META MATERIALS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with its consolidated financial statements and related notes, each included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in or implied by these forward-looking statements as a result of several factors, including those discussed in the section titled "Risk Factors" included under Part I, Item 1A and elsewhere in this Annual Report. See "Cautionary Note Regarding Forward-Looking Statements" in this Annual Report.
This Report on Form 10-K contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Report on Form 10-K, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend for our use or display of other companies' trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by any other companies.
OVERVIEW
BUSINESS AND OPERATIONAL HIGHLIGHTS
Throughout 2022, we emphasized new investments in pilot scale manufacturing of our NANOWEB® applications, expansion of our production capacity in our banknote and brand security lines, and more aggressive design, development and testing of our broad array of medical products. For more information regarding our business, see Part I, Item I (Business). of this Form 10-K.
As of
Nasdaq Potential Delisting
On
Known Trends and Uncertainties
Inflation
A prolonged period of inflation in
Inflation in
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Vehicle Electrification
The transition from internal combustion engine (ICE) vehicles to electric vehicles (EVs) may be accelerated by recent disruptions in global oil supply, reduced investment in new domestic oil exploration, and increased government support for domestic EV production, battery and battery materials supply chain, and EV charging infrastructure. This may increase the opportunity for META to scale up battery materials production, acquire new battery component customers, and obtain government funding for capital projects. It could also accelerate demand for certain of our NANOWEB® products targeting EV's.
Global Chip Shortage
A global shortage of computer chips has triggered significant delays in product launches in the automotive industry. Should these shortages continue, META could experience on-going delays in orders for our NANOWEB® applications from this vertical market since these products are intended to be incorporated into planned new models.
Expanding Operations, Facilities and Staffing
META is expanding capacity and facilities to support a growing range of market
opportunities. This includes a new headquarters facility in
Expanding Focus and Emphasis on Information Technology
With the rapid growth of our global business, our data protection and cyber security needs have become a significant element of our business. Failure on our part to invest in the tools, equipment and personnel required to adequately manage these elements could result in regulatory issues, claims by customers and potential financial liabilities. Further, customer prospects identifying such failures could decide to delay or abandon orders from us.
NANOWEB® Capacity
Our NANOWEB® products have not yet reached the required manufacturing scale to enable us to address the volume demands of a number of our target vertical markets. We must either design, develop and procure additional internal capacity to produce NANOWEB® in higher volume and larger formats or identify outsourced suppliers capable of producing our designs. Internal capacity expansion may require higher capital expenditures and faces risk of supply chain delays. Outsourced production may increase variable costs and put pressure on gross margins as we scale volumes.
Recent AcquisitionsPlasma App Ltd
On
We issued an aggregate of 9,677,419 shares of our common stock to PAL's
shareholders at closing, representing a number of shares of common stock equal
to
Optodot
We completed an asset purchase agreement with
The consideration transferred included the following: A cash payment of
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Agreement, equal to
RESULTS OF OPERATIONS
We have incurred recurring losses to date, and we anticipate incurring additional losses until such time, if ever, we can achieve profitability. Substantial additional financing will be needed to fund our development, marketing and sales activities and generally to commercialize our technology, and we expect to raise additional capital through various financing transactions or arrangements, including sale/leaseback of certain properties, joint venturing of projects, debt financing, equity financing, or other means. These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.
Revenue and Gross Profit
Our revenue is generated from product sales as well as development revenue. We recognize revenue when we satisfy performance obligations under the terms of our contracts, and control of our products is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products or services.
Product Sales
Product sales include products, components, and samples sold to our customers. Revenue from the sale of prototypes and finished products is recognized at the point in time when control of the asset is transferred to the customer, generally on delivery of goods. We consider whether there are other obligations in the contract that are separate performance obligations to which a portion of the transaction price needs to be allocated. In determining the transaction price for the sale of prototypes, we consider the effects of variable consideration, the existence of significant financial components, non-cash consideration and consideration payable to the customer (if any).
Development Revenue
Development Revenue consists of revenues from contract services and research services, including non-recurring engineering services. Revenue from development activities is recognized over time, using an output method to measure progress towards complete satisfaction of the research activities and whether associated performance obligations identified within each contract have been satisfied.
Cost of Goods Sold
Cost of Goods Sold consists of direct material used in production, depreciation
expenses of machinery and equipment used in production, salaries and benefits
relating to the production staff, and other overhead costs allocated to
production.
Year ended December 31,
2022 2021 Change
$ $ $ %
Product sales 1,211,746 407,915 803,831 197 %
Development revenue 8,988,421 3,674,602 5,313,819 145 %
Total Revenue 10,200,167 4,082,517 6,117,650 150 %
Cost of goods sold 3,036,190 675,973 2,360,217 349 %
Gross Profit 7,163,977 3,406,544 3,757,433 110 %
Gross Profit percentage 70 % 83 % -13 %
Product Sales
The increase in product sales of
Development Revenue
The increase in development revenue for the year ended
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services with a confidential G10 central bank. In 2021, we acquired Nanotech
which had a development contract for up to
Cost of Goods Sold
The increase in cost of goods sold for the year ended
Gross Profit
The increase in gross profit for the year endedDecember 31, 2022 , of$3.8 million compared to the year endedDecember 31, 2021 , is again mainly due to our increased revenue from contract services with a confidential G10 central bank during 2022. Operating expenses Year ended December 31, 2022 2021 Change $ $ $ % Operating Expenses Selling & Marketing 6,244,883 2,267,354 3,977,529 175 % General & Administrative 61,543,282 29,699,601 31,843,681 107 % Research & Development 22,640,495 9,497,427 13,143,068 138 % Total operating expenses 90,428,660 41,464,382 48,964,278 118 % Selling & Marketing
The increase in selling & marketing expenses for the year ended
General & Administrative
The increase in general & administrative expenses for the year ended
Research & Development
The increase in research & development expenses for the year ended
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maintenance fees and consulting expense, a
Other Expenses
Year ended December 31,
2022 2021 Change
$ $ $ %
Other expenses, net:
Interest expense, net (174,234 ) (1,106,445 ) 932,211 -84 %
Loss on foreign exchange,
net (2,054,447 ) (205,882 ) (1,848,565 ) 898 %
Gain on deconsolidation of
subsidiaries 3,990,737 - 3,990,737 100 %
Loss on financial
instruments, net - (40,540,091 ) 40,540,091 -100 %
Other expenses, net (3,433,757 ) (11,939,068 ) 8,505,311 -71 %
Total other expense, net (1,671,701 ) (53,791,486 ) 52,119,785 -97 %
Interest Expense, net
The decrease in net interest expense for the year ended
Loss on Foreign Exchange, net
The change in net loss on foreign exchange of
Gain on deconsolidation of wholly-owned subsidiary
A gain of
Loss on Financial Instruments, net
No loss on financial instruments was recorded for the year ended
Other expenses, net
The decrease in other expenses of
Deferred Tax recovery
Year ended December 31,
2022 2021 Change
$ $ $ %
Income tax recovery 5,834,160 852,063 4,982,097 585 %
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Income Tax recovery
The increase in our income tax recovery for the year ended
a) utilization of previously fully reserved tax assets in relation to the
Optodot acquisition. We recognized a deferred tax liability as of acquisition
date of
b) income tax recovery of
We have provided a valuation allowance for various jurisdictions as a result of our historical net losses. We continue to assess our future taxable income by jurisdiction based on our recent historical operating results, the expected timing of reversal of temporary differences, various tax planning strategies that we may be able to implement, the impact of potential operating changes on our business and our forecast results from operations in future periods based on available information at the end of each reporting period.
To the extent that we are able to reach the conclusion that deferred tax assets are realizable based on any combination of the above factors in a single, or multiple, taxing jurisdictions, a reversal of the related portion of our existing valuation allowances may occur.
We have not yet been able to establish profitability or other sufficient significant positive evidence, to conclude that our deferred tax assets are more likely than not to be realized. Therefore, we continue to maintain a valuation allowance against our deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity risk is the risk that we will not meet our financial obligations as they become due after use of currently available cash. We have a planning and budgeting process to monitor operating cash requirements, including amounts projected for capital expenditures, which are adjusted as input variables change. These variables include, but are not limited to, our ability to plan for and generate revenue from current and prospective customers, our general and administrative requirements and the availability of equity or debt capital and government funding. As these variables change, we may be required to issue equity or obtain debt financing.
On
During the year ended
During the year ended
On
Shelf Registration
On
On
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time to time. The sales agents are entitled to compensation at a fixed commission rate of 3.0% of the gross proceeds of each sale of shares of our common stock.
Under the ATM Agreement, we set the parameters for the sale of ATM Shares, including the number of ATM Shares to be issued, the time period during which sales are requested to be made, limitations on the number of ATM Shares that may be sold in any one trading day and any minimum price below which sales may not be made. Sales of the ATM Shares, if any, under the ATM Agreement may be made in transactions that are deemed to be "at-the-market offerings" as defined in Rule 415 under the Securities Act.
As of
Going Concern
In accordance with Accounting Standards Codification ("ASC") 205-40, going concern, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements included in this Form 10-K are issued. This evaluation initially does not take into consideration the potential mitigating effect of management's plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of management's plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. In performing its analysis, management excluded certain elements of its operating plan that cannot be considered probable. Under ASC 205-40, the receipt of potential funding from future partnerships, equity or debt issuances, potential achievement of milestones from customer agreements and reductions in workforce cannot be considered probable at this time because these plans are not entirely within our control and/or have not been approved by our Board of Directors as of the date of issuance of the consolidated financial statements.
Our expectation to generate operating losses and negative operating cash flows in the future and the need for additional funding to support our planned operations, raise substantial doubt regarding our ability to continue as a going concern. Management's plans to alleviate the conditions that raise substantial doubt include reduced spending, and the pursuit of additional capital. Management has concluded the likelihood that its plan to successfully obtain sufficient funding from one or more of these sources, or adequately reduce expenditures, while highly possible, is less than probable. Accordingly, we have concluded that substantial doubt exists about our ability to continue as a going concern for a period of at least 12 months from the date of issuance of the consolidated financial statements.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.
The following table summarizes META's cash flows for the periods presented:
Year ended December 31,
2022 2021
Net cash used in operating activities (62,244,794 ) (34,764,911 )
Net cash (used in) provided by investing activities (19,472,250 ) 65,144,545 Net cash provided by financing activities
46,367,012 15,655,863
Net (decrease) increase in cash, cash equivalents
and restricted cash (35,350,032 ) 46,035,497
Net cash used in operating activities
During the year ended
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During the year ended
Net cash (used in) provided by investing activities
During the year ended
During the year ended
Net cash provided by financing activities
During the year ended
During the year ended
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with
Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis of accounting, which contemplates continuity of operations,
realization of assets and liabilities and commitments in the normal course of
business. The accompanying consolidated financial statements do not reflect any
adjustments that might result if we are unable to continue as a going concern.
In connection with the preparation of the consolidated financial statements for
the years ended
Under ASC 205-40, the receipt of potential funding from future partnerships, equity or debt issuances, potential achievement of milestones from customer agreements and reductions in workforce cannot be considered probable at this time because these plans are not entirely within our control and/or have not been approved by our Board of Directors as of the date of issuance of the consolidated financial statements.
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Our expectation to generate operating losses and negative operating cash flows in the future and the need for additional funding to support our planned operations, raise substantial doubt regarding our ability to continue as a going concern. Management's plans to alleviate the conditions that raise substantial doubt include reduced spending, and the pursuit of additional capital. Management has concluded the likelihood that its plan to successfully obtain sufficient funding from one or more of these sources, or adequately reduce expenditures, while highly possible, is less than probable.
We have one operating segment in accordance with ASC 280 Segment Reporting. We
have similarly determined that we have one reporting unit, to which all goodwill
is assigned, in accordance with ASC 350 Intangibles -
We first perform a qualitative assessment to test the reporting unit's goodwill for impairment. Based on the qualitative assessment, if it is determined that the fair value of our reporting unit is more likely than not (i.e. a likelihood of more than 50 percent) to be less than its carrying amount, the quantitative assessment of the impairment test is performed. In the quantitative assessment, we compare the fair value of our reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets of the reporting unit exceeds its fair value, then an impairment loss equal to the difference, but not exceeding the total carrying value of goodwill allocated to the reporting unit, would be recorded.
For example, a sustained decline in market capitalization below book value is an
indicator that goodwill and other intangible assets should be tested for
impairment under ASC 350 Intangibles -
Next Bridge Note Receivable
Notes receivable consists of an amount due from
We have assessed the fair value of the notes receivable on the deconsolidation
date in accordance with ASC 820, Fair Value Measurement. In particular, we
assessed the likelihood of our ability to receive the aggregate amount of the
At subsequent reporting periods to
We are currently in negotiations with
Revenue recognition - Our revenue is generated from product sales as well as development revenue. We recognize revenue when it satisfies performance obligations under the terms of its contracts, and control of its products is transferred to its customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products or services.
Revenue from the sale of prototypes and finished products is recognized at the point in time when control of the asset is transferred to the customer, generally on delivery of goods. We consider whether there are other obligations in the contract that are separate performance obligations to which a portion of the transaction price needs to be allocated. In determining the transaction price for the
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sale of prototypes, we consider the effects of variable consideration, the existence of significant financial components, non-cash consideration and consideration payable to the customer (if any).
Revenue from development activities is recognized over time, using an output method to measure progress towards complete satisfaction of the research activities and whether associated performance obligations identified within each contract have been satisfied.
Acquired intangibles - In accordance with ASC 805 Business Combinations, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values. Such valuations may require management to make significant estimates and assumptions, especially with respect to intangible assets. Acquired intangible assets consist of acquired technology and customer relationships. In valuing acquired intangible assets, we make assumptions and estimates based in part on projected financial information, which makes assumptions and estimates inherently uncertain, particularly for early-stage technology companies. The significant estimates and assumptions used by us in the determination of the fair value of acquired intangible technology assets include the revenue growth rate and the discount rate. The significant estimates and assumptions used by us in the determination of the fair value of acquired customer contract intangible assets include the revenue growth rate and the discount rate.
As a result of the judgments that need to be made, we obtain the assistance of independent valuation firms. We complete these assessments as soon as practical after the closing dates. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill.
Although we believe the assumptions and estimates of fair value we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain and subject to refinement. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill, if the changes are related to conditions that existed at the time of the acquisition. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments, based on events that occurred subsequent to the acquisition date, are recorded in our consolidated statements of operations and comprehensive loss.
Business combinations - We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill to reporting units based on the expected benefit from the business combination. Allocation of purchase consideration to identifiable assets and liabilities affects the amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite-lived intangible assets, including goodwill, are not amortized. During the measurement period, which is not to exceed one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Acquisition-related expenses are recognized separately from business combinations and are expensed as incurred.
Commitments and contractual obligations
For a description of our commitments and contractual obligations, please see "note 25 - Leases" as well as "note 26 - Commitments and contingencies" in the notes to the Consolidated Financial Statements of this Form 10-K.
Off-balance sheet arrangements
Off-balance sheet firm commitments relating to an outstanding letter of credit
amounted to approximately
Recent accounting pronouncements
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our Consolidated Financial Statements, please see "note 2 - Significant accounting policies" in the notes to the Consolidated Financial Statements of this Form 10-K.
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