Amid a corrective backdrop in the equities market, materials and nanocomposite manufacturer Meta Materials (NASDAQ:MMAT) increased pessimism exponentially. After management announced the pricing of its previously proposed underwritten public offering, MMAT stock fell 42% before paring losses slightly to 40% down. With a significant number of warrants involved in the deal, the dilutive potential scared off investors.
According to MarketWatch, the Nova Scotia-based advanced materials firm stated before the opening bell Friday that it will be “…offering 83.3 million shares of common stock and warrants to buy up to 83.3 million more shares at a combined public offering price of 30 cents per share and accompanying warrant.”
In addition, “[e]ach warrant is exercisable at a price of 37.5 cents per share and will expire in five years. The offering is expected to close on Tuesday and net about $25 million in proceeds, before underwriting discount and estimated expenses.”
Also, underwriters will receive a 30-day overallotment option to purchase up to an additional 12.5 million shares at a discount. Not liking the terms of the deal, stakeholders quickly dumped MMAT stock.
Dilution Fears Drive Volatility for MMAT Stock
Absent any other market-related context, Meta Materials represents a fundamentally critical and relevant business. Meta specializes in holography and lithography and which can facilitate greater efficiencies for myriad industries. These sectors include aerospace, automotive, consumer electronics, 5G, and more. Nevertheless, MMAT stock must make financial sense for stakeholders. Unfortunately, the enterprise doesn’t appear particularly viable.
Primarily, the concerns of the deal center on dilution. According to Investopedia, unlike options, “…warrants are dilutive. When an investor exercises their warrant, they receive newly issued stock, rather than already-outstanding stock. Warrants tend to have much longer periods between issue and expiration than options, of years rather than months.”
The issuance of warrants may also bring up speculation as to why management would incur dilution for MMAT stock. On paper, the Corporate Finance Institute states that the “…warrant represents a potential source of capital in the future when the company needs to raise additional capital without offering other bonds or stock.”
Unfortunately, investors may perceive the public offering of MMAT stock as a desperation move, hence the sharp selloff.
Why It Matters
Not adding confidence to the matter is Meta Materials’ financial profile.
According to Gurufocus, MMAT stock incurs several warnings. Among them, the investment resource identified a buildup of inventory. Also, its Altman Z-Score slipped to 1.74, reflecting distress and possible bankruptcy risk in the next two years.
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On the date of publication, Josh Enomoto did not have (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.
