | | |
$ | - | | |
$ | 1,654 | |
Warrant liability | |
$ | 972 | | |
$ | - | | |
$ | - | | |
$ | 972 | |
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
For the year ended December 31, 2022 there was
a change of approximately $0.9 million in Level 3 liabilities measured at fair value. There were no Level 3 liabilities measured at fair
value for the nine months ended December 31, 3021.
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 year ended December 31, 2022. 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, 2021 | |
$ | - | | |
$ | - | |
Issuance of convertible notes and warrants | |
| 1,505 | | |
| 1,995 | |
Change in fair value | |
| 149 | | |
| (1,023 | ) |
Balance at December 31, 2022 | |
$ | 1,654 | | |
$ | 972 | |
Convertible Notes
During the year ended December 31, 2022, the Company
issued its Notes. The fair value of the Notes on the issuance dates and as of 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 Notes
(See Note 3) and the 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 consolidated financial statements.
A summary of significant unobservable inputs (Level
3 inputs) used in measuring the Notes upon the issuance date and as of December 31, 2022 is as follows:
| |
October 19,
2022 | | |
December 31,
2022 | |
Dividend yield | |
| 0 | % | |
| 0 | % |
Expected price volatility | |
| 48.4 | % | |
| 48.7 | % |
Risk free interest rate | |
| 4.60 | % | |
| 4.74 | % |
Expected term (in years) | |
| 1.0 | | |
| 0.8 | |
Warrants
During the year ended December 31, 2022, in connection
with its convertible notes, the Company issued 21,759,402 warrants to purchase shares of the Company’s common stock. 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 consolidated financial statements.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
A summary of significant unobservable inputs (Level
3 inputs) used in measuring warrants on issuance date and as of December 31, 2022 is as follows:
| |
October 19,
2022 | | |
December 31,
2022 | |
Dividend yield | |
| 0 | % | |
| 0 | % |
Expected price volatility | |
| 53.4 | % | |
| 53.9 | % |
Risk free interest rate | |
| 4.35 | % | |
| 4.01 | % |
Expected term (in years) | |
| 5.0 | | |
| 4.8 | |
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 6 – Property & Equipment, Net
Property and equipment, net, consists of the
following (in thousands):
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Equipment | |
$ | 1,457 | | |
$ | 1,013 | |
Computers | |
| 52 | | |
| 37 | |
Leasehold improvements | |
| 362 | | |
| 28 | |
Total | |
| 1,871 | | |
| 1,078 | |
Less accumulated depreciation and amortization | |
| (462 | ) | |
| (183 | ) |
Property and equipment, net | |
$ | 1,409 | | |
$ | 895 | |
During the year ended December 31, 2022, depreciation
expense was approximately $0.3 million, and the Company recognized a $0.05 million loss on disposal of equipment. For the nine months
ended December 31, 2021, depreciation expense was approximately $0.1 million.
Note 7 – Intangible Assets, Net
IBM Patents
On July 23, 2021, the Company entered into a
Patent Assignment Agreement with International Business Machines Corporation (“IBM”) to acquire an ownership interest in
assigned patents. As consideration for the patents, the Company paid $264,000 (including legal fees of approximately $38,000).
Intellectual Property
On January 31, 2016, the Company, entered into
an IP agreement with HP to acquire a research license to determine the feasibility of incorporating HP’s electro-kinetic display
technology in the Company’s products. Under the terms of the agreement, the license is to be used for research purposes only.
Under the guidance of ASC 350, Intangibles
- Goodwill and Other Intangibles, the Company recorded the research license at the cost to acquire the license. The Company has paid
$375,000 for the transfer of the technology. The research license will be amortized over a 10-year useful life.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
HP Patents
On February 4, 2021, the Company entered into
the fourth amendment to the IP agreement with HP. Under the terms of the amendment, the parties agreed to amend the list of patent and
patent applications, which includes two additional patents that are assignable to the Company by HP. The Company exercised the option
to purchase the assignable patents and paid HP $1.55 million dollars on February 9, 2021. Upon assignment of the patents, the Company
will pay HP a royalty fee based on the cumulative gross revenue received by the Company from the patents as follows:
1. Prior
to December 31, 2029:
| ● | Less than $70,000,000, royalty
rate of 0.00% |
| ● | $70,000,000 - $500,000,000,
royalty rate of 1.25% |
| ● | $500,000,000 and beyond, royalty
rate of 1.00% |
2.
After January 1, 2030 and onward, royalty rate of 0.00%
Under the terms of the amendment, HP waived any
interest that would have been accrued on the open payable of $75,000 which was due from the Company related to the license agreement
dated January 31, 2016.
Intangible assets, net, consists of the following
(in thousands):
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Patents | |
$ | 1,800 | | |
$ | 1,739 | |
Research license | |
| 375 | | |
| 375 | |
Total | |
| 2,175 | | |
| 2,114 | |
Accumulated amortization | |
| (577 | ) | |
| (353 | ) |
Intangible assets, net | |
$ | 1,598 | | |
$ | 1,761 | |
The following table represents the total estimated
amortization of intangible assets for the five succeeding years and thereafter as of December 31, 2022 (in thousands):
| |
Estimated
Amortization
Expense | |
| |
| |
Year ended December 31, 2023 | |
$ | 220 | |
Year ended December 31, 2024 | |
| 221 | |
Year ended December 31, 2025 | |
| 220 | |
Year ended December 31, 2026 | |
| 183 | |
Year ended December 31, 2027 and thereafter | |
| 754 | |
Total | |
$ | 1,598 | |
For the year ended December 31, 2022, and the
nine months ended December 31, 2021, amortization expense was approximately $0.2 million and $0.15 million, respectively.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
Note 8 – Accrued Expenses
As of December 31, 2022 and 2021, the Company’s
accrued expenses consisted of the following (in thousands):
| |
December 31,
2022 | | |
December 31,
2021 | |
| |
| | |
| |
General liability insurance | |
$ | 104 | | |
$ | 234 | |
Rent | |
| - | | |
| 57 | |
Bonus | |
| 510 | | |
| - | |
Other expenses | |
| 7 | | |
| 7 | |
Total | |
$ | 621 | | |
$ | 298 | |
Note 9 – Notes Payable
Senior Secured Convertible Notes
On October 19, 2022, the Company issued its 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 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 Notes. The 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
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.
There were no convertible notes outstanding as
of December 31, 2021.
Paycheck Protection Loan
On April 24, 2020 and March 3, 2021, the Company
entered into Promissory Notes (the “PPP Notes”) with Newtek Corp AVB as the lender (the “Lender”), pursuant to
which the Lender agreed to make loans to the Company under the Paycheck Protection Program (the “PPP Loan”) offered by the
U.S. Small Business Administration (the “SBA”) in principal amounts of $197,200 and $233,300 pursuant to Title 1 of the Coronavirus
Aid, Relief and Economic Security Act (the “CARES Act”).
The PPP Loan proceeds are available to be used
to pay for payroll costs, including salaries, commissions, and similar compensation, group health care benefits, and paid leaves; rent;
utilities; and interest on certain other outstanding debt. The Loan is subject to forgiveness to the extent proceeds are used for payroll
costs, including payments required to continue group health care benefits, and certain rent, utility, and mortgage interest expenses
(collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the PPP Loan. The Company used the PPP Loan
amounts against Qualifying Expenses, and during the nine months ended December 31, 2021, the total PPP Loan balance of $430,500 was forgiven.
On June 17, 2020, the Company received an Economic
Injury Disaster Loan totaling $8,000 from the U.S. Small Business Administration. As of December 31, 2022 and 2021, this loan is outstanding.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
Note 10 – Stockholders’ Deficit
Preferred Stock
As of December 31, 2022 and 2021, there were
50,000,000 authorized shares of the Company’s preferred stock, par value $0.0001.
Series A Preferred Sock
On January 5, 2021, the Company’s Board
of Directors authorized 300 shares of Series A preferred stock with a par value of $0.0001 per share. Each preferred share of Series
A preferred stock will have a stated valued of $1,000 per share. From and after the second anniversary the holders of the Series A preferred
stock shall be entitled to receive, quarterly cumulative dividends or distributions at the annual rate of 8% of the stated value per
share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization
with respect to the Series A preferred stock). Such dividend shall be paid in cash or at the direction of the Company’s Board of
Directors, in duly authorized, validly issued, fully paid and non-assessable shares of common stock, or a combination thereof. All declared
but unpaid dividends on shares of Series A preferred stock shall increase the stated value of such shares, but when such dividends are
actually paid any such increase in the stated value shall be rescinded. The holders shall be entitled to receive, and the Company shall
pay, dividends on shares of Series A preferred stock equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends
actually paid on shares of the common stock when, as and if such dividends are paid on shares of the Company’s common stock or
other junior securities. The Series A preferred stock has no voting rights. Each share of Series A preferred stock shall be convertible,
at any time and from time to time from and after the original issue date at the option of the holder, into that number of shares of common
stock determined by dividing the stated value of such shares of Series A preferred stock by the conversion price. The conversion price
for the Series A preferred stock shall equal $1.3329, subject to adjustment.
During the fiscal year ended March 31, 2021,
the Company issued 251 shares of its Series A preferred stock in connection with the conversion of its convertible notes, and as of December
31, 2022 and 2021, 251 shares of Series A preferred stock are outstanding.
Series B Preferred Stock
On January 22, 2021, the Company’s Board
of Directors authorized 1,500 shares of Series B preferred stock with a par value of $0.0001 per share. Each preferred share of Series
B preferred stock will have a stated valued of $1,000 per share. From and after the second anniversary the holders of the Series B preferred
stock shall be entitled to receive, quarterly cumulative dividends or distributions at the annual rate of 8% of the stated value per
share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization
with respect to the Series B preferred stock). Such dividend shall be paid in cash or at the direction of the Company’s Board of
Directors, in duly authorized, validly issued, fully paid and non-assessable shares of common stock, or a combination thereof. All declared
but unpaid dividends on shares of Series B preferred stock shall increase the stated value of such shares, but when such dividends are
actually paid any such increase in the stated value shall be rescinded. The holders shall be entitled to receive, and the Company shall
pay, dividends on shares of Series B preferred stock equal (on an as-if-converted-to-common-stock basis) to and in the same form as dividends
actually paid on shares of the common stock when, as and if such dividends are paid on shares of the Company’s common stock or
other junior securities. The Series B preferred stock has no voting rights. Each share of Series B preferred stock shall be convertible,
at any time and from time to time from and after the original issue date at the option of the holder, into that number of shares of common
stock determined by dividing the stated value of such shares of Series B preferred stock by the conversion price. The conversion price
for the Series B preferred stock shall equal $0.7149, subject to adjustment.
During the fiscal year ended March 31, 2021,
the Company issued 1,443 shares of its Series B preferred stock in connection with the conversion of its convertible notes, and as of
December 31, 2022 and 2021, 1,443 shares of Series B preferred stock are outstanding.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
Series C Preferred Stock
On February 19, 2021, the Company’s Board
of Directors authorized 600,000 shares of Series C preferred stock with a par value of $0.0001 per share. Each preferred share of Series
C preferred stock will have a stated valued of $1.00 per share. From and after the second anniversary the holders of the Series C preferred
stock shall be entitled to receive, quarterly cumulative dividends or distributions at the annual rate of 8% of the stated value per
share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization
with respect to the Series C preferred stock). Such dividend shall be paid in cash or at the direction of the Company’s Board of
Directors, in duly authorized, validly issued, fully paid and non-assessable shares of common stock, or a combination thereof. All declared
but unpaid dividends on shares of Series C preferred stock shall increase the stated value of such shares, but when such dividends are
actually paid any such increase in the stated value shall be rescinded. The holders shall be entitled to receive, and the Company shall
pay, dividends on shares of Series C preferred stock equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends
actually paid on shares of the common stock when, as and if such dividends are paid on shares of the Company’s common stock or
other junior securities. The Series C preferred stock has no voting rights. Each share of Series C preferred stock shall be convertible,
at any time and from time to time from and after the original issue date at the option of the holder, into that number of shares of common
stock determined by dividing the stated value of such shares of Series C preferred stock by the conversion price. The conversion price
for the Series C preferred stock shall equal $0.893, subject to adjustment.
During the fiscal year ended March 31, 2021,
the Company issued 500,756 shares of its Series C preferred stock in connection with the conversion of its convertible notes, and as
of December 31, 2022 and 2021, 500,756 shares of Series C preferred stock are outstanding.
Series D Preferred Stock
On July 8, 2022, the Company’s Board of
Directors authorized 7,000 shares of Series D preferred stock with a par value of $0.0001 per share. Each preferred share of Series D
preferred stock has a stated valued of $1,000 per share, is convertible into shares of the Company’s common stock at an initial
conversion price of $1.30 per share, and is entitled to a dividend of 12% per annum. The cumulative dividends shall be paid in common
stock based on the conversion price in effect on the applicable conversion date. All accrued but unpaid dividends on shares of Series
D preferred stock shall increase the stated value of such shares. The Company may redeem all, but not less than all, of the Series D
preferred stock for cash, at a price per share of Series D preferred stock equal to 125% of the stated value. The Series D preferred
stock has no voting rights.
In July 2022, the Company issued 1,058 shares
of Series D preferred stock for approximately $1.1 million, which was included on the consolidated balance sheet in shares liability as
of June 30, 2022, as the proceeds were received by the Company in June 2022, prior to issuance of the shares. As of December 31, 2022,
1,058 shares of Series D preferred stock are issued and outstanding.
In connection with the issuance of the 1,058
shares of Series D preferred stock, the Company issued 814,102 equity-classified warrants to purchase shares of the Company’s common
stock with an exercise price of $1.30 per share. The proceeds from the Series D preferred stock were allocated between the warrants and
the Series D preferred stock based on their relative fair values.
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 1.0% multiplied by the aggregate subscription amount paid by such holder pursuant to the
purchase agreement, up to an aggregate of 10% of the aggregate subscription amount paid by such holder pursuant to the purchase agreement
for all such liquidated damages.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
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 $2,400.
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.
Common Stock
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 $0.0001 per share. The Company
agreed to sell 1,250,000 shares of its common stock to the underwriters, at a purchase price per share of $0.744 (the offering price
to the public of $0.80 per share minus the underwriters’ discount), pursuant to the Company’s registration statement on Form
S-3 (File No. 333-262122), under the Securities Act of 1933, as amended. The Company has also granted to the underwriters a 30-day option
to purchase up to 187,500 additional shares of common stock to cover over-allotments. On July 22, 2022, the Company received net proceeds
of $855,000, net of underwriter fees and commissions of approximately $70,000, and offering costs of $75,000.
In connection with the Company’s public
offering, the Company issued a warrant to the underwriters to purchase 62,500 shares of its common stock. The warrant may be exercised
beginning on the date that is 180 days after July 22, 2022 until July 19, 2027. The exercise price of the warrant is $0.80 per share.
ATM Offering
As of December 31, 2022, the Company has received
net proceeds on sales of 3,368,146 shares of common stock under its ATM Offering (See Note 2) of approximately $1.25 million (after deducting
$0.05 million in commissions and expenses) at a weighted average price of $0.385 per share.
Stock Issued for Services
During the year ended December 31, 2021, the
Company issued 64,261 shares of its common stock with a fair value of approximately $0.2 million in exchange for consulting services.
Stock Options
During the nine months ended December 31, 2021,
the Company issued 409,385 shares of its common stock in connection with the exercise of stock options and received proceeds of approximately
$0.2 million.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
Note 11 – Stock-Based Compensation,
Restricted Stock and Stock Options
On December 22, 2022, the Company adopted its
2022 Long-Term Incentive Plan (the “2022 Plan”). Under the 2022 Plan, there are 4,200,000 shares of the Company’s common
stock available for issuance and the 2022 Plan has a termination date of October 31, 2032.
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 19.9% of the total number of outstanding shares of common stock, determined on a fully diluted basis as of the applicable
trading date (the “Stipulated Percentage”); (b) our Board of Directors may act prior to January 1st of a given calendar year
to provide that (i) there will be no such automatic annual increase in the number of shares reserved for issuance under the 2022 Plan
or (ii) the increase in the number of shares for such calendar year will be a lesser number of shares than necessary to maintain the
Stipulated Percentage of shares reserved for issuance under the 2022 Plan; and (c) unless an increase in shares reserved for issuance
under the 2022 Plan in excess of the Initial Share Limit has been approved by our shareholders, the maximum number of shares of common
stock that may be delivered pursuant to incentive stock options shall not exceed the Initial Share Limit or, if greater, the number of
shares of common stock subsequently approved by the requisite vote of our shareholders entitled to vote thereon.
On December 16, 2020, the Company adopted its
2020 Long-Term Incentive Plan (the “2020 Plan”). Under the 2020 Plan, there are 5,333,333 shares of the Company’s common
stock available for issuance and the 2020 Plan has a term of 10 years. The available shares in the 2020 Plan will automatically increase
on the first trading day in January of each calendar year during the term of this Plan, commencing with January 2021, by an amount equal
to the lesser of (i) five percent (5%) of the total number of shares of common stock issued and outstanding on December 31 of the immediately
preceding calendar year, (ii) 1,000,000 shares of common stock or (iii) such number of shares of common stock as may be established by
the Company’s Board of Directors.
The Company grants equity-based compensation
under its 2020 Plan and its 2016 Equity Incentive Plan (the “2016 Plan”). The 2020 Plan and 2016 Plan allows the Company
to grant incentive and nonqualified stock options, and shares of restricted stock to its employees, directors and consultants. 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 5,500,000 to 7,333,333.
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 year ended December 31, 2022 and the nine months ended December 31, 2021, which are included in the accompanying
statements of operations, as follows (in thousands):
|
|
Year Ended December 31, | | |
Nine Months Ended December 31, | |
|
|
2022 | | |
2021 | |
|
|
| | |
| |
Research and development expenses |
|
$ | 508 | | |
$ | 384 | |
Selling, general and administrative expenses |
|
| 1,897 | | |
| 8,318 | |
Total stock-based compensation |
|
$ | 2,405 | | |
$ | 8,702 | |
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
Restricted stock units:
A summary of the Company’s restricted stock
activity during the year ended December 31, 2022 is as follows:
| |
Number of
Shares | | |
Weighted Average
Grant-Date Fair Value | |
Unvested at December 31, 2021 | |
| 1,939,683 | | |
$ | 3.40 | |
Granted | |
| 676,350 | | |
$ | 1.37 | |
Vested | |
| (892,016 | ) | |
$ | 2.09 | |
Issued | |
| (1,095,237 | ) | |
$ | 4.50 | |
Unvested at December 31, 2022 | |
| 628,780 | | |
$ | 2.30 | |
During the year ended December 31, 2022, the
Company granted 676,350 restricted stock units (“RSUs”) to employees and members of its board of directors with a fair value
of approximately $0.9 million. Included in the RSUs granted during 2022, 33,332 RSUs were exchanged for 33,332 cancelled stock options.
The cancellation of the stock options and the issuance of the RSUs was accounted for as a modification of the equity awards, and during
the year ended December 31, 2022, the Company recognized incremental stock-based compensation of $0.1 million.
During the year ended December 31, 2022, the
Company accelerated the vesting of 423,779 RSUs. The accelerated vesting was accounted for as a modification of the equity awards, and
during the year ended December 31, 2022 the Company reversed $0.4 million of stock-based compensation related to the incremental fair
value of the awards.
During the nine months ended December 31, 2021,
the Company granted 800,000 restricted stock units with a fair value of approximately $4.1 million, in exchange for 800,000 restricted
stock awards issued to an officer of the Company and a consultant. The fair value and vesting terms of the restricted stock units are
identical to the terms of the restricted stock awards, and therefore, no incremental stock-based compensation has been recognized during
the nine months ended December 31, 2021.
During the nine months ended December 31, 2021,
the Company granted 400,000 restricted stock units with a fair value of approximately $1.6 million to its Chief Financial Officer.
During the year ended December 31, 2022, the
Company recognized stock-based compensation of approximately $1.6 million, related to restricted stock. As of December 31, 2022, unrecognized
stock-based compensation totaled approximately $0.3 million, which is expected to be recognized over a weighted-average period of one
year.
Restricted stock awards:
During the nine months ended December 31, 2021,
66,666 shares of the Company’s restricted stock awards vested. During the nine months ended December 31, 2021, the Company exchanged
88,888 shares of its vested restricted stock awards and 711,112 of its unvested restricted stock awards for restricted stock units. (See
Restricted stock units).
Stock Options:
The Company provides stock-based compensation
to employees, directors and consultants under 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.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
During the year ended December 31, 2022, the
Company granted 832,500 options to purchase shares of the Company’s common stock to members of the Company’s Board of Directors,
employees and consultants. The options have a fair value of approximately $0.3 million. During the nine months ended December 31, 2021,
the Company granted 1,442,204 stock options with a fair value of approximately $5.1 million. The following was used in determining the
fair value of stock options granted during the year ended December 31, 2022 and the nine months ended December 31, 2021.
|
|
Year Ended December 31, | |
Nine Months Ended
December 31, |
|
|
2022 | |
2021 |
Dividend yield |
|
0% | |
0% |
Expected price volatility |
|
88.8% - 91.7% | |
50% - 103% |
Risk free interest rate |
|
3.96% - 3.25% | |
0.35% - 1.33% |
Expected term |
|
5.0 - 7.0 years | |
3-7 years |
A summary of activity under the 2016 and 2020
Plans for the year ended December 31, 2022 is as follows:
| |
Shares Underlying Options | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term (Years) | | |
Aggregate Intrinsic Value | |
Outstanding at December 31, 2021 | |
| 11,135,432 | | |
$ | 2.85 | | |
| 7.6 | | |
$ | 13,031 | |
Granted | |
| 832,500 | | |
$ | 0.40 | | |
| - | | |
| | |
Canceled | |
| (977,638 | ) | |
$ | 3.20 | | |
| - | | |
| | |
Forfeited | |
| (1,476,670 | ) | |
$ | 2.60 | | |
| - | | |
| | |
Outstanding at December 31, 2022 | |
| 9,513,624 | | |
$ | 2.64 | | |
| 6.5 | | |
$ | 26,188 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at December 31, 2022 | |
| 8,579,370 | | |
$ | 2.80 | | |
| 6.3 | | |
$ | 26,188 | |
During the year ended December 31, 2022, the
Company cancelled 977,638 stock options with a weighted average exercise price of $3.20 per share. Of these stock option cancellations,
33,332 were related to an exchange for restricted stock units (see restricted stock units above) and 944,306 stock options were canceled
in connection with employee departures.
During the year ended December 31, 2022 the Company
modified the expiration dates of 789,527 vested stock options related to terminated employees. The modification of the equity awards
modified the expiration date based on the options original terms. During the year ended December 31, 2022, the Company recognized incremental
stock-based compensation of $0.6 million.
During the nine months ended December 31, 2021,
the Company granted 1,318,147 options to purchase shares of its common stock with a fair value of approximately $2.4 million to the Company’s
Board of Directors, executives and employees. The options vest over a period of one month - 2 years.
During the nine months ended December 31, 2021,
the Company granted 124,057 options to purchase shares of its common stock with a fair value of approximately $0.2 million for consulting
services.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
During the year ended December 31, 2022, the
Company recognized stock-based compensation of approximately $0.8 million, related to stock options. As of December 31, 2022, unrecognized
stock-based compensation totaled approximately $0.3 million, which is expected to be recognized over a weighted-average period of four
months.
Warrants:
A summary of the Company’s warrant (excluding
penny warrants) activity during the years ended December 31, 2022 is as follows:
| |
Shares
Underlying
Warrants | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Contractual Term
(Years) | | |
Aggregate
Intrinsic
Value | |
Outstanding at December 31, 2021 | |
| 4,525,177 | | |
$ | 2.65 | | |
| 4.0 | | |
$ | 7,088 | |
Issued | |
| 23,136,004 | | |
$ | 0.38 | | |
| | | |
| | |
Outstanding and Exercisable at December 31, 2022 | |
| 27,661,181 | | |
$ | 0.75 | | |
| 4.5 | | |
$ | - | |
2022 Liability Classified Warrants
October 2022 Financing
On October 19, 2022, the Company issued 21,759,402
warrants in connection with the issuance of its Notes (See Note 5 and Note 9). The warrants have an exercise price of $0.32 per share
and expire five years from the issuance date.
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 $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 Q2 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.
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 year ended
December 31, 2022.
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 $161,700, and as of December 31, 2022, the Company
recorded a prepaid asset of $85,450, representing the recoverable value from the PO’s, which is included in prepaid and other current
assets on the accompanying consolidated balance sheet.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
SLOC
In connection with the SLOC, the Company issued
a warrant for 200,000 shares of common stock with an exercise price of $2.00, and a total fair value of approximately $223,000. This amount
is included in the accompanying consolidated balance sheet as deferred debt issuance costs. During the year ended December 31, 2022 the
Company amortized approximately $73,000 of the warrants fair value, which is included in other expense on the accompanying consolidated
statement of operations. As of December 31, 2022, deferred debt issuance costs totaled $150,000.
2021 Equity Classified Warrants
During the nine months ended December 31, 2021,
the Company issued 775,724 common stock warrants in exchange for consulting and advisory services. The warrants have a fair value of
approximately $1.3 million which is recorded as stock-based compensation in the accompanying statement of operations for the nine months
ended December 31, 2021.
The Company estimated the fair value of its equity
classified warrants using the Black-Scholes pricing model during the year ended December 31, 2022 and the nine months ended December
31, 2021 as follows:
| |
Year Ended
December 31,
2022 | |
Nine Months
Ended
December 31,
2021 |
Dividend yield | |
0% | |
0% |
Expected price volatility | |
87.3%-103.0% | |
50%-103% |
Risk free interest rate | |
2.2%-3.0% | |
0.81%-1.2% |
Expected term (years) | |
5.0 | |
5.0 |
Note 12 – Income Taxes
During the years ended December 31, 2022 and the nine months ended
December 31, 2021, the Company did not record a provision for income taxes due to the recognition of a full valuation allowance.
As of December 31, 2022, the Company has net operating loss carryforwards
of approximately $34.2 million and $24.2 million available to reduce future taxable income, for federal and state income tax purposes,
respectively. Under the Tax Cuts and Jobs Act, the Federal NOLs of approximately $34.2 million incurred during the years ended after December
31, 2017 can be carried forward indefinitely, but are limited in utilization to 80% of taxable income each year. Approximately $26,000
of the federal NOL will expire in 2037. The state net operating loss carryforwards will begin to expire in 2037.
Under the Internal Revenue Code (“IRC”)
Section 382, annual use of the Company’s net operating loss carryforwards to offset taxable income may be limited based on cumulative
changes in ownership. The Company has not completed an analysis to determine whether any such limitations have been triggered as of December
31, 2022. The Company has no income tax effect due to the recognition of a full valuation allowance on the expected tax benefits of future
loss carry forwards based on uncertainty surrounding realization of such assets.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
The federal and state tax returns beginning with the year ended December
31, 2019 are currently open for examination under the applicable federal and state income tax statutes of limitations.
The tax effects of the temporary differences and carry forwards that
give rise to deferred tax assets consist of the following (in thousands):
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Net operating loss carryforwards | |
$ | 8,438 | | |
$ | 7,229 | |
Equity based compensation | |
| 923 | | |
| 986 | |
Amortization | |
| 25 | | |
| 6 | |
Lease liability | |
| 409 | | |
| - | |
Capitalized research costs | |
| 707 | | |
| - | |
Accruals and other temporary differences | |
| 78 | | |
| 2 | |
Gross Deferred Tax Assets | |
| 10,580 | | |
| 8,223 | |
Depreciation | |
| (46 | ) | |
| (46 | ) |
Right of use asset | |
| (388 | ) | |
| - | |
Accruals and other temporary differences | |
| - | | |
| - | |
Less Valuation Allowance | |
| (10,146 | ) | |
| (8,177 | ) |
Net Deferred Taxes | |
$ | - | | |
$ | - | |
A reconciliation of the statutory income tax
rates and the Company’s effective tax rate is as follows:
| |
Year ended | | |
Nine months ended | |
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Tax provision at statutory rate | |
| 21.0 | % | |
| 21.0 | % |
State taxes, net of federal benefit | |
| 0.1 | % | |
| - | % |
Permanent items | |
| (0.2 | )% | |
| 0.6 | % |
Stock-based compensation | |
| (4.0 | )% | |
| (6.3 | )% |
Change in fair value of warrant liability | |
| 1.5 | % | |
| - | % |
Deferred tax true-up / return to provision | |
| (4.6 | )% | |
| 8.7 | % |
Tax reform rate change | |
| - | % | |
| (0.8 | )% |
Change in valuation allowance | |
| (13.8 | )% | |
| (23.2 | )% |
Income taxes provision (benefit) | |
| - | % | |
| - | % |
As of December 31, 2022 and 2021, the Company had no uncertain tax
positions. The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value
of unrecognized tax benefits as a component of income tax expense. The Company did not accrue either interest or penalties for the years
ended December 31, 2022 and 2021.
The Company has not been under tax examination
in any jurisdiction for the years ended December 31, 2022 and 2021.
Note 13 – 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 $400 monthly. On July 1, 2016, the Company entered into the first amendment to the lease agreement
which increased the monthly lease expense to approximately $1,200. On October 1, 2017, the Company entered into a sublease agreement,
which provides for additional office space and the monthly lease payment increased to approximately $1,800. The lease expired on June
30, 2018 and the Company extended the lease through June 30, 2019. The monthly lease payment increased to approximately $4,500 for the
months ended June 30 2018 through November 30, 2018, and increased to approximately $7,550 for the months ended December 31, 2018 through
June 30, 2019.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
On September 1, 2021, the Company entered into
the seventh amendment to its lease with Oregon State University which expands the lease to now include approximately 703 square feet
of lab space, 576 square feet of cubicle space, 1096 square feet of Highbay lab space, and 376 square feet of High bay storage space
in a building commonly known as Building 11. Effective September 1, 2021, the quarterly operating expense will be $31,647 covering all
utility and facility tooling costs. The sublease is extended until June 30, 2025.
On January 24, 2022, the Company entered into
the eighth amendment to its lease with Oregon State University which expands the lease to now include approximately 703 square feet of
lab space, 768 square feet of cubicle space, 2,088 square feet of Highbay lab space, and 376 square feet of High bay storage space in
a building commonly known as Building 11. Effective January 24, 2022, the quarterly operating expense will be $44,252 covering all utility
and facility tooling costs. The sublease expires June 30, 2025.
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 768 square feet to 288 square
feet. Effective January 20, 2023 the quarterly operating expense will be $41,323 covering all utility and facility tooling costs.
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:
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 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
will pay 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.
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. 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 |
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
As of December 31, 2022, the Company had
operating lease liabilities of approximately $1.9 million and right-of-use assets of approximately $1.8 million, which are included
in the consolidated balance sheet.
The components of lease expense were as follows (in thousands):
| |
Year Ended December 31, 2022 | |
Operating leases: | |
| |
Operating lease cost | |
$ | 760 | |
Variable lease cost | |
| 50 | |
Operating lease expense | |
$ | 810 | |
Supplemental cash flow information related to
leases were as follows:
| |
Year Ended
December 31,
2022 | |
Operating cash flows - operating leases | |
$ | 719 | |
Right-of-use assets obtained in exchange for operating lease liabilities | |
$ | 2,336 | |
Weighted-average remaining lease term – operating leases (in years) | |
| 3.3 | |
Weighted-average discount rate – operating leases | |
| 12.0 | % |
As of December 31, 2022, future minimum payments are as follows (in
thousands):
| |
Operating
Leases | |
Year ended December 31, 2023 | |
$ | 776 | |
Year ended December 31, 2024 | |
| 678 | |
Year ended December 31, 2025 | |
| 475 | |
Year ended December 31, 2026 | |
| 390 | |
Year ended December 31, 2027 | |
| 58 | |
Total | |
| 2,377 | |
Less present value discount | |
| (437 | ) |
Operating lease liabilities | |
$ | 1,940 | |
During the year ended December 31, 2022 the Company
recognized rent expense of approximately $0.8 million, and during the nine months ended December 31, 2021 the Company recognized rent
expense of approximately $0.2 million.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
Litigation
From time to time, the Company is also involved
in various other claims and legal actions that arise in the ordinary course of business. Although the results of litigation and claims
cannot be predicted with certainty, the Company does not believe that the ultimate resolution of these actions will have a material adverse
effect on its financial position, results of operations, liquidity or capital resources.
Future litigation may be necessary to defend
ourselves and our partners by determining the scope, enforceability and validity of third party proprietary rights or to establish the
Company’s proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless
of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management
resources and other factors.
Note 14 – Subsequent Events
The Company has evaluated all subsequent events through
the date of filing, March 31, 2023, of this Annual Report on Form 10-K with the SEC, to ensure that this filing includes appropriate disclosure
of events both recognized in the consolidated financial statements as of December 31, 2022, and events which occurred after December 31,
2022, 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.
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 LLC (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 the assets acquired and liabilities assumed
as of the acquisition date has not been completed.
Notes Payable
On January 19, 2023, the Company entered into
a warrant inducement agreement with certain holders of the Notes, and issued 6.4 million warrants, with a fair value of $2.05 million,
to purchase shares of the Company’s common stock.
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, 2024. 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 January 3, 2023, the Company issued senior secured
notes (the “2023 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 $0.8 million. The 2023 Notes were issued with an original issue discount of 20%,
do not bear interest, and mature three months from the date of issuance (unless extended pursuant to the terms of the 2023 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.
2023 Line of Credit
On February 2, 2023, the Company entered into
a line of credit (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 (See Note 1). 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 2, 2023, the Company withdrew $2.0 million under the Line of Credit.
CROWN ELECTROKINETICS, CORP.
Notes to Consolidated Financial
Statements
Year Ended December 31, 2022 and Nine Months
Ended December 31, 2021
Upon drawing down on the Line of Credit, the
Company will issue a Secured Promissory Note (“the Promissory Note”) which is due and payable 60 days from the issuance date.
The Promissory Note is non-interest bearing and secured by the Company’s assets. The Promissory 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 Promissory Note. Promissory 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 consideration for entering into the Line of
Credit, the Company issued 5,000 shares of Series E preferred stock, and issued a warrant to purchase 45,000 shares of the Company’s
Series E preferred stock. Additionally, 5,000 shares of Series E preferred stock will be issued on the first and second anniversary of
the effective date of the Line of Credit. However, if the Company does not elect to extend the Line of Credit for an additional one or
two years, the additional 5,000 shares of Series E preferred stock will be issued immediately.
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
Subsequent to December 31, 2022,
in connection with its ATM Offering, the Company received net proceeds on sales of 12,700,100 shares of its common stock of approximately
$2.11 million (after deducting $0.09 million in commissions and expenses) at a weighted average price of $0.189 per share.
Subsequent to December 31, 2022, 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.
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 $1.30
to $0.50 per share.
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, in
connection with its 2023 Line of Credit. 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. The holders of the Series E preferred stock shall receive dividends
on an as converted basis together with the holders of the Company’ common stock. The Series E preferred stock has no
voting rights and does not have a preference upon any liquidation, dissolution or winding-up of the Company.
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
4.99% and thereafter adjusted by the holder to a number between 4.99% and 9.99%) of the total number of shares of common stock issued
and outstanding immediately after giving effect to such conversion. In addition, in the event a conversion of Series E preferred stock
would result in the holder owning more than 19.99% of the Company’s outstanding shares of common stock, the number of shares of
common stock that may be issued upon such conversion of Series E preferred stock, shall be limited to 19.99% of the Company’s outstanding
shares of common stock on that date, unless stockholder approval is obtained by the Company to issue a number of shares of common stock
exceeding the limit.
Common Stock
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.
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