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 September 30, 2022

☐ 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) 674-3612

(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 November 9, 2022 was 20,243,509.

Title of each class:		Trading Symbol		Name of each exchange on which registered:
Common Stock, $0.0001 par value		CRKN		The Nasdaq Capital Market

CROWN ELECTROKINETICS CORP.

		Page
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited	1

	Condensed Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021	1

	Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)	2

	Condensed Statements of Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)	3

	Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)	5

	Notes to the Condensed Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults Upon Senior Securities	30

Item 4.	Mine Safety Disclosures	30

Item 5.	Other Information	30

Item 6.	Exhibits	30

	Signatures	31

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.

PART I - FINANCIAL INFORMATION

Item 1. - Financial Statements.

CROWN ELECTROKINETICS CORP.

Condensed Balance Sheets

(in thousands, except share and per share amounts)

	September 30, 2022			December 31, 2021
	(Unaudited)
ASSETS
Current assets:
Cash	$	342		$	6,130
Prepaid and other current assets		380			687
Total current assets		722			6,817
Property and equipment, net		1,416			895
Intangible assets, net		1,654			1,761
Right of use asset		1,971			-
Other assets		403			179
TOTAL ASSETS	$	6,166		$	9,652

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	1,211		$	358
Accrued expenses		133			298
Lease liability - current portion		253			-
Notes payable		8			8
Total current liabilities		1,605			664
Lease liability		1,815			-
Total liabilities		3,420			664

Commitments and Contingencies (Note X)

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, 2022 and December 31 2021		-			-
Series B preferred stock, par value $0.0001; 1,500 shares authorized, 1,443 shares outstanding as of September 30, 2022 and December 31 2021		-			-
Series C preferred stock, par value $0.0001; 600,000 shares authorized, 500,756 shares outstanding as of September 30, 2022 and December 31, 2021		-			-
Series D preferred stock, par value $0.0001; 7,000 shares authorized, 1,058 shares issued and outstanding as of September 30, 2022; liquidation preference $1,081 as of September 30, 2022; No shares authorized, or outstanding, and no liquidiation peference as of December 31, 2021		-
Common stock, par value $0.0001; 200,000,000 shares authorized; 18,523,072, and 14,530,126 shares outstanding as of September 30, 2022 and December 31, 2021, respectively		2			1
Additional paid-in capital		88,597			82,677
Accumulated deficit		(85,853	)		(73,690	)
Total stockholders’ equity		2,746			8,988
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,166		$	9,652

The accompanying notes are an integral part of these condensed financial statements.

CROWN ELECTROKINETICS CORP.

Condensed Statements of Operations

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

(in thousands, except share and per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Operating expenses:
Research and development	$	955		$	787		$	3,523			2,127
Selling, general and administrative		2,160			4,865			8,634			14,184
Total operating expenses		3,115			5,652			12,157			16,311

Loss from operations		(3,115	)		(5,652	)		(12,157	)		(16,311	)

Other income (expense):
Other income (expense)		-			(49	)		-			(42	)
Interest expense		(1	)		(2	)		(6	)		(535	)
Loss on exchange of notes payable for common stock and warrants		-			-			-			(6	)
Gain (loss) on extinguishment of debt		-			-			-			(13,805	)
Change in fair value of warrant liability		-			-			-			(1,024	)
Change in fair value of derivative liability		-			-			-			(51	)
Total other income (expense)		(1	)		(51	)		(6	)		(15,463	)

Net loss		(3,116	)		(5,703	)		(12,163	)		(31,774	)
Cumulative dividends on Series D preferred stock		(23	)		-			(23	)		-
Net loss attributable to common stockholders	$	(3,139	)	$	(5,703	)	$	(12,186	)	$	(31,774	)

Net loss per share attributable to common stockholders	$	(0.18	)	$	(0.39	)	$	(0.73	)	$	(2.32	)

Weighted average shares outstanding, basic and diluted:		17,644,188			14,510,818			16,646,616			13,669,445

The accompanying notes are an integral part of these condensed financial statements.

CROWN ELECTROKINETICS CORP.

Condensed Statements of Stockholders’ Equity (Deficit)

Three and Nine Months Ended September 30, 2022 and 2021

(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’
	Number		Amount		Number		Amount		Number		Amount		Number		Amount		Number		Amount		Capital		Deficit			Equity
Balance as of January 1, 2022		251	$	-		1,443	$	-		500,756	$	-		-	$	-		14,530,126	$	1	$	82,677	$	(73,690	)	$	8,988
Delivery of restricted common stock		-		-		-		-		-		-		-		-		1,095,237		1		-		-			1
Issuance of common stock and warrants, net of fees		-		-		-		-		-		-		-		-		1,250,000				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		-		-		-		-		-		-		-		-		1,647,709		-		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	$	-		18,523,072	$	2	$	88,597	$	(85,853	)	$	2,746

	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	$	-	$	-	$	-		14,614,627	$	1	$	85,489	$	(82,737	)	$	2,753
Delivery of restricted common stock		-		-		-		-		-		-		-		-		1,061,905		1		-		-			1
Issuance of common stock and warrants, net of fees		-		-		-		-		-		-		-		-		1,250,000		-		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		-		-		-		-		-		-		-		-		1,596,540		-		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	$	-		18,523,072	$	2	$	88,597	$	(85,853	)	$	2,746

CROWN ELECTROKINETICS CORP.

Condensed Statements of Stockholders’ Equity (Deficit)

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

(in thousands, except share and per share amounts)

	Series A Preferred Stock				Series B Preferred Stock				Series C Preferred Stock				Common Stock					Additional Paid-in			Accumulated			Total Stockholders’
	Number		Amount		Number		Amount		Number		Amount		Number			Amount		Capital			Deficit			Equity
Balance as of January 1, 2021		-	$	-		-	$	-		-	$	-		7,599,716		$	1	$	29,758		$	(36,530	)	$	(6,771	)
Issuance of common stock and warrants, net of fees		-		-		-		-		-		-		4,772,500			-		19,326			-			19,326
Issuance of common stock and preferred stock in connection with conversion of notes		251		-		1,443		-		500,756		-		1,261,277			-		19,222			-			19,222
Repurchased beneficial conversion feature in connection with conversion of notes payable		-		-		-		-		-		-		-			-		(6,647	)		-			(6,647	)
Issuance of common stock warrants in connection with note exchange agreements		-		-		-		-		-		-		-			-		4,918			-			4,918
Restricted stock awards exchanged for restricted stock units		-		-		-		-		-		-		(800,000	)		-		-			-			-
Exercise of common stock warrants		-		-		-		-		-		-		219,199			-		180			-			180
Issuance of common stock to consultants		-		-		-		-		-		-		64,954			-		247			-			247
Issuance of common stock warrants		-		-		-		-		-		-					-		772			-			772
Stock-based compensation		-		-		-		-		-		-		1,038,095			-		8,131			-			8,131
Stock option exercise		-		-		-		-		-		-		434,385			-		186			-			186
Canceled restricted stock awards		-		-		-		-		-		-		(60,000	)		-		-			-			-
Reclassification of warrant liabilities		-		-		-		-		-		-		-			-		3,566			-			3,566
Net loss		-		-		-		-		-		-		-			-		-			(31,774	)		(31,774	)
Balance as of September 30, 2021 (Unaudited)		251	$	-		1,443	$	-		500,756	$	-		14,530,126		$	1	$	79,659		$	(68,304	)	$	11,356

	Series A Preferred Stock				Series B Preferred Stock				Series C Preferred Stock				Common Stock					Additional Paid-in		Accumulated			Total Stockholders’
	Number		Amount		Number		Amount		Number		Amount		Number			Amount		Capital		Deficit			Equity
Balance as of July 1, 2021 (Unaudited)		251	$	-		1,443	$	-		500,756	$	-		14,920,741		$	1	$	76,376	$	(62,601	)	$	13,776
Restricted stock awards exchanged for restricted stock units		-		-		-		-		-		-		(800,000	)		-		-		-			-
Issuance of common stock warrants		-		-		-		-		-		-		-			-		772		-			772
Stock option exercise		-		-		-		-		-		-		409,385			-		182		-			182
Stock-based compensation		-		-		-		-		-		-		-			-		2,329		-			2,329
Net loss		-		-		-		-		-		-		-			-		-		(5,703	)		(5,703	)
Balance as of September 30, 2021 (Unaudited)		251	$	-		1,443	$	-		500,756	$	-		14,530,126		$	1	$	79,659	$	(68,304	)	$	11,356

The accompanying notes are an integral part of these condensed financial statements.

CROWN ELECTROKINETICS CORP.

Condensed Statements of Cash Flows

Nine Months Ended September 30, 2022 and 2021

(Unaudited)

(in thousands)

	Nine months ended September 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(12,163	)	$	(31,774	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		3,011			8,903
Issuance of common stock to consultants		-			247
Depreciation and amortization		360			184
Loss on extinguishment of debt		-			13,805
Loss on exchange of notes payable for common stock and warrants		-			6
Amortization of debt discount		-			458
Change in fair value of warrant liability		-			1,024
Change in fair value of derivative liability		-			51
Loss on disposal of equipment		52			-
Amortization of right of use assets		365			-
Changes in operating assets and liabilities:
Prepaid and other assets		392			(479	)
Accounts payable		367			(757	)
Accrued expenses		(165	)		123
Accrued interest		-			72
Lease liability		(268	)		-
Net cash used in operating activities		(8,049	)		(8,137	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment		(278	)		(392	)
Purchase of patents		(61	)		(1,706	)
Net cash used in investing activities		(339	)		(2,098	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of common stock and warrants, net of fees		855			19,326
Proceeds from the issuance of common stock / At-the-market offering		732			-
Offering costs for the issuance of common stock / At-the-market offering		(26	)		-
Proceeds from issuance of Series D preferred stock and warrants, net of fees		1,039			-
Proceeds from the exercise of common stock warrants		-			180
Proceeds from PPP loan		-			233
Proceeds from exercise of stock options		-			186
Repayment of related party non interest bearing advance		-			(25	)
Net cash provided by financing activities		2,600			19,900

Net increase (decrease) increase in cash		(5,788	)		9,665
Cash — beginning of period		6,130			36
Cash — end of period	$	342		$	9,701

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock warrants in connection with SLOC	$	223		$	-
Issuance of common stock and preferred stock in connection with conversion of notes	$	-		$	19,222
Repurchase beneficial conversion feature in connection with conversion of notes payable	$	-		$	6,647
Reclassification of warrant liabilities	$	-		$	3,566
Issuance of common stock warrants in connection with note exchange agreements	$	-		$	4,918
Issuance of common stock warrants in connection with consideration payable	$	86		$	-
Unpaid equipment included in accounts payable	$	486		$	-
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	$	3		$	5

The accompanying notes are an integral part of these condensed financial statements.

CROWN ELECTROKINETICS, CORP.

Notes to Condensed Financial Statements

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

Note 1 - Organization and Description of Business Operations

Crown Electrokinetics Corp. (the “Company”) was incorporated in the State of Delaware on April 20, 2015. Effective October 6, 2017, the Company’s name was changed to Crown Electrokinetics Corp. from 3D Nanocolor Corp. (“3D Nanocolor”).

On January 26, 2021, the Company completed its public offering, and its common stock began trading on the Nasdaq Capital Market (Nasdaq) under the symbol CRKN.

The Company is commercializing technology for smart or dynamic glass. The Company’s electrokinetic glass technology is an advancement on microfluidic technology that was originally developed by HP Inc.

On July 19, 2022, the Company entered into an underwriting agreement relating to the Company’s public offering of its common stock, par value $0.0001 per share. The Company agreed to sell 1,250,000 shares of its common stock to the underwriters, at a purchase price per share of $0.744 (the offering price to the public of $0.80 per share minus the underwriters’ discount), pursuant to the Company’s registration statement on Form S-3 (File No. 333-262122), under the Securities Act of 1933, as amended. The Company has also granted the underwriters a 30-day option to purchase up to 187,500 additional shares of common stock to cover over-allotments. On July 22, 2022, the Company received net proceeds of $855,000, net of underwriter fees and commissions of approximately $70,000, and offering costs of $75,000.

In connection with the Company’s public offering, the Company issued a warrant to the underwriters to purchase 62,500 shares of its common stock. The warrant may be exercised beginning on the date that is 180 days after July 22, 2022 until July 19, 2027. The exercise price of the warrant is $0.80 per share.

Note 2 - Liquidity and Financial Condition

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 financial statements, the Company had an accumulated deficit of approximately $85.9 million and negative working capital of approximately $0.9 million at September 30, 2022, a net loss of approximately $12.2 million, approximately $8.0 million of net cash used in operating activities for the nine months ended September 30, 2022. The Company expects to continue to incur ongoing administrative and other expenses, including public company expenses.

On March 23, 2022, the Company entered into an Irrevocable $10 million Standby Letter of Credit (“SLOC”). The SLOC accrues interest at a rate of 12% per annum and matures 2 years from the issuance date of the SLOC. Interest is payable quarterly. In connection with the SLOC, the Company issued a warrant for 200,000 shares of common stock with an exercise price of $2.00. Additionally, the Company will issue 50,000 shares of its restricted common stock with each cash draw of $1.0 million. Drawdowns are capped at a maximum of $5 million in the first six months. The Company intends to sign and drawdown on the available funds as necessary in 2022 and 2023.

As of September 30, 2022, the Company settled $1.1 million of shares liability, by issuing 1,058 shares of Series D preferred stock in July 2022 (See Note 7).

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.

CROWN ELECTROKINETICS, CORP.

Notes to Condensed Financial Statements

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

On October 5, 2022, the Company and the Sales Agents filed the first amendment to the Sales Agreement (the “First Amendment to the Sales Agreement”). Pursuant to the First Amendment to the Sales Agreement, the Company may from time to time, sell up to $3.5 million in Placement Shares of the Company’s common stock through the Sales Agents in a continuous At-the-Market Offering (the Amended ATM Offering”). According to the First Amendment to the Sales Agreement, the Company will pay the Sales Agents a commission of up to 3.0% of the aggregate gross proceeds the Company receives from all sales of its common stock in the Amended ATM Offering.

As of September 30, 2022, the Company has received net proceeds on sales of 1,647,709 shares of common stock under the Sales Agreement of approximately $706,000 (after deducting $26,000 in commissions and expenses) at a weighted average price of $0.44 per share.

Subsequent to September 30, 2022, the Company received net proceeds of approximately $0.5 million on sales of 1,720,437 shares of common stock under the Sales Agreement at a weighted average price of $0.32 per share.

Additionally, the Company received $3.2 million in funding related to the issuance of Convertible Notes on October 19, 2022. This issuance was reported by the Company in the 8-K filed October 20, 2022. (See Note 10)

Although it is difficult to predict the Company’s liquidity requirements as of September 30, 2022, based upon the Company’s current operating plan, cash on hand, SLOC funding, and ATM facility, management believes that the Company will have sufficient cash to meet its projected operating requirements for at least the next 12 months following the issuance of these condensed financial statements.

Risks and Uncertainties

Management is constantly monitoring the impact of the COVID-19 pandemic on operations and financials of the Company. To date the main impact has been the delayed evaluation of potential manufacturing partnerships. These delays have been caused by Covid lockdowns i) restricting site tour opportunities by potential partners and ii) driving strong demand for potential partners existing product lines, limiting their capacity to assess new partnership opportunities. The Company has concluded that while it is reasonably possible that the virus could still have a negative effect on the Company’s financial position, the specific impact is not readily determinable as of the date of these condensed financial statements.

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 financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Note 3 - Significant Accounting Policies

Basis of Presentation

The Company’s condensed 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 results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results for the full year or the results for any future periods. These condensed financial statements should be read in conjunction with the audited financial statements and related notes for the fiscal year ended December 31, 2021 included in the Company’s Form 10-KT filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2022.

CROWN ELECTROKINETICS, CORP.

Notes to Condensed Financial Statements

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

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. 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, 2021 financial statements included in its 2021 Annual Report.

Leases

The Company accounts for its leases under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the condensed balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term.

In calculating the right of use asset and lease liability, the Company elects to combine lease and non-lease components as permitted under ASC 842. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.

Warrants

SLOC

The Company accounts for its warrants related to the SLOC in accordance with ASC 815-40, Contracts in Entity’s Own Equity. The warrants to purchase the Company’s common stock meet the criteria in ASC 815-40 to be classified within stockholders’ equity, and therefore, the warrants are not revalued after issuance. The Company uses a Black-Scholes model to value the warrants at issuance.

Under the guidance of ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, the Company concluded the warrants should be recorded as a deferred asset. At issuance and as of September 30, 2022, since no loan amounts were drawn down, the SLOC warrant is recorded as a deferred asset at fair value and will be amortized over the life of the SLOC. Upon a draw down, the remaining balance of the deferred asset would be reclassified to debt discount and amortized under the effective interest method over the one-year term of the loan.

Purchase Order Warrants

The Company accounts for its warrants issued in connection with purchase orders in accordance with ASC 606, Revenue Recognition. With respect to the warrant, the Company accounts for it as consideration payable to a customer under ASC 606, as it relates to the future purchase of the Company’s Smart Window Inserts™. Pursuant to ASC 718 Compensation - Stock Compensation (“ASC 718”), the Company measured the fair value of the warrant using the Black-Scholes valuation model on the issuance date, with the value being recognized as a prepaid asset up to the recoverable value represented by the value of the contract (See Note 8).

CROWN ELECTROKINETICS, CORP.

Notes to Condensed Financial Statements

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

Net Loss per Share

ASC 260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Basic net loss per share of common stock excludes dilution and is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive. Since the Company has only incurred losses, basic and diluted net loss per share is the same.

Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at September 30, 2022 and 2021 are as follows:

	September 30,		September 30,
	2022		2021
	(Unaudited)
Series A preferred stock		188,311		188,311
Series B preferred stock		2,019,038		2,019,038
Series C preferred stock		560,757		560,757
Series D preferred stock		814,102		-
Warrants to purchase common stock (excluding penny warrants)		5,901,779		4,300,177
Options to purchase common stock		9,838,486		10,920,432
Unvested restricted stock units		887,462		2,039,683
		20,209,935		20,028,398

Emerging Growth Company

The Company is considered to be an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (JOBS Act). The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Securities and Exchange Act of 1934.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) which supersedes FASB Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842, which amends ASU 2016-02 to provide entities an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 842. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. The standard will be effective for non-public entities for fiscal years beginning after December 15, 2022 and interim periods beginning after December 15, 2023. The Company adopted this standard on January 1, 2022, and the adoption did not have a material impact on the Company’s financial statements or disclosures.

CROWN ELECTROKINETICS, CORP.

Notes to Condensed Financial Statements

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. On January 1, 2022, the adoption of ASU 2020-06 did not have a material impact on the Company’s condensed financial statements or disclosures.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. On January 1, 2022, the adoption of ASU 2021-04 did not have a material impact on the Company’s condensed financial statements or disclosures.

Note 4 - Property & Equipment, Net

Property and equipment, net, consists of the following (in thousands):

	September 30,			December 31,
	2022			2021
	(Unaudited)
Equipment	$	1506		$	1,013
Computers		52			37
Leasehold improvements		284			28
Total		1,842			1,078
Less accumulated depreciation and amortization		(426	)		(183	)
Property and equipment, net	$	1,416		$	895

Depreciation expense for the three months ended September 30, 2022 and 2021 was $69,000 and $21,000, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $191,000 and $56,000, respectively.

CROWN ELECTROKINETICS, CORP.

Notes to Condensed Financial Statements

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

Note 5 - Intangible Assets, Net

IBM Patents

On July 23, 2021, the Company entered into a Patent Assignment Agreement with International Business Machines Corporation (“IBM”) to acquire an ownership interest in assigned patents. As consideration for the patents, the Company paid $264,000 (including legal fees of approximately $38,000).

Intellectual Property

On January 31, 2016, the Company, entered into an IP agreement with HP to acquire a research license to determine the feasibility of incorporating HP’s electro-kinetic display technology in the Company’s products. Under the terms of the agreement, the license is to be used for research purposes only, has a purchase price of $200,000 for the technology and a two-year closing date. On April 12, 2016 the Company and HP entered into the first amendment to the agreement, which reduced the purchase price of the technology to $175,000. The sales agreement entered into with HP concurrently with the first amendment to the agreement allocated $25,000 of the $200,000 purchase price to acquire equipment to be used in the research. On May 1, 2017, the Company and HP entered into the second amendment to the agreement which increased the purchase price for the technology to $375,000 and extended the closing date to January 31, 2020. On March 10, 2019, the Company and HP entered into the third amendment to the agreement, which extended the closing date to January 31, 2021, enumerated certain intellectual property owned by HP that is not subject to the exclusive license granted to the Company and revised the schedule of fees payable by the Company to HP. Under the terms of the fourth amendment with HP (see details below), $75,000 will be included in the purchase price for the option to purchase assignable patents, which was paid on February 9, 2021.

Under the guidance of ASC 350, Intangibles - Goodwill and Other Intangibles, the Company recorded the research license at the cost to acquire the license. The Company has paid $375,000 for the transfer of the technology. The research license will be amortized over a 10-year useful life.

HP Patents

On February 4, 2021, the Company entered into the fourth amendment to the IP agreement with HP. Under the terms of the amendment, the parties agreed to amend the list of patent and patent applications, which includes two additional patents that are assignable to the Company by HP. The Company exercised the option to purchase the assignable patents and paid HP $1.55 million dollars on February 9, 2021. Upon assignment of the patents, the Company will pay HP a royalty fee based on the cumulative gross revenue received by the Company from the patents as follows:

1.	Prior to December 31, 2029:

●

Less than $70,000,000, royalty rate of 0.00%

●

$70,000,000 - $500,000,000, royalty rate of 1.25%

●

$500,000,000 and beyond, royalty rate of 1.00%

2.	After January 1, 2030 and onward, royalty rate of 0.00%

Under the terms of the amendment, HP waived any interest that would have been accrued on the open payable of $75,000 which was due from the Company related to the license agreement dated January 31, 2016.

CROWN ELECTROKINETICS, CORP.

Notes to Condensed Financial Statements

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

Intangible assets, net, consists of the following (in thousands):

	September 30,	December 31,
	2022	2021
	(Unaudited)
Patents	$

SEC Form 10-Q filed by Crown Electrokinetics Corp.