MMAT - Meta Materials: Ongoing Cash Burn Results In Substantial Dilution

2023-04-30 05:35:09 ET

Summary

• Meta's cash burn appears to have been around $17 million in Q1 2023.
• Estimated revenues also declined approximately 50% in Q1 2023 compared to Q1 2022.
• Meta was forced to do a $25 million equity offering to give itself another four months of runway.
• It has made progress with product development agreements, but less progress with finding customers.
• At $0.19 per share it is valued at approximately 10x trailing 12 month revenues.

The situation for Meta Materials ( MMAT ) has deteriorated faster than I expected . I had thought it could raise enough money via its at-the-market offering to fund its operations into 2024. However, it appears that it wasn't raising money quickly enough via the ATM offering to keep up with cash burn as its share price dropped. Meta Materials ended up doing a $25 million underwritten public equity offering at a $0.30 per share price (with accompanying warrants).

This should give it enough funding to last into Q3 2023, but it is in a tough spot due to its high rate of cash burn and declining revenues. Meta Materials revamped part of its management team and Board of Directors in an attempt to alter its course, but it needs to deliver some results quite soon if it wants to avoid continued significant dilution and a reverse split.

If Meta is valued at 10x revenues (which is generous given its recent history of declining revenues), that would value it at approximately $0.19 per share. Meta thus seems to be fairly priced currently, although additional dilution may reduce its value.

Equity Offering

Meta Materials is issuing 83.33 million common shares and 83.33 million warrants (with an exercise price of $0.375 per share) for a combined price of $0.30 per share. This is giving it net proceeds of approximately $22.1 million.

The exercise price of the warrants will be adjusted in the event of another equity offering within one year, if that equity offering has a price of under $0.375 per share. In that case the exercise price of the warrants will be adjusted to the price of the new offering, with a floor of $0.076 per share.

If there is a reverse split within two years, the exercise price of the warrants gets adjusted (also with a $0.076 per share floor) based on the average daily VWAP for the five trading day period starting on the day of the reverse split.

In a worst case scenario, the 83.33 million warrants could be exercised for only $6.3 million in proceeds.

After the offering (and not including warrants), Meta had approximately 467 million outstanding shares.

Cash Burn

In conjunction with the offering, Meta disclosed its preliminary unaudited estimates for Q1 2023 . It estimated that it had around $6.25 million and $6.75 million in cash, cash equivalents and short-term investments at the end of Q1 2023.

Meta had approximately $11.8 million in cash, cash equivalents and short-term investments at the end of 2022 and raised approximately $11 million in net proceeds from its ATM offering during Q1 2023. It also received $1 million in repayments from NextBridge Hydrocarbons.

Meta's cash burn can be calculated at around $17 million during Q1 2023. This is down from approximately $20 million in cash burn during Q4 2022, but it is uncertain how much of that reduced cash burn is due to changes in working capital.

At $17 million per quarter in cash burn, Meta's recent equity offering gives it around four months of additional runway.

Sliding Revenues

Investors are often willing to forgive cash burn if there is also substantial revenue growth. However, Meta's revenues have declined in recent quarters. It mentioned preliminary estimates for $1.4 million to $1.5 million in revenues in Q1 2023. This is a 50% to 53% decline in revenues compared to Q1 2022. Meta's Q4 2022 revenues were down 37% compared to Q4 2021.

Meta's trailing 12 month revenues (up to March 2023) are expected to be around $8.7 million, which is an approximately 13% decline compared to its 2021 revenues (proforma for its Nanotech acquisition). This is worse than what I expected, as I thought that Meta would be able to at least deliver a slight amount of revenue growth.

Valuation

I had previously discussed a 10x revenue valuation for Meta Materials. That may be an excessively high multiple due to its lack of revenue growth, but if we stick with that multiple it would value Meta at $87 million based on trailing 12 month revenues of $8.7 million. This is approximately $0.19 per share, so Meta appears fairly valued currently.

The challenge though is that there is no indication that Meta's cash burn will be significantly reduced anytime soon. Thus it may be forced to continue to issue equity at lower share prices. If it wants to raise further funds in August to get it to the end of 2023, it may have to do another $25 million raise. If this raise is done at $0.15 per share, it would bring Meta's share count up to 634 million.

With that share count, a 10% increase in revenues to $9.6 million per year would make it worth around $0.15 per share at a 10x revenue multiple.

This is a scenario that would make it very hard to avoid a reverse split. Even with a very favorable 20x multiple to revenues, Meta's revenues would need to get above $35 million per year to be worth $1 (without a reverse split) with 717 million shares outstanding (assuming the exercise of 83.33 million warrants).

Other Notes

Meta Materials also announced a number of changes to its management team and Board of Directors. CFO/COO Ken Rice and CTO Jonathan Waldern were terminated without cause (entitling them to appropriate severance), and the company hired Uzi Sasson as CFO/COO. Meta's Board of Directors was also expanded from seven to eight members, with Maurice Guitton resigning and Vyomesh Joshi and Eugenia Corrales being added to the board.

Time will tell whether these changes have a significant positive effect on Meta's situation. However, it seems very likely Meta will continue to have a large amount of cash burn during the rest of 2023.

While Meta's debt is fairly minimal ($3.6 million at the end of 2022) its large amount of cash burn and frequent need to raise additional funding probably isn't helping its ability to gain customers.

Meta had previously hoped to get repaid the $24.2 million it was owed by Next Bridge Hydrocarbons, but other than a $1 million prepayment at the end of Q1 2023, further repayment is uncertain. A 25% working interest in the Orogrande was pledged as collateral for part of the money owed by Next Bridge, but Meta has determined that the value of that collateral is "not substantive".

Products And Patents

In the last few months Meta has expanded its patent portfolio , getting to 501 active patent documents, including 315 issued patents. It is uncertain how much those patents are worth though, given Meta's relative lack of customers and licensing deals. BlackBerry's recent non-core patent sale only valued those patents at approximately $28,000 each, showing that patents can have relatively low values.

Meta also announced that it signed a joint development agreement with a top 10 battery OEM to develop and adapt NPORE as a battery separator solution. This is a positive for Meta, but it has more success with signing product development partnerships than it has in finding customers. This agreement will also have no positive effect on Meta's near-term cash burn.

Conclusion

Meta Materials has had trouble generating revenue growth, with trailing 12 month revenues down approximately 13% from 2021 (proforma for its Nanotech acquisition).

Meta's cash burn has also been quite high, at around $37 million during the last half year. This has forced Meta into a substantial amount of dilution while its share price is relatively low. I also believe Meta is likely to raise more funds later this year since its recent offering only covers around four months of cash burn.

Thus at $0.19 per share, Meta is valued at around 10x trailing 12 month revenues. I believe it is roughly fairly priced currently, but further dilution could push reduce its estimated value further.

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