Meta Materials: Cash Burn May Result In A Q1 2023 Equity Offering (NASDAQ:MMAT)

Meta Materials (NASDAQ:MMAT) has now spun off its oil and gas assets into Next Bridge Hydrocarbons. This removes a distraction for the company as it seeks to increase revenues and reduce its cash burn.

Meta appears to be on track for around 20% organic revenue growth in 2022, leaving its market cap at around 35x revenues. I believe that it will need to do an equity offering soon unless it gets its loans from Next Bridge repaid and/or enough of its warrants (with a $1.75 exercise price) get exercised. I estimate that Meta ended 2022 with approximately $15 million of cash on hand, which is roughly enough to cover one quarter of cash burn.

Meta successfully reset the clock for Nasdaq listing compliance and its share price has been above $1 for nearly all of the last several months. Meta’s rate of cash burn has been higher than I projected though, so the potential equity offering may take place in Q1 2023 now instead of either Q1 or Q2 2023.

Organic Sales Growth

Meta appears to be on track for roughly 20% organic sales growth in 2022. It previously noted that it would have generated approximately $10 million revenue in 2021 if it had acquired Nanotech at the beginning of 2021.

Meta has reported $8.8 million in revenues during the first three quarters of 2022 and will end up with around $12 million revenue in 2022 if it generates $3.2 million in revenue during Q4 2022. That amount of quarterly revenue would be approximately 30% more than what it generated in Q3 2022 but would be roughly in-line with the quarterly revenue it generated in 1H 2022.

Cash Balance

Meta’s cash balance (including restricted cash and short term investments) went down to $32.2 million at the end of Q3 2022, a $23.1 million decrease from the $55.3 million it reported at the end of Q2 2022.

I previously thought that Meta’s cash burn in 2H 2022 would end up around $25 million to $30 million. It looks like I was too optimistic about Meta’s cash burn in 2H 2022 given that already burned close to that amount in Q3 2022.

Changes in working capital and spending on its Highfield Park facility (opened in November) inflated Meta’s cash burn in Q3 2022, so its cash burn may be more in the $15 million to $20 million range for Q4 2022. This would still put its 2H 2022 cash burn at around $40 million though and leave it with a relatively modest (such as $15 million) cash balance at the end of 2022.

Potential Equity Offering

This scenario ($15 million in cash at the end of 2022 and $15+ million in cash burn per quarter) makes it quite likely that Meta will raise cash through another equity offering in Q1 2023 unless it receives funds from Next Bridge repaying its loans and/or Meta’s warrants are exercised.

Meta has approximately 37 million warrants with an exercise price of $1.75 per share. Although Meta’s share price was above that level most of the time from mid-November to early December, the warrants were not yet exercisable at that time. Those warrants are now exercisable (with an expiry date of late 2027), so if Meta’s share price goes above $1.75, it could receive some funds from the exercised warrants.

Meta also appears to be owed approximately $21 million by Next Bridge Hydrocarbons, including $1 million for spinoff costs and $20 million that it loaned to Next Bridge. The loans are currently due at the end of March 2023, but could be extended to October 2023 (with repayments in six equal monthly installments beginning in April 2023) if Next Bridge raises at least $30 million by the end of March 2023.

Notes On Valuation

Meta Materials currently has a market capitalization of approximately $420 million, which is fairly high given its current revenues. This is around 35x its projected 2022 revenues (based on the $12 million total I mentioned above). I think Meta could end up with around $15 million to $20 million in revenues for 2023, leading to its current market cap being a 21x to 28x multiple to 2023 revenues.

To get to a 10x multiple to revenues at its current share price (and before factoring in potential dilution), Meta will need to grow revenues to around $42 million, which is around 3.5x projected 2022 revenues.

Meta’s enthusiastic retail investor following can probably keep it trading at a high multiple for now, but eventually it will need to deliver substantial organic revenue growth as well as reduce its cash burn. At $15 million to $20 million in revenues for 2023, Meta is probably looking at another $60+ million in cash burn for this year.

Notes On Oil & Gas Assets

The oil and gas assets are now part of Next Bridge Hydrocarbons after the spinoff was completed in late 2022. There was a lot of uproar over how trading ended for the MMTLP placeholder since it wasn’t communicated clearly and plainly in advance that the last day of trading would be December 8th.

While I doubt that anything will be done in regards to that mess, I do believe that Next Bridge common shares will end up as tradable securities soon. In addition to the loans from Meta mentioned above, Next Bridge also currently owes Greg McCabe $20 million by the end of March 2023 as well. Thus Next Bridge appears to require some sort of funding in Q1 2023.

I’ve previously expressed my skepticism that the oil and gas assets are worth anything more than a minimal amount, and nothing has changed there.

Conclusion

Meta is attempting to increase its organic revenue growth from the roughly 20% growth it appears to be on track for in 2022. It seems quite likely to have significant cash burn in 2023 (potentially $60+ million) and will likely need to do an equity offering soon unless it receives money from repayment of Next Bridge loan or the exercise of warrants.

Retail enthusiasm for the company still appears to be strong, which should help it continue to trade at a lofty multiple to revenues. However, it will eventually need to generate a higher rate of organic revenue growth and reduce its cash burn in order to avoid continuing dilution.