Earnings Call Transcript - CRKN Q2 2024

Operator, Operator

Good afternoon, everyone and welcome to the Crown Electrokinetics Second Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will not be following the management remarks. This conference call is being recorded. A replay of today's call will be available on the Investor Relations section of the Crown's website. I will now hand the call over to Jason Assad, Director of Corporate Communications for introductions and the reading of the safe harbor statement. Please go ahead.

Jason Assad, Director of Corporate Communications

Thank you, operator. Good afternoon, and welcome to Crown's second quarter 2024 call. With us today on the call are Doug Croxall, Crown's Chief Executive Officer and Chairman; Joel Krutz, Chief Financial Officer; and Sheldon Davis, President of the company's ElectroKinetics Film division. Before we begin, I'd like to remind you that today's call contains certain forward-looking statements from management made within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21A of the Securities and Exchange Act of 1934 as amended. Words such as should, projects, expects, intends, plans, believes, anticipates, hopes, estimates and variations of such words and similar expressions are intended to identify forward-looking statements. These statements are subject to numerous conditions, many of which are beyond the control of the company, including those set forth in the Risk Factors section of the company's quarterly report on Form 10-Q for the second quarter ended 2024. Copies of these documents are available on the SEC's website at sec.gov. Actual results may differ materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation to update these statements for revisions or changes after the date of this call, except as required by law. Now, at this time, it's my pleasure to introduce Doug Croxall, CEO and Chairman of Crown. Doug?

Doug Croxall, CEO and Chairman

Thanks, Jason. Welcome, everyone to our second quarter 2024 earnings call. As most of you know, Crown has been expanding its scope of services. Previously, Crown was comprised of two divisions: our ElectroKinetics Film division and our Fiber Optic Construction division. Recently, we announced further expansion into lead pipe inspection as well as lead pipe remediation. We now have four complementary markets and revenue verticals, which allow us to go broader within existing customers while taking advantage of what we believe to be large total addressable markets. Most importantly, we've attracted a team of top talent across all four of our divisions to ensure that we execute and drive both growth and profitability across all of them. I'd like to start with a discussion of our film division today. The development of our Electrokinetics Film has been a long and sometimes tedious process. In late February of this year, we announced that our film team had solved the 12-inch mastering challenge for its Gen 1 Alpha smart window insert product. We remain in a good position to start shipping the product, the first product in small quantities in the next couple of months, towards the end of the calendar year. With this technical milestone addressed, we announced that Sheldon Davis, previously a consultant to the company, was named President of our Electrokinetic Film division. Sheldon's work history makes him the ideal person for Crown's exact stage of growth, and we're extremely encouraged by the progress that he has made in his short time in his new role. Sheldon and I have known each other since about 2016 while he was working at Guardian Glass, Koch Industries companies. His knowledge of our target market, ink formations, window insert, glass manufacturing and different glazing technologies make him the perfect person for the job. We're excited to have him take a leadership role at this important time. Sheldon is here on the call with us today, and I've asked him to provide you with a further update on the status of our film division. Sheldon?

Sheldon Davis, President, Electrokinetics Film Division

Thank you, Doug. I appreciate this opportunity to update our progress on the film division. In my previous company, I had the opportunity to interact with many different dynamic glazing companies, small and large. We explored different solutions from electrochromic to novel lab technologies. I also talked to tenants, occupants, building engineers, and building owners worldwide. They shared what they needed and wanted. I learned a lot about their frustrations regarding facades, windows, shading, and so much more. Through all of this, I saw the amazing potential of Crown ElectroKinetics technology and business. Crown technology was differentiated and well positioned to succeed. The team has great customer outreach and connections. They listen to and understand their customers exceptionally well. When I chose to come to Crown Electrokinetics, I was excited and enthusiastic about being part of this team. It's been three months since joining Crown, and every day reaffirms my decision. Our DynamicTint film technology and smart window inserts are excellent solutions for our target customers. Through conversations with our customers and within our value chain, our product looks to uniquely fulfill market needs. Technical progress has been good, and we still expect the Gen 1 Alpha smart window inserts to be available in limited quantities by the end of the year. I am more enthusiastic and excited to be part of Crown today. Now for the update. As mentioned, the film division had a significant breakthrough in the early part of the year. We were able to validate and demonstrate mastering capability. The team is working hard to convert this technical breakthrough into manufacturing capability. We are making good progress. Our partners are expected to deliver the necessary parts to begin 12-inch film production in the coming months. The mastering milestone was a critical development that required new techniques and technology. This success is foundational to our business. There is much more to be done to bring our products to market. The team must build out the capabilities required for our Alpha launch and, ultimately, a successful ramp to full production and product release. To do so, we've begun reshaping and building out our team, starting with the senior management team. As announced earlier, we added Rob Vandal as Chief Technical Officer and Francois Prouhet as Director of Business Development. Tim Koch shifted his role to Chief Innovation Officer. Tim Koch's work and leadership have been crucial in getting us this far. He continues to play an important role in our film development activities. We are thankful for all he has done. In his role as Chief Innovation Officer, Tim will continue to focus on advancing our film design and technology to help bring the best product to market. Rob Vandal joined as CTO. This is a wonderful addition as he rounds out the technical leadership. Rob has extensive experience bringing product technology to the market in automotive and building industries. Moreover, he is very familiar with manufacturing, having previously been a plant manager in Guardian Automotive. This experience will be critical in launching our product and establishing a strong platform to grow our business. Francois Prouhet joins as Director of Business Development. He will play an important role in developing the go-to-market capabilities required for success. Francois brings broad experience in financial planning, analysis and strategy. Moreover, he has the skills and understanding of the value chain and translating that into action. I've known Tim and worked with Rob and Francois for many years. I'm excited by the potential of this team. I know that they position us for our future success. To wrap up, there is much work to be done. Our management changes are a strong step forward. We remain optimistic about our Gen 1 Alpha launch in Q4 of this calendar year.

Doug Croxall, CEO and Chairman

Thanks, Sheldon. All right. Let's move into the fiber optics division. The last nearly two years have taught us some pretty valuable lessons about both the fiber construction market, how to operate, and more importantly, how not to operate within it. As evidenced in today's financial report, Crown fiber is generating revenue in multiple markets under the leadership of Corey Boaz, who we named as President of Construction in early February of this year. We have current projects in Idaho, Nevada, Oregon, and Mexico. Corey not only added revenue and customers to Crown but helped us change our operating model that allows Crown to be cash flow positive on a project from Day 1. As opposed to hiring hundreds of employees, we now deploy a model that includes a limited number of Crown employees, coupling them with outside third-party subcontractors. This allows Crown to control costs on a project-by-project basis as well as lock in our margins. Corey has market credibility and connections that have allowed us to build a significant pipeline of revenue-generating projects. The pipeline, leveraged with its proven business model, will allow Crown to generate revenue and soon positive net income. We also previously announced that we secured a large backbone project in Nevada that includes primarily plowing and some horizontal directional drilling. Previously, Crown had received two clusters of the four clusters that constitute the project. Those two clusters will generate approximately $5.7 million in revenues. We communicated on our last call that we anticipated being awarded additional stages of the project as it continues through Nevada and eventually to the state of California. In July, we were awarded an additional cluster in Nevada under this agreement. We're pleased to have been awarded this additional work for our customer. Obviously, we're happy to receive the additional revenue that the project brings. We were awarded this work due to the high quality of work and the efficiency with which we have completed the other sections of the large project. Suffice to say, we would not have been awarded the additional opportunity if it were not for our continuing commitment to exceeding customer expectations. High customer satisfaction and repeat business continue to fuel our pipeline. Our project with Twin Dolphin Club located in Los Cabos, Mexico is ongoing. The Twin Dolphin Club is an exclusive high-end 1,400 residential housing and resort master plan development. Crown is currently constructing slant wells for the desalination plant that provides freshwater from the ocean to the hotel and surrounding planned residential development. We've actively posted videos of our slant well construction on our various social media channels. The Twin Dolphin project is expected to conclude in the early fall timeframe, and is expected to generate about $3.5 million in revenue. The opportunity was generated and is managed by Corey Boaz. We expect this new approach of plant well construction to lead to new revenue opportunities in Mexico, Central America, and the Caribbean. I'd now like to focus on the formation of our two new divisions, Element 82 and PE Pipelines. Element 82 will focus on lead pipe inspection, and PE Pipelines will focus on lead pipe remediation. Lead in drinking water pipes represents an enormous problem for the United States. The U.S. Environmental Protection Agency estimates that about 9.2 million lead pipes are carrying drinking water to American taps. The National Resource Council has estimated numbers as high as 12.8 million pipes. These numbers could be significantly higher given the poor mapping and enormous complexity of our country's water systems. Despite the range, experts agree that millions of households remain at risk of lead exposure through their drinking water. To establish these divisions, Crown has hired a team of world-class experts, innovators, and operators. 18-year veteran David Kinsella will serve as President of Element 82 and PE Pipelines; Chuck Hansen, a 40-year water pipe industry expert, joins Crown as Chief Adviser on Lead Pipe Assessment. To assist Mr. Kinsella, Mike App and Campos have joined in project management and engineering roles for Element 82 projects. Element 82 teams with Chuck Hansen and his California-based company Electro Scan to offer services utilizing the company's revolutionary Swordfish handheld tool. Swordfish automatically detects various pipe materials using electric resistance, a low-voltage machine intelligent method. Before Swordfish, no technology other than digging or excavation was commercially available to accurately and reliably identify lead pipes. Recognized by the U.S. EPA, Swordfish quickly and accurately identifies multiple buried pipe materials. The Swordfish technology and Chuck Hansen's expertise provide Crown with a significant competitive advantage. Element 82 has already commenced new projects in New York, Virginia, and Florida. Over the course of the next month or two, Element 82 will be making announcements regarding purchase orders and revenue targets for the remainder of this calendar year. All right. With that, I'm going to turn it over to Joel for a review of our Q2 financial results, and I'll handle the closing remarks. Joel?

Joel Krutz, Chief Financial Officer

Thank you, Doug. Good afternoon, everyone. Today, we will walk through Crown's second quarter 2024 financial results. Firstly, though, just a quick update on Crown's NASDAQ compliance. After working closely with NASDAQ, Crown received a notification from the listing qualifications department on July 25 that confirms Crown as being fully compliant again. On to the Q2 financials. For the quarter ended June 30, 2024, Crown generated $4.6 million of revenue, which represented a net six-fold increase compared to the first quarter of this year. For the six months ended June 30, 2024, the company's revenue now stands at $5.3 million, which is compared to just $0.1 million for the six months ended 2023 at June 30. Revenues, which were solely generated by Crown fiber optics, were $4 million and $23,000 for the three months ended June 30, 2024, and 2023, respectively. There were $5.8 million and $0.1 million for the six months ended June 30, 2024, and 2023, respectively. The cost of revenue of $4 million includes subcontract labor of $2.7 million, equipment costs of $0.6 million, and other costs related to supply, materials, and maintenance of $0.7 million. Depreciation and amortization expense for the three months in Q2 were $0.2 million and $0.1 million, respectively. R&D expenses were $1.1 million for the three months ended June 30 compared to $0.5 million for the last quarter in 2023. This increase of $0.6 million is primarily related to increases in salaries and benefits, which includes the addition of the new film leadership. G&A expenses were $4.2 million for the quarter, which included $2.4 million of non-cash stock compensation expense. The $0.1 million decrease in G&A is related to a reduction in professional fees of $1.4 million, offset by an increase in compensation and benefits related to wages of $1.3 million. Losses from operations for the second quarter were $4.9 million, in line with the same quarter in 2023. June year-to-date operating losses of $8.6 million are compared to $9 million in 2023. Finally, net losses were $5 million compared to Q1 2023's $4.5 million. The $9.5 million reduction or improvement was due to reductions in other expenses, including debt interest and amortization, and fair value write-down for last year's balance sheet restructuring. On to cash. For the six months ended June 30, net cash increased $2.9 million to $4 million as the company raised $11.8 million through financing activities and deployed $8.9 million of cash against operations. Just looking forward, we expect the strong growth trajectory to continue and are projecting our third quarter revenues to be in line with previous guidance of $8 million. That concludes the financial update. Doug, back to you.

Doug Croxall, CEO and Chairman

All right. Thanks, Joel. On the last call, I pointed out that if you look at where this company was a year ago, compared to where we are today, our progress was pretty substantial. If you actually just look at where we were 90 days ago compared to where we are, we've grown tremendously. We believe that Crown is at the beginning of our growth mode in utility construction. We also believe that 2025 is going to be a watershed year for investors in terms of our revenue generation and our EBITDA generation. We look forward to talking to everybody during our third quarter earnings call, which should be sometime in mid-November. With that, I'll turn it back to the operator. Thank you.

Operator, Operator