Everyone, welcome to Crown Electrokinetics Corporation earnings call for the second quarter 2022. At this time, participants are in a listen-only mode. A question-and-answer session will follow management's remarks. This conference call is being recorded. A replay of today's call will be available on the investor relations section of Crown's website and will remain posted there for the next 30 days. I will now hand the call over to Henryk Dabrowski for introductions and the reading of the safe harbor statement. Please go ahead.
Thank you, operator. Good afternoon, everyone, and welcome to Crown's earnings call for the second quarter of 2022. With us today, on today's call are Doug Croxall, Crown's Chief Executive Officer and Chairman, and Joel Krutz, Chief Financial Officer. Before we begin, I would like to remind you that today's call contains certain forward-looking statements from our management made within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E 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 second quarter 2022 filed with the SEC. Copies of these documents are available on the SEC's 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 is my pleasure to introduce Doug Croxall, CEO and Chairman of Crown. Mr. Croxall, please go ahead.
Thank you, Henryk. I'd like to thank everyone for joining us today on our earnings call. I'm gonna start by giving a business and operational update. After that, Joel, our CFO, will review the highlights of our financial results. Then if there are any questions, we're happy to take those at the end of the presentation. Just to review, Crown's mission is to provide an affordable smart glass solution to the commercial real estate market that will enable its customers to reduce energy expenses and in turn, lower carbon emissions. Our first product is called the Smart Window Insert, powered by DynamicTint, an affordable solar-powered insert which does not require hard wiring and can be easily installed into the interior side of existing windows in commercial office buildings.
Crown's DynamicTint is a pigment-based thin film that is based on our proprietary and patent-protected electrokinetic technology. At Crown, we recognize that windows in commercial buildings are inefficient insulators, causing HVAC systems to use unnecessary amounts of energy, leading to increased energy spend and excessive carbon emissions. Crown's Smart Window Insert easily installs into a building's existing window frame, leaving the existing window intact. This transforms a building's single-pane window into an energy-efficient, dual-pane smart window. Once installed, our insert is powered by a solar strip, eliminating the need to have each smart window insert hardwired into the existing electrical system of the building. Crown's Smart Window Insert absorbs sunlight, thereby reducing the amount of HVAC usage, leading to lower electricity costs and a smaller carbon footprint.
Crown's insert also provides an insulative benefit by effectively adding a second pane to the building's existing single pane, allowing heat and air conditioning to stay in the building more efficiently. The commercial building sector is under increasing pressure from shareholders, tenants, and regulators to reduce HVAC energy consumption and reduce carbon emissions. As the only smart glass retrofit product in the market, Crown's Smart Window Insert is priced comparatively to high-end window blinds. We operate in two manufacturing facilities in Corvallis and Salem, Oregon, and we expect to deliver our product, first product, in the coming months. Moving to the customer update. I am very pleased to announce that we have received two purchase orders for our Smart Window Inserts from Hudson Pacific Properties. The Smart Window Inserts will be delivered after Crown's first-generation production line comes into operation in the coming months.
The inserts will be deployed in two of Hudson Pacific Properties' buildings located in the San Francisco Bay Area. The purchase orders from Hudson Pacific Properties for our Smart Window Insert are a confirmation of years of hard work by the entire team at Crown and represents a critical milestone in Crown's evolution. As part of Crown's commitment to its vision, we're actively working to become a key ESG supplier to the U.S.-based office buildings by helping them retrofit the legacy infrastructure and assets to be environmentally responsible and energy efficient. This vision continues to be supported by legislative initiatives at both the federal and local levels. The recently announced Inflation Reduction Act will expand the tax incentives for retrofitted energy improvements and has also now made them available to our REIT customers, further enhancing Crown's already significant value proposition.
Other legislation, such as New York City's Local Law 97, which targets a 40% reduction in building energy use levels by 2030, is compelling REITs to rapidly upgrade their building envelopes or face material annual fines. In response, REITs are seeking to avoid these penalties and meet this mandate as cost-effectively and with as little disruption to the tenants as possible. Crown's Smart Window Insert solves for both of these conditions highly effectively. To this end, we are assessing a number of new retrofit locations with other prospective REIT customers in our sales pipeline and hope to have further announcements in the coming quarters. Financing. The last few months have been some of the most difficult in recent memory for our economy and our capital markets.
I'm pleased to announce that despite these headwinds, Crown has successfully closed on equity raises, which are required for Crown's access to debt financing and the execution of our manufacturing plans. On July 20, we announced an underwritten public offering of $1 million of common stock at $0.80 per share, and I must highlight that this offering did not include any warrants. Additionally, on July 26, we announced a further $1.1 million funding through a Series D preferred stock round, which was convertible into common stock at an above-market price. As I mentioned, these direct equity investments are necessary for Crown to have access to the debt financing, which we first discussed in our last earnings call. As an update, about a month ago, Crown entered into a second term sheet for debt funding, and we're now actively pursuing both debt funding opportunities.
While we had hoped to have the debt funding closed by this earnings call, we can say that we're making good progress on both paths, ensuring a higher likelihood that Crown will have the best possible terms for its debt capital. As communicated in previous earnings calls, access to non-dilutive debt financing is especially important as it will enable us to complete the planned production lines, have sufficient working capital through the end of 2023, and allow us to start delivering installation of Smart Window Inserts to our customers. The value of our intellectual property was instrumental to support the debt financing. Crown's independent IP valuation indicated a combined patent and trade secret fair market value of approximately $94 million.
The proceeds from both future debt financing and recent equity financing will allow us to build our new roll-to-roll lines, enabling Crown's produced film at any length and at widths ranging from 12 inches- 72 inches. Once the new lines are producing at capacity, Crown expects Smart Window Insert annualized revenues of approximately $220 million and EBITDA of $40 million. Moving to product development. In our earnings call, we provided an update on our current product delivery status. I'll provide a brief update for the benefit of our new shareholders. This fall we will be manufacturing and delivering our first generation Smart Window Insert. That insert will be comprised of 12-inch strips of our DynamicTint film. Crown's insert will have the following capabilities.
Our insert will have a solar strip that's facing the exterior of the building, capturing sunlight to charge a lithium-ion battery. The lithium ion battery will be the power source that allows the user to transition the film from clear to dark on demand. Each office that has our inserts will have a handheld controller that allows the occupant of the office to easily control the insert. Each insert will be gathering performance and usage data, and we'll be communicating that to Crown for monitoring the performance of our inserts. Our inserts are easily installed and will not require any fasteners. Each insert is powered by the solar strip attached to the exterior side of the insert, making our product highly sustainable and not requiring any hard wiring to the building's electrical system. Our second generation product will incorporate a single piece of DynamicTint, replacing the 12-inch strips.
We expect that new features will be incorporated into the second generation of our Smart Window Insert, potentially including the following upgrades. Increased data gathering, including but not limited to external weather information, amount of sunlight, internal temperatures, placement of the sun during the day, and product use patterns. The second generation insert will have an accompanying app that will allow the user to control the insert via a smart device in addition to the existing handheld controller. We expect that we'll be able to produce significantly more second generation inserts as compared to the limited run of the first generation insert. Production facility status. I receive requests that I oftentimes explain the difference between current production line and the future production lines. For the benefit of all shareholders today, I'm gonna describe the difference between the current and the planned production evolution.
Crown currently produces DynamicTint film on our proto-production tool in our Corvallis facility. We will be producing our film in this facility in limited quantities. This method has allowed us to test our production processes as well as develop our Generation 1.0 Smart Window Insert. Our Corvallis production line will produce 6-inch and 12-inch strips of DynamicTint for application on our Gen 1 Smart Window Insert. Initially, our Smart Window Inserts are expected to be produced in a limited run to fulfill orders of early customers like Hudson. With customer feedback on performance, design, usage of our first-gen Smart Window Insert, we will iterate and develop our second-generation Smart Window Insert.
We expect to transition production to our new roll-to-roll production lines, capable of manufacturing film with the varying widths that will allow Crown to meet the vast majority of demand from the U.S. office building retrofit market. To close, I wanna reiterate just how excited we are to have crossed another major milestone with the execution of Crown's first purchase orders, and in the coming weeks and months, also expect to have closed our debt capital financing, have our first generation production lines up and running, and start shipping products to our customers. I'll now hand the call over to Joel, who will take you through the financials. Joel?
Thank you, Doug, and good afternoon, everyone. Today I'll be discussing Crown's second quarter 2022 financial results. The company's net loss for the second quarter was $4.5 million, which included $1.5 million of non-cash stock-based compensation expense. This net loss was $0.9 million lower than the $5.4 million recorded during the quarter ended June 30, 2021. That quarter included $2.6 million of non-cash compensation. Total operating expenses for the second quarter were $4.5 million, comprising $1.5 million of non-cash compensation, $1.8 million of payroll and consultant expense, $0.5 million for professional fees, and $0.6 million of operating overhead. As we'd indicated on the Q1 call, we undertook a substantial organizational restructuring earlier this year to optimize Crown's organization.
This has materially reduced our operating expenses, and as at the end of June, our employee cost base had been reduced by an annualized $2.9 million or 31%. The impact of these actions is also evident in our reduced cash burn, with Q2 cash deployed for operations and investments, $2.6 million. This was $1 million lower than the $3.6 million that we outlaid in Q1 of this year. Our financing activities in Q2 yielded $1.1 million from our Series D preferred stock raise and also from our at the market offerings. As of June 30th, our cash and cash equivalents were $1.0 million. We have access to a $10 million standing letter of credit and also our at the market offering to provide additional funding optionality.
Subsequent to Q2, we also closed a $1 million underwritten offering in July, and as Doug mentioned, we're hopeful of completing the debt financing necessary for our second generation production lines shortly. That concludes our prepared remarks. Now we'd like to open the call for questions. Operator, if you could go ahead, please.
Thank you.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it might be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Shawn Severson with Water Tower Research. Please proceed with your question.
Hey, thanks. Hello, Doug, good progress. I do have a question. You said there was a second term sheet that was put out, so you have two different lenders that you're working with. Is that correct?
Yeah. To be clear, we do have two different lenders. Those are competing term sheets. The second term sheet came in just about a month ago. We're working feverishly, you know, to get everyone kinda caught up to speed. You know, competition is good, especially.
Okay.
When you're this scarce.
That's what I wanted to clarify. It'd still be funded from a single lender for all the funding for the CapEx, if you would need. They're just two different-
Yeah.
Proposals you're working on.
That's correct. Two separate funding sources, two separate term sheets. You know, we'll pick the one that we think is the best.
Understood. I think last time you mentioned they were performing some. It was a due diligence process, correct, from the lender that was going on. Can you give an update on what they've done and where they are? I know you can't give specifics on the timing, but I know there was a due diligence process and runway that they were working on, and just an update there would be very helpful.
Yeah, no problem. It's pretty standard. Management presentation, discussion with the vendor that will manufacture our production line, customer referral calls, lots of diligence in the, you know, virtual diligence room. You know, just kind of the standard stuff. At this point, we think we've got everybody at the same stage. You know, as far as one's not too far ahead of the other, even though one started, you know, significantly sooner than the other. We think we've got everyone caught up to the same point.
Okay. Then last question, I'll get back in queue. Upon funding, how long do you think it takes to actually get funded? How do the expenditures sequence from there to, you know, maybe through the remainder of the year and into next year?
Funding on the debt side, you mean?
Yeah, the debt side for the plant.
We think we're probably within 30 days of close of the debt, maybe sooner.
Okay.
The guidance that we've been giving is anywhere from, you know, two months of design phase, 6-8 months of manufacturing the line. They actually build the line in their facility. They actually run our film in their facility to our technical specifications and our quality standards. Once we approve that, the line is disassembled and moved to our facility in Oregon and reassembled. That entire process, we're estimating is anywhere from 10 months to a year.
Okay. I just wanted to confirm that's unchanged given some of the supply constraints out there. Then also had to ask a question on inflation and availability, as you know, as you've been talking with the potential providers.
As it relates to the line, the new line that we will have built, we don't see any issues with pricing or inflation or supply chains. This particular vendor, you know, was pretty aggressive in building their own inventory so that they could avoid some of the supply problems that others have experienced. Right now, we don't see any issues with pricing. You know, through the diligence process with our two different funding partners, we've gone back to the vendor and, you know, double and triple-checked to make sure the pricing's not changing, because obviously that would have an impact on how much capital we need to raise. We feel pretty comfortable there. On our first generation production line, though, we are delayed.
As you probably recognize, we were hopeful to get first product out this summer. We are still waiting on a material component of our first gen production line that's coming out of the United Kingdom that has been delayed by from 4-8 weeks. I'm assuming it'll be eight weeks because, you know-
Mm-hmm.
Murphy's Law. The actual delay that we have experienced is not related to our technology, not related to our film, not related to our customers, but related to a specific component that we need in order to produce our gen one film in its entirety. We have some of that in, and we're able to use part of what we have, but we need another component that we're still waiting on. Hopefully we'll have that in the next month or two and then have product out the door.
That answered my next question. Thanks, Doug. I'll get back in queue.
No worries.
Our next question is from Gerry Sweeney with Roth Capital Partners. Please proceed with your question.
Hey, Doug and Joel. Thanks for taking my call.
Thanks, Gerry.
Just to follow up with what Shawn was saying. Was that eight weeks from sort of today or on that piece coming in production?
Yeah, Joel. It's
We're pretty much still two months out, right?
Yeah, we're about two months out.
Gotcha. Okay, that's fair. You know, obviously we saw the Hudson PO potential for in the near future? Or are they still-
Yep.
Working with Gen 1?
Yeah, yeah. As everyone is looking at gen one and we're working to get other purchase orders executed as well. You know, I'd love to be able to tell you exactly when that's gonna happen. I'm not very good at predicting the future. We think we'll have some other purchase orders from some of our MSA customers and new customers that we have yet to announce in the coming months.
Gotcha. Then, let me see here. You know, one of the novel things you solved was with the width, right? The stitching technology. You're also pursuing, you know, a master drum that would have been a meter thick. I was curious..
Gerry, we're going down, and we're pursuing all three at the same time for various reasons. One, we're not sure which one will be the best. We wanna be able to compare the different techniques and see which one produces the best.
On the Corvallis line today?
No, that line is limited to 12 inches.
Okay. Got it. Great. All right.
Well, actually, you know what, Gerry? We could. Actually, that's not true. We could. It would be a very small. We would only be stitching to 12 inches. Not on that line, unfortunately.
Gotcha. Got it. Okay. Great. Well, then any update, you sort of alluded to some other, you know, REITs or potential customers percolating out there. Obviously, you can't name names until you can or if you can at all, but how is that process?
The tax incentive in the Inflation Reduction Act is real. We're a real benefit even without that. You know, this just makes it even more attractive. One of the prospective customers that we're talking to, they have a lot of property in the New York metropolitan area. They're desperate to find something. We have something that works, you know, immediately for them.
Yeah.
You know, we're hitting the market at a very timing is critical, right? You can't control timing. I don't control the events that lead up to the passage of bills that happen to benefit our customers and us, the Inflation Reduction Act or anything else.
Got it. Okay. It's a great spot to be in right now, so I do recognize that. Thanks. Thanks for the time.
Yep.
As a reminder, if you'd like to ask a question, please press star one on your telephone keys.
Thank you, Rob, and thank you everyone for dialing in. You know, if I could snap my fingers and fix our share price, I would. We can't. We control the inputs in our company. We control how hard we work in developing our technology and our product, happening behind the scenes that may not be evident to you. Getting someone like a Hudson Pacific Properties to sign a purchase order is not a simple task, right? They're not gonna do something unless they know it's gonna benefit them. We're very excited to have them as a partner, and we look forward in the coming months to announce some of the other partners that we're gonna have.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect and have a great day.