UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2023
OR
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 333-232426
Crown Electrokinetics Corp.
(Exact name of registrant as specified in its charter)
Delaware | 47-5423944 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1110 NE Circle Blvd., Corvallis, Oregon 97330
(Address of principal executive offices) (Zip Code)
(800) 674-3612213.660.4250
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of common stock, $0.0001 par value per share, outstanding as of May 22,November 13, 2023 was 50,713,135.12,636,555.
Common Stock, $0.0001 par value | CRKN | The Nasdaq Capital Market |
CROWN ELECTROKINETICS CORP.
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties.
All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.
ii
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements.
CROWN ELECTROKINETICS CORP.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
September 30, 2023 | December 31, 2022 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 2,056 | $ | 821 | ||||
Prepaid and other current assets | 606 | 590 | ||||||
Total current assets | 2,662 | 1,411 | ||||||
Property and equipment, net | 2,638 | 1,409 | ||||||
Intangible assets, net | 1,633 | 1,598 | ||||||
Right-of-use assets | 701 | 1,842 | ||||||
Goodwill | 652 | - | ||||||
Deferred debt issuance costs | 3,847 | 150 | ||||||
Other assets | 33 | 180 | ||||||
TOTAL ASSETS | $ | 12,166 | $ | 6,590 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,855 | $ | 865 | ||||
Accrued expenses | 175 | 621 | ||||||
Lease liabilities - current portion | 385 | 574 | ||||||
Warrant liability | 34 | 972 | ||||||
Notes payable at fair value | - | 1,654 | ||||||
Notes payable | 88 | 8 | ||||||
Total current liabilities | 2,537 | 4,694 | ||||||
Lease liabilities - non-current portion | 355 | 1,366 | ||||||
Total liabilities | 2,892 | 6,060 | ||||||
Commitments and Contingencies (Note 14) | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock, par value $0.0001; 50,000,000 shares authorized, no shares outstanding | - | - | ||||||
Series A preferred stock, par value $0.0001; 300 shares authorized, 251 shares outstanding as of September 30, 2023 and December 31, 2022; liquidation preference $256 as of September 30, 2023 and zero as of December 31, 2022 | - | - | ||||||
Series B preferred stock, par value $0.0001; 1,500 shares authorized, 1,443 shares outstanding as of September 30, 2023 and December 31, 2022; liquidation preference $1,472 as of September 30, 2023 and zero as of December 31, 2022 | - | - | ||||||
Series C preferred stock, par value $0.0001; 600,000 shares authorized, 500,756 shares outstanding as of September 30, 2023 and December 31, 2022; liquidation preference $521 as of September 30, 2023 and zero as of December 31, 2022 | - | - | ||||||
Series D preferred stock, par value $0.0001; 7,000 shares authorized, 0 shares issued and outstanding as of September 30, 2023 and 1,058 as of December 31, 2022; liquidation preference zero as of September 30, 2023 and $1,113 as of December 31, 2022 | - | - | ||||||
Series E preferred stock, par value $0.0001; 77,000 shares authorized, 0 shares issued and outstanding as of September 30, 2023 and December 31, 2022. | - | - | ||||||
Series F preferred stock, par value $0.0001; 9,073 shares authorized, 4,448 shares outstanding as of September 30, 2023 and no shares outstanding as of December 31, 2022; liquidation preference $4,620 as of September 30, 2023 and zero as of December 31, 2022. | - | |||||||
Series F-1 preferred stock, par value $0.0001; 9,052 shares authorized, 653 shares outstanding as of September 30, 2023 and no shares outstanding as of December 31, 2022; liquidation preference $1,578 as of September 30, 2023 and zero as of December 31, 2022. | - | |||||||
Series F-2 preferred stock, par value $0.0001; 9,052 shares authorized, 1,153 shares outstanding as of September 30, 2023 and no shares outstanding as of December 31, 2022; liquidation preference $1,198 as of September 30, 2023 and zero as of December 31, 2022. | - | |||||||
Common stock, par value $0.0001; 800,000,000 shares authorized; 6,880,049 and 338,033 shares outstanding as of September 30, 2023 and December 31, 2022, respectively | 7 | 2 | ||||||
Additional paid-in capital | 116,956 | 88,533 | ||||||
Accumulated deficit | (107,689 | ) | (88,005 | ) | ||||
Total stockholders’ equity | 9,274 | 530 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 12,166 | $ | 6,590 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CROWN ELECTROKINETICS CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except share and per share amounts)
Three Months Ended September 30, | Nine months ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Revenue | $ | - | $ | - | $ | 59 | $ | - | ||||||||
Cost of revenue | - | - | 54 | - | ||||||||||||
Gross profit | - | - | 5 | - | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 492 | 955 | 1,523 | 3,523 | ||||||||||||
Selling, general and administrative | 2,941 | 2,160 | 10,926 | 8,634 | ||||||||||||
Total operating expenses | 3,433 | 3,115 | 12,449 | 12,157 | ||||||||||||
Loss from operations | (3,433 | ) | (3,115 | ) | (12,444 | ) | (12,157 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (2,445 | ) | (1 | ) | (6,970 | ) | (6 | ) | ||||||||
Loss on extinguishment of warrant liability | - | - | (504 | ) | - | |||||||||||
Loss on extinguishment of debt | - | - | (2,345 | ) | ||||||||||||
Gain on issuance of convertible notes | - | - | 64 | - | ||||||||||||
Change in fair value of warrants | 2,688 | - | 10,424 | - | ||||||||||||
Change in fair value of notes | (40 | ) | - | (7,040 | ) | - | ||||||||||
Change in fair value of derivative liability | 401 | 401 | ||||||||||||||
Other expense | (30 | ) | - | (1,264 | ) | - | ||||||||||
Total other income (expense) | 574 | (1 | ) | (7,234 | ) | (6 | ) | |||||||||
Loss before income taxes | (2,859 | ) | (3,116 | ) | (19,678 | ) | (12,163 | ) | ||||||||
Income tax expense | - | - | - | - | ||||||||||||
Net loss | (2,859 | ) | (3,116 | ) | (19,678 | ) | (12,163 | ) | ||||||||
Deemed dividend on Series D preferred stock | - | - | (6 | ) | - | |||||||||||
Cumulative dividends on Series A preferred stock | (5 | ) | - | (14 | ) | - | ||||||||||
Cumulative dividends on Series B preferred stock | (29 | ) | - | (78 | ) | - | ||||||||||
Cumulative dividends on Series C preferred stock | (10 | ) | - | (20 | ) | - | ||||||||||
Cumulative dividends on Series D preferred stock | - | (23 | ) | (53 | ) | (23 | ) | |||||||||
Cumulative dividends on Series F preferred stock | (144 | ) | (190 | ) | ||||||||||||
Cumulative dividends on Series F-1 preferred stock | (51 | ) | (71 | ) | ||||||||||||
Cumulative dividends on Series F-2 preferred stock | (44 | ) | (44 | ) | ||||||||||||
Net loss attributable to common stockholders | $ | (3,142 | ) | $ | (3,139 | ) | $ | (20,154 | ) | $ | (12,186 | ) | ||||
Net loss per share attributable to common stockholders | $ | (0.94 | ) | $ | (11.76 | ) | $ | (12.96 | ) | $ | (48.58 | ) | ||||
Weighted average shares outstanding, basic and diluted: | 3,349,195 | 266,872 | 1,554,554 | 250,832 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CROWN ELECTROKINETICS CORP.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands, except share and per share amounts)
Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Series D Preferred Stock | Series E Preferred Stock | Series F Preferred Stock | Series F-1 Preferred Stock | Series F-2 Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2022 | 251 | $ | - | 1,443 | $ | - | 500,756 | $ | - | 1,058 | $ | - | - | $ | - | - | $ | - | - | $ | - | - | $ | - | 338,033 | $ | 2 | $ | 88,533 | $ | (88,005 | ) | $ | 530 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of common stock warrants | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 109,257 | 1 | 2,061 | - | 2,062 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with conversion of notes | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 31,466 | - | 516 | - | 516 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with equity line of credit | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 3,986,991 | - | 4,489 | - | 4,489 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock/at-the-market offering, net of offering costs | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 794,689 | 1 | 3,786 | - | 3,787 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Series E preferred stock in connection with LOC | - | - | - | - | - | - | - | - | 5,000 | - | - | - | - | - | - | - | - | - | 4,350 | - | 4,350 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deemed dividend for repricing of Series D preferred stock | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 6 | (6 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitment to issue shares of common stock in connection with March waiver agreement | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 298 | - | 298 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with Series A and Series B Dividends | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 6,921 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the conversion of Series E preferred stock | - | - | - | - | - | - | - | - | (5,000 | ) | - | - | - | - | - | - | - | 83,334 | 1 | - | - | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with conversion of 2022 Notes | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 248,984 | 1 | 2,165 | - | 2,166 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid in shares of Series D preferred stock | - | - | - | - | - | - | 139 | - | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series D preferred stock exchanged for Series F preferred stock in connection with Exchange Agreements | - | - | - | - | - | - | (1,197 | ) | - | - | - | 1,847 | - | - | - | - | - | - | - | (450 | ) | - | (450 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of Demand Notes and 2022 Notes into Series F preferred stock in connection with Exchange Agreements | - | - | - | - | - | - | - | - | - | - | 3,198 | - | - | - | - | - | - | - | 1,276 | - | 1,276 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of Senior Secured Notes into Series F preferred stock in connection with Exchange Agreements | - | - | - | - | - | - | - | - | - | - | 206 | - | - | - | - | - | - | - | 82 | - | 82 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Series F-1 preferred stock | - | - | - | - | - | - | - | - | - | - | - | - | 3,583 | - | - | - | - | - | 1,372 | - | 1,372 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Series F-2 preferred stock | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 1,153 | - | - | - | 464 | - | 464 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of Series F preferred stock into common stock | - | - | - | - | - | - | - | - | - | - | (803 | ) | - | - | - | - | - | 103,234 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of Series F-1 preferred stock into common stock | - | - | - | - | - | - | - | - | - | - | - | - | (2,930 | ) | - | - | - | 325,737 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitment to issue shares of common stock in connection with Senior Secured Notes | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 2,410 | - | 2,410 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitment to issue shares of common stock in connection with line of credit notes | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 230 | - | 230 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitment to issue shares of Series E preferred stock in connection with line of credit notes | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 3,363 | - | 3,363 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitment to issue shares of common stock in connection with Demand Notes | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 286 | - | 286 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to settle commitment shares | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 570,916 | 1 | (1 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with Senior Secured Notes settlement | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 189,602 | - | 1,160 | - | 1,160 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with equity line of credit | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 21,841 | - | 114 | - | 114 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reverse stock split rounding | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 30,709 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 38,335 | - | 446 | - | 446 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | (19,678 | ) | (19,678 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2023 (unaudited) | 251 | $ | - | 1,443 | $ | - | 500,756 | $ | - | - | $ | - | - | $ | - | 4,448 | $ | - | 653 | $ | - | 1,153 | $ | - | 6,880,049 | $ | 7 | $ | 116,956 | $ | (107,689 | ) | $ | 9,274 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CROWN ELECTROKINETICS CORP.
Condensed Consolidated Statements of Stockholders’ Equity (Continued)
(Unaudited)
(in thousands, except share and per share amounts)
Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Series D Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | 251 | $ | - | 1,443 | $ | - | 500,756 | $ | - | - | $ | - | 242,808 | $ | 1 | $ | 82,677 | $ | (73,690 | ) | $ | 8,988 | ||||||||||||||||||||||||||||||
Delivery of restricted common stock | - | - | - | - | - | - | - | - | 18,255 | 1 | - | - | 1 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock and warrants, net of fees | - | - | - | - | - | - | - | - | 20,834 | - | 855 | - | 855 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock warrants in connection with SLOC | - | - | - | - | - | - | - | - | - | - | 223 | - | 223 | |||||||||||||||||||||||||||||||||||||||
Issuance of Series D preferred stock and warrants, net of fees | - | - | - | - | - | - | 1,058 | - | - | - | 1,039 | - | 1,039 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock/at-the-market offering, net of offering costs | - | - | - | - | - | - | - | - | 27,462 | - | 706 | - | 706 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock warrants in connection with consideration payable | - | - | - | - | - | - | - | - | - | - | 86 | - | 86 | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | - | - | - | - | 3,011 | - | 3,011 | |||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | - | - | - | (12,163 | ) | (12,163 | ) | |||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2022 (Unaudited) | 251 | $ | - | 1,443 | $ | - | 500,756 | $ | - | 1,058 | $ | - | 309,359 | $ | 2 | $ | 88,597 | $ | (85,853 | ) | $ | 2,746 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CROWN ELECTROKINETICS CORP.
Condensed Consolidated Statements of Stockholders’ Equity (Continued)
(Unaudited)
(in thousands, except share and per share amounts)
Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Series D Preferred Stock | Series E Preferred Stock | Series F Preferred Stock | Series F-1 Preferred Stock | Series F-2 Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2023 (Unaudited) | 251 | $ | - | 1,443 | $ | - | 500,756 | $ | - | - | $ | - | - | $ | - | 5,251 | $ | - | 3,583 | $ | - | 1,153 | $ | - | 1,067,997 | $ | 6 | $ | 109,381 | $ | (104,830 | ) | $ | 4,557 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock to settle commitment shares | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 570,916 | 1 | (1 | ) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with Senior Secured Notes settlement | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 189,602 | - | 1,160 | - | 1,160 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with equity line of credit | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 21,841 | - | 114 | - | 114 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock/equity line of credit, net of offering costs | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 3,986,991 | - | 4,489 | - | 4,489 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock/at-the-market offering, net of offering costs | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 583,022 | - | 1,680 | - | 1,680 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of Series F preferred stock into common stock | - | - | - | - | - | - | - | - | - | - | (803 | ) | - | - | - | - | - | 103,234 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of Series F-1 preferred stock into common stock | - | - | - | - | - | - | - | - | - | - | - | - | (2,930 | ) | - | - | 325,737 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reverse stock split rounding | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 30,709 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 133 | - | 133 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | (2,859 | ) | (2,859 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2023 (Unaudited) | 251 | $ | - | 1,443 | $ | - | 500,756 | $ | - | - | $ | - | - | $ | - | 4,448 | $ | - | 653 | $ | - | 1,153 | $ | - | 6,880,049 | $ | 7 | $ | 116,956 | $ | (107,689 | ) | $ | 9,274 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Item 1. - Financial Statements.
CROWN ELECTROKINETICS CORP.
Condensed Consolidated Balance SheetsStatements of Stockholders’ Equity (Continued)
(Unaudited)
(in thousands, except share and per share amounts)
March 31, 2023 | December 31, 2022 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 2,138 | $ | 821 | ||||
Prepaid and other current assets | 723 | 590 | ||||||
Total current assets | 2,861 | 1,411 | ||||||
Property and equipment, net | 2,528 | 1,409 | ||||||
Intangible assets, net | 1,744 | 1,598 | ||||||
Right of use asset | 1,709 | 1,842 | ||||||
Goodwill | 652 | - | ||||||
Deferred debt issuance costs | 8,261 | 150 | ||||||
Other assets | 213 | 180 | ||||||
TOTAL ASSETS | $ | 17,968 | $ | 6,590 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,146 | $ | 865 | ||||
Accrued expenses | 230 | 621 | ||||||
Lease liability - current portion | 598 | 574 | ||||||
Warrant liability | 2,332 | 972 | ||||||
Notes payable at fair value | 3,191 | 1,654 | ||||||
Notes payable | 1,519 | 8 | ||||||
Total current liabilities | 9,016 | 4,694 | ||||||
Lease liability - non-current portion | 1,208 | 1,366 | ||||||
Total liabilities | 10,224 | 6,060 | ||||||
Commitments and Contingencies (Note 14) | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock, par value $0.0001; 50,000,000 shares authorized, no shares outstanding | - | - | ||||||
Series A preferred stock, par value $0.0001; 300 shares authorized, 251 shares outstanding as of March 31, 2023 and December 31, 2022; liquidation preference $255 and $251 as of March 31, 2023 and December 31, 2022, respectively | - | - | ||||||
Series B preferred stock, par value $0.0001; 1,500 shares authorized, 1,443 shares outstanding as of March 31, 2023 and December 31, 2022; liquidation preference $1,464 and $1,143 as of March 31, 2023 and December 31, 2022, respectively | - | - | ||||||
Series C preferred stock, par value $0.0001; 600,000 shares authorized, 500,756 shares outstanding as of March 31, 2023 and December 31, 2022; liquidation preference $501 as of March 31, 2023 and December 31, 2022 | - | - | ||||||
Series D preferred stock, par value $0.0001; 7,000 shares authorized, 1,058 shares issued and outstanding as of March 31, 2023 and December 31, 2022; liquidation preference $1,145 and $1,113 as of March 31, 2023 and December 31, 2022, respectively | - | - | ||||||
Series E preferred stock, par value $0.0001; 77,000 shares authorized, 5,000 shares outstanding as of March 31, 2023 and no shares outstanding as of December 31, 2022 | - | - | ||||||
Common stock, par value $0.0001; 800,000,000 shares authorized; 43,686,523 and 20,243,509 shares outstanding as of March 31, 2023 and December 31, 2022, respectively | 4 | 2 | ||||||
Additional paid-in capital | 98,051 | 88,533 | ||||||
Accumulated deficit | (90,311 | ) | (88,005 | ) | ||||
Total stockholders’ equity | 7,744 | 530 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 17,968 | $ | 6,590 |
Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Series D Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||
Balance as of July 1, 2022 (Unaudited) | 251 | $ | - | 1,443 | $ | - | 500,756 | $ | - | - | $ | - | 244,217 | $ | 1 | $ | 85,489 | $ | (82,737 | ) | $ | 2,753 | ||||||||||||||||||||||||||||||
Delivery of restricted common stock | - | - | - | - | - | - | - | - | 17,699 | 1 | - | - | 1 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock and warrants, net | - | - | - | - | - | - | - | - | 20,834 | - | 855 | - | 855 | |||||||||||||||||||||||||||||||||||||||
Issuance of Series D preferred stock and warrants, net of fees | - | - | - | - | - | - | 1,058 | - | - | - | 1,039 | - | 1,039 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock/at-the-market offering, net of offering costs | - | - | - | - | - | - | - | - | 26,609 | - | 648 | - | 648 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock warrants in connection with consideration payable | - | - | - | - | - | - | - | - | - | - | 86 | - | 86 | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | - | - | - | - | 480 | - | 480 | |||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | - | - | - | (3,116 | ) | (3,116 | ) | |||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2022 (Unaudited) | 251 | $ | - | 1,443 | $ | - | 500,756 | $ | - | 1,058 | $ | - | 309,359 | $ | 2 | $ | 88,597 | $ | (85,853 | ) | $ | 2,746 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CROWN ELECTROKINETICS CORP.
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2023 and 2022
(Unaudited)
(in thousands, except share and per share amounts)
Three months ended March 31, | ||||||||
2023 | 2022 | |||||||
Revenue | $ | 22 | $ | - | ||||
Cost of revenue | 31 | - | ||||||
Gross loss | (9 | ) | - | |||||
Operating expenses: | ||||||||
Research and development | 541 | 1,096 | ||||||
Selling, general and administrative | 3,576 | 3,471 | ||||||
Total operating expenses | 4,117 | 4,567 | ||||||
Loss from operations | (4,126 | ) | (4,567 | ) | ||||
Other income (expense): | ||||||||
Interest expense | (2,017 | ) | (3 | ) | ||||
Loss on extinguishment of warrant liability | (504 | ) | ||||||
Gain on issuance of convertible notes | 64 | |||||||
Change in fair value of warrants | 5,606 | |||||||
Change in fair value of notes | (117 | ) | ||||||
Other income | - | - | ||||||
Other expense | (1,206 | ) | - | |||||
Total other income (expense) | 1,826 | (3 | ) | |||||
Net loss | (2,300 | ) | (4,570 | ) | ||||
Deemed dividend on Series D preferred stock | (6 | ) | - | |||||
Cumulative dividends on Series A preferred stock | (4 | ) | ||||||
Cumulative dividends on Series B preferred stock | (20 | ) | ||||||
Cumulative dividends on Series D preferred stock | (86 | ) | - | |||||
Net loss attributable to common stockholders | $ | (2,416 | ) | $ | (4,570 | ) | ||
Net loss per share attributable to common stockholders | $ | (0.08 | ) | $ | (0.29 | ) | ||
Weighted average shares outstanding, basic and diluted: | 29,695,083 | 15,856,316 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CROWN ELECTROKINETICS CORP.
Condensed Consolidated Statements of Stockholders’ EquityCash Flows
(Unaudited)
(in thousands, except share and per share amounts)thousands)
Nine months ended September 30, | ||||||||
2023 | 2022 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (19,678 | ) | $ | (12,163 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock-based compensation | 446 | 3,011 | ||||||
Depreciation and amortization | 542 | 360 | ||||||
Loss on extinguishment of warrant liability | 504 | - | ||||||
Change in fair value of warrant liability | (10,424 | ) | - | |||||
Change in fair value of derivative liability | (401 | ) | - | |||||
Gain on issuance of convertible note | (64 | ) | ||||||
Loss on extinguishment of debt | 2,345 | - | ||||||
Change in fair value of notes | 7,040 | - | ||||||
Amortization of deferred debt issuance costs | 6,800 | - | ||||||
Amortization of right-of-use assets | 1,141 | 365 | ||||||
Other expenses | 467 | - | ||||||
Loss on disposal of equipment | 380 | 52 | ||||||
Changes in operating assets and liabilities: | ||||||||
Prepaid and other assets | 136 | 392 | ||||||
Accounts payable | 732 | 367 | ||||||
Accrued expenses | (575 | ) | (165 | ) | ||||
Lease liabilities | (1,200 | ) | (268 | ) | ||||
Net cash used in operating activities | (11,809 | ) | (8,049 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Cash paid for acquisition of Amerigen 7 | (645 | ) | - | |||||
Purchase of equipment | (1,084 | ) | (278 | ) | ||||
Purchase of patents | - | (61 | ) | |||||
Net cash used in investing activities | (1,729 | ) | (339 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from the exercise of warrants | 2,062 | - | ||||||
Proceeds from the issuance of common stock and warrants, net of fees | - | 855 | ||||||
Proceeds from the issuance of common stock / at-the-market offering | 3,957 | 732 | ||||||
Proceeds from the issuance of notes in connection with line of credit | 2,350 | - | ||||||
Offering costs for the issuance of common stock / at-the-market offering | (170 | ) | (26 | ) | ||||
Proceeds from a deposit for Series D preferred stock (shares liability) | - | 1,039 | ||||||
Proceeds from issuance of Series F-1 preferred stock | 2,328 | - | ||||||
Proceeds from issuance of Series F-2 preferred stock | 748 | - | ||||||
Proceeds from issuance of Senior Secured Notes, net of fees paid | 1,357 | - | ||||||
Repayment of notes payable | (2,348 | ) | - | |||||
Proceeds from the issuance of common stock in connection with equity line of credit, net of offering costs | 4,489 | - | ||||||
Net cash provided by financing activities | 14,773 | 2,600 | ||||||
Net increase / decrease in cash | 1,235 | (5,788 | ) | |||||
Cash — beginning of period | 821 | 6,130 | ||||||
Cash — end of period | $ | 2,056 | $ | 342 | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Issuance of Series E preferred stock in connection with line of credit | $ | 4,350 | $ | - | ||||
Issuance of common stock in connection with equity line of credit | $ | 114 | $ | - | ||||
Issuance of Series F preferred stock in connection with exchange of Series D preferred stock | $ | 450 | $ | - | ||||
Issuance of common stock in connection with conversion of notes | $ | 2,681 | $ | - | ||||
Issuance of common stock in connection with Senior Secured Notes settlement | $ | 1,160 | $ | - | ||||
Issuance of common stock warrants in connection with SLOC | $ | - | $ | 223 | ||||
Conversion of Senior Secured Notes into Series F preferred stock in connection with Exchange Agreements | $ | 82 | $ | - | ||||
Commitment to issue shares of common stock in connection with Demand Notes | $ | 286 | $ | - | ||||
Unpaid equipment included in accounts payable | $ | 23 | $ | 486 | ||||
Issuance of common stock warrants in connection with consideration payable | $ | - | $ | 86 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
Cash paid for interest | $ | 9 | $ | 3 |
Three Months Ended March 31, 2023
Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Series D Preferred Stock | Series E Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Number | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2022 | 251 | $ | - | 1,443 | $ | - | 500,756 | $ | - | 1,058 | $ | - | - | $ | - | 20,243,509 | $ | 2 | 88,533.00 | $ | (88,005 | ) | $ | 530 | ||||||||||||||||||||||||||||||||||||
Exercise of common stock warrants | - | - | - | - | - | - | - | - | - | - | 6,555,095 | 1 | 2,061 | - | 2,062 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with conversion of notes | - | - | - | - | - | - | - | - | - | - | 1,887,919 | - | 516 | - | 516 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock/At-the-market offering, net of offering costs | - | - | - | - | - | - | - | - | - | - | 12,700,000 | 1 | 2,106 | - | 2,107 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of Series E preferred stock in connection with LOC | - | - | - | - | - | - | - | - | 5,000 | - | - | - | 4,350 | - | 4,350 | |||||||||||||||||||||||||||||||||||||||||||||
Commitment to issue shares of common stock in connection with March waiver agreement | - | - | - | - | - | - | - | - | - | - | - | - | 298 | - | 298 | |||||||||||||||||||||||||||||||||||||||||||||
Deemed dividend for repricing of Series D preferred stock | - | - | - | - | - | - | - | - | - | - | - | - | 6 | (6 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | - | - | - | - | 2,300,000 | - | 181 | - | 181 | |||||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | - | - | - | - | - | (2,300 | ) | (2,300 | ) | |||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2023 | 251 | $ | - | 1,443 | $ | - | 500,756 | $ | - | 1,058 | $ | - | 5,000 | $ | - | 43,686,523 | $ | 4 | $ | 98,051 | $ | (90,311 | ) | $ | 7,744 |
Three Months Ended March 31, 2022
Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | Number | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | 251 | $ | - | 1,443 | $ | - | 500,756 | $ | - | 14,530,126 | $ | 1 | $ | 82,677 | $ | (73,690 | ) | $ | 8,988 | |||||||||||||||||||||||||
Delivery of restricted common stock | - | - | - | - | - | - | 33,332 | - | - | - | - | |||||||||||||||||||||||||||||||||
Issuance of common stock warrants in connection with SLOC | - | - | - | - | - | - | - | - | 223 | - | 223 | |||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | - | - | - | - | 1,083 | - | 1,083 | |||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | - | (4,570 | ) | (4,570 | ) | |||||||||||||||||||||||||||||||
Balance as of March 31, 2022 (Unaudited) | 251 | $ | - | 1,443 | $ | - | 500,756 | $ | - | 14,563,458 | $ | 1 | $ | 83,983 | $ | (78,260 | ) | $ | 5,724 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CROWN ELECTROKINETICS CORP.
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2023 and 2022
(Unaudited)
(in thousands)
Three months ended March 31, | ||||||||
2023 | 2022 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (2,300 | ) | $ | (4,570 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock-based compensation | 181 | 1,083 | ||||||
Depreciation and amortization | 182 | 107 | ||||||
Loss on extinguishment of warrant liability | 504 | - | ||||||
Change in fair value of warrant liability | (5,606 | ) | - | |||||
Change in fair value of notes | 117 | - | ||||||
Amortization of deferred debt issuance costs | 1,635 | - | ||||||
Amortization of debt discount | 374 | - | ||||||
Amortization of right of use assets | 133 | 118 | ||||||
Gain on issuance of convertible note | (64 | ) | - | |||||
Other expenses | 1,206 | - | ||||||
Loss on disposal of equipment | - | 52 | ||||||
Changes in operating assets and liabilities: | ||||||||
Prepaid and other assets | (161 | ) | (87 | ) | ||||
Accounts payable | 125 | (32 | ) | |||||
Accrued expenses | (920 | ) | (208 | ) | ||||
Lease liability | (134 | ) | (15 | ) | ||||
Net cash used in operating activities | (4,728 | ) | (3,552 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Cash paid for acquisition of Amerigen 7 | (645 | ) | - | |||||
Purchase of equipment | (435 | ) | (58 | ) | ||||
Purchase of patents | - | (7 | ) | |||||
Net cash used in investing activities | (1,080 | ) | (65 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from the exercise of warrants | 2,062 | - | ||||||
Proceeds from the issuance of common stock / At-the-market offering | 2,198 | - | ||||||
Offering costs for the issuance of common stock / At-the-market offering | (91 | ) | - | |||||
Proceeds from the issuance of notes in connection with Line of Credit | 2,000 | - | ||||||
Proceeds from issuance of January promissory notes, net of fees paid | 970 | - | ||||||
Repayment of notes payable | (14 | ) | - | |||||
Net cash provided by financing activities | 7,125 | - | ||||||
Net increase / decrease in cash | 1,317 | (3,617 | ) | |||||
Cash — beginning of period | 821 | 6,130 | ||||||
Cash — end of period | $ | 2,138 | $ | 2,513 | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Issuance of Series E preferred stock in connection with LOC | $ | 4,350 | $ | - | ||||
Issuance of common stock in connection with conversion of notes | $ | 516 | $ | - | ||||
Issuance of common stock warrants in connection with SLOC | $ | - | $ | 223 | ||||
Commitment to issue shares of common stock in connection with March waiver agreement | $ | 298 | $ | - | ||||
Deemed dividend for repricing of Series D preferred stock | $ | 6 | $ | - | ||||
Unpaid equipment included in accounts payable | $ | 156 | $ | 4 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
Cash paid for interest | $ | 8 | $ | 3 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Organization and Description– Nature of Business Operationsand Liquidity
Organization
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, LLC (“Amerigen 7”) in January 2023. Crown Fiber Optics Corp. is accounted for as a wholly- ownedwholly-owned subsidiary of Crown Electrokinetics, Corp.
Preferred Stock
Subsequent to December 31, 2022,Initial Public Offering
On January 26, 2021, the Company filedcompleted its public offering, and its common stock began trading on the first amendment to its Series D preferred stock, which modifiesNasdaq Capital Market (“Nasdaq”) under the conversion price of the Series D preferred stock from $1.30 to $0.50 per share (See Note 12).symbol CRKN.
Reverse Stock Split
On February 1,August 11, 2023, the Company’s Boardboard of Directorsdirectors 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 12).
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 (the “Asset Acquisition”), for cash consideration of approximately $0.65 million (See Note 4).
Reverse Stock Split
On December 22, 2022, the Company’s stockholders approved a reverse stock split (‘Reverse Stock Split”) at an exchange ratio of itsone-for-60 basis. The Reverse Stock Split was effective on August 15, 2023, such that every 60 shares of common stock athave been automatically converted into one 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 were held by a stockholder were aggregated and each stockholder was entitled to receive 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.
The number of authorized shares and the par value of the common stock was not adjusted as a result of the Reverse Stock Split. In connection with the Reverse Stock Split, the conversion ratio of not more than 1-for-15, such ratio to be determined byfor the Company’s Boardoutstanding convertible preferred stock was proportionately adjusted such that the common stock issuable upon conversion of Directors on or priorsuch preferred stock was decreased in proportion to December 22, 2023.the Reverse Stock Split. All references to common stock and options to purchase common stock share data, per share data and related information contained in the condensed consolidated financial statements have been adjusted to reflect the effect of the Reverse Stock Split.
Note 2 - Liquidity and Financial ConditionGoing 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 condensed consolidated financial statements, the Company had an accumulated deficit of approximately $90.3$107.7 million and negative working capitalcash of approximately $6.15$2.1 million at March 31,as of September 30, 2023, a net loss of approximately $2.3$19.7 million, and approximately $4.6$11.8 million of net cash used in operating activities for the threenine months ended March 31,September 30, 2023. The Company expects to continue to incur ongoing administrative and other expenses, including public company expenses.
The accompanying condensed consolidated 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 condensed consolidated 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 obtainhas obtained additional capital through the sale of debt or equity financings or other arrangements to fund operations including through its existing At-The-Marketat-the-market offering, $10$10.0 million Standing Letter of Credit (“SLOC”), $100.0 million line of credit, and $100$50.0 million Lineequity line of Credit (see below);credit; 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 condensed consolidated financial statements.
At-the-Market Offerings
Note 2 – Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The Company entered into a Sales AgreementCompany’s condensed consolidated financial statements have been prepared in conformity with A.G.P./Alliance Global Partners (the “Sales Agents”accounting principles generally accepted in the United States of America (“GAAP”) dated March 30, 2022 (the “Sales Agreement”), pursuant to whichand include all adjustments necessary for the Company may, from time to time, sell up to $5 million in shares (the “Placement Shares”)fair presentation of the Company’s common stock throughfinancial position for the Sales Agents, actingperiods presented.
The condensed consolidated balance sheet as of September 30, 2023, the condensed consolidated statements of operations, stockholders’ equity for the three and nine months ended September 30, 2023 and 2022 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022 are unaudited. These unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s sales agent and/or principal,consolidated financial position, results of operations and cash flows for the interim period presented. The financial data and the other financial information contained in a continuous at-the-market offering (the “ATM Offering”).these notes to the condensed consolidated financial statements related to the three and nine month periods are also unaudited. The Company will payresults of operations for the Sales Agents a commission of up to 3.0%three and nine months ended September 30, 2023 are not necessarily indicative of the aggregate gross proceedsresults to be expected for the Company receivesyear ending December 31, 2023 or for any other future annual or interim period. The condensed consolidated balance sheet as of December 31, 2022 included herein was derived from all salesthe audited financial statements as of that date. These unaudited condensed consolidated financial statements should be read in conjunction with 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 prospectusCompany's audited consolidated financial statements included in the registration statement, as supplemented byCompany’s Annual Report on Form 10-K for the prospectus supplement dated March 30, 2022.
On October 5,year ended December 31, 2022, filed with 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.
During the three months endedSEC on March 31, 2023,2023.
Use of Estimates
The preparation of condensed financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the Company received net proceeds on salesreported amounts of 12,700,000 sharesassets and liabilities, disclosure of common stock undercontingent assets and liabilities at the Sales Agreement of approximately $2.1 million (after deducting $0.1 million in commissions and expenses) at a weighted average price of $0.173 per share.
Senior Secured Notes
On January 3, 2023, the Company received net proceeds of $1.0 million from the issuance of senior secured notes with a principal balance of $1.2 million and a debt discount of $0.2 million. The notes are non-interest bearing and matured on April 3, 2023 and subsequently were extended to May 23, 2023. In connection with the senior secured notes, the Company issued 2.5 million warrants to purchase shares of the Company’s common stock at an exercise price of $0.32 per share.
Line of Credit
On February 2, 2023, the Company entered into a line of credit agreement (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 drew down $2.0 million under the Line of Credit. Upon drawing down on the Line of Credit, the Company issued a Secured Promissory Note (the “2023 Note”) which is due and payable 60 days from the issuance date (See Note 11).
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 Linecondensed financial statements and the reported amounts of Credit. However, ifrevenue and expenses during the Company doesreporting periods. Accounting estimates and assumptions are inherently uncertain. Management bases its estimates and assumptions on current facts, historical experience and various other factors believed to be reasonable under the circumstances. Actual results could differ materially and adversely from these estimates. Significant estimates and assumptions made in the accompanying condensed consolidated financial statements include, but not electlimited to, extend the Linevaluation of Credit for an additional one or two years, the additional 5,000 sharesits business combination, estimated fair value of convertible notes, estimated fair value of warrant lability, Series EF/F-1/F-2 preferred stock, will be issued immediately.
The warrant to purchase 45,000 shares of the Company’s Series E preferred stock is exercisableoption awards for five years at an exercise price of $0.50 per share multiplied by 1,000,stock-based compensation and subject to adjustment under certain circumstances described in the warrant.
Warrantsoperating lease right-of-use assets and liabilities.
During the three months ended March 31, 2023, the Company received net proceeds of approximately $2.06 million in connection with the exercise of 6,555,095 warrants (See Note 13).
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 condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Note 3 - Significant Accounting Policies
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. The condensed consolidated results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results for the full year or the results for any future periods. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes for the fiscal year ended December 31, 2022 included in the Company’s Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2023.
Use of Estimates
The preparation of condensed 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 condensed financial statements and the reported amounts of expenses during the reporting period. The most significant estimates in the Company’s condensed consolidated financial statements relate to the valuation of its business combination, 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.
Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies, see the Company’s December 31, 2022 financial statements included in its 2022 Annual Report.
Summary of Significant Accounting Policies
Reference is made to Note 3 Basis of Presentation and Significant Accounting Policies in our 2022 Form 10-K filed on March 31, 2023 for a detailed description of significant accounting policies. There have been no significant changes to our accounting policies as disclosed in our 2022 Form 10-K.
Revenue Recognition
The Company adopted the newrecognizes revenue standard, ASC 606, on March 31, 2019 using the full retrospective approach. The adoption did not have an effect on 2021 or 2020 revenue recognition or a cumulative effect on opening equity, as the timing and measurement of revenue recognition is materially the same as under ASC 605. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer ofwhen promised goods or services are transferred to customers in an amount that reflects the consideration to which the companyCompany expects to be entitled in exchange for those goods or services. Theservices by following five steps are applied to achieve that core principle:a five-step process:
● | Step 1: Identify the contract with the customer |
● | Step 2: Identify the performance obligations in the contract |
● | Step 3: Determine the transaction price |
● | Step 4: Allocate the transaction price to the performance obligations in the contract |
● | Step 5: Recognize revenue when the company satisfies a performance obligation |
For contracts where the period between when the Company transfers a promised good or service to the customer and when the customer pays is one year or less, theThe Company has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component.component when the time between the goods or service being transferred to the customer and the customer pays is one year or less,
The Company’s performance obligation is to provideCompany generates revenue from providing fiber splicing services as required based on short-term work orders as work is assigned by the Customer.customers. The Company is required to complete the description of work described in the work order and test the service provided prior to any recognition of revenue and invoicing. The short-term work orders are for very specific performance obligations which are performed from start to finishgenerally completed within two weeks or less, and more often, within one week.weeks. The Company is required to adhere to the rules and regulations that are outlined in the Agreement between the Company and the Customer.
Cost for the work performedof revenue is outlined in thebased on individual work orders based on theand detailed description of work to be performed. All of the revenue is recognized immediately upon completion of the work in each work order. A 5% retainage will be withheld by the Customer upon payment of invoices and will be paid to the Company within one year after termination of the contract. The retainage can be utilized by Customer for any claims that may arise after work is completed up through one year after completion.
Revenue recognized during the threenine months ended March 31,September 30, 2023 was generated by the Company’s wholly-owned subsidiary, Crown Fiber Optics Corporation, and was immaterial. No revenue was recognized by the Company during the threenine months ended March 31,September 30, 2022.
Financial Instruments – Credit Losses
MeasurementsIn June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments (“ASC 326”), which replacesInstruments. The amendments in ASU No. 2016-13 introduce an approach based on expected losses to estimated credit losses on certain types of financial instruments, modify the existing incurred loss model with a current expected credit loss (“CECL”) model that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company would be required to use a forward-looking CECLimpairment model for accounts receivables, guaranteesavailable-for-sale debt securities and otherprovide for a simplified accounting model for purchased financial instruments.assets with credit deterioration since their origination. The new standard requires financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, using a modified retrospective approach. The Company adopted ASC 326 onASU No. 2016-13 and related updates as of January 1, 2023 and ASC 326 did not have a2023. The adoption of this guidance had no material impact on itsthe Company’s condensed consolidated financial statements.
statements
Segment and Reporting Unit Information
Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive Officer is determined to be the CODM. On January 3, 2023 the Company acquired Crown Fiber Optics, Corp. (see Note 1) and is currently in the process of integrating this new business line including identifying leadership, and aligning management reporting and allocation methodologies. The Company is assessing its current segment structure in conjunction withhas two operating segments and two reportable segments as of September 30, 2023, which includes film group and fiber optics group. Revenue recognized during the integration efforts.nine months ended September 30, 2023 relates to the fiber optics group.
Business Combinations
The Company accounts for business combinations using the guidance provided by Accounting Standards Codification (“ASC”) 805, Business Combinations. ASC 805 requires the Company to use the acquisition method of accounting by recognizing the identifiable tangible and intangible assets acquired and liabilities assumed, and any non-controlling interest in the acquired business, measured at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the aforementioned amounts.
Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets. Although the Company believes the assumptions and estimates made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain intangible assets we have acquired include future expected cash flows from customer contracts. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results. 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 of the assets acquired and liabilities assumed as of the acquisition date has not been completed.
Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Deferred Debt Issuance Costs
The Company accounts for debt issuance costs related to its Lineline of Creditcredit and equity line of credit as a deferred asset on the condensed consolidated balance sheets, which is amortized over the life of the Lineline of Credit.credit and equity line of credit. Since the Company has elected the fair value option for its convertible notes (see below)Note 9), upon a draw down, a portion of the deferred asset balance will be amortized toand recognized as other expense.income (expense) on the condensed consolidated statements of operations. On the issuance date of the Company’s Lineline of Credit, since no loan amounts are drawn down,credit, the cost related to issuance of the Series E preferred shares and the warrant to purchase Series E preferred shares arewas recorded as a deferred asset. On the issuance date of the Company’s equity line of credit, the cost related to issuance of common stock was recorded as a deferred asset.
Goodwill
The Company performs a goodwill impairment analysis on October 1st of each year. When conducting its annual goodwill impairment assessment, the Company initially performs a qualitative evaluation to determine if it is more likely than not that the fair value of its reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test.
Convertible Notes Payable at Fair Value
In accordance with Accounting Standards Codification 825, Financial Instruments (“ASC 825”), theThe Company has elected the fair value option for the recognition of its convertible notes. In accordance with ASC 825, the Company recognizes these notes at fair valueand notes payable, 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 wereand notes payable are recognized in other expense.income (expense) in the condensed consolidated statements of operations. The Company will includeincludes the interest expense as a component of the notes fair value.
Warrants
The Company accountedaccounts for certain common stock warrants outstanding as a liability at fair value and adjustedadjusts the instruments to fair value of the instruments at each reporting period. ThisThe liability is subject to re-measurementremeasurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s condensed consolidated statements of operations. The fair value of the warrants issued by the Company have beenwas estimated using the Black Scholes Methodology.Black-Scholes model.
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 withinas stockholders’ equity, and therefore, the warrants are not revalued after issuance. The Company uses athe Black-Scholes model to value the warrants at issuance.
Under the guidanceAs 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 March 31,September 30, 2023, since no loan amounts were drawn down, the SLOC warrant is recorded as a deferred asset on the condensed consolidated balance sheets 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.
Purchase Order Warrants
The Company accounts for its warrants issued in connection with purchase orders in accordance with ASC 606Revenue 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”), thepurchases. 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 in the condensed consolidated balance sheets, up to the recoverable value represented by the value of the contract.
Net Loss per Share Attributable to Common Stockholders
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 ofattributable to common stock excludes dilution andstockholders is computed by dividing net loss byusing the weighted averageweighted-average number of shares of common stock outstanding during the period. Diluted net loss per share attributable to common stockholders is computed using the sum of the weighted-average number of shares of common stock reflectsoutstanding during the potential dilution that could occur ifperiod and the effect of dilutive securities.
As the Company was in a net loss position for the three and nine months ended September 30, 2023 and 2022, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders because the effects of potentially dilutive 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.are antidilutive.
Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at March 31,September 30, 2023 and 2022 are as follows:
September 30, | ||||||||
2023 | 2022 | |||||||
Series A preferred stock | 3,146 | 3,146 | ||||||
Series B preferred stock | 33,883 | 33,883 | ||||||
Series C preferred stock | 9,346 | 9,346 | ||||||
Series D preferred stock | - | 35,278 | ||||||
Series F preferred stock | 501,579 | - | ||||||
Series F-1 preferred stock | 72,631 | - | ||||||
Series F-2 preferred stock | 124,946 | - | ||||||
Warrants to purchase common stock (excluding penny warrants) | 1,760,095 | 98,402 | ||||||
Warrants to purchase Series E preferred stock | 750,000 | - | ||||||
Options to purchase common stock | 157,779 | 164,996 | ||||||
Unvested restricted stock units | 7,139 | 14,796 | ||||||
Commitment shares | 200,205 | - | ||||||
Total | 3,620,749 | 359,847 |
March 31, | ||||||||
2023 | 2022 | |||||||
Series A preferred stock | 190,994 | 188,311 | ||||||
Series B preferred stock | 2,047,359 | 2,019,038 | ||||||
Series C preferred stock | 560,757 | 560,757 | ||||||
Series D preferred stock | 2,289,247 | - | ||||||
Series E preferred stock | 5,000,000 | - | ||||||
Convertible notes | 12,991,783 | - | ||||||
Warrants to purchase common stock (excluding penny warrants) | 35,974,595 | 4,725,177 | ||||||
Warrants to purchase Series E preferred stock | 45,000,000 | - | ||||||
Options to purchase common stock | 9,423,486 | 10,567,099 | ||||||
Unvested restricted stock units | 497,913 | 2,261,905 | ||||||
Commitment shares | 1,903,428 | - | ||||||
115,879,562 | 20,322,287 |
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.
Note 43 – Acquisitions
On January 3, 2023, the Company completed its Asset Acquisitionacquired certain assets and assumed liabilities from Amerigen 7, which was accounted for as described in Note 1. In accordance witha business combination as the termsCompany concluded that the transferred set of activities and assets related to the Asset Acquisition theacquisition constituted a business. The Company paid cash consideration of approximately $0.65 million. The Asset Acquisition$0.7 million which included approximately 12 employees, customer contracts, and certain operating liabilities. The Company accounted for the Asset Acquisition as a business combination (See Note 3). The initial purchase price may be adjusted as needed per the terms of the 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. The measurement period for the Asset Acquisition will be up to one year from the acquisition date.
The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed for the Amerigen 7 acquisition (in thousands):
Property and equipment | $ | 656 | $ | 655 | ||||
Intangible assets | 200 | 200 | ||||||
Security deposits | 5 | 5 | ||||||
Accrued expenses | (529 | ) | (529 | ) | ||||
Notes payable | (338 | ) | (338 | ) | ||||
Total identifiable assets and liabilities acquired | (7 | ) | (7 | ) | ||||
Goodwill | 652 | 652 | ||||||
Total purchase consideration | $ | 645 | $ | 645 |
The Company engaged an independent valuation specialist to conduct a valuation analysis of the identifiable intangible assets acquired by the Company with the objective of estimating the fair value of such assets as of January 3, 2023. The valuation specialist utilized the Income Approach,income approach, specifically the Multi-Period Excess Earnings Method,multi-period excess earnings method, to value the existing customer relationship.
Note 5 -4 – Prepaid and Other Current Assets
Prepaid and other current assets consist of the following (in thousands):
March 31, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | |||||||||||||
License fees | $ | 256 | $ | 300 | $ | 176 | $ | 300 | ||||||||
Notes receivable | 120 | - | - | - | ||||||||||||
Professional fees | 99 | - | 189 | - | ||||||||||||
Insurance | 66 | 142 | 59 | 142 | ||||||||||||
Hudson warrant * | 85 | 85 | 86 | 85 | ||||||||||||
Other | 97 | 63 | 96 | 63 | ||||||||||||
Total | $ | 723 | $ | 590 | $ | 606 | $ | 590 |
* | Fair value of warrant issued to Hudson Pacific Properties, L.P. (See Note |
Note 5 – Property & Equipment, Net
Property and equipment, net, consists of the following (in thousands):
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
Equipment | $ | 2,204 | $ | 1,457 | ||||
Leasehold improvements | 362 | 362 | ||||||
Vehicles | - | - | ||||||
Computers | 57 | 52 | ||||||
Construction-in-progress | 854 | - | ||||||
Total | 3,477 | 1,871 | ||||||
Less: accumulated depreciation | (839 | ) | (462 | ) | ||||
Property and equipment, net | $ | 2,638 | $ | 1,409 |
Depreciation expense for the three months ended September 30, 2023 and 2022 was $0.1 million and $0.1 million, respectively. Depreciation expense for the nine months ended September 30, 2023 and 2022 was $0.3 million and $0.2 million, respectively.
Note 6 - Property & Equipment, Net
Property and equipment, net, consists of the following (in thousands):
March 31, | December 31, | |||||||
2023 | 2022 | |||||||
Equipment | $ | 2,533 | $ | 1,457 | ||||
Leasehold improvements | 362 | 362 | ||||||
Vehicles | 159 | - | ||||||
Computers | 55 | 52 | ||||||
Other | 9 | - | ||||||
Total | 3,118 | 1,871 | ||||||
Less accumulated depreciation and amortization | (590 | ) | (462 | ) | ||||
Property and equipment, net | $ | 2,528 | $ | 1,409 |
During the three months ended March 31, 2023, the Company recorded $0.5 million of equipment and $0.2 million of vehicles in connection with its acquisition of Amerigen 7 (See Note 4).
Depreciation expense for the three months ended March 31, 2023 and 2022 was $128,000 and $54,000, respectively.
Note 7 -6 – Intangible Assets, Net
Intangible assets, net, consists of the following (in thousands):
March 31, | December 31, | |||||||
2023 | 2022 | |||||||
Patents | $ | 1,800 | $ | 1,800 | ||||
Research license | 375 | 375 | ||||||
Customer relationships | 200 | - | ||||||
Total | 2,375 | 2,175 | ||||||
Accumulated amortization | (631 | ) | (577 | ) | ||||
Intangible assets, net | $ | 1,744 | $ | 1,598 |
During the three months ended March 31, 2023, the Company recorded $0.2 million of customer relationships in connection with its acquisition of Amerigen 7 (See Note 4).
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
Patents | $ | 1,800 | $ | 1,800 | ||||
Research license | 375 | 375 | ||||||
Customer relationships | 200 | - | ||||||
Total | 2,375 | 2,175 | ||||||
Less: accumulated amortization | (742 | ) | (577 | ) | ||||
Intangible assets, net | $ | 1,633 | $ | 1,598 |
The following table represents the total estimated amortization of intangible assets for the five succeeding years and thereafter as of March 31,September 30, 2023 (in thousands):
Estimated Amortization Expense | Estimated Amortization Expense | |||||||
Nine months ended December 31, 2023 | $ | 177 | $ | 66 | ||||
Year ended December 31, 2024 | 235 | 235 | ||||||
Year ended December 31, 2025 | 234 | 234 | ||||||
Year ended December 31, 2026 | 197 | 197 | ||||||
Year ended December 31, 2027 and thereafter | 901 | 901 | ||||||
Total | $ | 1,744 | $ | 1,633 |
For the three months ended March 31,September 30, 2023 and 2022, amortization expense was approximately $54,000$0.1 million and $53,000,$0.1 million, respectively. For the nine months ended September 30, 2023 and 2022, amortization expense was approximately $0.2 million and $0.2 million, respectively.
Note 87 – Deferred Debt Issuance Costs
Deferred debt issuance costs consist of the following (in thousands):
March 31, 2023 | December 31, 2022 | |||||||
SLOC | $ | 223 | $ | 223 | ||||
Line of Credit | 9,943 | - | ||||||
Total | 10,166 | 223 | ||||||
Accumulated amortization | (1,905 | ) | (73 | ) | ||||
Deferred debt issuance costs, net | $ | 8,261 | $ | 150 |
September 30, 2023 | December 31, 2022 | |||||||
Standing letter of credit | $ | 150 | $ | 223 | ||||
Equity letter of credit | 555 | |||||||
Line of credit | $ | 9,943 | - | |||||
Total | 10,648 | 223 | ||||||
Accumulated amortization | (6,801 | ) | (73 | ) | ||||
Deferred debt issuance costs | $ | 3,847 | $ | 150 |
SLOC
For the three months ended September 30, 2023 and 2022, the Company recognized amortization expense of approximately $0.1 million and $23,000, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized amortization expense of approximately $0.2 million and $0.1 million, respectively.
Equity line of credit
In July 2023, the Company entered into the equity line of credit (“ELOC”) for the right to sell common stock shares to an investor and recorded deferred debt issuance costs of approximately $0.6 million. For the three and nine months ended September 30, 2023, the Company recognized amortization expense of approximately $0.1 million and $0.1 million, respectively.
Line of Credit
OnIn February 2, 2023, the Company entered into its Lineline of Creditcredit and recorded deferred debt issuance costs of approximately $9.9 million (See Note 3).million. During the three and nine months ended March 31,September 30, 2023, the Company recognized amortization expense of approximately of $1.6$2.4 million in connection with the Line of Credit, which is recorded as interest expense on the accompanying condensed consolidated statement of operations.and $6.5 million, respectively. During the threenine months ended March 31,September 30, 2023, in connection with the $2.0$2.4 million draw down and issuance of the convertible promissory note,notes, the Company recognized amortization expense of approximately $0.2 million.
Note 8 – Accrued Expenses
Accrued expenses consisted of the following (in thousands):
September 30, 2023 | December 31, 2022 | |||||||
Payroll and related expenses | $ | 115 | $ | - | ||||
Bonus | - | 510 | ||||||
Taxes | 49 | - | ||||||
Insurance | - | 104 | ||||||
Other expenses | 11 | 7 | ||||||
Total | $ | 175 | $ | 621 |
Note 9 – Notes Payable
Convertible Notes
2022 Notes
In October 2022, the Company issued convertible notes (the “2022 Notes”) with a principal balance of approximately $5.4 million and warrants to purchase 362,657 shares of the Company’s common stock for net proceeds of $3.5 million. The 2022 Notes is non-interest bearing and secured by the Company’s assets. The maturity date is the earlier of (i) twelve months from the date of issuance or (ii) the closing of a change of control transaction. The 2022 Notes are convertible into shares of the Company’s common stock at a conversion price of $29.70 per share. The warrants have an exercise price of $19.32 per share and expire five years from the issuance date.
In February 2023, the Company entered into waiver agreements with holders of the 2022 Notes which extended the maturity date of the 2022 Notes from October 19, 2023 to April 18, 2024. As consideration for this agreement, the Company issued 96,890 warrants to purchase shares of the Company’s common stock (See Note 10).
In March 2023, the Company entered into the waiver agreements with holders of the 2022 Notes to eliminate the minimum pricing covenant as it relates to Company’s at-the-market facility. As consideration for this agreement, the Company provided the holders with two options to choose from (i) to take an additional five percent original issue discount (“OID”) on their 2022 Note principal or (ii) to be issued shares of common stock with a value equal to the five percent OID, and to issue total shares of 31,724 as converted using the Nasdaq minimum price of $9.42. During the nine months ended September 30, 2023, six of the note holders elected option (i), and the Company increased the respective principal balance of the notes by approximately $0.2 million. The remaining noteholders elected option (ii), and as of September 30, 2023, no shares of common stock have been issued. The Company recorded expense of $0.3 million associated with the commitment to issue shares of the Company’s common stock.
In May 2023, the Company entered into an inducement agreements with the investors to reduce the conversion price of the 2022 Notes in an aggregate principal amount equal to $1.5 million, convertible into 161,603 shares of the Company’s common stock at $9.28 per share. The remaining investors agreed to reduce the conversion price of the 2022 Notes in an aggregate principal amount equal to $1.4 million, convertible into 127,393 shares of the Company’s common stock at $10.93 per share.
The Company elected to account for the 2022 Notes under the fair value option. For the inducement agreements that were entered into as described above, the Company accounted for the change in the terms through the fair value adjustment of $2.7 million, which is recorded as other expenseincluded in the change in fair value of notes on the accompanying condensed consolidated statement of operations (See Note 3).
SLOC
For the three months ended March 31, 2023 and 2022, in connection with its SLOC, the Company recognized amortization expense of approximately $41,000 and $73,000, respectively, which is recorded as other expense on the accompanying condensed consolidated statements of operations.operations, upon the settlement of $0.2 million principal balance of the 2022 Notes as part of the exchange agreements, and $1.0 million principal balance of the 2022 Notes in June 2023 based on the issuance of 248,981 shares of the Company’s common stock.
Senior Secured Notes
In January 2023, the Company issued senior secured notes (“Senior Secured Notes”) with a principal balance of approximately $1.2 million and warrants to purchase 41,667 shares of the Company’s common stock for net proceeds of $1.0 million. The Senior Secured Notes do not bear interest, and mature three months from the date of issuance. Pursuant to these terms, the Senior Secured Notes were subsequently extended to May 3, 2023, incurring an additional 10% on principal. The warrants are exercisable for five years at an exercise price of $19.32 per share.
In May 2023, the Company entered into several amendments to extend the Senior Secured Notes maturity date with the investors. In exchange, the Company issued a total of 203,500 shares of common stock to the investors.
The Company concluded that a troubled debt restructuring did not occur, but an extinguishment of the outstanding senior secured notes occurred. Subsequent to the extinguishment, the Company concluded to account for the Senior Secured Notes using the fair value option. The Company recorded an extinguishment loss of $2.2 million.
On June 4, 2023, $0.2 million of the outstanding Senior Secured Notes was settled. The Company accounted for the settlement as an extinguishment that resulted in a $0.1 million gain and resulted in $0.1 million being recorded as Series F convertible preferred stock and $0.1 million being recorded as part of the warrant liability.
On June 30, 2023, the Company and the remaining investors agreed to extend the maturity date of the 2023 Notes until July 31, 2023, in exchange for 41,667 shares of common stock. The Company recorded a change in fair value adjustment of $0.3 million based on the fair value of the 41,667 shares of common stock.
On July 10, 2023, the Company and the remaining investors entered into a forbearance agreement, which was subsequently amended on July 14, 2023. The forbearance agreement provides that the investor shall forbear the exercise of its rights and remedies due to certain events of defaults under the Senior Secured Notes, including payment, until December 31, 2023, in exchange for a non-refundable and indefeasible payment of $0.1 million in the form of a promissory note due December 31, 2023 (the “December 2023 Note). The December 2023 Note was never executed and the Senior Secured Notes investors fully settled the outstanding balance for a total of 189,602 shares of common stock during July and August 2023. The Company recorded a change in fair value adjustment of $39,000 at settlement of the Senior Secured Notes. As of September 30, 2023, there was no outstanding balance related to the Senior Secured Notes.
2023 Note
In February 2023, upon drawing down on the line of credit, the Company issued a Secured Promissory Note (the “2023 Note”) totaling $2.0 million, which is due and payable 60 days from the issuance date. The 2023 Note is non-interest bearing and secured by the Company’s assets. The 2023 Note is convertible into shares of the Company’s common stock at $30.00 per share.
In April 2023, the Company entered into a first amendment to the 2023 Note with the lender, pursuant to which the lender agreed to extend the maturity date of the 2023 Note balance until May 1, 2023 in exchange for 33,333 shares of the Company’s common stock. The 2023 Note was further amended to accrue interest at the 15% per annum from the original funding date of the 2023 Note. The Company recorded a change in fair value adjustment of $0.2 million related to the commitment to issue 33,333 shares of the Company’s common stock.
On May 1, 2023, the Company entered into a second amendment to the 2023 Note with the lender, pursuant to which the lender agreed to extend the maturity date of the 2023 Note balance until May 15, 2023
On May 15, 2023, the Company entered into a third amendment to the 2023 Note with the lender, pursuant to which the lender agreed to extend the maturity date of the 2023 Note until June 7, 2023 in exchange for 4,000 shares of the Company’s Series E preferred stock, which are convertible into 66,667 shares of the Company’s common stock. The Company recorded a change in fair value adjustment of $0.7 million related to the commitment to issue 4,000 shares of the Company’s Series E preferred stock.
On May 16, 2023, the Company made a second draw of $0.2 million under the line of credit. Upon drawing down on the line of credit, the Company issued a second Secured Promissory Note (the “2nd 2023 Note”) which is due and payable on July 16, 2023. The 2nd 2023 Note shall accrue interest at the 15% per annum from the original funding date of the 2nd 2023 Note.
On May 26, 2023, the Company made a third draw of $0.2 million under the line of credit. Upon drawing down on the line of credit, the Company issued a third Secured Promissory Note (the “3rd 2023 Note”) which is due and payable on June 2, 2023. The 3rd 2023 Note included a $0.2 million commitment fee and does not bear interest. With the 3rd 2023 Note, the Company recorded a change in fair value adjustment of $0.2 million related to the commitment fee.
On May 26, 2023, the Company entered into a fourth amendment to the 2023 Note, pursuant to which the Company will issue to the holder a convertible promissory note in the principal amount of $0.2 million due June 2, 2023 in exchange for 4,000 shares of the Company’s Series E preferred stock, which are convertible into 66,667 shares of the Company’s common stock. The Company recorded a change in fair value adjustment of $0.6 million related to the commitment to issue 4,000 shares of the Company’s Series E preferred stock.
On June 13, 2023, the Company partially redeemed the principal of the 2023 Note. In addition to the accrued interest and commitment fees, the total redeemed balance was approximately $2.1 million. With the settlement of the 2nd 2023 and the 3rd 2023 Note, the Company recorded a change in fair value adjustment of $0.1 million.
On June 30, 2023, the Company and the line of credit lender agreed to amend the 2nd 2023 Note and the 3rd 2023 Note to extend the maturity dates of each until July 16, 2023. In connection with the amendments, the Company agreed to issue to the line of credit lender 5,000 shares of the Company’s Series E preferred stock, which is convertible into 83,333 shares of the Company’s common stock. Additionally, the Company agreed to issue an additional 8,000 shares of the Company’s Series E preferred stock, which is convertible into 133,333 shares of the Company’s common stock, to the line of credit lender for failure to comply with a covenant in the line of credit, as amended. The Company recorded a change in fair value adjustment of $2.0 million related to the commitment to issue 13,000 shares of the Company’s Series E preferred stock.
During July 2023, the Company repaid the outstanding balance of the 2nd 2023 Note and 3rd 2023 Note for cash of $0.4 million. As of September 30, 2023, there was no outstanding balance related to the 2nd 2023 Note and 3rd 2023 Note.
Demand Note
Between May 17 and May 18, 2023, the Company issued secured demand promissory notes (the “Demand Notes”) in an aggregate principal amount equal to $0.2 million. The Demand Notes are due and payable at any time upon demand by the noteholders after the earlier of (i) the consummation of the Company’s first securities offering after the issuance of the Demand Notes or (ii) July 16, 2023. The Demand Notes do not bear interest. In connection with the issuance of the Demand Notes, the Company agreed to issue an aggregate of 76,626 shares of the Company’s common stock to the Demand Note holders. The Company recorded expense of $0.2 million associated with the commitment to issue shares of the Company’s common stock.
On May 30, 2023, the Company issued secured demand promissory notes (the “2nd Demand Notes”) in an aggregate principal amount equal to $0.1 million. The 2nd Demand Notes are due and payable at any time upon demand by the noteholder after the earlier of (i) the consummation of the Company’s first securities offering after the issuance of the 2nd Demand Notes or (ii) July 16, 2023. The 2nd Demand Notes do not bear interest. In connection with the issuance of the 2nd Demand Notes, the Company agreed to issue an aggregate of 46,935 shares of the Company’s common stock to the 2nd Demand Notes holders. The Company recorded expense of $0.1 million associated with the commitment to issue shares of the Company’s common stock.
On July 25, 2023, the Company entered into the Demand Secured Promissory Note Agreement (“Q3 Demand Notes”) with two investors for a purchase price of $20,000 each and with an original issue discount of $12,000. Upon settlement, the Company is obligated to pay a total of $0.1 million in principal for the issuance of both notes. The Q3 Demand Notes are due and payable at any time upon demand by the holder after the earlier of (i) the consummation of the Company’s first securities offering after the issuance of the Q3 Demand Notes and (ii) January 25, 2024.
Note 910 - 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 March 31,September 30, 2023 and December 31, 2022:
Fair value measured at March 31, 2023 | Fair value measured at September 30, 2023 | |||||||||||||||||||||||||||||||
Total carrying value at March 31, 2023 | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total carrying value | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Convertible notes | $ | 3,191 | $ | - | $ | - | $ | 3,191 | ||||||||||||||||||||||||
Warrant liability | $ | 2,332 | $ | - | $ | - | $ | 2,332 | $ | 34 | $ | - | $ | - | $ | 34 |
Fair value measured at 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) | Total carrying value | 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 | $ | 1,654 | $ | - | $ | - | $ | 1,654 | ||||||||||||||||
Warrant liability | $ | 972 | $ | - | $ | - | $ | 972 | $ | 972 | $ | - | $ | - | $ | 972 |
For the threenine months ended March 31,September 30, 2023 there was a changedecrease of approximately $5.5$2.6 million in Level 3 liabilities measured at fair value.
2022 Convertible Notes at Fair Value
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 three months ended March 31, 2023. 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, 2022 | $ | 1,654 | $ | 972 | ||||
Conversion of October convertible notes | (516 | ) | - | |||||
Issuance of convertible note in connection with Line of Credit | 2,000 | - | ||||||
Warrants issued in connection with January promissory note | - | 157 | ||||||
Warrants issued in connection with Line of Credit | - | 5,593 | ||||||
Warrants issued in connection with inducement agreement | - | 760 | ||||||
Warrants issued in connection with February waiver agreement | - | 711 | ||||||
Change in fair value of convertible notes in connection with March waiver agreement | 368 | - | ||||||
Fair value of warrants exercised | - | (759 | ) | |||||
Loss on extinguishment of warrant liability | - | 504 | ||||||
Gain on issuance of convertible note | (64 | ) | - | |||||
Change in fair value | (251 | ) | (5,606 | ) | ||||
Balance at March 31, 2023 | $ | 3,191 | $ | 2,332 |
Convertible Notes
During the year ended December 31, 2022 the Company issued convertible promissory notes (the “2022 Notes”). The fair value of the Notes on the issuance dates, and as of March 31,September 30, 2023 and 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 2022 Notes and the 2022 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 condensed consolidated financial statements.
During the threenine months ended March 31,September 30, 2023, twoseven noteholders converted a portion of their 2022 Notes into 1,887,919248,981 shares of the Company’s commons stock (See Note 11)9). The fair value of the converted notes totaled $0.5$2.2 million.
February Waiver Agreement
OnIn February 28, 2023, the Company entered into waiver agreements with holders of the 2022 Notes (See Note 11)9). In connection with thisthe waiver agreement, the 2022 Notes were revalued as of the amendment date.
March Waiver Agreement
OnIn March 24, 2023, the Company entered into the second waiver agreements with holders of the 2022 Notes (See Note 11)9). A select number of holders elected to increase the principal balance of their notes. The Company revalued the respective notes on the date prior to the amendment date and again on the amendment date. The change in fair value related to the amendment of these 2022 Notes was approximately $0.4 million.
As of March 31,In June 2023, the Company entered into an exchange agreement and $0.2 million fair value of the 2022 Notes was approximately $1.2 million.exchanged for 206 shares of Series F Preferred stock. As of September 30, 2023, there was no outstanding balance related to the 2022 Notes.
Line of Credit
OnIn February 3, 2023, the Company drew down $2.0 million from the Lineline of Creditcredit and in accordance with the terms of the agreement issued the 2023 NoteNotes of $2.0 million. The 2023 Note had fair value at issuance of $1.9 million and the Company recorded a gain on issuance of approximately $0.1 million, which is included in other income (expense) on the accompanying condensed consolidated statement of operations.
In May 2023, the Company drew down $0.4 million from the line of credit and in accordance with the terms of the agreement issued the 2nd 2023 Notes and 3rd 2023 Notes. During July 2023, the Company repaid the outstanding balance of $0.4 million in cash.
As of March 31,September 30, 2023, there was no outstanding balance related to the 2023 Notes.
The following table provides the changes in fair value of the 2023 Note was approximately $2.0 million.2022 Notes and warrant liability (in thousands):
Warrants
Convertible Notes | Warrant Liability | |||||||
Balance at December 31, 2022 | $ | 1,654 | $ | 972 | ||||
Conversion of 2022 Notes | (516 | ) | ||||||
Issuance of 2023 Notes in connection with line of credit | 2,000 | |||||||
Change in fair value of 2022 Notes in connection with March waiver agreement | 368 | |||||||
Senior Secured Notes - reclass to fair value option | 1,133 | |||||||
Conversion of 2022 Notes into Series F in connection with exchange agreements | (243 | ) | ||||||
Conversion of 2022 Notes | (950 | ) | ||||||
Settlement in connection with line of credit | (1,747 | ) | ||||||
Issuance of 2nd 2023 Notes and 3rd 2023 Notes | 350 | |||||||
Repayment of line of credit, 2nd 2023 Notes and 3rd 2023 Notes | (600 | ) | ||||||
Settlement in connection with Senior Secured Notes | (1,107 | ) | ||||||
Warrants issued in connection with Senior Secured Notes | 157 | |||||||
Warrants issued in connection with line of credit | 5,593 | |||||||
Warrants issued in connection with inducement agreement | 760 | |||||||
Warrants issued in connection with February waiver agreement | 711 | |||||||
Fair value of warrants exercised | (759 | ) | ||||||
Loss on extinguishment of warrant liability | 504 | |||||||
Warrants Issued in connection with Demand Notes to Series F exchange | 140 | |||||||
Warrants Issued in connection with Senior Secured Notes to Series F exchange | 50 | |||||||
Warrants Issued in connection with 2022 Notes to Series F exchange | 639 | |||||||
Warrants Issued in connection with Series D to Series F exchange | 450 | |||||||
Warrants Issued in connection with Series F-1 | 956 | |||||||
Warrants Issued in connection with Series F-2 | 285 | |||||||
Change in fair value | (342 | ) | (10,424 | ) | ||||
Balance at September 30, 2023 | $ | - | $ | 34 |
Senior Secured Notes
Warrants
2022 Notes
In connection with the issuance of its senior secured notes on January 3, 2023 (See Note 11),2022 Notes, the Company issued 2,500,000362,657 warrants to purchase shares of the Company’s common stock. The warrants had a fair value at issuance of $157,000, and as of March 31, 2023 have a fair value of $92,000.
Line of Credit
On February 2, 2023, in connection with the issuance of its Line of Credit, the Company issued 45,000 warrants to purchase shares of its Series E preferred stock (See Note 13). The warrants had a fair value at issuance of approximately $5.6 million, and as of March 31, 2023 have a fair value of approximately $1.1 million.
Warrant Inducement and Exercise Agreement
During the year ended December 31, 2022, in connection with the 2022 Notes, the Company issued 21,759,402 warrants to purchase shares of the Company’s common stock.
During the threenine months ended March 31,September 30, 2023, in connection with its 2022 Notes, the Company entered into a warrant inducement and exercise agreement with certain holders. Under the terms of the agreement, the holders exercised 6,405,844106,764 warrants with a fair value of approximately $0.76$0.8 million and the Company issued 6,405,844106,764 new warrants to purchase shares of its common stock with a fair value of $1.26$1.3 million. The Company recognized a loss on extinguishment of the warrants of approximately $0.5 million which is included in other income (expense) on the accompanying condensed consolidated statement of operations..operations.
February Waiver Agreement
As consideration forIn connection with the February waiver agreement, the Company issued 5,813,41496,890 warrants to purchase shares of the Company’s common stock with a fair value of $0.7 million on the issuance date.
As of March 31,September 30, 2023, there are 27,572,816were 96,980 warrants outstanding issued inwith nominal fair value.
Series F Preferred Stock Exchange Agreements
In connection with the 2022 Notes,Series F preferred stock exchange agreements, the Company issued 592,137 warrants to purchase shares of the Company’s common stock. The Company concluded that the exchange warrants are liability classified with a fair value of $1.3 million as of the issuance date. As of September 30, 2023, the exchange warrants had a nominal fair value.
Senior Secured Notes
In connection with the issuance of the Senior Secured Notes in January 2023 (See Note 9), the Company issued 41,667 warrants to purchase shares of the Company’s common stock. The Company estimated the aggregate fair value of the warrants on the issuance date to be approximately $1.1 million.$0.2 million, and nominal value as of September 30, 2023.
Line of Credit
In February 2023, in connection with the issuance of its line of credit, the Company issued 45,000 warrants to purchase shares of its Series E preferred stock (See Note 11). The Company estimated the aggregate fair value of the warrants on the issuance date to be approximately $5.6 million, and nominal value as of September 30, 2023.
Series F-1 and F-2 Issuances
As part of the Series F-1 and F-2 preferred stock issuances, the Company issued 523,323 warrants to purchase shares of the Company’s common stock. The Company concluded that the Series F-1 and Series F-2 warrants are liability classified with a fair value of $1.2 million as of the issuance date. As of September 30, 2023, the fair value of the Series F-1 and Series F-2 warrants were nominal.
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 condensed consolidated statements of operations and disclosed in the condensed consolidated financial statements.operations.
A summary of significant unobservable inputs (Level 3 inputs) used in measuring warrants on the issuance dates and as of March 31,September 30, 2023 and December 31, 2022 is as follows:
January 2023 | February 2023 | March 31, 2023 | December 31, 2022 | |||||||||||||
Dividend yield | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Expected price volatility | 50.0 | % | 47.6%- 60 | % | 50.0%-54.0 | % | 48.7 | % | ||||||||
Risk free interest rate | 3.98 | % | 3.68%-5.13 | % | 3.60%-3.65 | % | 4.74 | % | ||||||||
Expected term (in years) | 5.0 | 5.0-6.0 | 4.6-4.8 | 0.8 |
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 10 - Accrued Expenses
As of March 31, 2023 and December 31, 2022, the Company’s accrued expenses consisted of the following (in thousands):
March 31, 2023 | December 31, 2022 | |||||||
Payroll and related expenses | $ | 155 | $ | -- | ||||
Bonus | -- | 510 | ||||||
Taxes | 25 | -- | ||||||
Insurance | 15 | 104 | ||||||
Other expenses | 35 | 7 | ||||||
Total | $ | 230 | $ | 621 |
Note 11 - Notes Payable
Convertible Notes
Series F / F-1 / F-2 | 2022 Notes | Warrants - Senior Secured Note | Warrants - Series E - Line of Credit | December 31, 2022 | ||||||
Date | 9/30/2023 | 9/30/2023 | 9/30/2023 | 9/30/2023 | 12/31/2022 | |||||
Dividend yield | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | |||||
Expected price volatility | 70.0% | 65.0% | 65.0% | 65.0% | 48.7% | |||||
Risk free interest rate | 4.63% | 4.69% | 4.22% | 4.67% | 4.74% | |||||
Expected term (in years) | 4.7 | 4.1 | 4.3 | 4.3 | 0.8 |
2022 Notes
On October 19, 2022, the Company issued its 2022 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 2022 Notes were issued with a conversion price at a 54% premium to the most recent closing price, an original issue discount (“OID”) 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 2022 Notes). The 2022 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 2022 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).
During the three months ended March 31, 2023, in connection with its 2022 Notes, the Company entered into a warrant inducement and exercise agreement with certain holders of the 2022 Notes (See Notes 7 and 13).
On February 28, 2023, the Company entered into waiver agreements with holders of the 2022 Notes which extended the maturity date of the 2022 Notes from October 19, 2023 to April 18, 2024. As consideration for this agreement, the Company issued 5,813,414 warrants to purchase shares of the Company’s common stock (See Note 7 and 13).
On March 24, 2023, the Company entered into the waiver agreements with holders of the 2022 Notes to eliminate the minimum pricing covenant as it relates to Company's At-The-Market facility. As consideration for this agreement, the Company provided the holders with two options to choose from i) to take an additional 5% OID on their October note principal or ii) pending shareholder approval, to be issued shares of common stock with a value equal to the 5% OID, and to issue total shares of 1,903,429 as converted using the Nasdaq minimum price of $0.157. During the three months ended March 31, 2023, six of the note holders elected option i), and the Company increased the respective principal balance of the notes by approximately $0.15 million. The remaining noteholders elected option ii), and as of the date of this report, no shares of common stock have been issued.
During the three months ended March 31, 2023, two noteholders converted a portion of their 2022 Notes into 1,887,919 shares of the Company’s commons stock (See Note 12).
2023 Note
On February 3, 2023, upon drawing down on the Line of Credit, the Company issued its 2023 Note totaling $2.0 million, which is due and payable 60 days from the issuance date. The 2023 Note is non-interest bearing and secured by the Company’s assets. The 2023 Note issued with the initial $2.0 million drawdown 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 2023 Note. 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 of the date of this report, the Company has entered into agreements extending maturity of the 2023 Note out to May 31st, 2023. As consideration the Company has agreed to issue the note holder with 4 thousand Series E preferred stock and 2 million shares of common stock. Both of these issuances are pending shareholder approval.
As of March 31, 2023, the fair value of the 2022 Notes and the 2023 Notes was approximately $3.2 million. During the three months ended March 31, 2023, the Company recorded a change in fair value of the 2022 Notes and the 2023 Notes totaling $0.1 million.
Senior Secured Notes
On January 3, 2023, the Company issued senior secured 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 $1.0 million. The senior secured notes were issued with an original issue discount of 16.7%, do not bear interest, and mature three months from the date of issuance (unless extended pursuant to the terms of the 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. As of the date of this report, the Company has entered into agreements extending maturity of the Senior Secured Notes out to May 23rd, 2023 in return for the issuance of 4,710,000 shares of common stock split pro-rata across the holders. This issuance is pending shareholder approval.
The senior secured notes and warrants 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 upon 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 Investors are “accredited investors” as such term is defined in Regulation D promulgated under the Securities Act.
Note 12 -11 – Stockholders’ Equity
Preferred Stock
As of March 31,September 30, 2023, and December 31, 2022, there were 50,000,000 authorized shares of the Company’s preferred stock with par value of $0.0001.
Series A Preferred Sock
As of March 31,September 30, 2023 and December 31, 2022, 251 shares of Series A preferred stock are issued and outstanding.
Series B Preferred Stock
As of March 31,September 30, 2023 and December 31, 2022, 1,443 shares of Series B preferred stock are issued and outstanding.
Series C Preferred Stock
As of March 31,September 30, 2023 and December 31, 2022, 500,756 shares of Series C preferred stock are issued and outstanding.
Series D Preferred Stock
On July 8, 2022, the Company’s BoardAs 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 and as of March 31,September 30, 2023 and December 31, 2022,zero and 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.
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.
During the three months ended March 31, 2023, 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. The modification increased the fair value of the Series D preferred stock by approximately $6,000, which the Company recorded as a deemed dividend.
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, in connection with its 2023 Lineline of Credit.credit. Each share of Series E Preferred Stockpreferred 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.
On February 2, 2023, in connection with its Lineline of Credit,credit, the Company issued 5,000 shares of Series E Preferred Stockpreferred stock as a commitment fee with a fair value of $1.45$1.5 million. In addition, the Company agreed to issue an additional 5,000 shares of Series E preferred stock on both the first and second anniversary date of the Lineline of Credit,credit, or 10,000 shares on the first anniversary, if the Company does not elect to extend the maturity date of the Lineline of Credit.credit. The fair value of the additional 10,000 shares of Series E preferred stock on the issuance date totaled $2.9 million. The Company recorded the total fair value of $4.35$4.4 million as additional paid-in capital with the offsetting increase to deferred debt issuance costs. The deferred debt issuance costs will be amortized over the term of the Line of Credit.
As of March 31,September 30, 2023, 5,000following Series E preferred stock conversions, zero shares of Series E preferred stock are issued and outstanding. There were no shares of Series E preferred stock issued and outstanding as of December 31, 2022.
Series F Preferred Stock
On June 4, 2023, the Company entered into exchange agreements with (i) the 2022 Notes investors for the exchange of 2022 Notes in the aggregate principal amount of $2.6 million for 2,622 shares of the Company’s Series F convertible preferred stock (“Series F preferred stock”), (ii) with the Senior Secured Notes investors for the exchange of Senior Secured Notes in the aggregate principal amount of $0.2 million for 206 shares of Series F Preferred Stock; (iii) with the Demand Noteholders for the exchange of Demand Notes in the principal amount of $0.6 million for 576 shares of Series F Preferred Stock, and (iv) with the purchasers of the Company’s Series D Preferred Stock for the exchange of 1,197 shares of Series D Preferred Stock for 1,847 shares of Series F Preferred Stock.
In addition, the Company issued new five-year warrants to purchase an aggregate of 592,137 shares of common stock (the “Exchange Warrants”) to the 2022 Note holders, the Senior Secured Note holders, and the purchasers of the Company’s Series D preferred stock. The Exchange Warrants are exercisable at an exercise price of $8.868 per share of common stock. The holders may exercise the Exchange Warrants on a cashless basis if the shares of the Company’s common stock underlying the Exchange Warrants are not then registered pursuant to an effective registration statement. The Company concluded that the Exchange Warrants are liability classified.
For the 2022 Note holders, the total fair value of Series F preferred stock and warrant liability issued were $1.1 million and $0.6 million, respectively. For the Senior Secured Note holders, the total fair value of Series F preferred stock and warrant liability issued were $0.1 million and $30,000, respectively. For the Demand Note holders, the total fair value of Series F Preferred Stock and Warrant Liability issued were $0.2 million and $0.2 million, respectively. For the purchasers of the Company’s Series D preferred stock, the Company accounted for the exchange as an extinguishment of the Series D preferred stock and recorded the total fair value of Series F preferred Stock and warrant liability of $0.7 million and $0.5 million, respectively. The difference of $0.5 million with the $0.7 million carrying value of the Series D preferred stock as a deemed dividend and reduction to additional-paid-in-capital.
In July 2023, the Company converted 803 shares of Series F preferred stock for 103,234 shares of common stock. As of September 30, 2023 and December 31, 2022, 4,448 and zero shares of Series F preferred stock are issued and outstanding.
Series F-1 Preferred Stock
On June 13, 2023, the Company issued 3,583 shares of Series F-1 preferred stock for an aggregate purchase price of $2.3 million. In connection with the issuance of the Series F-1 preferred stock, the holders will receive five-year warrants to purchase an aggregate of 398,377 shares of common stock (the “Series F-1 Warrants”). The Series F-1 Warrants will be exercisable at an exercise price of $8.994 per share of the Company’s common stock, subject to certain adjustments as set forth in the Series F-1 Warrants. The holders may exercise the Series F-1 Warrants on a cashless basis if the shares of our Common Stock underlying the Series F-1 Warrants are not then registered pursuant to an effective registration statement. The obligations of the Company and the Purchasers to consummate the transactions contemplated by the Purchase Agreement are subject to the satisfaction on or prior to the Closing of customary closing conditions..
The Company allocated the proceeds of $2.3 million to the liability classified warrants with a fair value of $0.9 million and the remaining proceeds of $1.4 million to the Series F-1 preferred stock.
In July 2023, the Company converted 2,930 shares of Series F-1 preferred stock for 325,737 shares of common stock. As of September 30, 2023 and December 31, 2022, 653 and zero shares of Series F-1 preferred stock are issued and outstanding.
Change in Authorized Shares
Series F-2 Preferred Stock Offering
On June 14, 2023, the Company issued 1,153 shares of its Series F-2 preferred stock for an aggregate purchase price of approximately $0.7 million. In connection with the issuance of the Series F-2 preferred stock, the holders will receive five-year warrants to purchase an aggregate of 124,946 shares of common stock (the “F-2 Warrants”). The F-2 Warrants will be exercisable at an exercise price of $9.228 per share of common stock.
The Company allocated the proceeds of $0.7 million to the liability classified warrants with a fair value of $0.3 million and the remaining proceeds of $0.4 million to the Series F-2 preferred stock.
As of September 30, 2023 and December 22,31, 2022, the Company’s Board1,153 and zero shares of Directors approved increasingSeries F-2 preferred stock are issued and outstanding.
Common Stock
Authorized Shares
As of September 30, 2023, there were 800,000,000 shares of the Company’s authorized shares of common stock from 200,000,000 to 800,000,000 shares.
Reverse Stock Splitstock.
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.
Warrant Exercises
During the threenine months ended March 31,September 30, 2023, the Company issued 6,55,095106,764 shares of its common stock in connection with the exercise of 6,405,844106,768 warrants, receiving net proceeds of approximately $2.06$2.0 million at a weighted averageweighted-average price of $0.32$19.30 per share.
During the threenine months ended March 31,September 30, 2023, the Company issued 149,2512,493 shares of its common stock in connection with the exercise of 166,6672,778 penny warrants.
Notes
During the three months ended March 31,At-the-Market Offering
As of September 30, 2023, the Company issued 1,887,919has received net proceeds on sales of 794,689 shares of its common stock under the at-the-market offering of approximately $3.8 million after deducting $0.1 million in commissions and expenses. The weighted-average price of the common stocks were $4.98 per share.
Equity Line of Credit
On July 20, 2023 (“Closing Date”), the Company entered into the ELOC with a purchaser (“ELOC Purchaser”) whereby the Company has the right to sell up to an aggregate of $50.0 million of newly issued shares (the “ELOC Shares”) of the Company’s common stock. The aggregate number of shares that the Company can sell under the ELOC Purchase Agreement may not exceed 4.99% of the outstanding common stock, subject to certain exceptions set forth in the ELOC Purchase Agreement.
The purchase price of the shares of common stock that the Company elects to sell to the pursuant to the ELOC Purchase Agreement will be equal to 97.0% of the lower of (i) the lowest intraday sale price of the common stock on the Company’s current trading market on the applicable purchase date or (ii) the arithmetic average of the three lowest closing sale prices during the ten trading days immediately preceding the applicable purchase date. There is no upper limit on the price per share that ELOC Purchase could be obligated to pay for the common stock under the ELOC Purchase Agreement.
On the Closing Date, the Company issued 21,841 shares of common stock to the ELOC Purchase as an initial fee for commitment to purchase the Company’s common stock under the ELOC Purchase Agreement. On the date that is the earlier of (i) 30 calendar days after the Closing Date or (2) October 16, 2023, the Company will issue an additional 87,417 shares of common stock as additional commitment shares. Liability for common stock issued was $0.4 million as of the closing date. The liability is subject to remeasurement at each reporting period until issued, and any change in fair value is recognized and included as other income (expense) in the condensed consolidated statement of operations. The change in fair value of liability issued was approximately $0.5$0.4 million in connection withduring the conversion of a portion of its 2022 Notes (See Note 11).nine months ended September 30, 2023.
ATM Offering
As of March 31,September 30, 2023, the Company has received net proceeds on sales of 12,700,0003,986,991 shares of common stock under its ATM Offering (See Note 2) of approximately $2.1$4.5 million, (afterafter deducting $0.1 million in commissions and expenses)expenses, at a weighted average price of $0.173 per share.
Consulting
During the three months ended March 31, 2023, the Company issued 1,800,000 shares of its common stock with a fair value of approximately $0.6 million as compensation for consulting services.
Restricted Stock
During the three months ended March 31, 2023, the Company issued 500,000 shares of its common stock in connection with vested restricted stock units.
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$1.19 per share.
Note 13 -12 – Stock-Based Compensation
Stock Options Restricted Stock Units and Warrants:
On December 22, 2022, theThe 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 issuancegrants equity-based compensation 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 5,500,00091,667 to 7,333,333.122,222.
On December 16, 2020, the Company adopted its 2020 Plan. Under the 2020 Plan, there are 88,889 shares of the Company’s common stock available for issuance and the 2020 Plan has a term of 10 years.
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:
TheOn December 22, 2022, the Company recognized total expensesadopted its 2022 Long-Term Incentive Plan (the “2022 Plan”). Under the 2022 Plan, there are 70,000 shares of the Company’s common stock available for stock-based compensation duringissuance and the three months ended March 31, 2023 and 2022 which are included in the accompanying statements of operations, as follows (in thousands):
Three months ended March 31, | ||||||||
2023 | 2022 | |||||||
(Unaudited) | (Unaudited) | |||||||
Research and development expenses | $ | 59 | $ | 55 | ||||
Selling, general and administrative expenses | 122 | 1,028 | ||||||
Total stock-based compensation | $ | 181 | $ | 1,083 |
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 thePlan has a termination 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.October 31, 2032.
A summary of activity under the 2016 and 2020 Plans for the nine three months ended March 31,September 30, 2023 is as follows:
Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2022 | 159,295 | $ | 153.35 | 6.5 | $ | 26,188 | ||||||||||
Forfeited | (1,516 | ) | $ | 196.86 | - | - | ||||||||||
Outstanding at September 30, 2023 | 157,779 | $ | 157.47 | 5.8 | $ | - | ||||||||||
Exercisable at September 30, 2023 | 143,325 | $ | 168.04 | 5.5 | $ | - |
Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2022 | 9,513,624 | $ | 2.64 | 6.5 | $ | 26,188 | ||||||||||
Forfeited | (90,138 | ) | $ | 3.29 | - | |||||||||||
Outstanding at March 31, 2023 | 9,423,486 | $ | 2.63 | 6.3 | $ | - | ||||||||||
Exercisable at March 31, 2023 | 8,521,662 | $ | 2.80 | 6.0 | $ | - |
Stock-Based Compensation
The total stock-based compensation expense recognized was as follows (in thousands):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Research and development expenses | $ | 46 | $ | 136 | $ | 150 | $ | 636 | ||||||||
Selling, general and administrative expenses | 87 | 344 | 296 | 2,375 | ||||||||||||
Total stock-based compensation | $ | 133 | $ | 480 | $ | 446 | $ | 3,011 |
As of September 30, 2023, the total unrecognized stock-based compensation cost related to outstanding unvested stock options that are expected to vest was $0.1 million, which the Company expects to recognize over an estimated weighted-average period of 2.5 years.
Restricted stock units:Stock Units
A summary of the Company’s restricted stock activity during the three months ended March 31, 2023and related information is as follows:
Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
Unvested at December 21, 2022 | 10,483 | $ | 82.02 | |||||
Vested | (3,344 | ) | $ | 104.04 | ||||
Unvested at September 30, 2023 | 7,139 | $ | 71.68 |
Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
Unvested at January 1, 2023 | 628,780 | $ | 1.37 | |||||
Vested | (130,867 | ) | $ | 1.55 | ||||
Unvested at March 31, 2023 | 497,913 | $ | 1.32 |
Warrants:Note 13 – Warrants
A summary of the Company’s warrant (excluding penny warrants) activity during the three months ended March 31, 2023and related information is as follows:
Shares Underlying Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | Shares Underlying Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||||||||||||||
Outstanding at December 31, 2022 | 27,661,181 | $ | 0.75 | 4.5 | $ | - | 461,066 | $ | 44.88 | 4.5 | $ | - | ||||||||||||||||||||
Issued | 14,764,258 | $ | 0.32 | 4.7 | 1,405,797 | $ | 11.42 | 4.6 | - | |||||||||||||||||||||||
Exercised | (6,405,844 | ) | $ | 0.32 | - | (106,768 | ) | $ | 19.20 | - | - | |||||||||||||||||||||
Outstanding at March 31, 2023 | 36,019,595 | $ | 0.65 | 4.4 | $ | - | ||||||||||||||||||||||||||
Outstanding at September 30, 2023 | 1,760,095 | $ | 18.96 | 4.4 | $ | - |
2023 Liability Classified Warrants
Senior Secured Note
During the threenine months ended March 31,September 30, 2023, in connection with the issuance of its senior secured notes on January 3, 2023 (See Note 11), the Company issued 2,500,00041,667 warrants to purchase shares of the Company’s common stock with an exercise price of $0.32$19.30 per share. The warrants expire 5 years from the issuance date.
Line of Credit
During the threenine months ended March 31,September 30, 2023, in connection with its Lineline of Credit,credit, the Company issued 45,000 Series E warrants to purchase shares of its Series E preferred stock with an exercise price of $0.50 per share multiplied by 1,000, and subject to adjustment under certain circumstances described in the warrant. (See Note 12)9). The warrants expire 5 years from the issuance date.
2022 Notes
During the year ended December 31, 2022, inIn connection with the 2022 Notes, the Company issued 21,759,402362,657 warrants to purchase shares of the Company’s common stock. The warrants have an exercise price of $0.32$19.30 per share and expire five years from the issuance date.
During the threenine months ended March 31,September 30, 2023, in connection with its 2022 Notes, the Company entered into a warrant inducement and exercise agreement with certain holders. Under the terms of the agreement, the holders exercised 6,405,844106,764 warrants, and the Company issued 6,405,844106,764 new warrants to purchase shares of its common stock with an exercise price of $0.32$19.30 per share. The warrants expire 5 years from the issuance date.
On February 28, 2023, the Company entered into waiver agreements with holders of the 2022 Notes and issued 5,813,41496,894 warrants to purchase shares of the Company’s common stock with an exercise price of $0.32$19.30 per share.
Exchange Warrants, F-1 Warrants, and F-2 Warrants
In connection with the exchange agreement, the Company issued new five-year warrants to purchase an aggregate of 592,137 shares of common stock to the noteholders and the purchasers of the Company’s Series D preferred stock. The Exchange Warrants are exercisable at an exercise price of $8.868 per share of common stock. The holders may exercise the warrants on a cashless basis if the shares of the common stock underlying the warrants are not then registered pursuant to an effective registration statement. The Company concluded that the Exchange Warrants are liability classified.
In connection with the issuance of the Series F-1 preferred stock, the noteholders will receive five-year warrants to purchase an aggregate of 398,379 shares of common stock. The warrants will be exercisable at an exercise price of $8.994 per share of the Company’s common stock. The noteholders may exercise the warrants on a cashless basis if the shares of the common stock underlying the warrants are not then registered pursuant to an effective registration statement.
In connection with the issuance of the Series F-2 preferred stock, the noteholders will receive five-year warrants to purchase an aggregate of 124,948 shares of common stock. The F-2 warrants will be exercisable at an exercise price of $9.228 per share of common stock. The noteholders may exercise the F-2 warrants on a cashless basis if the shares of the common stock underlying the F-2 warrants are not then registered pursuant to an effective registration statement.
2022 Equity ClassifiedPurchase Order 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$0.1 million and represent the first orders the Company has received prior to the launch of its Inserts. Delivery and installation are expected to begin in the fourth quarter of 2023.
On August 12, 2022, asAs additional consideration for the PO’s, the Company issued a warrant to Hudson to purchase 300,0005,000 shares of the Company’s common stock at $0.75$45.00 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”).606. As the performance obligations have not yet been satisfied, the Company has not recognized any revenue in connection with Hudson during the threenine months ended March 31,September 30, 2023.
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,$0.2 million, and as of March 31,September 30, 2023, and December 31, 2022, the Company recorded a prepaid asset of $85,450,$0.1 million, representing the recoverable value from the PO’s, which is included in prepaid and other current assets on the accompanyingcondensed consolidated balance sheet.
SLOC
In connection with the SLOC, on March 17, 2022 the Company issued a warrant for 200,0003,333 shares of common stock with an exercise price of $2.00,$120.00 per share, and a total fair value of approximately $223,000.$0.2 million. This amount is included in the accompanying consolidated balance sheet as deferred debt issuance costs (See Note 6)8).
Note 14 -– Commitments and Contingencies
Operating Leases
Oregon State University
On March 8, 2016,The Company leases laboratory spaces, warehouse and office facilities with lease terms ranging from three to five years. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain operating leases also include renewal options at the election of the Company entered into ato renew or extend the lease. The Company evaluates renewal options at lease agreement with Oregon State University,inception and on an ongoing basis and includes renewal options that it is reasonably certain to exercise in its expected lease officeterms when classifying leases 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 themeasuring 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 Juneliabilities.
As of September 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.
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 intohad operating lease liabilities of approximately $0.7 million and right-of- use assets of approximately $0.7 million, which are included in the ninth amendmentcondensed consolidated balance sheet.
The components of operating lease expense were as follows:
Three Months Ended September 30, | Nine months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Operating leases: | ||||||||||||||||
Operating lease cost | $ | 108 | $ | 190 | $ | 439 | $ | 570 | ||||||||
Variable lease cost | 25 | 17 | 74 | 33 | ||||||||||||
Operating lease expense | $ | 133 | $ | 207 | $ | 513 | $ | 603 |
The following information represents supplemental disclosure for the condensed consolidated statement of cash flows related to itsoperating leases (in thousands):
Nine months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Operating cash flows - operating leases | $ | 513 | $ | 570 | ||||
Right-of-use assets obtained in exchange for operating lease liabilities | $ | - | $ | 2,336 |
The present value assumptions used in calculating the present value of the 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 is $41,323 covering all utility and facility tooling costs.payments were as follows:
September 30, | ||||||||
2023 | 2022 | |||||||
Weighted-average remaining lease term (years) | 1.7 | 3.5 | ||||||
Weighted-average discount rate | 12.0 | % | 12.0 | % |
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 paid 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:
As of March 31, 2023, the Company had operating lease liabilities of approximately $1.8 million and right-of-use assets of approximately $1.7 million, which are included in the condensed balance sheet.
The components of lease expense were as follows:
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Operating leases: | ||||||||
Operating lease cost | $ | 190 | $ | 190 | ||||
Variable lease cost | 58 | 19 | ||||||
Operating lease expense | $ | 248 | $ | 209 |
Supplemental cash flow information related to leases were as follows:
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Operating cash flows - operating leases | $ | 192 | $ | 153 | ||||
Right-of-use assets obtained in exchange for operating lease liabilities | $ | - | $ | 2,336 | ||||
Weighted-average remaining lease term – operating leases (in years) | 3.0 | 3.9 | ||||||
Weighted-average discount rate – operating leases | 12.0 | % | 12.0 | % |
As of March 31,September 30, 2023, future minimum payments are as follows (in thousands):
Operating | ||||
Leases | ||||
Nine months ended December 31, 2023 | $ | 584 | ||
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 | 2,185 | |||
Less present value discount | (379 | ) | ||
Operating lease liabilities | $ | 1,806 |
During the three months ended March 31, 2023 and 2022, the Company recognized rent expense of approximately $0.2 million in each period, respectively.
Operating | ||||
Leases | ||||
Three months ended December 31, 2023 | $ | 133 | ||
Year ended December 31, 2024 | 417 | |||
Year ended December 31, 2025 | 194 | |||
Year ended December 31, 2026 | 100 | |||
Year ended December 31, 2027 | 9 | |||
Total | 853 | |||
Less present value discount | (113 | ) | ||
Operating lease liabilities | $ | 740 |
On April 27, 2023 the Company terminated the Pacific NW lease and exited the building on May 10th, 2023. (See note 15)
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 15 -– Subsequent Events
The Company has evaluated all subsequent events through the date of filing, May 22,November 14, 2023, of this Quarterly Report on Form 10-Q with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the condensed consolidated financial statements as of March 31,September 30, 2023, and events which occurred after March 31,September 30, 2023, 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.
Lease Termination
On April 27,ATM Offering
Subsequent to September 30, 2023, the Company terminated the Pacific NW leasereceived net proceeds on sales of 5,456,699 shares of common stock of approximately $1.9 million (after deducting $0.1 million in commissions and exited the building on May 10th, 2023. As partexpenses) at a weighted average price of the termination agreement, the Company agreed to pay fees to the landlord for rent in arrears and re-tenanting costs. The fees will be covered by forfeiting Crowns $150,000 security deposit and paying an additional $115,394 for Landlord re-tenanting costs to be paid in three monthly instalments beginning April 30, 2023.$0.36 per share.
Convertible Note RepricingDelisting Notice
On May 12,October 19, 2023, the Company entered intoreceived a letter agreements (the “Inducement Agreements”“Nasdaq Staff Deficiency Letter”) with certain offrom Nasdaq indicating that, for the October Investors, pursuant to which such October Investors agreed to reducelast thirty (30) consecutive business days, the conversionbid price of October Notes in an aggregate principal amount equal to $1,500,000, to $0.1547for the Company’s common stock had closed below the minimum $1.00 per share which are now convertible into 9,693,681 sharesrequirement for continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”).
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided an initial period of 180 calendar days, or until April 16, 2024, to regain compliance with the Bid Price Rule. The letter states that the Nasdaq staff will provide written notification that the Company has achieved compliance with Bid Price Rule if at any time before April 16, 2024, the bid price of the Company’s common stock representing an increase of 5,030,951 shares in excess of the number of shares into which such October Notes were convertible prior to the Company’s entry into the Inducement Agreements.
On May 17, 2023, the Company entered into Inducement Agreements with the remaining October Investors, pursuant to which such October Investors agreed to reduce the conversion price of October Notes in an aggregate principal amount equal to $1,392,657, to $0.1822closes at $1.00 per share which are now convertible into 7,643,560 sharesor more for a minimum of ten (10) consecutive business days. The Nasdaq Staff Deficiency Letter has no immediate effect on the Company’s common stock, representing an increase of 3,314,506 shares in excess of the number of shares into which such October Notes were convertible prior to the Company’s entry into the Inducement Agreements.
Line of Credit Promissory Note Extension
On May 15, 2023, the Company entered into that certain Third Amendment to the Convertible Promissory Note (the “LOC Note Amendment”) with the lender, pursuant to which the lender agreed to extend the maturity date of the LOC Note until June 7, 2023 in exchange for, subject to stockholder approval, 4,000 shares of the Company’s SeriesE Preferred Stock, which are convertible into 4,000,000 shareslisting or trading of the Company’s common stock.
January Senior Secured Note ExtensionThe Company intends to monitor the bid price of its common stock and consider available options if its common stock does not trade at a level likely to result in the Company regaining compliance with the Bid Price Rule by April 16, 2024.
If the Company does not regain compliance with the Bid Price Rule by April 16, 2024, the Company may be eligible for an additional 180 calendar day compliance period. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Bid Price Rule, and will need to provide written notice of its intention to cure the deficiency during the second compliance period, for example, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq staff that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible, Nasdaq will notify the Company that its securities will be subject to delisting. In the event of such a notification, the Company may appeal the Nasdaq staff’s determination to delist its securities. There can be no assurance that the Company will be eligible for the additional 180 calendar day compliance period, if applicable, or that the Nasdaq staff would grant the Company’s request for continued listing subsequent to any delisting notification.
On May 15, 2023, the lead lender and collateral agent for the January Notes agreed to grant the Company an extension of the maturity date thereof until May 23, 2023 in exchange for the issuance by the Company to the January Investors, on a pro rata basis, of 4,000,000 shares of the Company’s common stock, subject to approval by the Company’s stockholders.
May Demand Notes
Between May 17, 2023 and May 18, 2023, the Company issued secured demand promissory notes (the "Demand Notes") to certain investors (the “Holders”) in an aggregate principal amount equal to $429,877. The Demand Notes are due and payable at any time upon demand by a Holder after the earlier of (i) the consummation of the Company’s first securities offering after the issuance of the Demand Notes and (ii) July 16, 2023. The Demand Notes do not bear interest. In connection with the issuance of the Demand Notes, subject to stockholder approval, the Company agreed to issue to the Holders an aggregate of 8,597,539 shares of the Company’s common stock.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this report.
As an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay our adoption of such new or revised accounting standards. As a result of this election, our condensed consolidated financial statements may not be comparable to the condensed financial statements of other public companies.
Management’s plans and basis of presentation:Overview
Crown Electrokinetics Corp. wasWe were incorporated in the State of Delaware on April 20, 2015. Effective October 6, 2017, the Company’sour name was changed to Crown Electrokinetics Corp. from 3D Nanocolor Corp.
On January 26, 2021, the Companywe completed itsour public offering, and itsour common stock began trading on the Nasdaq Capital Market (Nasdaq) under the symbol CRKN.
The Company is commercializingWe commercialize technology for smart or dynamic glass. The Company’sOur electrokinetic glass technology is an advancement on microfluidic technology that was originally developed by HP Inc.
Business Combination
On December 20, 2022, the Companywe incorporated Crown Fiber Optics Corp., a Delaware based entity, to own and operate itsour acquired business from the acquisition of Amerigen 7, LLC (“Amerigen 7)7”) in January 2023. Crown Fiber Optics Corp. will beis accounted for as aour wholly- owned subsidiary of Crown Electrokinetics, Corp.subsidiary.
Reverse Stock Split
On January 3,August 11, 2023, our board of directors authorized a reverse stock split (‘Reverse Stock Split”) at an exchange ratio of one-for-60 basis. The number of authorized shares and the Company acquired certain assets related to the construction of 5G fiber optics infrastructure and distributed antenna systems from Amerigen 7 (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 fairpar value of the assets acquired and liabilities assumedcommon stock was not adjusted as a result of the acquisition date has notReverse Stock Split. In connection with the Reverse Stock Split, the conversion ratio for our outstanding preferred stock was proportionately adjusted such that the common stock issuable upon conversion of such preferred stock was decreased in proportion to the Reverse Stock Split. All references to common stock and options to purchase common stock share data, per share data and related information contained in the condensed consolidated financial statements have been completed.adjusted to reflect the effect of the Reverse Stock Split.
Preferred Stock
Components of Operating Results
On February 1, 2023 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.
Revenue
Revenue include fiber splicing services as required based on short-term work orders assigned by customers. We recognize revenue immediately upon completion of each work order in the amount that reflects the consideration to which we expect to be entitled.
Cost of Revenue
Cost of revenue primarily consists of cost of inventory sold during the period (net of discounts and allowances), storage costs, direct labor, shipping and handling costs, and allocated overhead
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.
On February 2, 2023, as consideration for entering into its Line of Credit (see below), the Company issued 5,000 shares of Series E Preferred Stock as a commitment fee with a fair value of $1.45 million and issued a warrant to purchase 45,000 shares of the Company’s Series E preferred stock. In addition, the Company agreed to issue an additional 5,000 shares of Series E preferred stock on both the first and second anniversary date of the Line of Credit, or 10,000 shares on the first anniversary, if the Company does not elect to extend the maturity date of the Line of Credit. The fair value of the additional 10,000 shares of Series E preferred stock on the issuance date totaled $2.9 million. The Company recorded the total fair value of $4.35 million as additional paid-in capital with the offsetting debit to deferred debt issuance costs. The deferred debt issuance costs will be amortized over the term of the Line of Credit.
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 stockGross Profit
Change in Authorized Shares
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.
Reverse Stock Split
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.
Warrant Exercises
During the three months ended March 31, 2023, 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.
ATM Offering
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.
Gross profit have been, and will continue to be, affected by a variety of factors, including those that may affect our revenue set forth above and factors that may affect our cost of revenue.
During the three months ended March 31, 2023, the Company has received net proceeds on sales of 12,700,000 shares of common stock under the Sales Agreement of approximately $2.1 million (after deducting $0.1 million in commissions and expenses) at a weighted average price of $0.173 per share.
Line of Credit and Convertible Promissory Note
On February 2, 2023, the Company entered into a line of credit agreement (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 3, 2023, upon drawing down on the Line of Credit, the Company issued a convertible promissory note (the “2023 Note”) totaling $2.0 million, which is due and payable 60 days from the issuance date. The 2023 Note is non-interest bearing and secured by the Company’s assets. The 2023 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 2023 Note. 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 of the date of this report the Company is in discussions to extend the Maturity of the 2023 Note.
Operating Expenses
Senior Secured Convertible Notes
Our operating expenses consist of (i) research and development expenses and (ii) selling, general and administrative expenses.
On October 19, 2022,
Research and Development Expenses
Research and development expenses primarily consist of compensation and related costs for personnel (including stock-based compensation expenses), materials, supplies, technology and software license amortization and equipment depreciation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of personnel costs, including salaries, bonus and benefit costs, professional fees, stock-based compensation, facility costs (including rent, property taxes, utilities, common area maintenance and insurance), audit and compliance expenses, advertising and marketing expenses and other administrative costs.
Other Income (Expense)
Interest Expense
Interest expenses consist primarily of amortization expense from our line of credits. Refer to Note 7 on our condensed consolidated financial statements for additional information.
Loss on Extinguishment of Warrant Liability
Loss on extinguishment of warrant liability relates to the Company issued senior securedloss recognized on the settlement of our warrant liabilities. Refer to Note 10 on our condensed consolidated financial statements for additional information.
Loss on Extinguishment of Debt
Loss on extinguishment of debt relates to the loss recognized on the settlement of our convertible notes. Refer to Note 9 on our condensed consolidated financial statements for additional information.
Gain on Issuance of Convertible Notes
Gain on issuance of convertible notes (the “2022 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% premiumrelates to the most recent closing price, an original issue discount of 35%, do not bear interest, and mature upongain recognized due to 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 2022 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 2022 Notes. The 2022 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 2022 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.
During the three months ended March 31, 2023, in connection with its 2022 Notes, the Company entered into a warrant inducement and exercise agreement with certain note holders. The Company received net proceeds of approximately $2.06 million in connection with the exercise of 6,405,844 warrants, and the Company issued 6,405,844 shares of its common stock. Under the terms of the agreement, the Company issued 6,405,844 new warrantsour convertible notes. Refer to purchase shares of its common stock with an exercise price of $0.32 per share. The warrants expire 5 years from the issuance date.
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, 2023. 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 March 24, 2023, the Company entered into waiver agreements with holders of the 2022 Notes to eliminate the minimum pricing covenant as it relates to Company’s At-The-Market facility. As considerationNote 10 on our condensed consolidated financial statements for this agreement, the Company provided the holders with two options i) take an additional 5% OID on the October note principal or ii) pending shareholder approval, be issued shares of common stock with a value equal to the 5% OID value, and issue total shares of 1,903,429 as converted using the Nasdaq minimum price of $0.157. During the three months ended March 31, 2023, six of the note holders elected option i), and the Company increased the respective principal balance of the notes by approximately $0.15 million. The remaining note holders elected option ii), and as of the date of this report, no shares of common stock have been issued.
information.
Senior Secured Notes
Change in Fair Value of Warrants
On January 3, 2023, the Company issued senior secured notes with a principal balance
Change in fair value of approximately $1.2 million and warrants relates to purchase 2,500,000 shares of the Company’s common stock for net proceeds of $1.0 million. The senior secured notes were issued with an original issue discount of 16.7%, do not bear interest, and mature three months from the date of issuance (unless extended pursuant to the terms of the notes). The warrants are exercisable for five years at an exercise price of $0.322, subject to adjustment under certain circumstances describedchanges in the warrants. Asfair value of our warrants which were remeasured to fair value in each reporting period. Refer to Note 10 on our condensed consolidated financial statements for additional information.
Change in Fair Value of Notes
Change in fair value of notes relates to changes in the datefair value of this report the Company isour convertible notes which were remeasured to fair value in discussionseach reporting period. Refer to extend the maturity of this note.Note 10 on our condensed consolidated financial statements for additional information.
LeasesChange in Fair Value of Derivative Liability
Crown’s Research & Development Operation currently occupies 1,700 square feet of space, located on the HP Inc. campus in Corvallis, Oregon in the Advanced Technology and Manufacturing Institute (ATAMI). ATAMI is an academic-industrial research center and business incubator designed to provide an advanced materials development environment to private sector partner tenants performing research and development. The facility includes access to shared state-of-the-art tooling capabilities. ATAMI has grown to 80,000 square feet since its inception in 2004.
Hudson 11601 Wilshire, LLC
On March 4, 2021, the Company entered into a standard office lease with Hudson 11601 Wilshire, LLC, to lease 3,500 square feet of office space located at 11601 Wilshire Boulevard, Los Angeles, California 90025. The base monthly rent for the first year of the lease is $18,375 per month, which increases to $19,018.13 per month for the second year, $19,683.76 for the third year and $20,372.69 for the final three months of the lease. The lease expires on June 30, 2024.
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.
On April 27, 2023 the Company terminated the Pacific NW lease and exited the building on May 10th, 2023. (See note 15)
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 paid 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.
We believe that our facilities are adequate to meet our needs for the immediate future and that, should it be needed, we will be able to secure additional space to accommodate the expansion of our operations. This office space, along with ATAMI, offers Crown all the space requirements it needs for the foreseeable future.
Master Supply AgreementsChange in fair value of derivative liability relates to changes in the fair value of our derivative liability which was remeasured to fair value in each reporting period. Refer to Note 11 on our condensed consolidated financial statements for additional information.
As partOther Expense
Other expenses consist primarily of various other expenses.
Results of Operations for the January 4,Three and Nine Months Ended September 30, 2023 Amerigen 7 asset purchase agreement, Crown Fiber Optics acquired an MSA with Charter Spectrum which covered the five Great Lakes states. SubsequentCompared to the acquisition, Crown has now entered into three further MSA’s, with two of the agreements covering the Northwest United StatesThree and the other contemplating a Southwest United States footprint. Of the four MSA’s, two are direct agreements with Internet Service Providers (ISP’s) and the others with infrastructure solution providers.Nine Months Ended September 30, 2022 (in thousands):
On March 25, 2022, Crown executed a Master Supply Agreement (the “BDN MSA”) with Brandywine Operating Partnerships L.P. to install its Smart Window Inserts powered by DynamicTintTM in Brandywine office buildings. The BDN MSA provides the master terms and conditions under which purchase orders will be executed for Crown to supply units to retrofit windows at certain locations.
Three Months Ended | Nine months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||
Revenue | $ | - | $ | - | $ | - | $ | 59 | $ | - | $ | 59 | ||||||||||||
Cost of revenue | - | - | - | 54 | - | 54 | ||||||||||||||||||
Gross profit | - | - | - | 5 | - | 5 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Research and development | 492 | 955 | (463 | ) | 1,523 | 3,523 | (2,000 | ) | ||||||||||||||||
Selling, general and administrative | 2,941 | 2,160 | 781 | 10,926 | 8,634 | 2,292 | ||||||||||||||||||
Total operating expense | 3,433 | 3,115 | 318 | 12,449 | 12,157 | 292 | ||||||||||||||||||
Loss from operations | (3,433 | ) | (3,115 | ) | (318 | ) | (12,444 | ) | (12,157 | ) | (287 | ) | ||||||||||||
Other income (expense) | ||||||||||||||||||||||||
Interest expense | (2,445 | ) | (1 | ) | (2,444 | ) | (6,970 | ) | (6 | ) | (6,964 | ) | ||||||||||||
Loss on extinguishment of warrant liability | - | - | - | (504 | ) | - | (504 | ) | ||||||||||||||||
Loss on extinguishment of debt | - | - | - | (2,345 | ) | - | (2,345 | ) | ||||||||||||||||
Gain on issuance of convertible notes | - | - | - | 64 | - | 64 | ||||||||||||||||||
Change in fair value of warrants | 2,688 | - | 2,688 | 10,424 | - | 10,424 | ||||||||||||||||||
Change in fair value of notes | (40 | ) | - | (40 | ) | (7,040 | ) | - | (7,040 | ) | ||||||||||||||
Change in fair value of derivative liability | 401 | 401 | 401 | 401 | ||||||||||||||||||||
Other expense | (30 | ) | - | (30 | ) | (1,264 | ) | - | (1,264 | ) | ||||||||||||||
Total other income (expense) | 574 | (1 | ) | 575 | (7,234 | ) | (6 | ) | (7,228 | ) | ||||||||||||||
Loss before income taxes | (2,859 | ) | (3,116 | ) | 257 | (19,678 | ) | (12,163 | ) | (7,515 | ) | |||||||||||||
Net loss | $ | (2,859 | ) | $ | (3,116 | ) | $ | 257 | $ | (19,678 | ) | $ | (12,163 | ) | $ | (7,515 | ) |
On December 27, 2021, Crown executed a Master Supply Agreement (the “HPP MSA”) with Hudson Pacific Properties L.P. for the installation of Crown’s energy saving Smart Window Inserts in several office properties across its West Coast portfolio. The HPP MSA provides the master terms and conditions under which purchase orders will be executed for Crown to supply units to retrofit windows at certain locations.
Prior to this, Crown had entered into a Master Supply Agreement with MetroSpaces Inc., Crown’s first commercial customer, install its Smart Window Inserts in MetroSpaces’ 70,000 square-foot Houston, Texas office building.
Additionally, discussions with multiple other building owners to buy Crown Smart Window Inserts are progressing as the regulatory and consumer pressure to reduce the level of energy consumption and carbon emissions, continues to build.
Hudson Purchase OrdersRevenue
On August 12, 2022,
No revenue was recognized by 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 in the fourth quarter of 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.
Results of Operations forduring the three months ended March 31, 2023 compared to the three months ended March 31,September 30, 2022 (in thousands):
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Revenue | $ | 22 | $ | - | ||||
Cost of revenue | 31 | - | ||||||
Gross loss | (9 | ) | - | |||||
Research and development | 541 | 1,096 | ||||||
Selling, general and administrative | 3,576 | 3,471 | ||||||
Other (income) expense: | (1,826 | ) | 3 | |||||
Net loss | $ | (2,300 | ) | $ | (4,570 | ) |
Revenue
and September 30, 2023. Revenue is generated by the Company’s wholly-owned subsidiary, Crown Fiber Optics Corporation, and was immaterial$0.1 million for the threenine months ended March 31,September 30, 2023. No revenue was recognized by the Company during the nine months ended September 30, 2022.
Cost of Revenue
No cost of revenue was recognized by the Company during the three months ended March 31, 2022.
Cost of Revenue
September 30, 2022 and September 30, 2023. Cost of revenue is generated by the Company’s wholly-owned subsidiary, Crown Fiber Optics Corporation, and was immaterial$0.1 million for the threenine months ended March 31,September 30, 2023. No cost of revenue was recognized by the Company during the threenine months ended March 31,September 30, 2022.
Research and Development
Research and development expenses were $0.5 million and $1.1$1.0 million for the three months ended March 31,September 30, 2023 and 2022, respectively. The decrease of $0.6$0.5 million is primarily related to a decrease in salaries and benefits.
Research and development expenses were $1.5 million and $3.5 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease of $2.0 million is primarily related to a decrease in salaries and benefits of $0.5$1.9 million and a decrease in lab supplies and$0.1 million of other expenses of $0.1 million.expenses.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses were $3.6$2.9 million and $3.5$2.2 million for the three months ended March 31,September 30, 2023 and 2022, respectively. The $0.1$0.7 million increase in SG&A expenses is primarily due to an increase in salaries and benefits of $0.5 million, an increase in professional feesfor Crown Fiber Optics of $0.2 million and $0.5 million in consolidated professional fees.
Selling, general and administrative (“SG&A”) expenses were $10.9 million and $8.6 million for the nine months ended September 30, 2023 and 2022, respectively. The $2.3 million increase in SG&A expenses is primarily due to an increase in other SG&A expenses related to the acquisition ofsalaries and benefits for Crown Fiber Optics Corp in December 2022 of $0.3$2.6 million, partially offset by a decrease in stock-based compensationsalaries and benefits for Crown Electrokinetics of approximately $0.9$0.3 million.
Other (Income)Interest Expense
Other incomeInterest expenses was $1.8$2.5 million for the three months ended March 31,September 30, 2023 and was immaterial for the three months ended March 31,September 30, 2022. Other incomeInterest expenses for the three months ended March 31,September 30, 2023 primarily consisted of a gainamortization expense from our line of credits.
Interest expenses was $7.0 million for the nine months ended September 30, 2023 and was immaterial for the nine months ended September 30, 2022. Interest expenses for the nine months ended September 30, 2023 primarily consisted of amortization expense from our line of credits.
Loss on Extinguishment of Warrant Liability
Loss on extinguishment of warrant liability was $0.5 million for the nine months ended September 30, 2023 and was zero for the nine months ended September 30, 2022. Loss on extinguishment of warrant liability for the nine months ended September 30, 2023 primarily consisted of settlement of our warrant liabilities.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $2.3 million for the nine months ended September 30, 2023 and was zero for the nine months ended September 30, 2022. Loss on extinguishment of debt for the nine months ended September 30, 2023 primarily consisted of settlement of our convertible notes.
Gain on Issuance of Convertible Notes
Gain on issuance of convertible notes was $0.1 million for the nine months ended September 30, 2023 and was zero for the three months ended September 30, 2022. Gain on issuance of convertible notes for the nine months ended September 30, 2023 was related to the changegain on our 2023 Note.
Change in Fair Value of Warrants
Change in fair value of warrants was $2.7 million for the three months ended September 30, 2023 and was zero for the three months ended September 30, 2022. Change in fair value of $5.6warrants for the three months ended September 30, 2023 is related to the fair value gain from the remeasurement of our warrants.
Change in fair value of warrants was $10.4 million offset by interestfor the nine months ended September 30, 2023 and was zero for the nine months ended September 30, 2022. Change in fair value of warrants for the nine months ended September 30, 2023 is related to the fair value gain from the remeasurement of our warrants.
Change in Fair Value of Notes
Change in fair value of notes was $40,000 for the three months ended September 30, 2023 and was zero for the three months ended September 30, 2022. Change in fair value of notes for the three months ended September 30, 2023 is related to the fair value gain from the remeasurement of our convertible notes.
Change in fair value of notes was $7.0 million for the nine months ended September 30, 2023 and was zero for the nine months ended September 30, 2022. Change in fair value of notes for the nine months ended September 30, 2023 is related to the fair value gain from the remeasurement of our convertible notes.
Change in Fair Value of Derivative Liability
Change in fair value of derivative liability was $0.4 million for the three months ended September 30, 2023 and was zero for the three months ended September 30, 2022. Change in fair value of notes for the three months ended September 30, 2023 is related to the fair value gain from the remeasurement of the derivative liability.
Change in fair value of notes was $0.4 million for the nine months ended September 30, 2023 and was zero for the nine months ended September 30, 2022. Change in fair value of derivative liability for the nine months ended September 30, 2023 is related to the fair value gain from the remeasurement of our derivative liability.
Other Expense
Other expense of $2.0 million, loss on extinguishment of warrant liabilities of $0.5 million,was $30,000 for the three months ended September 30, 2023 and other expenses of $1.3 million whichwas zero for the three months ended September 30, 2022. Other expense for the three months ended September 30, 2023 primarily consisted of expenses incurred in connection with our February and March waiver agreements.various other expenses.
Other expense was $1.3 million for the nine months ended September 30, 2023 and was zero for the nine months ended September 30, 2022. Other expense for the nine months ended September 30, 2023 primarily consisted of various other expenses.
Liquidity and Going Concern
September 30, | September 30, | |||||||||||||||
Three Months Ended March 31, | 2023 | 2022 | ||||||||||||||
2023 | 2022 | |||||||||||||||
Cash and cash equivalents at the beginning of the period | $ | 821 | $ | 6,130 | $ | 821 | $ | 6,130 | ||||||||
Net cash used in operating activities | (4,728 | ) | (3,552 | ) | (11,809 | ) | (8,049 | ) | ||||||||
Net cash used in investing activities | (1,080 | ) | (65 | ) | (1,729 | ) | (339 | ) | ||||||||
Net cash provided by financing activities | 7,125 | - | 14,773 | 2,600 | ||||||||||||
Cash and cash equivalents at the end of the period | $ | 2,138 | $ | 2,513 | $ | 2,056 | $ | 342 |
The CompanyAs of September 30, 2023, we had an accumulated deficit of approximately $90.3 million, and a$107.7 million. During the nine months ended September 30, 2023, we incurred net loss of $2.3$19.7 million, and used approximately $4.7$11.8 million in net cash in operating activities for the three months ended March 31, 2023. The Company expects to continue to incur ongoing administrative and other expenses, including public company expenses.activities.
During the threenine months ended March 31,September 30, 2023, the Companywe received net proceeds on sales of 12,700,000 shares of common stock under the Sales Agreementat-the-market offering sales agreement of approximately $2.1$3.8 million (after deducting $0.1 million in commissions and expenses) at a weighted average price of $0.173$4.98 per share.
During the nine months ended September 30, 2023, in connection with its 2022 Notes, we entered into a warrant inducement and exercise agreement with certain holders. Under the terms of the agreement, the holders exercised 106,764 warrants with a fair value of approximately $0.8 million and we issued 106,764 new warrants to purchase shares of its common stock with a fair value of $1.3 million. We recognized a loss on extinguishment of the warrants of approximately $0.5 million which is included in other expense on the accompanying condensed consolidated statement of operations.
On January 3, 2023, the Companywe received net proceeds of $1.0 million from the issuance of senior secured notes with a principal balance of $1.2 million and a debt discount of $0.2 million.
On February 2, 2023, the Companywe withdrew $2.0 million under the Lineline of Credit.credit. Upon drawing down on the Lineline of Credit, the Companycredit, we issued the 2023 Note which is due and payable 60 days from the issuance date.
DuringOn April 4th, 2023, we made a $0.3 million payment on the three months ended March 31,note balance.
On May 16, 2023, we made a second draw of $0.2 million under the line of credit. Upon drawing down on the line of credit, we issued a second Secured Promissory Note (the “2nd 2023 Note”) which is due and payable July 16, 2023. The 2nd 2023 Note shall accrue interest at the 15% per annum from the original funding date of the 2nd 2023 Note.
On May 26, 2023, we made a third draw of $0.2 million under the line of credit. Upon drawing down on the line of credit, we issued a third “Secured Promissory Note (the “3rd 2023 Note”) which is due and payable June 2, 2023. The 3rd 2023 Note included a $0.2 million commitment fee and does not bear interest.
On June 13, 2023, we partially redeemed the principal of the 2023 Note and fully redeemed the principal of the 2nd 2023 Note and the 3rd 2023 Note in addition to all accrued interest and commitment fees owing for approximately $2.1 million.
Between May 17, 2023 and May 18, 2023, we issued secured demand promissory notes (the “Demand Notes”) to certain investors (the “Demand Holders”) in an aggregate principal amount equal to $0.2 million. The Demand Notes are due and payable at any time upon demand by a Demand Holder after the earlier of (i) the consummation of our first securities offering after the issuance of the Demand Notes and (ii) July 16, 2023. The Demand Notes do not bear interest.
On May 30, 2023, we issued secured demand promissory notes (the “2nd Demand Notes”) to certain investors (the “2nd Demand Holders”) in an aggregate principal amount equal to $0.1 million. The 2nd Demand Notes are due and payable at any time upon demand by a 2nd Demand Holder after the earlier of (i) the consummation of our first securities offering after the issuance of the 2nd Demand Notes and (ii) July 16, 2023. The 2nd Demand Notes do not bear interest.
On June 13, 2023, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited investors (the “Series F-1 Purchasers”), pursuant to which, at the closing of the transactions contemplated by the Purchase Agreement the Series F-1 Purchasers agreed to purchase an aggregate of 3,583 shares of our Series F-1 Convertible Preferred Stock (“Series F-1 Preferred Stock”) for an aggregate purchase price of approximately $2.3 million.
On June 14, 2023, we entered into a Securities Purchase Agreement (the “Series F-2 Purchase Agreement”) with certain accredited investors (the “Series F-2 Purchasers”), pursuant to which, at the closing of the transactions contemplated by the Purchase Agreement the Series F-2 Purchasers agreed to purchase an aggregate of 1,153 shares of our Series F-2 Convertible Preferred Stock (“Series F-2 Preferred Stock”) for an aggregate purchase price of approximately $0.7 million, net of $0.1 million in legal fees.
On July 25, 2023, the Company issued 6,555,095 shares of its common stock in connectionentered into the Demand Secured Promissory Note Agreement (“Q3 Demand Notes”) with the exercise of 6,555,095 warrants, receiving net proceeds of approximately $2.06 million attwo investors for a weighted averagepurchase price of $0.32 per share.$20,000 each and with an original issue discount of $12,000. Upon settlement, the Company is obligated to pay a total of $0.1 million in principal for the issuance of both notes. The Q3 Demand Notes are due and payable at any time upon demand by the holder after the earlier of (i) the consummation of the Company’s first securities offering after the issuance of the Q3 Demand Notes and (ii) January 25, 2024.
The Company will seek to obtain
We have obtained additional capital through the sale of debt or equity financings or other arrangements including through its existing At-The-Market, $10at-the-market offering, $10.0 million Standing Letterstanding letter of Credit $10,credit, $100.0 million line of credit, and $100$50.0 million Lineequity line of Creditcredit facilities to fund operations; however, there can be no assurance that the Companywe 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’sour ability to pay dividends or make other distributions to stockholders. If the Company iswe are unable to obtain such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in the Company’sour ability to raise capital, management believeswe believe that there is substantial doubt in the Company’sour ability to continue as a going concern for twelve months from the issuance of these condensed consolidated financial statements.
Cash Flows
Net Cash Used in Operating Activities
For the nine months ended September 30, 2023, net cash used in operating activities was $11.8 million, which primarily consisted of our net loss of $19.7 million, adjusted for non-cash expenses of $8.6 million, which primarily consisted of change in fair value of warrant liability of $10.4 million, change in fair value of derivative liability of $0.4 million, and gain on issuance of convertible notes of $0.1 million, partially offset by change in fair value of notes $7.0 million, amortization of deferred debt issuance costs of $6.8 million, loss on extinguishment of debt $2.3 million, amortization of right of use assets $1.1 million, loss on extinguishment of warrant liability $0.5 million, stock based compensation expense of $0.4 million, depreciation and amortization expense of $0.5 million, loss on disposal of equipment $0.4 million, and other expenses of $0.5 million. The net change in operating assets and liabilities was $1.0 million.
Cash Flows
Operating Activities
For the threenine months ended March 31, 2023,September 30, 2022, net cash used in operating activities was $4.7$8.0 million, which primarily consisted of our net loss of $2.3$12.2 million, adjusted for non-cash expenses of $1.3 million, which primarily consisted of a gain related to the change in fair value of warrant liabilities of $5.6 million, offset by the amortization of deferred debt issuance costs of $1.6 million, a loss on extinguishment of warrant liabilities of $0.5 million, amortization of debt discount of $0.4 million, stock-based compensation of $0.2 million, depreciation and amortization of $0.2 million, and other expenses of $1.4 million which primarily consisted of expenses incurred in connection with our February and March waiver agreements. The net change in operating assets and liabilities was $0.8 million, primarily consisting of an increase in accrued expenses.
For the three months ended March 31, 2022, net cash used in operating activities was $3.6 million, which primarily consisted of our net loss of $4.6 million, adjusted for non-cash expenses of $1.4$3.8 million which primarily consisted of stock-based compensation expenses totaling $1.0$3.0 million, amortization of right of use assets of $0.4 million, and depreciation and amortization of $0.1 million,$0.4 million. The net change in operating assets and liabilities was $0.3 million, primarily consisting of an increasea decrease in prepaid and other current assets.
Net Cash Used in Investing Activities
For the threenine months ended March 31,September 30, 2023, net cash used in investing activities was approximately $1.1$1.7 million, consisting of cash paid for the acquisition of Amerigen 7 of approximately $0.6 million, and purchases of equipment totaling $0.5$1.1 million.
For the nine months ended September 30, 2022, net cash was approximately $0.3 million.
Net Cash Provided by Financing Activities
For the threenine months ended March 31, 2022, net cash used in investing activities was approximately $0.1 million and primarily consisted of purchases of equipment.
Financing Activities
For the three months ended March 31,September 30, 2023, net cash provided by financing activities was $7.1$14.8 million, consisting of net proceed from the issuance of common stock in connection with equity line of credit of $4.5 million, net proceeds received from the issuance of common stock in connection with our ATM agreementat-the-market offering totaling $2.1$4.0 million, net proceeds from the issuance of our 2023 Note in connection with the line of credit of $2.4 million, net proceeds from issuance of Series F-1 preferred stock of $2.3 million, net proceeds from the exercise of common stock warrants of $2.1 million, proceeds from the issuance of our 2023 Note (in connection with the Line of Credit) of $2.0 million, andnet proceeds from the issuance of senior secured notes of $0.9$1.4 million, net proceeds from issuance of Series F-2 preferred stock of $0.7 million, partially offset by repayment of notes payable $2.3 million and offering cost for the issuance of common stock in connection with at-the-market agreement of $0.2 million.
There were no
For the nine months ended September 30, 2022, net cash provided by financing activities duringwas $2.6 million, and consisted of proceeds of the three months ended March 31, 2022.issuance of common stock and warrants of $0.8 million, $1.0 million received in connection with the issuance of our Series D preferred stock and $0.7 million received from the issuance of common stock in connection with our at-the-market offering.
Off-balance sheet arrangementsOff-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements during the periods presented, and we do not currently have any off-balance sheet arrangements, as defined in the SEC rules and regulations.
Critical Accounting Policies and Significant Judgments and Estimates
Revenue Recognition
We adopted the new revenue standard, ASC 606, on March 31, 2019 using the full retrospective approach. The adoption did not have an effect on 2020 or 2019 revenue recognition or a cumulative effect on opening equity, as the timing and measurement of revenue recognition is materially the same as under ASC 605. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
For contracts where the period between when we transfer a promised good or service to the customer and when the customer pays is one year or less, we have elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component.
Our performance obligation is to provide fiber splicing services as required based on short-term work orders as work is assigned by the Customer. We are required to complete the description of work described in the work order and test the service provided prior to any recognition of revenue and invoicing. The short-term work orders are for very specific performance obligations which are performed from start to finish within two weeks or less, and more often, within one week. We are required to adhere to the rules and regulations that are outlined in the Agreement between the Company and the Customer.
Cost for the work performed is outlined in the individual work orders based on the detailed description of work to be performed. All of the revenue is recognized immediately upon completion of the work in each work order. A 5% retainage will be withheld by the Customer upon payment of invoices and will be paid to the Company within one year after termination of the contract. The retainage can be utilized by Customer for any claims that may arise after work is completed up through one year after completion.
Revenue recognized during the three months ended March 31, 2023 was generated by the Company’s wholly-owned subsidiary, Crown Fiber Optics Corporation, and was immaterial for the three months ended March 31, 2023. No revenue was recognized by the Company during the three months ended March 31, 2022.
Segment and Reporting Unit Information
Operating segments are defined as components of an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive Officer is determined to be the CODM. On January 3, 2023 we acquired Crown Fiber Optics, Corp and are currently in the process of integrating this new business line including identifying leadership, and aligning management reporting and allocation methodologies. We are assessing our current segment structure in conjunction with the integration efforts.
Business Combinations
We account for business combinations using the guidance provided by Accounting Standards Codification (“ASC”) 805, Business Combinations. ASC 805 requires us to use the acquisition method of accounting by recognizing the identifiable tangible and intangible assets acquired and liabilities assumed, and any non-controlling interest in the acquired business, measured at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the aforementioned amounts.
Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets. Although we believe the assumptions and estimates made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain intangible assets we have acquired include future expected cash flows from customer contracts. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results. 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.
Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Deferred Debt Issuance Costs
We account for debt issuance costs related to our Line of Credit as a deferred asset which is amortized over the life of the Line of Credit. Since we have elected the fair value option for our convertible notes (see below), upon a draw down, a portion of the deferred asset balance will be amortized to other expense. On the issuance date of our Line of Credit, since no loan amounts are drawn down, the issuance of the Series E preferred shares and the warrant to purchase Series E preferred shares are recorded as a deferred asset.
Goodwill
We perform a goodwill impairment analysis on October 1st of each year. When conducting our annual goodwill impairment assessment, we initially perform a qualitative evaluation to determine if it is more likely than not that the fair value of our reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test.
Convertible Notes
In accordance with Accounting Standards Codification 825, Financial Instruments (“ASC 825”), we have elected the fair value option for recognition of our convertible notes. In accordance with ASC 825, we recognize 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 other expense. The Company will include the interest expense as a component of the notes fair value.
Warrants
We account 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 our statements of operations. The fair value of the warrants issued by us has been estimated using the Black Scholes Methodology.
Fair Value of Common Stock
Historically, the fair values of the shares of common stock underlying our options were estimated on each grant date by our board of directors. In order to determine the fair value, our board of directors considered, among other things, contemporaneous valuations of our common stock and preferred stock prepared by unrelated third-party valuation firms in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held- Company Equity Securities Issued as Compensation, or the Practice Aid. Given the absence of a public trading market of our capital stock, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including:
Critical accounting policies and significant judgments and estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. Our most critical accounting policies are summarized below. See Note 3 to our condensed consolidated financial statements for a description of our other significant accounting policies.
Recent accounting pronouncementsAccounting Pronouncements
See Note 32 to our condensed consolidated financial statements for a description of recent accounting pronouncements applicable to our financial statements.
JOBS Act Transition Period
As an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay our adoption of such new or revised accounting standards. As a result of this election, our condensed consolidated financial statements may not be comparable to the condensed financial statements of other public companies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for a Smaller Reporting Company.smaller reporting company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.
The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
With respect to the quarter ended March 31,September 30, 2023, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer has concluded that our disclosure controls and procedures are effective.
Management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.
Changes in Internal Control over Financial Reporting:Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended March 31,September 30, 2023 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are 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, we do not believe that the ultimate resolution of these actions will have a material adverse effect on our 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 our 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 us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Other than those previously disclosed by the Company in its current reports on Form 8-K as filed with the SEC, there have been no unregistered sales of the Company’s equity securities during the period covered by this Quarterly Report.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
N/A
Item 5. Other Information
N/A
Item 6. Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
Crown Electrokinetics Corp. | |
Dated: | /s/ Doug Croxall |
Doug Croxall | |
Chief Executive Officer and | |
Principal Executive Officer | |
Dated: | /s/ Joel Krutz |
Joel Krutz | |
Chief Financial Officer and | |
Principal Financial Officer |
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