Editor’s Note: This article was updated on March 30, 2023 to reflect that Next Bridge Hydrocarbons is now an independent company that is no longer owned by Meta Materials nor its stakeholders.
On Dec. 14, 2022, executives at Meta Materials (NASDAQ:MMAT) finalized a bizarre transaction. In a single stroke, they converted the firm’s entire listed block of preferred MMTLP shares into untradeable common stock of Next Bridge Hydrocarbons, Inc.
At first glance, the transaction seems like pulling the rug from under Meta Material’s MMTLP shareholders. The preferred stock (trading at $12.50 less than a month before the deal) is now worth about as much as the hoard of stuffed animals sitting in my attic. There’s no easy way to offload them. An unexpected trading halt by FINRA two days before the deal also prevented many shareholders from cashing out.
Even Meta Material common shareholders don’t have much to celebrate. MMAT stock is down another 60% since the spinoff and trades at around 96% below its 2021 peak.
That begs the question:
What should bagholders now do with Meta Materials stock?
Meta Materials Stock: The Making of a Hustle
First, a little background. Because if you’ve lost money on Meta Materials, there’s a good chance it’s someone else’s fault.
On Dec. 13, federal prosecutors and the SEC accused several online influencers of running a $100 million pump-and-dump scheme that included alleged market manipulation in the precursor to Meta Materials, Torchlight Energy Resources (TRCH). According to the SEC complaint, four defendants bought around 800,000 shares of Torchlight at prices between $1.68 to $1.95 in February 2021. They would proceed to “promote false information about Meta itself (e.g., that it was worth ‘north of $4.8 billion’) and promoted the purported benefits of the merger.”
The four conspirators would later allegedly sell at prices up to $3.63 over the following week just as momentum traders and social media watchers began to swarm in. Shares would eventually peak at over $12.
In other words, investors who lost money on Meta Materials were likely either 1) using faulty information designed to manipulate markets, or 2) following other momentum investors who were fooled by the first point.
Mismanagement at Meta Materials
Meta Materials’ management, however, hasn’t helped the situation. Since its 2021 reverse merger, the firm’s top brass has embarked on a massive spending spree, burning through an average of $34 million every quarter while seeing their cash position dwindle.
From a managerial standpoint, this is troubling. Research & development (R&D) firms are notorious for their high capital requirements, and Meta Materials’ executives have been spending cash as if good times will never end. The money raised from their upsized reverse merger with Torchlight could now run out by this spring.
Other CEOs tend to be more judicious with cash from capital raises. AMC Entertainment (NYSE:AMC) boss Adam Aron used high share prices to raise $6.2 billion and pay off debt, saving his firm from bankruptcy. And Tesla’s (NASDAQ:TSLA) Elon Musk has pulled the same trick masterfully to fund his Gigafactories. No matter their industry, skilled CEOs will realize that capital raises are best used to fund specific ends.
Meanwhile, Meta Materials’ management has done the opposite. The company has stretched itself thin by pursuing too many projects across at least seven different areas. And capital raises are far more challenging now that shares trade well below $1. Every $50 million in new equity now dilutes existing shareholders by 30%, assuming the pain is spread evenly.
The company’s weak fundamentals only add to the concern. 86% of MMAT’s development revenues are derived from a single customer and analysts expect no profits until at least 2025. Its auditors have issued a “going concern” audit qualification.
How to Make $71 Million Disappear
However, the most worrying issue is how Meta Materials has treated its external stakeholders.
Consider MMAT’s “deletion” of preferred shares.
Ordinarily, a preferred share spinoff will result in a new tradable entity. In 2005, IAC (NASDAQ:IAC) used mandatory exchangeable preferred stock units to establish Expedia (NASDAQ:EXPE) as an independent firm. It is a roundabout way of creating a spinoff, but one that still allows investors to cash out.
Meanwhile, the unlisted Next Bridge spinoff makes the deal feel more like AmTrust Financial Services. In 2018, a bungled $3 billion go-private deal essentially wiped out AmTrust’s preferred shares, making them untradable and worthless. The company was taken to court by its shareholders and eventually settled the suit for $13 million.
Meta Material’s preferred shareholders will see clear parallels. Their once-tradable MMTLP shares are now locked away in untradable Next Bridge ones. And these shareholders have virtually no control over the new entity.
Here’s from the company’s Next Bridge prospectus.
“Our Board has the authority to cause us to issue, without any further vote or action by the stockholders, shares of preferred stock in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights…”
In other words, the $71 million carrying value of the Torchlight RTO now finds itself at the total disposal of Next Bridge’s board. No shareholder votes required.
It didn’t have to be this way. Meta Materials could have structured the deal so that the spinoff was immediately tradable on public markets. Or the firm could have sold off assets and provided shareholders with a one-time cash dividend. Instead, former MMTLP shareholders have been left with untradable shares of a hydrocarbon company with no clear exit strategy. On Feb. 16, Next Bridge’s management hammered the point with a press release that “there is no current expectation for a public market to develop for the common stock.”
The Bagholder’s Guide to Meta Materials (MMTLP) Stock
That leaves current investors with few good choices.
For Meta Materials’ former MMTLP stock holders, the only realistic course (besides waiting) is a class-action lawsuit. These suits occasionally recoup a portion of losses, and shareholders could use AmTrust’s settlement (and others like it) to argue their case. Punitive damage awards are rare, however, so the best hope that former MMTLP shareholders have is that management eventually lists the company. Next Bridge aims to publish financial statements by March 31, 2023.
For MMAT common stockholders, the choice is more difficult.
- Status Quo. On the one hand, investors can hold onto their losses and hope for the best. Meta Materials might still produce a winning product as its investor presentation breathlessly suggests. Or it could monetize its patents in a method often unflatteringly referred to as “patent trolling.” With Meta Materials trading at close to a dollar, what’s the most you can lose? (Hint: It’s close to a dollar per share)
- Loss Aversion. Other investors might feel that selling the remaining value they have left of MMAT is still better than nothing. Why hold onto $500 of shares that could go to zero?
Either way, bagholders will likely face significant losses. The hundreds of patents that Meta Materials claims to have are only worth the cash flow they can generate, and there’s no guarantee that any of its projects will yield results. Meanwhile, Meta’s dwindling cash reserves will either require a significant capital raise by Q2 2023 or the sale of parts of its business.
InvestorPlace contributor Mark Hake once figured Meta Materials was worth about the cash on its balance sheet — around 56 cents per share. The longer that investors hang on, the greater the risk that bagholders will also know what it feels like to own $100’s of stuffed animals gathering dust in an attic.
On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.