Crown Electrokinetics Corp. (CRKN) 2022 Q4 法說會逐字稿

Good day, everyone, and welcome to Crown ElectroKinetics Corporation earnings conference call for the stub period nine months ended December 31, 2021. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the management's remarks. This conference call is being recorded. A replay of today's call will be available on the Investor Relations section of Crown's website and will remain posted there for the next 30 days.

I will now hand the call over to Henryk Dabrowski for introductions and the reading of the Safe Harbor statement. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Crown's earnings call for the nine-month stub period ended December 31, 2021. With us on today's call are Doug Croxall, Crown's Chief Executive Officer and Chairman; and Joel Krutz, Chief Financial Officer.

Before we begin, I would like to remind you that today's call contains certain forward-looking statements from our management, made within the meaning of Section 27A of the Securities Act of 1933, as amended in Section 21E of the Securities and Exchange Act of 1934 as amended. Words such as may, should, project, expects, intends, plans, believes, anticipates, hopes, estimates, and variations of such words, and similar expressions are intended to identify forward-looking statements. These statements are subject to numerous conditions, many of which are beyond the control of the company, including those set forth in the Risk Factors section of the company's annual report on Form 10-K (technical difficulty) for the fiscal year and stub period, including the nine months ended December 31, 2021, filed with the SEC.

Copies of these documents are available on the SEC's website at www.sec.gov. Actual results may differ materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation to update these statements for revisions or changes after the date of this call, except as required by law.

Now, at this time, it is my pleasure to introduce Doug Croxall, CEO and Chairman of Crown. Mr. Croxall, please go ahead.

All right. Thank you, Henryk.

So thanks, everyone, for joining us today. I've got about five pages of prepared remarks. I hate reading from a script, so I'm going to do my best to not do that. I want to start off by just reviewing Crown's mission, which is to provide an affordable smart glasses solution kit to get and enable its customers to reduce energy and in turn lower carbon emissions.

Our first product, as many of you know, it's called the Smart Window Insert powered by DynamicTint. It's an affordable solar-powered Insert, which does not require hardwiring. It can be easily installed into the interior side of existing windows in commercial office buildings. Our tint, which we call DynamicTint, is a pigment-based thin film, was originally developed by HP, and it's based on our proprietary and patent-protected electrokinetic technology.

So at Crown, we recognize that commercial buildings are inefficient. They're inefficient insulators because glass is an inefficient material in which to insulate. So Crown is solving a big problem for a very large addressable market.

Our Smart Window Insert easily installs into a building's existing window frame, leaving the existing window intact; we do not touch the existing window. This transforms a building single-pane window into an energy efficient, dual-pane Smart Window. Once installed, the Insert is powered by a solar strip. We do not hardwire to the building's electrical system.

This is a big deal. There are no other Inserts that have smart glass technology associated with them. And if they did, they would be hardwired into the building.

Our Insert absorb sunlight, thereby reducing the amount of HVAC usage, leading to lower electricity costs and a smaller carbon footprint. Our Insert also provides an insulating benefit by effectively adding the second pane to the building's existing single pane, allowing heat and air conditioning to stay in the building more efficiently than the existing single-pane window. Also, a big deal, which means our product is not only important in warm weather climates, but in climates like New York City where they actually experienced this.

The commercial building sector is under increasing pressure from shareholders, tenants, and regulators to reduce their HVAC energy consumption and more importantly, reduce their carbon emissions. We're hitting the market at a really interesting time. Luck is a good thing to have on your side.

We're the only smart glass retrofit product in the market. Crown's Smart Window Insert is priced comparatively with high-end window blinds. We're not expensive electrochromic windows. We're priced slightly above a solar shade, which is pretty prevalent in most office buildings.

Okay. So what I'd like to do now is review our product development and our product release schedule. This summer, we'll be manufacturing and delivering our first-generation Smart Window Insert. That Smart Window Insert will be comprised of 12-inch strips of our DynamicTint film.

Today, we cannot make film wide enough to cover the entire Insert, so we can make, however, 12-inch strips of our film and we're making it defect free two-day. So those 12-inch strip will be placed across a single piece of glass. Our frame will encompass that piece of glass.

Our solar strip that faces exterior in the building, capturing the sunlight to charge a lithium-ion battery, the lithium-ion power source for allowing the user to transition the film from clear to dark on demand. Each office that has our Inserts will have a handheld controller that allows the occupant of that office to easily control the Insert. Each Insert will be gathering performance and usage data.

We will effectively be creating an epidermal layer to the building, and that layer will be gathering data. That data will be important to help not only Crown monitor the performance of our Insert, but help the building manage their HVAC.

Our Inserts are easily installed and will not require any fasteners for installation; and each Insert is powered by the sun's energy through the solar strip. Our product is highly sustainable, and again, does not require any hard wiring to the building's electrical system.

We'll have a limited run of the first-generation Insert to be sold and distributed to three customers: MetroSpaces, Hudson Pacific, and recently announced Brandywine Realty Trust. Those first have a total of 281 buildings.

We will strategically place those Inserts in a handful of buildings owned by our customers. We'll get feedback and performance. We'll look at the design and the usage, and we'll use that iterative approach with our customer to help develop our second-generation Smart Window Insert with their feedback.

The second-generation product, again, first-generation product is coming out this summer. Second-generation product will be a single piece of DynamicTint, replacing the 12-inch strips. We expect that there'll be new features that will be incorporated into the second-generation product, including the following potential upgrades: increased data gathering including external weather information, amount of sunlight, internal temperatures, placement of the sun in the sky during the day, whether someone is in or not in their office. The second-generation Insert can be controlled by either the same handheld device or through an app downloaded to a smart device, like a phone or an iPad. We expect that it will be able to produce significantly more second-generation Inserts as compared to the limited run of the first-generation and begin into that next.

So from a manufacturing update, one year ago, at this time -- for those of you who are shareholders and a part of our IPO, one year ago, at this time, we actually had a very different strategy here. Crown was to produce our film in our R&D lab in Corvallis on our proto-production tool, and then to teach our contract manufacturing partners, we had three at the time, to develop and build their -- our film in their facility. Obviously, that's not happening today. COVID and business disruption and delayed product launches by our manufacturing partners on our own products caused us to start down a path to vertically, previously planned outsource manufacturing.

I'm thrilled to tell you that today, Crown is able to manufacture our own film and will do so in our Corvallis and Salem, Oregon facilities. I cannot understate the importance of what we've achieved in less than one year. We will increase our margins and protect our intellectual property by manufacturing our own film. We now control our own destiny.

We're currently producing our film at a 6-inch width and defect-free in our Corvallis R&D lab. We're working towards producing our film at 12-inch, defect free, which will be the basis of our first-generation Smart Window Insert this summer.

We've also developed a technique that will allow us to produce our film up to 72-inch width, which is wide enough to satisfy the commercial building market. Let me read that again. We've also developed a technique internally, owned by us that will allow us to produce our film up to 72-inch width, which is plenty wide to satisfy the commercial building market. We call this technique stitching. And if filed -- and we'll continue to file the proper protections on this invention.

Our team of engineers and one in particular have given Crown the opportunity to significantly advanced our time to market with wide width film, allowing us to approach the commercial market with the product that can have an immediate impact on the building's cost savings and carbon footprint.

Last summer, we embarked upon a process to design a purpose-built line, a single line performing all the necessary steps in making our electrokinetic film. The conclusion of that process has provided us with a partner that will build our first purpose-built roll-to-roll manufacturing our film in any width, from 12 inches up to 72 inches.

This new production line once up and running at capacity. We believe will produce annualized revenues of between $110 million and $120 million and has the potential to generate EBITDA of approximately $20 million. So one line in one facility with assembly should be able to produce between $110 million, $120 million annually and the ability to produce about $20 million of EBITDA annually.

We're in active discussions with a number of funding sources that we believe can provide non-dilutive funding for our capital expenditures. These are hard assets that we're purchasing. There's a lot of equipment financing out there; we've been in discussions, and we'll continue discussions. As soon as we have something to report, we will report.

Environmental, social, and governance, ESG. It's big trends to talk about these days. We, obviously, are actively pursuing our participation as a key ESG supplier to US-based office buildings. The retrofitting that we do for these buildings allow them to start checking the boxes and providing meaningful response to the ESG requirements that they all have.

Our goal is to help building owners reduce their energy use and reduce their carbon footprint. Crown Smart Window Insert can do that immediately for all existing buildings.

Let's talk about customers briefly. As previously stated, we have a new customer that we added to our growing list. Brandywine is our late, largest customer to date with over 170 buildings. Their buildings are primarily in Philadelphia where they're headquartered there. They're all -- they all (technical difficulty) see in Austin, Texas.

We'll be delivering our first generation and search all three customers this summer to specific locations as determined by Crown and our customers. We'll continue to work with other perspective customers in our sales pipeline, and hope to have further announcements in the coming quarters.

It should be noted that we are experiencing interest not only from US-based building owners, but also from commercial property owners in Europe, Middle East, and Asia. Additionally, other markets such as residential and transportation also continued to show interest. In due course, we will address those market opportunities. But for the near term, we're very focused on providing our products to our current target customer, the US office building market.

All right, intellectual property. Intellectual property and specifically patents are really difficult asset class for public markets to properly value. We believe the value of our intangible assets were not fully understood by the public market. For that purpose, we engaged an independent organization to provide us with an updated assessment of our US patents and trade secrets.

We're pleased with these results, which we will announce after this earnings call. The estimated new value should favorably impact our valuation and provide additional assurances as we look to finance Crown's expansion.

All right. Those are my prepared remarks. I look forward to taking some questions from everyone afterwards. Right now, I'm going to hand the call over to Joel.

Thank you, Doug, and good morning, everybody. First, I remind our investors and the public that we have now transitioned our March fiscal year end to December in order to better align our financial and operating calendars.

Accordingly, today, I will be discussing Crown's financial results for the nine-month stub period ended December 31, 2021. Consistent with the MD&A section and [night note 13 about 10 KC], which will be filed later today. I'll be comparing the stub period of 2021 to the same nine-month period in 2020.

The results. The company's net loss for the nine months ended December 31, 2021, was $16.5 million. This included $8.7 million of non-cash stock-based compensation expense. This was $3.6 million lower than the $21.1 million recorded during the nine months ended December 31, 2020, which included $16.5 million of non-cash compensation and financing expenses.

Total operating expenses for the nine months was $16.9 million, which included $8.7 million of non-cash stock-based comp. Excluding the impact of the cost of this stock-based compensation (technical difficulty) operating expenses last year. This was driven by $2.9 million increase in payroll as we ramped up in-house manufacturing and other functional capabilities. So the $1.2 million increase in consulting and professional fees and $1 million increase in operating overheads.

Other income was $0.4 million, which related to a PPP loan forgiveness and as compared to $6 million of expense last year, which primarily related to debt conversions. Net cash used for the nine months was $9.2 million, with $8.6 million deployed for operations, and $0.8 million invested in patents and equipment.

As of December 31, 2021, our cash and cash equivalents were $6.1 million. And we've also recently agreed terms with the financial institution for $10 million outstanding letter of credit, which will provide access to operational financing if required for the next two years.

Looking ahead to 2022, we will seek organizational streamlining and operational efficiency. And we'll continue to pursue the optimal least dilutive financing solutions with which to fund our capital requirements and to strengthen Crown's balance sheet.

That concludes our prepared remarks. Now we'll open the call for any questions. Operator?

Thank you. And at this time, we'll be conducting a question-and-answer session. (Operator Instructions) One moment, please, while we poll for questions.

Jeffrey Campbell, Alliance Global Partners.

Hi, Doug. First of all, I want to say congratulations on the Brandywine. And it's great to see that geographic diversification.

Thank you.

Regarding the move to vertical integration, I thought the stronger IP protection was an interesting point. I just wondered, when that IP become a concern, assuming that was what you are alluding to?

Well, when you -- a lot of our intellectual properties, not just in the product, but the way we manufacture and process. So a lot of that you'd have to disclose to your contract manufacturing partner in order to teach them how to do it.

You put the assurance is in place in a written agreement so that they treat your intellectual property with the same respect that you do. But it's still a risk. There're still people that come and go from that employer. And there's -- they're used to open their selves up to a risk.

And so like, by vertically integrating, which to be honest, it was the only move on the chessboard. I don't want to break our arms patting ourselves on the back. When the whole world went to hell during COVID and all of our manufacturing partners told us it would be two or three years before they could start focusing on producing our own film, I didn't think that the investors would want us to sit on our hands for two or three years and wait for those manufacturers to come around. So we really didn't have a choice.

And so -- but one of the results of doing everything yourself is that you keep all your trade secrets and how you process things to yourself. So it's definitely an added benefit of vertically integrating along with the other ones that we have identified. Better time to market, better control over your product and your quality, better gross margins because you're not sharing anything with the contract manufacturer.

Right. Okay. No, I appreciate that color. When do you expect to be able to provide this 72-inch-wide film that you discussed this morning?

Yeah, it's a great question. We know the exact amount of time it will take from once we placed the order to when the line will be built. Let me just kind of give you a little bit of color on that. If we place the order on April 1 -- we're not, but if we did -- it would take about 1.5 month to finish the design phase, and then it would take about 5.5 months to actually see (technical difficulty) build the line. And for the most part, the design phase has been locked down; there's a period in which they're starting to order the equipment to build the line.

So by the end of about seven months, they built the line and they actually build it in their facility. And then, they run our film to our quality control and our specifications. We approve that film and that line. We understand exactly how it works, what the finished product looks like. They then actually disassemble the line, ship it to our Salem, Oregon facility, reassemble it, get it up and run it again to the same quality control and specs that they had achieved in their facility. That entire process is right around a 10-month period, plus or minus a month.

So we started April 1 with the order and the design phase. We would be concluded sometime in the December, with product up and running either in December or January kind of timeframe. So that's the schedule. And they're really good at doing what they do. They've been doing it for decades and we went through a pretty long process to settle with this as these guys as our partner.

And you said you're not actually going to start on April 1. So what's sort of the getting item to decide when you're actually going to start to do it?

A thing called money. So we're out raising the capital. We're going to go out -- look, this is hard assets. We did our IP valuation to help support collateral.

So we've been in the market speaking to effectively credit and debt funds and equipment financing funds to get the capital to acquire this. And we're well down the path with the number. We should -- we hope to have something -- we wanted to have something to announce for this call, but we hope to have something ready to announce within the next 30 days.

Okay. And the last question I'll ask, it's kind of on the same idea but I want to make sure I understand it. You said that when the smoke clears and all this is done, you'll be able to make film from 12 inches to 72 inches. I guess what I'm wondering is does that imply any number between 12 and 72 are possible? And maybe they -- is it more likely in the real world that there's certain discrete width that you expect will be ordered over and over again, and what might those be?

Yeah, such a great question. Yeah. The way that we've designed the line is that we'll be able to run 12 inch, or 13 inch, or 23 inch, or 36 inch, or 50 inch, or 72 inch, whatever the size in between 12 inch and 72 inch.

And the importance of that, Jeffery, is that we have to do this thing called edge sealing, so we have to cut a little bit of a film on each side. The minimal amount of film you cut on each side increases your yield; that's less wasted film. So the way we design the line is with yield, you know, the best yield, which you'll be able to control the width of the film that you run through the machine based on the customer's order. You actually increase your yield and should be able to maintain a pretty high yield going forward. So it's got ramifications not only for the ability to customize, but it's got positive effects on our P&L as well, so hopefully --

And as to your question about what we see like modes of sizes that will be more prevalent probably -- I mean, if you look at our office building, generally speaking, the width and the height of office windows are similar, between 45 inches and 60 inches in width, either 5 feet, 8 feet, or 10 feet in height generally speaking, that obviously on a hard and fast rule.

And we haven't really seen any windows wider than 72 inches. So we feel that that 72-inch width will allow us to capture 90% plus of the US office building market. I mean, there's always like atrium glass; and the one-off window, it's really, really large. Those just won't be our customers, unfortunately.

All right. Okay. Well, thanks for all the color and congratulations again.

Thank you. Jeffrey.

Gerry Sweeney, ROTH Capital.

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

Sure.

Doug, you mentioned, I think you said you're producing a 6-inch film today in the Corvallis facility, but version of called 1.0 is going to be the 12-inch film. What's -- where are you in that route to 12-inch film? What steps do you have to go through to get there? And then, a follow up to that would be, are there any big challenges or differences in making that jump or it's the same process?

It's the same process. It's just a slightly wider stamp, it's a 12-inch stamp that will run on our current production tool in Corvallis. We should have that stamp ready to go 1 month, 1.5 month. So it's the same process we're going through right now.

Got it. And what's the capacity at the Corvallis. So I mean, that's going to be the first facility then you have the purpose-built line, as you call, but how much capacity does the Corvallis facility have?

Yeah. So we -- so the Corvallis facility, we believe could produce between 2,500 and 3,000 Inserts a month, not out of the gate, we could. We don't think we're going to do that many. What we really want to do with our first-generation product is produce enough to get two or three buildings with Hudson and with Brandywine; deploy in a set number of floors; and really learn from the product; engage with our customer, the tenant or our customer, the REIT, I should say, in learning what they like, don't like, what they want to see change; and then, put the product, put our Insert in front of their customer, the tenants; and learn from the tenant, what they like, what they don't like, what they like to see change. And it's that iterative process that we'll embark upon the summer and the fall that will guide what the product to winter.

So we expect these are not going to be huge numbers. We expect we'll be able to sell between $801,000, fairly easily, frankly. And that will be enough of our product in the market to get a good data set to really guide towards generation to that film.

Generation to that, we'll be able to one line, and we'll be able to produce around Inserts on a monthly basis. I mean that we won't start off sprinting, we'll start off walking. And we'll slowly get to that, we'll get to that number over time on. But the capacity we have with our current proto-production tool pales in comparison to what the capacity will be with the purpose-built line.

Got it. And did you say -- how much on a purpose-built line? I'm sorry, my phone broke up there for a couple of seconds.

Yeah, I heard that. About 13,000 Inserts a month.

Got it. Sorry, I apologize for the connection. And then, what is the cost of the purpose-built line?

Yeah. I was going to put -- I wasn't sure if I should put that in my prepared remarks or not. But since you asked the question, I'll answer. We're estimating it somewhere between -- we know the exact price, but I'm putting a little cushion on it, and so it will be somewhere between $11 million and $12 million.

Got you. And any -- just a couple of little detailed question. Obviously, inflations on tip of everybody's tounge, does this impact you at all, or in terms of materials, cost, pricing, et cetera?

Not really. I mean, maybe a little bit on our PET and ITO. That's the basis of our actual film. But we haven't -- I mean, we've been told there might be slight pricing increases, but not material or meaningful at this point. If they do become, so Joel will obviously update everybody on our earnings call in May. But right now, we don't see -- we haven't experienced it.

Got you. And then, just final question, the IP (inaudible) is this coming out today? Or you said after this call, so it sounds like it's imminent. And then, just to confirm, that's really -- some of that value, the basis of you going after the non-dilutive financing (inaudible)?

Yeah. Look, we wanted to -- when you're talking to someone who's looking at providing non-equity-based financing, which therefore would be non-dilutive, yeah, they want to know what kind of collateral will they have. Not just in the purpose-built line, not just in the rest of the equipment we have in our current facility, but also the intangible assets that we have on our balance sheet; there's a lot of value in that.

So we went through that process about a month ago. We will be announcing -- we'll have a press release come out tomorrow that will give a little bit more color on the conclusion of that analysis. But we were pretty pleased with the conclusion. Yeah, it's serves two purposes: to educate our investors and also to educate those potential funding sources.

Perfect. I appreciate it. I'll jump back in line. Sorry for the connection.

Okay.

Jim McIlree, Dawson James.

Yeah, thank you, good morning. I just wanted to focus a little bit on the gen one products and make sure I understand it correctly. So the Brandywine, the Hudson, and the MetroSpaces installations, all of those are going to be the gen one product with the 12 inch, is that correct?

That's correct. The first-generation product will have 12-inch strips as opposed to the second-generation product, which will have a single piece of film. That now -- look, I would say one thing, Jim, if our customer likes the 12-inch strips, we'll make that on either our proto-production line or our new production line because it can go obviously down to 12 inches or up to 72 inches. So -- but the gen one product will be 12-inch strips for sure.

And I just want to ask about that aspect of the (inaudible), Doug. So once you have the gen two line up in place, you can still use the gen one line for --?

We can.

-- special projects or additional capacity or something like that?

Yeah. We can still (multiple speaker) I'm sorry, go ahead, Jim.

That was my question.

Okay. Yeah, we can definitely still use our proto-production line that we're using now for -- in the future. It was really intended to be a proto-production line, not a production line, but we can still certainly use it. We can also use our gen two line to make film as narrow as it is.

And then, just to give you a sense of kind of capacity, that gen two line, if we run that line at three shifts, five days a week, which we clearly intend to do, that line will be producing film and assembling Inserts throughout 2023 and 2024 just to handle our current tenants and customers. So I doubt this will be buy-and-build, and there's some economies of scale in the second line that we would not have to pay for since we've already done that in the first line. We actually think our second line will be about 60% to 70% of the cost of the first line and still produce the exact same amount of film.

So -- but from a capacity standpoint, yeah, we can use our proto-production line in Corvallis going in the future if need be.

That's great. Thank you. And Joel, can you talk about operating expenses going forward? How they compared to what you've just done in the [December] quarter?

Yeah. We're -- we went through a period of really expanding the organization to cater to the in-house capabilities that we have been successful in achieving. We're in (technical difficulty) is optimal for the going forward. And we would anticipate reporting in the next quarter a reduced on a monthly basis.

Okay. That's helpful. All right. Thanks a lot, guys. Appreciate it.

Thanks, Jim.

And I see no further questions in the queue. At this time, I'd like to turn the call back over to Mr. Doug Croxall, CEO and Chairman for closing remarks.

Thank you, Operator. Just a couple of things. So I actually love doing earnings calls. I know a lot of CEOs don't like it; I know a lot of public companies don't like to do it. I love it. I love to brag about our company, especially the team of people that work at Crown. What we've achieved, what we're going to achieve is really nothing short of a miracle. And I love working with them and I love watching them do what they do. And they're very good at what they do.

You know, my wife and I do the same with our kids when we have dinner, which used to be every single night. Now, I've got two teenagers and we have fewer and fewer family dinners unfortunately. But we do this thing called roses and thorns. You go around the table and you say the best thing that happened to you that day, obviously, the rose, and the worst thing that happened to you that day. And it's really interesting to hear how kids classify the best thing or the worst thing.

And I kind of thought about that as I was heading into the office this morning to do this earnings call. And for me, for the last year, my thorn for the last year is obviously our stock price. I hate it. I wish I could snap my fingers and make it much higher. I wish there was something I could do to affect it directly; they're simply not.

I don't control when wars break out. I, unfortunately, don't control inflation or monetary policy. And I know that it's happening everywhere, and I don't want that to be an excuse for why our stock price is where it is.

What I do control though, which is my rose, we do control the inputs that affect that stock price. We control how hard we (technical difficulty) in a given day. We control the passion with which we approach our job. We control how smart we are and how hard we work in the lab to invent things that make this product real.

And I'm very thankful that my rose is that we vertically integrated to this company. We actually control our own destiny; and I can't tell you how good that (technical difficulty). So by controlling the inputs, we will eventually control that output. And that thorn, hopefully, very shortly will become a rose for all of us.

I appreciate all this. And if there's any questions, please feel free to e-mail or call. I look forward to talking to all of you in the future, our next quarterly call, which will be in May. Thank you very much.

Thank you for participating on today's conference call. We look forward to keeping you updated on advancements of our business.