Crown Electrokinetics Corp.

NASDAQ:CRKN

Earnings Call Transcript 2023-Q3

[Operator]

[Audio Gap] In Section 21 of the Securities and Exchange Act of 1934 as amended. Words such as may, 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 third quarter ended 2023 filed with the SEC. A copy of these documents are available on the SEC website at www.sec.gov. Actual results may differ materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation to update these statements for revisions or changes after the date of this call, except as required by law.

Now at this time, it's my pleasure to introduce Doug Croxall, CEO and Chairman of Crown. Doug?

[Douglas Croxall, executive]

Thank you, Jason, and welcome, everybody, to our third quarter earnings call. We're going to do things a little bit different than our traditional earnings call, which typically is just myself and Joel Krutz speaking.

We had an investor call a little -- about a month or 2 months ago, I guess, and you got to hear from Dave Martinez and Mike Sullivan. So today, I'm going to give a general corporate update giving on a couple of highlights, and then I'm going to hand the call over to Dave Martinez, who will go through a customer update; Mike Sullivan, who will go over a construction update; and newest to our teams, Jeremy Hubbard, who runs recruiting for us. And he will go through a recruiting and personnel update.

So as you saw from our recent announcement, we've added our third MSA, our third customer, and we started working on customer #2. So we have 2 active projects now in the field. Both of these are in Arizona, and the Phoenix area. One is micro trenching and one is traditional directional drilling. We -- as we had mentioned before, we're going to continue to focus on the Arizona market. I spent time with our customers last week, and there are -- there's significant work for us to do. We will continue to add customers and we'll continue to add more and more projects with the customers that we've already announced.

We do think that there will be some opportunities to move out of the State of Arizona. And when those arise, we will look at those as long as they're within the general vicinity of Arizona or the Southwest, West Coast area. We also expect and we should be adding another hopefully, 2 to 3 MSAs, before the end of the calendar year. I know that we get a lot of requests as to who the customer actually is. And while we are precluded from putting our customer's name in press release, I do want to give some insight as to whose fiber optics network we're building and who the prime contractors are that we're working with.

So the work that we're doing in Arizona currently is for fiber optic networks that are going to be owned by Google Fiber, Verizon and [ GigaFiber ]. Some of the prime contractors that we're going to be working with are Tilson, MASTECH, [indiscernible] and [ Blue Edge ]. So while we can't go into specifics, at least not today, as to what each of those customers are going to represent, those are the type of customers that we're working with.

Some of the best construction companies in the country and, obviously, some of the best fiber optic networks in the country as well. So I want to move quickly on to the EK film side because the rest of the team is going to bring you up to speed on the rest of the fiber optic side.

On the film side, we actually just got word yesterday that some of our mastering that was being done with our vendor in Europe has come back positive. So we're looking to go to the next step in our mastering phase. We expect that we should have 12-inch masters done sometime before the end of the calendar year, and be able to cycle that into our production with product coming hopefully towards the end of Q1, next year or early Q2. We will continue to provide updates on the film business and the film mastering as those occur.

One of the things that we also want to do this year, which we've not done in the past, is that after today's earnings call, you don't typically hear from our company until our 10-K earnings call, which isn't until typically the end of March. And so that's obviously 4 months, 4.5 months. So what we're going to do sometime in mid-January is another investor call like the one that we did in mid-September, where you're going to get to hear from the team. We're going to give you an update on customers, revenue, EBITDA and all the things that you're going to hear about today.

So with that said, I'd like to turn the call over to Dave Martinez, who's going to walk through some of our customers.

[David Martinez, executive]

Thank you, Doug. Hello. Good morning, everyone. It's my pleasure to be here again today. I want to share with you a few of our new opportunities that we have been able to secure, the 3 of our key customers since our last update.

The first customer is a Houston-based company focused on developing fiber network infrastructure solutions and is a premier provider of engineering design construction services to the pipeline and utility industries. It is a subsidiary of a much larger parent company consisting of over 200 companies that service North America. With this customer, we have been able to secure 3 HDD, horizontal directional drill projects in the Phoenix, Arizona market, but more products are expected to be awarded as the permits and work is available.

And this market, it seems to be an almost weekly basis. Just this last week, we announced this customer to discuss a partnership or a project in Northern Arizona, that is over 1.2 million feet of directional drilling and another 600 feet of aerial. Although this is still in the early stages, we are working diligently with the customer to secure this award.

The second customer has been involved in some of the largest and most complex infrastructure construction projects across the country. With options across North America, 80-plus years of experience and nearly 32,000 employees, this customer has become a leader in the infrastructure construction. We recently secured an MSA, master service agreement, with this customer. During a recent meeting we had with them in their Phoenix office, they shared with us some of their projects, timelines and their need for partners with microtrenching capabilities.

They were very excited to hear that we have those micro trenchers, and we can place them on their projects innately. We will be following up with this team this week to further discuss the logistics and the timing of the projects and awards. They have also shared with us that this project is expected to run 7 to 10 years.

The third customer that I would like to share with you today is an established networking communications infrastructure company, providing network infrastructure design, engineering, development solutions to the leading communication firms throughout the United States. Just this past week, we have signed an MSA with this customer. And through this customer, we have secured a project that includes working microtrenching, fiber placement and fiber splicing for a global Internet service provider that's providing the services to local municipalities through this customer.

This project is expected to run 5 to 7 years. [ That said ], we are excited about this customer relationship as they are to have our crews, skillset and equipment as part of the development offering, so much so that we will be discussing future local projects and multistate projects with this customer. For our future pipeline, our team has been working diligently to expand our customer base and grow our teams to meet and exceed the current and future needs of our customers.

Over the next month, we will be speaking with 3 nationwide companies and 1 international company about their needs and how Crown Fiber Optics can be part of their solution in building better communications. We look forward to everything that's coming down the pipeline. It's going to be an exciting adventure. I'm glad that we're here.

With this, I would like to go ahead and pass the call over to Mike for our construction update.

[Mike Sullivan]

Thank you, Dave, and hello. Good morning. It's a pleasure to meet with you today and provide an update on our status.

Currently, we have established a yard, office and shop facilities in Arizona. This location is close to our work workload in Mesa and Chandler, as Dave described with the current contracts we have. This limits a lot of windshield time and gets us on the job efficiently and effectively. Additionally, we'll be adding fuel storage to our yard, which again increases our efficiency and cement silos, and I'll go over that later as we discuss volumetric trucks.

For production equipment, we had 3 directional drills ready to go. We have the crews established to manage those machines. Total production between all 3 machines is around 2,200 feet per day. We have micro trenchers in market, 2 units are here right now capable of producing 4,400 feet per day, and we have 3 additional units ordered. And as I said, volumetric cement trucks, we've ordered 2. One is on its way here. Second one is in the manufacturer right now.

And the reason we're going with that is that increases our effectiveness and efficiency in the field. Rather than ordering grade mix, we can produce our own grade of concrete or slurry and clean up our job site. This allows us to continue production because the cleanup is done and that puts more permits and more work in front of us.

Additionally, we have 3 VAC units and 3 additional units coming in. Vacuum is a piece of support equipment that is required with both directional boring and micro trenching. We've established direct relationships with the manufacturers of this equipment and have a projected pipeline and production reserve as we increase contracts and production goals.

As Dave described, the pipeline of work is [indiscernible] going and increasing as we move along here. The market is huge right now for telecommunications infrastructure, and we anticipate 5 to 8 years of growth in this market. Therefore, we've coordinated the efforts of equipment procurement and staffing such that we can address the needs of our clients. With that, I'm going to introduce Jeremy Hubbard, Director of Recruiting.

[Jeremy Hubbard, executive]

Thanks, Mike. Thanks, Dave. It's a pleasure to be a part of this team as a Director of Recruiting here at Crown. I lead the talent acquisition strategy and execution for our growing and dynamic organization. Behind me, I have over 15 years of experience in the staffing and recruiting industry, working with clients across various sectors, disciplines and geographies. I'm born right here in Arizona, hold a great market behind me. And I hope core competencies and business planning, sales, consultation as well as employee benefits and new business development.

My whole 2 degrees in international business and marketing from the University of North Florida as well as a study a broad in 3 different countries to gain global perspective of culture awareness in our market and a variety of other industries.

I'm very passionate about finding and retaining the best talent for Crown Fiber and empowering them to succeed and driving their roles. So what I love to share with you today is just our current status, where we're moving, where we're grooving and where we're growing here in the near future.

So currently, we have 5 crews established in just 1 month. I was able to design 5 crews comprised of skilled labor, general labor, equipment operators, forming and leadership, of course. This has been instrumental in breaking ground on our first project, which we did break ground on time and is currently in process. So very excited about that. In addition to my recruiting efforts, I've also brought on 3 subcontractors to help us with the added business that we'll be bringing onboard.

So that way, we -- as I build out this squad and multiple other teams, we can also grab other business that may come upon us. I do have additional subcontractors and processes well to tag into whenever we need. So very, very good on that side. I also want to foreshadow some expected growth due to these new clients that David and Mike shared with you. I'll be building out teams to our fiber splicing divisions, engineering teams, micro trench team and then continuing to build out our directional drill teams.

Part of my recruiting process is working hand in hand with what Dave and Mike is identifying the need in regards to the equipment that Mike has gotten for us as well as how -- what talent do I need to bring in charge with that equipment to achieve Dave's projects. So it's posting recruiting, interviewing, hiring, onboarding, then training these individuals with our given clients and then getting them on the ground.

I also have enlisted virtual HR partner as well as standard industry recruiting tools and then utilizing a variety of referrals from our current workforce as well as through my own network to build out these squads. Building a culture is extremely important to me as we build out these teams. How we're defining that culture, of course, is finding individuals that are self-thinking, motivated, that want to work as a team and developing a sense of teamwork and family within this workforce is really what we're after.

And then showing these employees that we genuinely care about them. We want this to be a job. We want this to be a career, and I'm making that evident on Day 1 and following it through the interview process so that David and Mike can keep that flow and culture rolling as they hit the ground.

So outside of that, I am doing a variety of team building events, family building events. Our benefits are top-notch as far as the competitive wage, health benefits, 401(k), ESPPs and really just branding us outside of that is another option we're going into, which is community events. Networking through local counsels and business executives as well as getting our faces out to conferences throughout the nation, primarily in the Southwest region.

We've already identified 4 conferences that will be in attendance in the following year. So very, very bullish on the employment market, while it does remain highly competitive here in Arizona, in regards to a ton of business. I feel very confident in our market that I will be able to provide and deliver every person we need to get every one of these projects' [ need ]. And on to Joel.

[Joel Krutz, executive]

Thank you, Dave, Mike and Jeremy for those updates, and good morning, everyone. And today, I'll be discussing Crown's third quarter financial results. But just ahead of that though, I wanted to address the minimum price notification, which we received from NASDAQ on October 19. We have 180 days from that date to again, trade above $1 for 10 consecutive days to regain compliance.

We are confident that the progress we're making, as you've just heard, against our strategic plans will mean that we again meet the compliance standards, but we will also prepare alternate options to ensure that we retain our NASDAQ listing.

On to the financials. Crown's pretax loss for the third quarter of 2023 was $2.9 million. This loss was $0.3 million lower than the same quarter ended September 30, 2022. We did not record any revenue or cost of revenue in Q3 as we focused on building out our organization and equipment, in preparation for the Q4 projects, which are now underway. And as you've heard, there's a huge amount of work that's gone into that and a huge amount of progress that's being made.

Operating expenses for the third quarter were $3.4 million. Of that research and development expenses were $0.5 million, a decrease of $0.5 million compared to the 3 months ended September 30, 2022, primarily due to a decrease in salaries and benefits. SG&A expenses were $2.9 million for the quarter, which represents a $0.7 million increase versus Q3 of last year. This was primarily due to an increase of $0.5 million in professional fees related to Crown's significant transactional levels. Other income was $0.6 million for the 3 months ended September 30, and that was compared to 0 in the prior year's quarter.

Other income consisted of a $3 million change in the fair value of our warrants, notes and derivative liabilities, which were related to remeasurement. This other income was offset by interest expense of $2.4 million, primarily consisting of amortization expense from our lines of credit. Crown's net cash increased by $2 million in Q3. $5.5 million was provided by -- from financing activities, with $4.5 million from the equity line of credit and $1.8 million from our ATM.

This was offset by $0.7 million of debt repayment as we eliminated debt from our balance sheet. Net cash used in operations for the 3 months ended September 30 was $2.8 million, $0.7 million higher than the same quarter in 2022, driven primarily again by the increase in professional fees. Net cash used in investing activities was [ $7.7 million ], and this was dedicated to fiber optics equipment acquisitions.

Overall, this infusion of equity-driven capital has been very important for Crown's shareholder equity levels, which increased by $4.7 million in Q3 to $9.3 million comfortably above the $2.5 million NASDAQ compliance threshold. That concludes the financial section. I'll now throw it back to Doug.

[Douglas Croxall, executive]

Thank you, Joel. And again, thank you, Mike, Dave and Jeremy, for all your contributions, both to this call and to the efforts behind Crown Fiber Optics.

I just want to remind people that if you look back 1 year from this day, we had no business in the fiber optic industry. We had no customers. We had no equipment. We had no personnel. Today, we have 3 very large customers with lots of work for us to do. We'll have more customers as well. Those customers will provide us revenue. We have equipment to handle the current customer need, and we will have more equipment as the customer needs grow. And we have personnel to handle the customers today, and we'll have more personnel as we grow our customer base.

And I want to thank everyone for their patience and we will have some communication in the next month, indicating which day in January we'll do our next investors call. And we look forward to talking to everyone at that time. Thank you.

[Operator]

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.