Q2 2022 Crown Electrokinetics Corp. Earnings Call
Good day, everyone and welcome to Crown Electrokinetics fiscal 2022 second quarter earnings Conference call.
At this time all participants are in a listen only mode. A question and answer session will follow management's remarks.
This conference call is being recorded.
A replay of today's call will be available on the Investor Relations section of crowds website and will remain posted there for the next 30 days.
I will now hand, the call over to Allison Soss Investor Relations for introductions and the reading of the Safe Harbor statement. Please go ahead.
Thank you good morning, everyone and welcome to <unk> fiscal 2000, and turning to our second quarter conference call with us on today's call.
Cool.
Executive Officer, and chairman and John <unk>.
<unk> 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 27, a of the Securities Act of 1933 as amended and section 21 E of the Securities and Exchange Act of 934 as amended.
<unk> such as May should pre tax effects.
We expect intend plan believe anticipate.
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 for the fiscal year ending March 31st 2021 filed with the SEC.
Copies of these documents are available on the SEC's website at Www Dot SEC Dot 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 revisions or changes after the date of this call except as required by law.
Now at this time, it's my pleasure to introduce Doug Kratz.
Yes.
Doug. Please go ahead.
Thanks, Alison Thanks, everybody for joining us this morning.
I'm going to start and give my report on the operational performance of the quarter, then I'm going to hand, it over to Joel who is going to go through his report on our financial results.
Like to start.
Because we have a lot of new shareholders. So for those of you who are new to the Crown story I'd like to start with our mission our.
Our mission is to provide an affordable smart glass solution to the commercial real estate market that will enable its customers to reduce energy expenses and in turn lower carbon emissions. Our first product is called the smart window insert powered by dynamic 10, it's an affordable solar powered insert.
Which does not require hard wiring and can be easily installed.
The interior side of the existing window and commercial office.
Crowds dynamic tenant which is our pigment based in film was initially developed by HP and is based on our proprietary and patent protected.
Electrokinetic technology at Crown, we recognize that windows commercial inefficient insulators, causing HVAC systems to use unnecessary amounts of energy leading to increased energy spend in excess of carbon emissions crown smart window answer easily installs into our buildings existing window frame, leaving the.
The existing window intact.
This transforms a building single pane window into an energy efficient double paned smart window. Once installed the answered is powered by a solar strip eliminating the need to have each insert hard wired into the existing electrical system of the building.
Our insert absorbs sunlight, thereby reducing the amount of HVAC usage, leading to lower electricity cost and more importantly, a smaller carbon footprint. The commercial building sector is under increased pressure from shareholders tenants regulators to reduce their HVAC energy consumption and reduce their carbon emissions.
We are the only retrofit prospecting marketplace Crown smart window insert is priced comparatively window blinds, which leads to a very competitive ROI and payback period. So.
Our initial target market or the $5 6 million commercial buildings in the United States.
Brown target customers are Reits or real estate investment trust at this time, Chris engaged with over two dozen rights through an iterative customer discovery process.
Previous technologies focused on smart glass market have been around for over two decades. These technologies have frankly fallen short of what the market demands and what the market can afford with legislative support and growing social awareness building owners and tenants today are more aware of their surroundings.
And becoming more environmentally conscious and their decisions are smart window insert has the potential to be the dominant smart glass solution. We're the only company in the world that manufacturers Electrokinetic film and are the only company that offers a smart window insert targeted at the retrofit market.
We're continuously refining our smart window insert with guidance from customers and prospective customers to become a better solution.
Earlier this year, we launched our initial field tests in May June of this summer.
From the 22nd floor of the Los Angeles building.
Where our patented <unk> technology was partially rendered into a window insert and then placed over single pane windows in August we announced the preliminary results that suggest that crown smart glass insert can reduce the HVAC energy costs of buildings by approximately 26%.
At scale, such a reduction in HVAC utilization can also help lower carbon emissions. Additionally, the answers are intended to reduce glare improve tenant comfort and eliminate the need for window blinds recently, we started a second field test to test a new design of our framing system, we expect to have those <unk>.
<unk> analyzed and published in about three to four weeks.
About two years ago, we had our first meeting with Hudson Pacific properties.
They recognize the potential value of our technology in their buildings in June of 2020 Hudson became a strategic investor owned we've continued to work closely with their executive their ESG and their engineering teams to identify the most efficient and meaningful way in which to migrate our dynamic tent.
Technology into our product offering our smart window insert has been designed and developed with feedback from from.
From prospective customers, but none more active than Hudson.
With Hudson's lead we are identifying two buildings in California to rollout our smart window inserts with a potential third building in the northwest. We are very excited to start. This next chapter of our relationship with Hudson and expect to have other Reits followed.
Soon.
As you're also aware, we announced our first commercial agreement spaces, a prop tech focused real estate holding company as our first customer we will install our smart window inserts and Theres 70000 square foot Houston Office building. This rollout will help metro space has enhanced the efficiency of their existing windows.
Eliminating the need to replace their windows by easily installing our smart window insert into the existing window frames.
Our inserts are powered by solar energy, which means we do not have to hard wire anything into their electrical building.
We're pleased with our strong pipeline of other perspective customers and we will update the market with additional customer wins in the future.
With our growing customer base. We also continue our preparation for in house manufacturing, we look forward to keeping you apprised of our development and manufacturing progress as we target next quarter for deployment of our first smart window insert.
Now, let me talk about the talented team that we've built at crown since our last call. We've made key new hires rapidly expanding our engineering manufacturing and marketing teams. These new hires from back backgrounds in thin film development manufacturing and operations from companies like Tesla Intel.
Saint Gobain and codec Theyre unique backgrounds are a perfect fit for crown as we ramp up production for our smart window insert the.
And most notably to help this growing team we've welcomed many mindy Hamlin as vice President of engineering.
<unk> is a tremendous talented individuals with extensive experience in leading and building teams throughout our product's lifecycle cycle prior to joining crown. Many served as the director of technology development infrastructure and operations at HP.
Looking ahead, we will continue to add talent as part of our rollout for our commercialization strategy now I'll pass the call on to Joel who will review our financial results Joel.
Thanks, Doug and good morning, everyone.
I'll review, our fiscal 2022 second quarter financial results.
Net loss for the quarter ended September 32021 was $5 7 million.
Which included $3 1 million of noncash stock based compensation expense.
This net loss was <unk> $1 million lower than the same quarter last year with a $2 $1 million increase in noncash stock based compensation and a one $4 million increase in operating expenses being offset by a $3 $6 million decrease in other expense.
Total operating expenses for the quarter with $5 7 million, which included $3 1 million of noncash stock based compensation.
Excluding the impact of stock based compensation.
Operating expenses were $1 $4 million higher than the same quarter last year.
This was driven by a $4 million increase in both the R&D and SG&A payrolls.
$4 million increase in consulting and professional fees and a <unk> $3 million increase in operating overhead.
All other expenses with nominal for the quarter as compared to $3 7 million.
For the same quarter last yet.
This decrease was primarily due to reductions in our interest expense following the conversion of all notes in the last fiscal year.
Net cash used for the second quarter was $2 8 million and this was consistent with the first quarter of this year.
$2 $5 million was deployed against operating activities and $5 million was invested in patents and equipment.
While we had financing inflows of <unk> 2 million.
As of September 32021, our cash and cash equivalents with $9 7 million.
And we've also recently agreed terms with a financial institution for $10 million standing letter of credit.
This facility would potentially provide crown with access to additional financing for our operations if required during the company's production ramp up phase for the next two years.
And finally to better align crowds operational and financial challenges, we will be changing our fiscal year end from March 30 to December 31st effective this year.
This will mean, we closed out the current fiscal for the nine months stub, yet and we'll begin our new fiscal year reporting from January the.
2022.
That concludes our prepared remarks, now I would like to open the call for questions. Operator, you can please go ahead.
Thank you.
And at this time, we will be conducting our question and answer session.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that Youre line is in the question queue.
You May press the Star key followed by the number two if you would like to remove your question from the queue.
Call participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Gerry Sweeney with Roth Capital. Please state your question.
Hey, good morning, Doug and Joel Thanks for taking my call.
Sure Jerry.
I was wondering if you could give a little bit more details on the specific.
Rollouts.
It doesn't sound exactly.
The agreement is entirely formalized but curious on that front too.
Two buildings to three buildings what.
Hudson, maybe looking for obviously they are a 110 other buildings.
How do we go from this sort of trial to longer.
Tablets, maybe relationship contract et cetera.
Yes, so I'll take that.
Question so.
We know that we're moving forward with Hudson and what we're trying to do is identify the first couple of buildings that would make the most sense for us.
To rollout and for Hudson a lot of their buildings are owned.
With other partners and so one of those buildings.
That we're targeting we want to get we want to get as much exposures. We can not just the hudson, but some of their other some of their own financial back.
It's looking like it will be a building in the la area. One building in the Bay area in a building in either Seattle or Vancouver.
So and it's not a trial I mean, this is a real customer contract, where they're actually buying the product and we're building it and install it. So it's more of a phased rollout than certainly than a trial.
And Theres a lot of decision, making that goes into which buildings when you have 110.
But our expectation is that we'll start with the first couple and then we'll start to roll out across the rest of the portfolio throughout 2022.
Got it.
Specced in.
The press release, you highlighted two buildings.
Third because it sounds as though there is also a discussion for additional buildings behind as well.
Yes of course got.
Got it.
And then obviously I know you've been speaking and meeting with a bunch of rates and you mentioned the two dozen rates at your customer discovery process with.
What does this process entail.
And maybe could you provide some qualitative background as to what Youre discussing what the feedback is.
This is obviously a customer funnel, how does that sort of narrow down to what everybody is looking for additional contracts or opportunities.
Yes so.
Quite frankly, the first few meetings typically are making sure you get to the right decision maker and because this is our product kind of straddles operations engineering ESG.
Tenant relations leasing there's a lot of different parties that are.
We're interested in what we're doing within the REIT.
The first few meetings are literally explaining what a smart window insert is because one doesn't exist anywhere other than what we've made.
It's making sure that we get to the right to the right party and a lot of these rights.
They have office buildings, they have warehouse they have hospitality.
Medical facilities. So we're trying to be very focused on U S office buildings.
So it's really part of the first.
Set of meetings are really identifying the right.
The right person to speak with and then really understanding what the problems are that they have and making sure that their problem, which are windows that are inefficient are in alignment with what our solution is and so far we've been I.
I don't want to say batting but we've not had any REIT say, we're not interested in moving forward, it's actually quite the opposite.
Most of what we hear is when can we get a demo when can we get a prototype sent to our facility and that's what we're quickly building.
And getting out to the market. So it's a bit of a process, but that process has been ongoing and so we're kind of coming towards <unk>.
Towards the end of the funnel if you will.
And we should have a lot more announcements coming out in the market over the next.
Two to four months I would say got.
Got you.
Final question Tavis.
It has to deal with the manufacturing capacity.
Obviously, the next step in the process how is that coming along.
And maybe address.
The.
Buildup positioning.
Youre, having supply chain issues that youre hearing technology across a lot of conference calls that you are having any issues on that front as well yes.
We are not having supply chain issues yet.
I know that a lot of companies are we have not it doesn't mean that we won't in the future, but we haven't.
So if we do that is obviously a risk that we would that we would publish in our Qs and Ks and let the market know.
But so far we haven't seen anything that does not mean that we won't.
As a matter of fact, my office overlooks Santa Monica Bay.
And every day, there is more and more cargo ships that are lining up on the horizon. So I know, it's a problem, but it hasnt reached hasnt reached us yet as.
As far as manufacturing capabilities, we're able to make our own film right now.
We are gearing up to be able to assemble as many inserts as we can.
We're also looking at how to expand and when to expand so that we can meet what we think is a growing demand from our current and prospective customers.
Okay.
Doug.
Sure.
Our next question comes from Jeffrey Campbell with Allianz Global Partners. Please state your question.
Good morning, Doug.
The first thing I'd ask you just to pick up on something you mentioned today, what's behind this new branding design that you referenced.
Yes so.
The old framing design was more of a just a gasket.
No real insulated properties to it and our insert fit within the Mauling. So it didnt cover the molding the Molina as the frame.
And when we were doing that test over the summer we noticed that a lot of heat was still radiating through the frame or the moly in the sale and so we redesigned and frankly the gas it didnt look like it fit in the building it looked like it was an add on.
We redesigned our framing system, so that it looked more like the exact framing system of the building.
And so the second go around with the new framing design is more insulated because it's covering the bowling and therefore protecting a lot of that heat from radiating into the office and it looks exactly like the existing framing system. When the building was built and the prospective customers that we've demonstrated the new framing.
System for free.
Frankly couldn't tell the difference as matter of fact, many of them said this looks exactly like it was a part of the building when the building was built.
30 years ago.
So the system was meant to do two things one aesthetically the look of the smart window insert.
From an ROI perspective improve the.
Improve the performance of the insert so and then as far as how.
All of that relates to their field test Jeffrey is that we're trying to get a number of.
Of days, where the weather now matches the weather pattern that we used that we experienced I should say over the summer for the first field test. So that we can draw comparisons and say Oh. This new design has increased the energy savings by an additional X percent. So our challenge right now is to get <unk>.
Nature to two.
Coincide now with what we experienced in the summer we have a pretty good dataset, but we want to have a pretty robust data set because it's an important number so we're going to.
We're continuing to test hopefully in another three or four weeks, we have enough meaningful data.
In our data set to draw that comparison.
I certainly would recommend Manhattan for that data capture right now so let's stick to where we are.
I was just wondering if just wondering if you could provide us some color on the economics and the strategy underlying the reason IBM patent acquisitions.
What youre thinking there.
Yeah. So so our Q is going to be published at the end of the trading day. So four o'clock you your time and the details will be Hugh.
The purchase price was Joe what was the purchase price 200 225 $225000.
The assets are I get this question a lot are the assets offensive or defensive and the way I would categorize it as theyre very good assets for for Crown to own because there are some claims in the portfolio that cover areas of technology that we very well may see our product.
And technology move towards so we want to have ownership in that area. So that we can.
We can make use or sell a product without worrying about infringing somebody else's patents and frankly, there were some claims in the patents that we think of.
Other competitors will need a license to.
And so it's nice to hold those cards as well.
Yes that sounds great.
My last question is sort.
Sort of thinking about it.
The rollout in 2020, but maybe just from a different perspective, I remember I've been really client <unk> comprehensive preparation for product rollouts, such as the proper packaging for transport.
You showed me when we did a virtual visit I'm just curious are there any remaining gating items.
Within Crown.
Feel like need to be solved before you really start to accelerate installations over time.
Yes.
We know the path that we need to go down and we're moving down that path.
So theres nothing thats unknown to us at this point now I say that.
In two hours I'll get a phone call from Corvallis, and they'll say Oh, there is something we don't know, but right now we know we know what direction, we need to go and we know what steps we need to take so we're pretty confident in that regard.
And it's really just it's right now it's a process of getting the tools built getting the lines assembled and getting the lines running.
But we think we're pretty well prepared moving from R&D or prototype to actual production is challenging.
For all companies us included.
Right now we feel we have a very strong handle and frankly when you look at the roster of employees that we have working on this.
I'm blown away by the quality and integrity of our of our workforce there they come from.
Even winners and they've got a great set of experience and expertise that they bring to bear and it's comforting to know that they are working side by side with us.
Okay, great. Thank you for answering my questions today.
Sure.
Thank you. Our next question comes from Shawn Severson with water Tower. Please state your question.
Thanks.
Can you talk a little bit about the process that goes through and what do they need to understand in order to figure out if your product is a good solution for them. So when you go through the sales process and you say theyre evaluating evaluating at what does that mean.
Well it can mean a lot of different things it can mean.
I mean, not every REIT is the same so.
Oftentimes, it's can we see the demo.
Hello.
Temporary.
Travel recently, but we're going to be back at it.
<unk>.
So, it's really getting out and demonstrating the product thats the stage that we're at right now.
We were able to do that with some of the Reits on the west coast and that are a little easier for us to get to.
But right now it's really just getting in front of them, we've done a lot of zoom.
Calls and meetings they've seen the product over zoom I wanted I want them to see it in person and the nice thing about this insert it is not the same as buying a window. If you are buying a window for a building that means youre removing a window. It is.
It's a much more complicated and inconvenient process than a window insert where yes I'll buy.
I'll buy a 1000 in search and put them in a building in and see how it goes I mean, if they don't like it they can always remove it but right now the demand that we're getting from the REIT, it's pretty impressive.
Timing is everything and it's not like three years ago, we sat down and we decided okay. When we get this technology working less product ties it into an insert because it late 2021 theres going to be a lot of momentum for building owners to do something to reduce their carbon footprint. It just happened to turn out that way and so we feel.
That we have.
A really compelling technology that provides a really good ROI that frankly for a few hundred dollars more.
Is almost equivalent to the cost and blind. So the iterative process is really understanding.
Where are <unk>.
Which buildings.
Need them whats easy for us to deliver in order to satisfy the demand that we're seeing from some of the rights. So we're in that look we're in a really unique place right now for five years.
The core team of engineers have been at been at trying to develop this technology. We are now finally getting to that stage, where you can see five years of efforts turn into a product and a product that companies want to buy and put it in their building it's an incredibly.
Satisfying journey and it's a really it's an awesome place to be.
So right now, it's just about getting out meeting with it.
We've been talking to and starting hitting them.
The signed purchase order delivered.
The phase that we're in right now.
And from their perspective.
Look at how they might roll this out so I assume that they look at their portfolio of properties and they understand the product and the technology attributes and then they look at their portfolio of buildings and say.
Let's start with this one or something like Hudson couple I'm, just trying to understand what how do you think that they would roll out or if you're having success at Hudson, where people would be more aggressive and say, okay, let's say bigger bites at the Apple lets say for Rollouts.
Okay.
Number one that's a great question and it's actually a little bit of both some are I want to try I want to see it in different regions and see how it performs I wanted to see what the tenants think.
And by the way the biggest pressure on building owners in my opinion is not coming from any regulatory body, but actually coming from the tenants that are in the building. So.
<unk>, which is nice for us because customers are critical for everybody, including including Reits.
So we see a little bit of everything we see some companies are like hey, we want to start with.
A handful of our properties and then roll it out across.
The rest of the portfolio and some are like we'll try with a couple of buildings and see how it goes for six months and then maybe we'll expand so we get we get a little bit of both.
And then it kind of gets into for US it gets into how much of this can we make and how quickly can we deliver.
Also a good problem to have but.
But we're moving in that direction right now so it's so to answer your question, Sean its a little bit of both.
And I guess question around another good problem to have but will it be bottlenecks in installation I mean, what happens if all of a sudden you get you're working on the manufacturing side, but what about if you get.
Big orders, how does the installation process work and the rollout times.
Yes, so the way that we will do our installation and we've done an installation already we did it in our office in Los Angeles, but the way that our installation will will work eventually as it will have a crew crown employees that will be responsible for the installation within a building.
It's a labor intensive.
It's a manual process, it's not hard but it is a manual process. So we will likely have we'll start off with pure crown employees doing all of the installation because we want to understand the best fastest most efficient way to do it with the least amount of inconvenience to our customers.
But over time, it will likely look like accrue leader from probably with the team of labor or is that or probably locally sourced that are handling the installation in buildings, but.
You are right I mean these are all good problems to have.
When you have a demand and you have customers that want your product you've got to build it you got to ship. It you got to install it and so we're thinking through those problems and those those processes right now and we think we have a pretty good plan for it.
Great. Thanks, I'll take the rest of my questions offline. Thanks, Doug.
At.
Thank you and just a reminder to ask a question press star one on your telephone keypad to remove your question from the queue Press Star two we'll pause for a moment as we poll for questions.
Our next question comes from Tom Mcmahon with Mcmahon Capital Management. Please state your question.
Good morning, you too.
Doug.
Specifically related to your.
Yeah.
<unk>.
Patent acquisition strategy.
And my question.
In effect you have tangentially answered in an earlier statement, but phrase somewhat differently.
The most recent.
Months here.
The patent additions to your portfolio.
Were they.
Intended.
<unk> two.
Impact Z.
Manufacturing process or the <unk>.
Manufactured product Doug.
So.
Not so much to manufacturing process.
As much as what might be the manufactured product got it when we look when we look at IP, we look at where the what the IP claims to have invented.
We look to see if thats something that we need for our current product or potentially for our future plans.
We also look to see if potentially it's a claim of patent claim that could be used by a competitive technology out in the marketplace. So all of those factors kind of come to bear when we make a purchase decision and it's not so much led by the manufacturing process right now is the actual <unk>.
Or what the product might be or a product that's being.
Used sold or manufactured by a competitor and it doesn't mean, we won't look for manufacturing process type intellectual property, we certainly will and we will also invest a lot of our own.
Processes that will be either patented or protected by trade secrets.
Got it okay and one unrelated question.
Sure My ignorance, the time lapse Doug between.
Fabrication.
And installation.
Is there.
At what point does that become a material risk or none at all.
I mean, Ken can product.
Yes.
Yes.
Accumulate unintentionally.
The job site I don't mean open to the elements.
Or in a warehouse does that.
Does that.
<unk>.
The product's efficacy.
No.
Number one.
When the product is shipped from our facility in Oregon to wherever the building happens to be.
Our expectation is that it will be installed almost immediately and we've actually design.
Shipping containers not the containers that go on a semi truck, but our own our own containers that hold our inserts in a way that allows us if we have to the store in a building over long periods of time, we don't expect that we will not we think that once the inserts arrive there'll be installed because they are installed pretty easily.
On the inside of the.
The office, so we don't see that as a risk we don't think there'll be an accumulation of inserts at a at a building.
We think they'll get it installed almost immediately yes. Good thank you.
Sure.
Thank you.
I see no further questions in the queue at this time I'd like to turn the call over to Mr. Doug <unk>, CEO and chairman for closing remarks.
Alright, Thank you Diego and Joel and Allison for participating today and I want to thank all.
Of those who dialed in both on the phone and on the webcast.
I mentioned this earlier in our remarks.
I wanted to touch on it one more time.
There has been a team of engineers that left HP.
Follow a dream and that dream was to build this technology.
And that dream has turned into a much bigger dream and with a much bigger purpose frankly.
That purpose is to get our technology out into the marketplace not only to help building owners save money, but more importantly to help reduce the carbon the buildings put out in the environment.
I feel that this company has a mandate we must do this we have a role to play in the war on climate and we think we have a really important role in that regard and so.
It's amazingly satisfying.
To get to the point, where you're finally getting your product built and delivered and Youre getting customers, who are excited to buy and install your product and it's been a long road.
Sometimes it felt like we take three steps forward 16 steps backward, but we're finally getting to that point, where we can see all of the efforts that we put into this start to bear fruit and.
I want to thank everyone, who participated in that process and I'm really excited about what we have in store not only for our shareholders and not only for our customers, but for the world moving ahead. So thank you everybody for listening.
And I look forward to talking to you soon.
And if not before certainly in our next earnings call.
Thank you.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect have a good day.