UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to___________
Commission File Number: 001-36247
Meta Materials Inc.
(Exact Name of Registrant as Specified in its Charter)
| |
Nevada | 74-3237581 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
|
|
60 Highfield Park Drive Dartmouth, Nova Scotia, Canada | B3A 4R9 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (902) 482-5729
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class
| Trading Symbol(s)
| Name of each exchange on which registered
|
Common Stock, par value $0.001 per share | MMAT | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | |
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
|
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 7, 2023, the registrant had 490,414,607 shares of common stock, $0.001 par value per share, outstanding.
TABLE OF CONTENTS
2
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include statements about:
•our ability to achieve expected savings and benefits in association with the Realignment and Consolidation plan,
•our strategy for protecting our intellectual property,
•our ability to obtain necessary funding on favorable terms or at all,
•our ability to retain and increase sales to existing customers,
•our plan and ability to secure revenues,
•the risk of competitors entering the market,
•our ability to expand operations, facilities and hire and retain skilled staff,
•our ability to obtain financing to fund future expenditures and capital requirements,
•our plans with respect to new facilities and the scaling of our manufacturing capabilities,
•the impact of adoption of new accounting standards,
•statements relating to the acquisition of Plasma App Ltd., or PAL, including but not limited to the effect the acquisition will have on significantly accelerating line speed and increasing our annual capacity for NANOWEB® films as well as KolourOptik® security films,
•statements relating to the acquisition of Optodot Corporation, including but not limited to the effect that the acquisition will offer simpler, faster, lower-cost assembly processes compatible with current and future battery chemistries,
•expectations regarding vehicle electrification,
•the capabilities of our technology, including but not limited to expectations regarding NANOWEB® capacity,
•our ability to maintain an adequate rate of revenue growth and our future financial performance, including our expectations regarding our revenue, gross profit or gross margin and operating expenses,
•our ability to expand our business, including to expand globally and into other markets,
•the sufficiency of our present cash and cash equivalents balances and cash flows,
•the effect of foreign currency fluctuation, and
•the effect of a global chip shortage.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based these forward-looking statements contained in this Quarterly Report on Form 10-Q largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
3
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.
4
SUMMARY OF RISK FACTORS
Below is a summary of the principal factors that could materially harm our business, operating results and/or financial condition, impair our future prospects or cause the price of our common stock to decline. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission, or the SEC, before making an investment decision regarding our common stock.
Risks Related to the Realignment and Consolidation Plan
▪Uncertainty in successfully completing the Realignment and Consolidation Plan, which may require a substantial portion of the time and attention of our management, may affect our ability to mitigate going concern risk and have an adverse effect on our business and results of operations.
▪We may undergo changes in organizational culture and employee morale, transformations in customer and partner relationships, and potential operational disturbances as a result of our Realignment and Consolidation Plan, each of which could adversely affect our overall business performance and stakeholder satisfaction levels.
▪A potential divestiture of certain applications under the Realignment and Consolidation Plan may require a recalibration of our business model, potentially affecting our market positioning and competitiveness. We may also face challenges in realizing an adequate return on prior investments, which may result in significant amount of impairment loss and impact our future results of operations.
Risks Related to our Business
▪Continuous operational losses and negative cash flows raise doubts about our ability to continue as a going concern.
▪Limited operational history makes it difficult to predict our future operating results.
▪We may require additional capital to support business growth, and this capital might not be available on acceptable terms.
▪Possible future needs for funding through debt financing may necessitate a significant amount of cash, and there may not be sufficient cash flow from our business to repay our debts.
▪Our agreement to share 50% of Vlepsis business profits with Vlepsis employees may extend the time needed to recoup our investment and potentially reduce the rate of return.
▪Our operating results fluctuate significantly because of a number of factors, many of which are beyond our control.
▪We currently rely on revenue from development services and most of our products are in the development stage. Any delay in the development or introduction of our new products could adversely affect our business.
▪We may be unable to develop new products, applications, and end markets for our products.
▪Our research and marketing development activities and investments may not result in profitable, commercially viable or successfully produced and marketed products.
▪Because our products typically have lengthy sales cycles, we may experience substantial delays between incurring expenses related to research and development and the generation of revenues.
▪We may experience delays in providing sufficient products for future testing of our products due to supply chain limitations.
▪Fluctuations in the mix of products sold may adversely affect our financial results.
▪Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could cause our stock price to decline.
▪Material weaknesses or significant deficiencies in our internal controls, including our inability to maintain effective disclosure controls and procedures, could materially and adversely affect our business, results of operations and financial condition.
▪Impairment of our goodwill or other intangible assets could materially and adversely affect our business and operating results.
▪We depend on our OEM customers and system integrators to incorporate our products into their systems.
▪Our revenues may be concentrated in a few customers, and if we lose any of these customers, or these customers do not pay us, our revenues could be materially adversely affected.
▪The markets in which we participate are intensely competitive.
▪If we are unable to make acquisitions, or successfully integrate them into our business, our business could be adversely affected.
▪Semiconductors for inclusion in consumer products have shorter product life cycles.
▪We may not be able to increase production capacity to meet the present and future demand for our products.
▪Our gross margin is dependent on a number of factors, such as our revenue and products mix, raw material prices, level of capacity utilization, and manufacturing efficiency.
▪Our revenues are dependent upon our products and technologies being designed into our customers’ products.
▪We rely on our distributors and sales representatives to sell some of our products.
▪Costs related to product defects and errata may harm our results of operations and business.
▪We order materials and commence production in advance of anticipated customer demand. Therefore, revenue shortfalls may also result in inventory write-downs.
▪Our international operations expose us to material risks.
▪Business interruptions may damage our facilities or those of our suppliers.
5
▪We are exposed to risks that our employees, consultants, or other commercial partners and business associates may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.
▪Compliance with environmental laws and regulations could be expensive, and failure to comply with these laws and regulations could subject us to significant liability.
▪The risk of loss of our intellectual property, trade secrets or other sensitive business or customer confidential information or disruption of operations due to cyberattacks or data breaches could negatively impact our financial results.
▪Cybersecurity breaches and information technology failures could harm our business by increasing our costs.
▪Changes in laws or regulations relating to privacy, information security and data protection, or any actual or perceived failure by us to comply with such laws and regulations or any other obligations, could adversely affect our business.
▪Changes in laws, regulations or guidelines relating to our business plan and activities could adversely affect our business.
▪Our agreements with various national governments and suppliers to such governments subject us to unique risks.
▪We are subject to the Foreign Corrupt Practices Act and similar anti-bribery and anti-corruption laws, as well as governmental export and import controls, all of which could subject us to liability or impair our ability to compete in international markets.
▪Our insurance coverage strategy and programs may not be adequate to cover all risks and resulting liabilities to which we may be subjected to.
▪Tax risks across various jurisdictions and new tax laws or liabilities could significantly impact our business.
Risks Related to Intellectual Property
▪If we fail to protect our intellectual property rights and our confidential information, our business could be adversely affected.
▪Our intellectual property revenues are uncertain and unpredictable in timing and amount.
▪We may become involved in material legal proceedings in the future to enforce or protect our intellectual property rights.
▪Our technologies may infringe on the intellectual property rights of others, which could lead to costly disputes or disruptions.
Risks Related to Industry Adoption of our Products
▪We cannot provide assurance that markets will accept our various products at the expected market penetration rates.
▪Slower than forecasted market acceptance of Lithography related products, partially in the automotive market, may have a material adverse effect on our financial position.
▪If products incorporating our technologies are used in defective products, we may be subject to product liability or other claims.
▪We participate in markets that are subject to rapid technological change and require significant research and development expenses to develop and maintain products that can achieve market acceptance.
Risks Related to Facilities and Human Resources
▪We may incur claims relating to our use, manufacture, handling, storage or disposal of hazardous materials.
▪Our failure to comply with export control, environmental and climate related laws and regulations, or the inability to timely obtain requisite approvals necessary for the conduct of our business, such as fab land and construction approvals, could harm our business and operational results or subject us to potential significant legal liability.
▪We are highly dependent on the continued service and availability of key management personnel, and failure to successfully execute personnel transitions and succession planning could harm our Company.
▪Our future success depends on our ability to attract and retain highly qualified personnel.
▪Our results of operations could be adversely affected by labor shortages, turnover, labor cost increases and inflation.
Risks Related to Legal Matters
▪We are, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business and which could adversely affect our business.
▪We and former executive officers have received “Wells Notices” from the SEC staff recommending that the SEC bring enforcement actions against us and the former executive officers which could have a material adverse effect on our business.
Risks Related to our Common Stock
▪Future sales and issuances of our common stock or rights to purchase common stock could result in additional dilution of the percentage ownership of our stockholders and cause our stock price to fall.
▪Our failure to satisfy certain Nasdaq listing requirements may result in our common stock being delisted from the Nasdaq Capital Market, which could eliminate the trading market for our common stock.
▪Subject to various spending levels approved by our board of directors, our management will have broad discretion in the use of the net proceeds from our capital raises and may not use them effectively.
▪The market price of our common stock has been and may continue to be volatile.
▪We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.
▪Anti-takeover provisions in our articles of incorporation and bylaws and provisions in Nevada law might discourage, delay, or prevent a change of control of us or changes in our management and, therefore, depress the trading price of our securities.
Risks Related to the December 2022 Spin-Off of Next Bridge Hydrocarbons Inc. (“Next Bridge”)
▪Our spin-off of our oil and gas operations could be challenged under various state and federal fraudulent transfer laws.
▪Public attention to and inquiries regarding the “naked” short selling of our previously outstanding Series A Preferred Stock may negatively affect the trading value of our common stock.
6
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
META MATERIALS INC.
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS (UNAUDITED)
| | | | | | | | |
| | As of | | | As of | |
| | September 30, 2023 | | | December 31, 2022 | |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 9,189,994 | | | $ | 10,090,858 | |
Restricted cash | | | 1,000,740 | | | | 1,720,613 | |
Accounts and other receivables | | | 1,688,711 | | | | 902,718 | |
Notes receivable, net of allowance for credit loss | | | — | | | | 2,211,900 | |
Inventory | | | 122,306 | | | | 468,027 | |
Prepaid expenses and other current assets | | | 3,979,055 | | | | 7,202,099 | |
Due from related parties | | | 8,501 | | | | 8,461 | |
Total current assets | | | 15,989,307 | | | | 22,604,676 | |
Intangible assets, net | | | 51,256,980 | | | | 56,313,317 | |
Property, plant and equipment, net | | | 46,015,506 | | | | 42,674,699 | |
Operating lease right-of-use ("ROU") assets | | | 8,410,263 | | | | 5,576,824 | |
Long-term subscription receivables | | | 82,645 | | | | — | |
Goodwill | | | — | | | | 281,748,466 | |
Total assets | | $ | 121,754,701 | | | $ | 408,917,982 | |
Liabilities and stockholders’ equity | | | | | | |
Current liabilities | | | | | | |
Trade payables and accruals | | $ | 10,700,047 | | | $ | 16,694,211 | |
Restructuring costs accrual | | | 661,405 | | | | — | |
Current portion of long-term debt | | | 709,015 | | | | 483,226 | |
Current portion of deferred revenues | | | 1,481,487 | | | | 730,501 | |
Current portion of deferred government assistance | | | 807,095 | | | | 799,490 | |
Current portion of funding obligation | | | 961,538 | | | | — | |
Current portion of operating lease liabilities | | | 1,391,757 | | | | 967,126 | |
Total current liabilities | | | 16,712,344 | | | | 19,674,554 | |
Deferred revenues | | | 433,717 | | | | 479,808 | |
Deferred government assistance | | | 387,714 | | | | 319,017 | |
Deferred tax liability | | | 1,832,221 | | | | 3,253,985 | |
Long-term operating lease liabilities | | | 6,110,144 | | | | 3,375,031 | |
Long-term funding obligation | | | — | | | | 180,705 | |
Long-term debt | | | 2,948,254 | | | | 3,070,729 | |
Total liabilities | | $ | 28,424,394 | | | $ | 30,353,829 | |
Commitments and contingencies (Note 21) | | | | | | |
Stockholders’ equity | | | | | | |
Common stock - $0.001 par value; 1,000,000,000 shares authorized, 485,339,440 shares issued and outstanding at September 30, 2023, and $0.001 par value; 1,000,000,000 shares authorized, 362,247,867 shares issued and outstanding at December 31, 2022 | | | 463,516 | | | | 340,425 | |
Additional paid-in capital | | | 628,002,196 | | | | 590,962,866 | |
Accumulated other comprehensive loss | | | (4,555,010 | ) | | | (5,242,810 | ) |
Accumulated deficit | | | (530,580,395 | ) | | | (207,496,328 | ) |
Total stockholders’ equity | | | 93,330,307 | | | | 378,564,153 | |
Total liabilities and stockholders’ equity | | $ | 121,754,701 | | | $ | 408,917,982 | |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
7
META MATERIALS INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
| | | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | | Nine months ended
September 30, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Revenue: | | | | | | | | | | | | |
Product sales | | $ | 27,484 | | | $ | 432,059 | | | $ | 109,090 | | | $ | 934,299 | |
Development revenue | | | 2,172,678 | | | | 2,023,953 | | | | 5,533,855 | | | | 7,820,135 | |
Total revenue | | | 2,200,162 | | | | 2,456,012 | | | | 5,642,945 | | | | 8,754,434 | |
Cost of sales (exclusive of items shown separately below) | | | 750,969 | | | | 514,312 | | | | 2,096,615 | | | | 1,921,845 | |
Depreciation and amortization expense included in cost of sales | | | 9,980 | | | | 14,639 | | | | 37,323 | | | | 55,298 | |
Stock-based compensation expense included in cost of sales | | | 32,744 | | | | 167,779 | | | | 173,713 | | | | 376,250 | |
Gross profit | | | 1,406,469 | | | | 1,759,282 | | | | 3,335,294 | | | | 6,401,041 | |
Operating expenses: | | | | | | | | | | | | |
Selling & marketing | | | 835,405 | | | | 874,315 | | | | 3,922,990 | | | | 2,842,165 | |
General & administrative | | | 5,881,598 | | | | 13,832,656 | | | | 18,564,304 | | | | 35,039,472 | |
Research & development | | | 5,088,556 | | | | 4,967,997 | | | | 15,208,926 | | | | 12,174,718 | |
Depreciation & amortization expense | | | 3,441,812 | | | | 1,871,163 | | | | 10,034,834 | | | | 5,322,172 | |
Stock-based compensation expense | | | 278,539 | | | | 2,389,749 | | | | (670,108 | ) | | | 10,250,149 | |
Restructuring expense | | | 809,002 | | | | — | | | | 2,278,151 | | | | — | |
Goodwill impairment | | | — | | | | — | | | | 282,173,053 | | | | — | |
Total operating expenses | | | 16,334,912 | | | | 23,935,880 | | | | 331,512,150 | | | | 65,628,676 | |
Loss from operations | | | (14,928,443 | ) | | | (22,176,598 | ) | | | (328,176,856 | ) | | | (59,227,635 | ) |
Interest expense, net | | | (125,482 | ) | | | (134,205 | ) | | | (243,002 | ) | | | (440,694 | ) |
Realized gain (loss) on foreign exchange, net | | | 78,602 | | | | 35,691 | | | | (319,925 | ) | | | 44,964 | |
Unrealized gain (loss) on foreign exchange, net | | | (1,526,356 | ) | | | (2,259,324 | ) | | | 319,355 | | | | (3,091,919 | ) |
Gain on sale of notes receivable | | | 6,750,195 | | | | — | | | | 6,750,195 | | | | — | |
Other income (expense), net | | | 473,638 | | | | 21,908 | | | | (844,487 | ) | | | (1,324,528 | ) |
Total other income (expense), net | | | 5,650,597 | | | | (2,335,930 | ) | | | 5,662,136 | | | | (4,812,177 | ) |
Loss before income taxes | | | (9,277,846 | ) | | | (24,512,528 | ) | | | (322,514,720 | ) | | | (64,039,812 | ) |
Income tax (expense) recovery | | | 540,843 | | | | 37,208 | | | | 1,455,653 | | | | 147,193 | |
Net loss | | $ | (8,737,003 | ) | | $ | (24,475,320 | ) | | $ | (321,059,067 | ) | | $ | (63,892,619 | ) |
Other comprehensive (loss) income, net of tax | | | | | | | | | | | | |
Unrealized foreign currency translation (loss) gain | | | (74,022 | ) | | | (4,413,860 | ) | | | 687,800 | | | | (6,565,154 | ) |
Total other comprehensive (loss) income | | | (74,022 | ) | | | (4,413,860 | ) | | | 687,800 | | | | (6,565,154 | ) |
Comprehensive loss | | $ | (8,811,025 | ) | | $ | (28,889,180 | ) | | $ | (320,371,267 | ) | | $ | (70,457,773 | ) |
Basic and diluted loss per share | | $ | (0.02 | ) | | $ | (0.07 | ) | | $ | (0.75 | ) | | $ | (0.20 | ) |
Weighted average number of shares outstanding - basic and diluted | | | 477,808,766 | | | | 362,260,641 | | | | 432,883,181 | | | | 316,661,487 | |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
8
META MATERIALS INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | Additional | | | Other | | | | | | Total | |
| | Common Stock | | | Paid-in | | | Comprehensive | | | Accumulated | | | Stockholders’ | |
| | Shares | | | Amount | | | Capital | | | Loss | | | Deficit | | | Equity | |
Balance, July 1, 2023 | | | 471,881,955 | | | $ | 450,059 | | | $ | 626,124,206 | | | $ | (4,480,988 | ) | | $ | (521,843,392 | ) | | $ | 100,249,885 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (8,737,003 | ) | | | (8,737,003 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | (74,022 | ) | | | — | | | | (74,022 | ) |
Issuance of common stock | | | 12,786,402 | | | | 12,786 | | | | 2,554,370 | | | | — | | | | — | | | | 2,567,156 | |
Stock issuance costs | | | — | | | | — | | | | (1,078,552 | ) | | | — | | | | — | | | | (1,078,552 | ) |
Exercise of warrants | | | 526,200 | | | | 526 | | | | 91,032 | | | | — | | | | — | | | | 91,558 | |
Settlement of restricted stock units | | | 144,883 | | | | 145 | | | | (145 | ) | | | — | | | | — | | | | — | |
Stock-based compensation | | | — | | | | — | | | | 311,285 | | | | — | | | | — | | | | 311,285 | |
Balance, September 30, 2023 | | | 485,339,440 | | | $ | 463,516 | | | $ | 628,002,196 | | | $ | (4,555,010 | ) | | $ | (530,580,395 | ) | | $ | 93,330,307 | |
| | | | | | | | | | | | | | | | | | |
Balance, July 1, 2022 | | | 360,810,016 | | | $ | 338,987 | | | $ | 585,045,778 | | | $ | (2,448,230 | ) | | $ | (167,811,403 | ) | | $ | 415,125,132 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (24,475,320 | ) | | | (24,475,320 | ) |
Other comprehensive loss | | | — | | | | — | | | | — | | | | (4,413,860 | ) | | | — | | | | (4,413,860 | ) |
Exercise of stock options | | | 120,269 | | | | 120 | | | | 32,352 | | | | — | | | | — | | | | 32,472 | |
Settlement of restricted stock units | | | 224,519 | | | | 225 | | | | (225 | ) | | | — | | | | — | | | | — | |
Stock-based compensation | | | 223,052 | | | | 223 | | | | 2,557,307 | | | | — | | | | — | | | | 2,557,530 | |
Balance, September 30, 2022 | | | 361,377,856 | | | $ | 339,555 | | | $ | 587,635,212 | | | $ | (6,862,090 | ) | | $ | (192,286,723 | ) | | $ | 388,825,954 | |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
9
META MATERIALS INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
| | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | |
| | | | | | Additional | | Other | | | | Total |
| | Common Stock | | Paid-in | | Comprehensive | | Accumulated | | Stockholders’ |
| | Shares | | Amount | | Capital | | Loss | | Deficit | | Equity |
Balance, January 1, 2023 | | 362,247,867 | | $340,425 | | $590,962,866 | | $(5,242,810) | | $(207,496,328) | | 378,564,153 |
Net loss | | — | | — | | — | | — | | (321,059,067) | | (321,059,067) |
Other comprehensive income | | — | | — | | — | | 687,800 | | — | | 687,800 |
Issuance of common stock and warrants | | 118,151,584 | | 118,151 | | 38,773,813 | | — | | — | | 38,891,964 |
Stock issuance costs | | — | | — | | (4,400,783) | | — | | — | | (4,400,783) |
Exercise of stock options and warrants | | 3,161,461 | | 3,161 | | 799,928 | | — | | — | | 803,089 |
Settlement of restricted stock units | | 1,778,528 | | 1,779 | | (1,779) | | — | | — | | — |
Stock-based compensation | | — | | — | | (156,849) | | — | | — | | (156,849) |
Deemed dividend for down round provision in warrants | | — | | — | | 2,025,000 | | — | | (2,025,000) | | — |
Balance, September 30, 2023 | | 485,339,440 | | $463,516 | | $628,002,196 | | $(4,555,010) | | $(530,580,395) | | $93,330,307 |
| | | | | | | | | | | | |
Balance, January 1, 2022 | | 284,573,316 | | $262,751 | | $463,136,404 | | $(296,936) | | $(128,394,104) | | $334,708,115 |
Net loss | | — | | — | | — | | — | | (63,892,619) | | (63,892,619) |
Other comprehensive loss | | — | | — | | — | | (6,565,154) | | — | | (6,565,154) |
Issuance of common stock and warrants | | 37,037,039 | | 37,037 | | 49,962,963 | | — | | — | | 50,000,000 |
Stock issuance costs | | — | | — | | (3,680,666) | | — | | — | | (3,680,666) |
Exercise of stock options and warrants | | 2,876,246 | | 2,876 | | 504,491 | | — | | — | | 507,367 |
Settlement of restricted stock units | | 224,519 | | 225 | | (225) | | — | | — | | — |
Issuance of stock in connection with acquisitions | | 36,443,684 | | 36,443 | | 67,086,069 | | — | | — | | 67,122,512 |
Stock-based compensation | | 223,052 | | 223 | | 10,626,176 | | — | | — | | 10,626,399 |
Balance, September 30, 2022 | | 361,377,856 | | $339,555 | | $587,635,212 | | $(6,862,090) | | $(192,286,723) | | $388,825,954 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
10
META MATERIALS INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | | | | |
| | Nine months ended | |
| | September 30, 2023 | | | September 30, 2022 | |
| | $ | | | $ | |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (321,059,067 | ) | | $ | (63,892,619 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | |
Non-cash finance expense (income) | | | 710,797 | | | | (12,433 | ) |
Non-cash interest expense | | | 281,128 | | | | 419,684 | |
Non-cash interest income | | | (979,997 | ) | | | — | |
Non-cash lease expense | | | 1,443,293 | | | | 1,212,415 | |
Non-cash goodwill impairment | | | 282,173,053 | | | | — | |
Deferred income tax | | | (1,455,653 | ) | | | (147,193 | ) |
Depreciation and amortization expense | | | 10,072,157 | | | | 5,377,470 | |
Inventory write off | | | 339,838 | | | | — | |
Credit loss expense | | | 1,799,977 | | | | — | |
Unrealized foreign currency exchange (gain) loss | | | (81,142 | ) | | | 2,843,223 | |
Change in deferred revenue | | | 702,782 | | | | (199,785 | ) |
Non-cash government assistance | | | — | | | | (3,047 | ) |
Gain on sale of property, plant and equipment | | | — | | | | (783 | ) |
Gain on sale of notes receivable | | | (6,750,195 | ) | | | — | |
Stock-based compensation expense (recovery) | | | (496,397 | ) | | | 9,763,627 | |
Non-cash consulting expense | | | — | | | | 862,771 | |
Changes in operating assets and liabilities | | | (3,786,778 | ) | | | (4,739,841 | ) |
Net cash used in operating activities | | | (37,086,204 | ) | | | (48,516,511 | ) |
Cash flows from investing activities: | | | | | | |
Purchases of property, plant and equipment | | | (7,962,480 | ) | | | (11,975,134 | ) |
Proceeds from sale of property, plant and equipment | | | — | | | | 39,140 | |
Proceeds from short-term investments | | | — | | | | 1,620,281 | |
Proceeds from below-market capital government loan | | | 256,240 | | | | — | |
Proceeds from collection of Next Bridge Notes Receivable | | | 1,000,000 | | | | — | |
Proceeds from sale of Next Bridge Notes Receivable | | | 6,083,333 | | | | — | |
Acquisition of business, net of cash acquired | | | — | | | | (3,486,906 | ) |
Net cash used in investing activities | | | (622,907 | ) | | | (13,802,619 | ) |
Cash flows from financing activities: | | | | | | |
Proceeds from the issuance of common stock and warrants | | | 38,891,964 | | | | 50,000,000 | |
Stock issuance costs paid on the issuance of common stock and warrants | | | (3,375,783 | ) | | | (3,680,666 | ) |
Repayments of long-term debt | | | (293,450 | ) | | | (467,767 | ) |
Proceeds from stock option and warrants exercises | | | 803,088 | | | | 507,367 | |
Net cash provided by financing activities | | | 36,025,819 | | | | 46,358,934 | |
Net decrease in cash, cash equivalents and restricted cash | | | (1,683,292 | ) | | | (15,960,196 | ) |
Cash, cash equivalents and restricted cash at beginning of the period | | | 11,811,471 | | | | 47,434,472 | |
Effects of exchange rate changes on cash, cash equivalents and restricted cash | | | 62,555 | | | | (429,356 | ) |
Cash, cash equivalents and restricted cash at end of the period | | $ | 10,190,734 | | | $ | 31,044,920 | |
Supplemental cash flow information | | | | | | |
Accrued purchases of property, equipment and patents | | $ | 981,767 | | | $ | 536,778 | |
Right-of-use assets obtained in exchange for lease liabilities | | $ | 1,434,186 | | | $ | 142,378 | |
Common stock issuance costs in accrued liabilities or accounts payable | | $ | 1,025,000 | | | $ | — | |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
11
META MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited)
1. Corporate information
Meta Materials Inc. (also referred to herein as the “Company”, “META®”, “META” “we”, “us”, or “our”) is an advanced materials and nanotechnology company. We are developing materials that we believe can improve the performance and efficiency of many current products as well as allow new products to be developed that cannot otherwise be developed without such materials. We believe we are positioned for growth, by pioneering a new category of intelligent surfaces, which will allow us to become a metamaterials industry leader. We enable our potential customers across a range of industries - consumer electronics, 5G communications, healthcare, aerospace, automotive, and clean energy - to deliver improved products to their customers. For example, our nano-optic metamaterial technology is being used to develop anti-counterfeiting security features for a Central Bank customer and for currencies and authentication for global brands. We currently have approximately 500 active patent documents, of which approximately 300 patents have been issued.
Our principal executive office is located at 60 Highfield Park Drive, Dartmouth, Nova Scotia, Canada.
2. Significant accounting policies
Basis of Presentation
These unaudited condensed consolidated interim financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States of America, or US GAAP. Our fiscal year-end is December 31. The condensed consolidated interim financial statements include the accounts of Meta Materials Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation.
These unaudited condensed consolidated interim financial statements do not include all of the information and notes required by US GAAP for annual financial statements. Accordingly, these unaudited condensed consolidated interim financial statements should be read in conjunction with our audited consolidated financial statements and notes for the years ended December 31, 2022 and 2021, filed with the Securities and Exchange Commission (the “SEC”) on Annual Reports on Form 10-K and 10-K/A, as applicable.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the condensed consolidated interim statement of operations and comprehensive loss.
Recently Adopted Accounting Pronouncements
ASU 2021-08:
In October 2021, the Financial Accounting Standards Board, or FASB, issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers. We adopted the guidance on January 1, 2023, and its adoption did not have a material effect on our condensed consolidated interim financial statements and related disclosures.
Recently Issued Accounting Pronouncements
We currently have no material recent accounting pronouncements yet to be adopted.
3. Going concern
At each reporting period, we evaluate whether there are conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. Our evaluation entails analyzing prospective operating budgets and forecasts for expectations of our cash needs and comparing those needs to the current cash and cash equivalent balances. We are required to make certain additional disclosures if we conclude substantial doubt exists and it is not alleviated by our plans or when our plans alleviate substantial doubt about our ability to continue as a going concern.
In accordance with Accounting Standards Codification, or 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 these consolidated financial statements are issued. This evaluation initially does not take into consideration the potential
12
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 condensed consolidated interim 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 these condensed consolidated interim financial statements are issued. In performing its analysis, management excluded certain elements of its operating plan that cannot be considered probable.
We have incurred net losses of $321.1 million (including $282.2 million of goodwill impairment) and $79.1 million for the nine months ended September 30, 2023 and the twelve months ended December 31, 2022, respectively, and have an accumulated deficit of $530.6 million as of September 30, 2023. 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 for a period of one year after the date that these condensed consolidated interim financial statements are issued. Management's plans to alleviate the conditions that raise substantial doubt include reduced spending, and the pursuit of additional capital. On June 6, 2023, our board of directors approved a revised operating plan (the "Realignment and Consolidation Plan") for the remainder of 2023 pursuant to which we have begun, but not yet completed, a process for increased focus on key applications with the greatest near-term revenue potential, and of realignment of our resources and structure for reduced operating expenses. As part of this plan, we are exploring alternatives for certain of our technologies including Holography, Wireless Sensing, and Radio Wave Imaging. These alternatives may include divesting, entering into a joint venture and/or curtailing our investments in these technologies. See Note 20 for details. Management has concluded the likelihood that its plan to successfully obtain sufficient funding, or adequately reduce expenditures, while highly possible, is less than probable because these plans are not entirely within our control. If we are unsuccessful in obtaining financing, we will be required to assess alternative forms of action. Accordingly, we have concluded that substantial doubt exists about our ability to continue as a going concern for a period of at least twelve months from the date of issuance of these condensed consolidated interim financial statements.
The accompanying condensed consolidated interim 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 condensed consolidated interim 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. These adjustments may be material.
4. Acquisitions
Plasma App Ltd Acquisition
On April 1, 2022, we completed the purchase of 100% of the issued and outstanding shares of PAL, or the PAL acquisition. PAL is the developer of PLASMAfusion®, a proprietary manufacturing platform technology, which enables high speed coating of any solid material on any type of substrate. PAL’s team is located at the Rutherford Appleton Laboratories in Oxford, UK.
The acquisition was accounted for as a business combination in accordance with ASC 805.
The following table presents the final allocation of consideration paid for the PAL acquisition and fair value of the assets and liabilities acquired:
| |
| Amount |
Fair value of common stock issued | $15,290,320 |
Fair value of deferred consideration | 1,698,926 |
Total Consideration | $16,989,246 |
Net assets of PAL: | |
Cash and cash equivalents | $13,822 |
Other assets | 36,104 |
Intangibles | 12,600,000 |
Deferred tax liability | (3,150,000) |
Goodwill | 7,489,320 |
| $16,989,246 |
Acquired intangible assets totaling $12.6 million relate to a developed technology intangible asset. The significant estimates and assumptions used in the determination of the fair value of the acquired developed technology intangible asset includes the revenue growth rate and the discount rate. The goodwill resulting from the transaction is attributable to assembled workforce, synergies, technical know-how and expertise. The fair value of acquired assets and liabilities was measured as at the acquisition date based on a valuation report provided by a third-party valuation expert.
13
During the nine months ended September 30, 2023, we wrote off the entire amount of goodwill. See Note 10, Intangible assets and goodwill.
We have finalized the purchase price allocation to the individual assets acquired and liabilities assumed using the acquisition method. There were no further changes to the purchase price allocation, as disclosed in the audited consolidated financial statements and notes for the year ended December 31, 2022.
Optodot Acquisition
On June 22, 2022, we completed a purchase agreement with Optodot Corporation, or Optodot, a developer of advanced materials technologies, to acquire certain assets related to patents and intellectual property for the battery and other industries, or the Optodot acquisition.
The acquisition was accounted for as a business combination in accordance with ASC 805. The transaction was structured as a tax-free re-organization pursuant to Internal Revenue Code Section 368(a)(1)(c). Accordingly, the tax basis of net assets acquired retains their carryover tax basis and holding period.
The following table presents the final allocation of consideration paid for the Optodot acquisition and fair value of the assets and liabilities acquired:
| | | | |
| | Amount | |
Fair value of unrestricted common stock issued or to be issued | | $ | 41,791,115 | |
Fair value of restricted common stock issued | | | 8,342,152 | |
Cash consideration | | | 3,500,000 | |
Total consideration | | $ | 53,633,267 | |
| | | |
Net assets of Optodot: | | | |
Intangibles | | $ | 23,300,000 | |
Deferred tax liability | | | (4,893,000 | ) |
Goodwill | | | 35,226,267 | |
| | $ | 53,633,267 | |
Acquired intangible assets totaling $23.3 million relate to a developed technology intangible asset. The significant estimates and assumptions used in the determination of the fair value of the acquired developed technology intangible asset includes the revenue growth rate and the discount rate. The goodwill resulting from the transaction is attributable to assembled workforce, synergies, technical know-how and expertise. The fair value of acquired assets and liabilities has been measured as at the acquisition date based on a valuation report provided by a third-party valuation expert.
During the nine months ended September 30, 2023, we wrote off the entire amount of goodwill. See Note 10, Intangible assets and goodwill.
We have finalized the purchase price allocation to the individual assets acquired and liabilities assumed using the acquisition method. There were no further changes to the purchase price allocation, as disclosed in the audited consolidated financial statements and notes for the year ended December 31, 2022.
5. Related party transactions
As of September 30, 2023 and December 31, 2022, receivables due from a related party, Lamda Guard Technologies Ltd, or Lamda, were $8,501 and $8,461, respectively.
6. Notes receivable
During 2021 and 2022, META loaned money to Next Bridge Hydrocarbons Inc., which was previously a wholly-owned subsidiary of META until the completion of the spin-off transaction on December 14, 2022, pursuant to a secured promissory note with principal amount of $15.0 million, or the 2021 Note, and unsecured note receivable for principal amount of $5.0 million, or the 2022 Note (collectively referred to as "Next Bridge Notes Receivable"). The 2021 Note was partially secured by a combination of shares of META’s common stock and an interest in the Orogrande Project Property. As of December 14, 2022, the principal including accrued interest of those notes receivable amounted to $24.2 million. We assessed the fair value of the notes receivable on the deconsolidation date in accordance with ASC 820, Fair Value Measurement, and recorded a note receivable for $2.2 million, representing fair value of the Next Bridge Notes Receivable as of December 31, 2022, and recognized an impairment loss of $21.9 million subsequent to the deconsolidation of Next Bridge from our consolidated financial results.
On March 31, 2023, in exchange for a prepayment of $1.0 million of the currently outstanding principal of the aforementioned loans, we agreed with Next Bridge on the following: (a) extended the maturity date of the Next Bridge Notes Receivable from March 31, 2023
14
to October 3, 2023, and (b) increased the total amount of commitments and loans made by us to Next Bridge under the Loan Agreement by $2.6 million to reflect the costs incurred in effecting the deconsolidation of Next Bridge.
On August 7, 2023, we entered into a Loan Sale Agreement with Gregory McCabe ("Purchaser"), under which we sold and assigned to Purchaser all of our rights, title, interests, and obligations in and to the aforementioned loans owed by Next Bridge (“Assigned Loan Interests”) in exchange for cash consideration of $6.0 million and subsequently entered into a Stock Purchase Agreement ("SPA") for $6.0 million of shares of our common stock. Assigned Loan Interests represented $24.0 million of the outstanding balance of the Next Bridge Notes Receivable as of the closing date of August 7, 2023 ("Closing Date"). Pursuant to the SPA, Mr. McCabe agreed to purchase an aggregate of $6.0 million of shares of our common stock beginning on September 1, 2023, in monthly amounts of $250,000 for the first six months and in monthly amounts of $500,000 for the next nine months thereafter, at a price per share equal to 120% of the 5-day VWAP on the trading day preceding the date of each such purchase.
In accordance with ASC 326, Financial Instruments – Credit losses, we elected a practical expedient to account for the Next Bridge Notes Receivable as collateral-dependent assets, whereby estimated credit losses are based on the fair value of the collateral. As of August 7, 2023, the carrying value of the Next Bridge Notes Receivable was $0.4 million, net of a credit loss allowance of $1.8 million. In addition, we recognized $6.8 million gain from sale of Next Bridge Notes Receivable during the three months ended September 30, 2023.
We concluded the premium Mr. McCabe pays for future stock purchases is deemed to be part of the consideration paid by Mr. McCabe in exchange for Next Bridge Notes Receivable. A financial asset has been recorded for $0.9 million in accounts and other receivables and long-term subscription receivables, representing the fair value of the premium we will receive on the share purchases made by Mr. McCabe pursuant to the SPA.
7. Inventory
Inventory consisted of nano-optic materials, photosensitive materials, lenses, laser protection film and finished eyewear, and was comprised of the following:
| | | | | | | | |
| | As of | |
| | September 30,
2023 | | | December 31,
2022 | |
Raw materials | | $ | 494,883 | | | $ | 490,077 | |
Supplies | | | 10,942 | | | | 11,345 | |
Work in process | | | 45,978 | | | | 51,589 | |
Finished goods | | | 43,155 | | | | 42,058 | |
Inventory provision | | | (472,652 | ) | | | (127,042 | ) |
Total inventory | | $ | 122,306 | | | $ | 468,027 | |
8. Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following:
| | | | | | | | |
| | As of | |
| | September 30, 2023 | | | December 31, 2022 | |
Prepaid expenses | | $ | 2,119,071 | | | $ | 2,835,660 | |
Other current assets | | | 807,961 | | | | 365,583 | |
Taxes receivable | | | 1,052,023 | | | | 4,000,856 | |
Total prepaid expenses and other current assets | | $ | 3,979,055 | | | $ | 7,202,099 | |
15
9. Property, plant and equipment, net
Property, plant and equipment consisted of the following:
| | | | | | | | | | |
| | | | As of | |
| | Useful life
(years) | | September 30,
2023 | | | December 31,
2022 | |
Land | | N/A | | $ | 440,089 | | | $ | 439,309 | |
Building | | 25 | | | 5,072,078 | | | | 5,063,091 | |
Computer equipment | | 3-5 | | | 1,446,212 | | | | 775,736 | |
Computer software | | 1 | | | 717,503 | | | | 606,729 | |
Manufacturing equipment | | 2-5 | | | 23,297,584 | | | | 22,701,761 | |
Office furniture | | 5-7 | | | 895,775 | | | | 660,549 | |
Leasehold improvements | | 5-10 | | | 22,059,641 | | | | 2,172,134 | |
Enterprise Resource Planning software | | 5 | | | 197,999 | | | | 197,648 | |
Assets under construction | | N/A | | | 6,929,822 | | | | 20,337,338 | |
| | | | | 61,056,703 | | | | 52,954,295 | |
Accumulated depreciation and impairment | | | | | (15,041,197 | ) | | | (10,279,596 | ) |
| | | | $ | 46,015,506 | | | $ | 42,674,699 | |
Depreciation expense was $1.7 million and $1.0 million for the three months ended September 30, 2023 and September 30, 2022, respectively, and $4.8 million and $2.6 million for the nine months ended September 30, 2023 and 2022, respectively.
Property, plant and equipment is pledged as security under a General Security Agreement, or a GSA, signed in favor of the Royal Bank of Canada, or RBC, on July 14, 2014, which is related to our corporate bank account and credit card and includes all property, plant and equipment and intangible assets.
10. Intangible assets and goodwill
Intangible Assets
Intangible assets consisted of the following:
| | | | | | | | | | |
| | | | As of | |
| | Useful life
(years) | | September 30,
2023 | | | December 31,
2022 | |
Patents | | 5-10 | | $ | 42,321,791 | | | $ | 42,111,143 | |
Trademarks | | | | | 125,215 | | | | 124,845 | |
Developed technology | | 20 | | | 14,001,479 | | | | 13,976,668 | |
Customer contract | | 5 | | | 9,615,384 | | | | 9,598,348 | |
| | | | | 66,063,869 | | | | 65,811,004 | |
Accumulated amortization and impairment | | | | | (14,806,889 | ) | | | (9,497,687 | ) |
| | | | $ | 51,256,980 | | | $ | 56,313,317 | |
Amortization expense was $1.8 million and $0.9 million for the three months ended September 30, 2023 and 2022, respectively, and $5.3 million and $2.8 million for the nine months ended September 30, 2023 and 2022, respectively.
Goodwill
| | | | |
Goodwill at December 31, 2022 | | $ | 281,748,466 | |
Goodwill impairment | | | (282,173,053 | ) |
Effect of foreign exchange on goodwill | | | 424,587 | |
Goodwill at September 30, 2023 | | $ | — | |
Goodwill is tested for impairment annually as of December 31 or more frequently on a reporting unit basis when events or changes in circumstances indicate that impairment may have occurred. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. Historically, we conducted our business in a single operating segment and reporting unit.
As a result of the continued and sustained decline in the price of our common shares in the three months ended June 30, 2023, we determined there to be an indicator of impairment for our one reporting unit to which goodwill is assigned. As a result, we performed a quantitative interim goodwill impairment assessment as of June 30, 2023. We concluded that the carrying value of the reporting unit was higher than its estimated fair value, and a goodwill impairment loss totaling $282.2 million was recognized in the three months ended June 30, 2023, representing the entirety of the goodwill.
16
The estimated fair value of the reporting unit was determined using the market valuation method, which is consistent with the methodology we used in the annual impairment test conducted at December 31, 2022. The most significant assumption used in applying this method was our share price.
11. Long-term debt
| | | | | | | | |
| | As of | |
| | September 30,
2023 | | | December 31,
2022 | |
Atlantic Canada Opportunities Agency, or ACOA, Business Development Program, or BDP, 2012 interest-free loan(1) with a maximum contribution of CA$500,000, repayable in monthly repayments commencing October 1, 2015, of CA$5,952 until June 1, 2023. Loan repayments were temporarily paused effective April 1, 2020, until January 1, 2021, as a result of the COVID-19 outbreak. As of September 30, 2023, the amount of principal drawn down on the loan, net of repayments is Nil (December 31, 2022 - CA$35,714.). | | $ | — | | | $ | 25,880 | |
ACOA Atlantic Innovation Fund, or AIF, 2015 interest-free loan(2)with a maximum contribution of CA$ 3,000,000. Annual repayments, commencing June 1, 2021, are calculated as a percentage of gross revenue for the preceding fiscal year, at Nil when gross revenues are less than CA$1,000,000, 5% when gross revenues are less than CA$10,000,000 and greater than CA$1,000,000, and CA$500,000 plus 1% of gross revenues when gross revenues are greater than CA$10,000,000. As of September 30, 2023, the amount of principal drawn down on the loan, net of repayments, is CA$2,661,293 (December 31, 2022 - CA$2,661,293.). | | | 1,442,346 | | | | 1,449,493 | |
ACOA BDP 2018 interest-free loan(1),(3) with a maximum contribution of CA$3,000,000, repayable in monthly repayments commencing June 1, 2021, of CA$31,250 until May 1, 2029. As of September 30, 2023, the amount of principal drawn down on the loan, net of repayments, is CA$2,125,000 (December 31, 2022 - CA$2,406,250). | | | 1,054,523 | | | | 1,136,556 | |
ACOA PBS 2019 interest-free loan(1)with a maximum contribution of CA$100,000, repayable in monthly repayments commencing June 1, 2021, of CA$1,400 until May 1, 2027. As of September 30, 2023, the amount of principal drawn down on the loan, net of repayments, is CA$61,111 (December 31, 2022 - CA$73,611). | | | 30,758 | | | | 34,750 | |
ACOA Regional Relief and Recovery Fund, or RRRF, 2020 interest-free loan with a maximum contribution of CA$390,000, repayable on monthly repayments commencing April 1, 2023, of CA$11,000 until April 1, 2026. As of September 30, 2023, the principal amount drawn down on the loan is CA$324,000 (December 31, 2022 - CA$390,000). | | | 158,426 | | | | 159,642 | |
Economic Development Agency of Canada for the Regions of Quebec, or EDC, 2022 interest-free loan(4) with a maximum contribution of CA$2,000,000 (CA$1,000,000 for building renovations and CA$1,000,000 for acquisition of equipment for Nanotech). Repayable in 60 monthly installments of CA$30,000, with the first repayment due in January 2026. As of September 30, 2023, the principal amount drawn down on the loan is CA$1,800,000 (December 31, 2022 - CA$1,454,167). | | | 971,216 | | | | 747,634 | |
Total debt | | | 3,657,269 | | | | 3,553,955 | |
Less: current portion | | | 709,015 | | | | 483,226 | |
Long-term debt | | $ | 2,948,254 | | | $ | 3,070,729 | |
(1) We were required to maintain a minimum balance of positive equity throughout the term of the loan. However, on November 14, 2019, ACOA waived this requirement for the period ending June 30, 2019 and for each period thereafter until the loan is fully repaid.
(2) The carrying amount of the ACOA AIF loan is reviewed each reporting period and adjusted as required to reflect management’s best estimate of future cash flows, discounted at the original effective interest rate.
(3) A portion of the ACOA BDP 2018 loan was used to finance the acquisition and construction of manufacturing equipment resulting in $425,872 that was recorded as deferred government assistance, which is being amortized over the useful life of the associated equipment.
(4) The EDC 2022 loan was used to finance building renovations and equipment purchase resulting in $400,922 of deferred government assistance as of September 30, 2023, which is being amortized over the useful life of the associated building and equipment.
12. Capital stock
Common Stock
Authorized: 1,000,000,000 common shares, $0.001 par value.
During the nine months ended September 30, 2023, 3,161,461 stock options and warrants were exercised to purchase an equal number of common shares. In addition, 1,778,528 restricted stock units have vested and settled into an equal number of common shares.
17
At-the-Market Equity Offering Program:
On February 10, 2023, we entered into an At The Market Issuance Sales Agreement (the "ATM Agreement" or "ATM Program") which was amended on June 20, 2023, with an investment bank to conduct an "at-the-market" equity offering program, or the ATM, pursuant to which we may issue and sell, shares of our common stock, par value $0.001 per share, up to an aggregate of $100.0 million of shares of common stock (the "ATM Shares") from time to time.
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 of 1933, as amended, or the Securities Act.
During the three months ended September 30, 2023, we sold a total of 4,934,676 shares of our common stock under the ATM at a weighted average price of $0.19 per share, generating gross proceeds of $1.0 million and net proceeds of $0.9 million after offering expenses.
During the nine months ended September 30, 2023, we sold a total of 26,966,524 shares of our common stock under the ATM at a weighted average price of $0.46 per share, generating gross proceeds of $12.3 million and net proceeds of $11.9 million after offering expenses.
On September 5, 2023, the Sales Agent terminated their participation as Sales Agent under the Sales Agreement, and accordingly, the Sales Agreement was terminated.
LPC Purchase Agreement:
On September 11, 2023, we entered into a Purchase Agreement (the “LPC Purchase Agreement”) with Lincoln Park Capital Fund, LLC ("Lincoln Park") which allows us to sell up to $50,000,000 of our Common Stock to Lincoln Park over 30 months until March 2026. We have the right, but not the obligation, to require Lincoln Park to purchase our Common Stock, with the number of shares and the timing of these transactions being at our discretion, in accordance with the agreement's terms, provided that the closing sale price per-share of our Common Stock is above $0.10.
The purchase price for shares sold under this agreement is set at 97% of the lower of: (i) the lowest sale price on the purchase date and (ii) the arithmetic average of the three lowest closing sale prices for our Common Stock in the ten business days preceding the purchase date.
The LPC Purchase Agreement includes an Exchange Cap provision which establishes that the aggregate number of shares sold to Lincoln Park should not exceed 95,497,527 shares, that is 19.99% of our outstanding Common Stock immediately prior to the execution of the Purchase Agreement (“Exchange Cap”), unless (i) shareholder approval is obtained to issue shares above the Exchange Cap or (ii) the average price of all applicable sales of our Common Stock to Lincoln Park under the LPC Purchase Agreement equals or exceeds $0.2134 (the “Minimum Price”).
The LPC Purchase Agreement may be terminated by us at any time, at our sole discretion, without any cost or penalty, by giving one business day notice to Lincoln Park to terminate the LPC Purchase Agreement. For consideration for entering into the LPC Purchase Agreement, and being obligated to fund up to $50,000,000, we agreed to pay $500,000 to Lincoln Park as an initial commitment fee for its commitment to purchase shares of Common Stock under the LPC Purchase Agreement, and we are obligated to pay an additional $500,000 to Lincoln Park as further described in the LPC Purchase Agreement.
During the three and nine months ended September 30, 2023, we sold a total of 6,000,000 shares of our common stock under the LPC Purchase Agreement at a weighted average price of $0.20 per share, generating proceeds of $1.2 million. We recorded $1.0 million of issuance costs as a reduction to equity as of September 30, 2023.
Registered Direct Offering:
April 2023 Offerings
On April 14, 2023, we entered into an underwriting agreement, or the Underwriting Agreement, with Ladenburg Thalmann & Co. Inc. and A.G.P/ Alliance Global Partners, or the underwriters, relating to our public offering of (i) 83,333,334 shares of our common stock, par value $0.001 and (ii) warrants to purchase up to an aggregate of 83,333,334 shares of our common stock. The shares of common stock and warrants were sold together as a fixed combination, consisting of one share of common stock and a warrant to purchase one share of common stock, but were immediately separable and were issued separately in the offering. Each warrant is immediately exercisable to purchase one share of common stock at a price of $0.375 per share, or Exercise Price, subject to certain adjustments in the case of a Share Combination Event or a Dilutive Issuance as described below, and expires five years from the date of issuance. The
18
combined price to the public in the offering for each share of common stock and accompanying warrant was $0.30. After deducting underwriting discounts and commissions and the offering expenses payable by us, the net proceeds were $22.1 million.
The gross proceeds of $25.0 million were allocated between common stock and accompanying warrants based on their relative fair values. The fair value of common stock was calculated based on the closing share price on the Issuance Date of $0.22. The fair value of the warrants was estimated using the Black-Scholes option pricing model. Accordingly, we have allocated $15.7 million as the fair value of common stock and $9.3 million as the fair value of warrants.
The warrants contain a down round provision that requires the exercise price to be adjusted if we sell shares of common stock below the current exercise price. If at any time and from time to time on or after April 18, 2023, the issue date of warrants, or Issue Date, and prior to the second anniversary of the Issue Date there occurs any Share Combination Event (as defined below) and the Event Market Price (as defined below) is less than the Exercise Price, then on the sixth trading day immediately following such Share Combination Event, the Exercise Price on such sixth trading day shall be reduced (but in no event increased) to the Event Market Price; provided, however, that in no event shall the Event Market Price be less than $0.076 (appropriately adjusted for any Share Combination Event occurring after the Issue Date), or the Floor Price.
A Share Combination Event occurs when we (i) pay a stock dividend or otherwise make a distribution or distributions in shares of our common stock or any other equity or equity equivalent securities payable in shares of common stock (which, for avoidance of doubt, shall not include any shares of common stock issued by us upon exercise of this warrant), (ii) subdivide outstanding shares of common stock into a larger number of shares, (iii) combine (including by way of reverse stock split) outstanding shares of common stock into a smaller number of shares, or (iv) issue by reclassification of shares of our common stock any shares of our capital stock. “Event Market Price” means, with respect to any Share Combination Event Date, the quotient determined by dividing (x) the sum of the volume weighted average price of the shares of common stock for each of the five trading days following such Share Combination Event divided by (y) five. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination, recapitalization or other similar transaction during such period.
In addition, if at any time prior to April 18, 2024, we grant, issue or sell, or are deemed to have granted issued or sold, any shares of our Common Stock, subject to certain exceptions, for a consideration per share, or the New Issuance Price less than a price equal to the exercise price of the warrants then in effect, the foregoing a Dilutive Issuance, then immediately after such Dilutive Issuance, the exercise price then in effect will be reduced to an amount equal to the greater of the New Issuance Price and the Floor Price.
We have evaluated the warrants as either equity-classified or liability-classified instruments based on an assessment of the warrants’ specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. We have concluded that the warrants are considered indexed to our common shares and as such they have been classified as equity.
In June 2023, we sold shares of common stock for $0.174 under the ATM Arrangement; therefore, the exercise price of these warrants was adjusted from $0.375 to $0.174. The change in fair value between the value of the warrants using the new exercise price versus the old exercise price was $2.0 million. The amount was recorded as a deemed dividend in the condensed consolidated interim statement of changes in stockholders' equity during the nine months ended September 30, 2023.
June 2022 Offerings
On June 24, 2022, we entered into a securities purchase agreement (the "June 2022 SPA"), as amended and restated on June 27, 2022, with certain institutional investors for the purchase and sale in a registered direct offering of 37,037,039 shares of our common stock at a purchase price of $1.35 per share and warrants to purchase 37,037,039 shares at an exercise price of $1.75 per share. This resulted in gross proceeds from the offering of $50.0 million and net proceeds of $46.3 million.
The gross proceeds were allocated between common stock and accompanying warrants based on their relative fair values. The fair value of common stock was calculated based on the closing share price on June 27, 2022 of $1.15. The fair value of the warrants was estimated using the Black-Scholes option pricing model. Accordingly, we have allocated $27.9 million as the fair value of common stock and $18.5 million as the fair value of warrants.
The warrants are exercisable six months after the date of issuance, expire five and a half years from the date of issuance and have an exercise price of $1.75 per share of common stock. We have evaluated the warrants as either equity-classified or liability-classified instruments based on an assessment of the warrants’ specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. We have concluded that the warrants are considered indexed to our common shares and as such they have been classified as equity.
19
The following table summarizes the changes in warrants:
| | | | | | | | |
| | Nine months ended | |
| | September 30, 2023 | |
| | Number of | | | | |
| | warrants (#) | | | Amount | |
Outstanding, December 31, 2022 | | | 39,920,919 | | | $ | 25,319,193 | |
Issued | | | 83,333,334 | | | | 9,317,080 | |
Exercised | | | (526,300 | ) | | | (62,257 | ) |
Deemed dividend for down round provision in warrants | | | — | | | | 2,025,000 | |
Outstanding, September 30, 2023 | | | 122,727,953 | | | $ | 36,599,016 | |
The fair value of warrants that were issued and estimated using the Black-Scholes option pricing model have the following inputs and assumptions:
| | |
| | Nine months ended |
| | September 30, 2023 |
Weighted average share price at issuance date or modification date ($) | | 0.22 |
Weighted average expected volatility | | 84.70% |
Weighted average risk-free interest rate | | 3.65% |
Weighted average expected life of the warrants | | 5.0 years |
13. Stock-based payments
On December 3, 2021, our shareholders approved the 2021 Equity Incentive Plan to utilize the 3,500,000 shares reserved and unissued under the Torchlight 2015 Stock Option and Grant Plan and the 6,445,745 shares reserved and unissued under the MMI 2018 Stock Option and Grant plan to set the number of shares reserved for issuance under the 2021 Equity Incentive Plan at 34,945,745 shares.
The 2021 Equity Incentive Plan allows the grants of non-statutory stock options, restricted stock, restricted stock units, or RSUs, stock appreciation rights, performance units and performance shares to employees, directors, and consultants.
DSU Plan
On March 28, 2013, we implemented a Deferred Stock Unit, or DSU, Plan for our directors, employees and officers. Directors, employees and officers are granted DSUs with immediate vesting as a form of compensation. Each unit is convertible at the option of the holder into one common share. Eligible individuals are entitled to receive all DSUs (including dividends and other adjustments) no later than December 1st of the first calendar year commencing after the time of termination of their services.
The following table summarizes the change in outstanding DSUs:
| | | | | | | | |
| | Number of
DSUs | | | Weighted
average
grant date fair value | |
| | # | | | $ | |
Outstanding, December 31, 2022 | | | 3,910,186 | | | $ | 0.32 | |
Granted | | | 525,210 | | | $ | 0.19 | |
Outstanding, September 30, 2023 | | | 4,435,396 | | | $ | 0.32 | |
X | | | | | | |
Vested, September 30, 2023 | | | 3,910,186 | | | $ | 0.32 | |
We recognized $15,045 and $30,090 of stock-based compensation expense related to DSUs during the three and nine months ended September 30, 2023 respectively.
RSU Plan
Each unit is convertible at the option of the holder into one common share of our shares upon meeting the vesting conditions.
20
Total stock-based compensation expense related to RSUs included in the condensed consolidated interim statements of operations was as follows:
| | | | | | | | | | | | | | | | |
| | Three months ended | | | Nine months ended | |
| | September 30, | | | September 30, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Cost of sales | | $ | 35,681 | | | $ | 167,779 | | | $ | (695 | ) | | $ | 376,250 | |
Selling & marketing | | | 61,710 | | | | 101,165 | | | | (64,060 | ) | | | 231,365 | |
General & administrative | | | (31,066 | ) | | | 519,769 | | | | (125,777 | ) | | | 1,036,931 | |
Research & development | | | (33,302 | ) | | | 447,707 | | | | (268,487 | ) | | | 1,640,939 | |
Total expenses related to RSUs | (1) | | 33,023 | | | | 1,236,420 | | | | (459,019 | ) | | | 3,285,485 | |
(1) Estimated forfeiture rate for RSUs has been changed to 45% from 0% during the second quarter ended June 30, 2023 due to the Realignment and Consolidation Plan.
The following table summarizes the change in outstanding RSUs:
| | | | | | | | |
| | Number of
RSUs (#) | | | Weighted
average
grant date fair value | |
Outstanding, December 31, 2022 | | | 6,506,922 | | | $ | 1.71 | |
Granted | | | 4,143,754 | | | $ | 0.22 | |
Vested and settled | | | (1,778,528 | ) | | $ | 2.49 | |
Forfeited | | | (1,877,227 | ) | | $ | 1.38 | |
Outstanding, September 30, 2023 | | | 6,994,921 | | | $ | 1.34 | |
| | | | | | |
Vested, but not yet settled, September 30, 2023 | | | 10,331 | | | $ | 1.21 | |
Employee Stock Option Plan
Each stock option is convertible at the option of the holder into one common share upon payment of the exercise price.
Total stock-based compensation expense related to stock options included in the condensed consolidated interim statements of operations and comprehensive loss was as follows:
| | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, | | September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Selling & marketing | | $94,391 | | $53,543 | | $95,396 | | $118,598 |
General & administrative | | 96,383 | | 506,392 | | $(270,187) | | 4,775,793 |
Research & development | | 72,442 | | 344,067 | | $107,323 | | 1,583,794 |
Total expenses related to options | (1) | $263,216 | | $904,002 | | $(67,468) | | $6,478,185 |
(1) Estimated forfeiture rate for stock options has been changed to 46% from 0% during the second quarter ended June 30, 2023 due to the Realignment and Consolidation Plan.
The following table summarizes the change in our outstanding stock options:
| | | | | | | | | | | | | | | | |
| | Number of
options (#) | | | Average
exercise
price per
stock
option | | | Average
exercise
remaining
contractual
term
(years) | | | Aggregate intrinsic
value | |
Outstanding, December 31, 2022 | | | 33,595,044 | | | $ | 0.80 | | | | 9.31 | | | $ | 17,611,251 | |
Granted | | | 3,376,143 | | | $ | 0.21 | | | | | | | |
Forfeited | | | (12,806,810 | ) | | $ | 0.97 | | | | | | | |
Exercised | | | (2,635,161 | ) | | $ | 0.27 | | | | | | | |
Outstanding, September 30, 2023 | | | 21,529,216 | | | $ | 0.68 | | | | 5.21 | | | $ | 78,827 | |
| | | | | | | | | | | | |
Exercisable, September 30, 2023 | | | 15,904,659 | | | $ | 0.62 | | | $ | 3.28 | | | $ | 47,615 | |
21
Below is a summary of the outstanding options as of September 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | |
| | September 30, | | | December 31, | |
| | 2023 | | | 2022 | |
Exercise price | | Number outstanding
# | | | Number exercisable
# | | | Number outstanding
# | | | Number exercisable
# | |
$0.12 - $0.27 | | | 13,421,520 | | | | 11,054,921 | | | | 18,128,657 | | | | 15,549,318 | |
$0.89 - $1.00 | | | 1,894,774 | | | | 929,319 | | | | 2,984,668 | | | | 1,822,394 | |
$1.17 - $1.26 | | | 1,964,592 | | | | 1,246,590 | | | | 2,782,704 | | | | 932,082 | |
$1.31 - $1.58 | | | 3,310,830 | | | | 1,736,329 | | | | 6,729,904 | | | | 3,054,672 | |
$1.97 - $2.00 | | | 937,500 | | | | 937,500 | | | | 2,969,111 | | | | 2,969,111 | |
| | | 21,529,216 | | | | 15,904,659 | | | | 33,595,044 | | | | 24,327,577 | |
The fair value of options granted during nine months ended September 30, 2023 were estimated at the grant date using the following weighted-average assumptions:
| | |
| | Nine months ended |
| | September 30, 2023 |
Weighted average grant date fair value ($) | | 0.19 |
Weighted average expected volatility | | 85.68% |
Weighted average risk-free interest rate | | 3.85% |
Weighted average expected life of the options | | 4.04 |
14. Income taxes
We estimate our annual effective income tax rate in recording our quarterly provision for income taxes in the various jurisdictions in which we operate. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur.
Our effective tax rate for the three and nine months ended September 30, 2023 differs from the statutory rates due to a valuation allowance as well as different domestic and foreign statutory tax rates.
Deferred tax recovery for the three months ended September 30, 2023 and 2022 was $0.5 million and $37,208, respectively. Deferred tax recovery for the nine months ended September 30, 2023 and 2022 was $1.5 million and $0.1 million, respectively.
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 going to be realized. Therefore, we continue to maintain a valuation allowance against our deferred tax assets.
15. Net loss per share
The following table sets forth the calculation of basic and diluted net loss per share during the periods presented:
| | | | | | | | | | | | | | | | |
| | Three months ended | | | Nine months ended | |
| | September 30, | | | September 30, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Numerator: | | | | | | | | | | | | |
Net loss | | $ | (8,737,003 | ) | | $ | (24,475,320 | ) | | $ | (321,059,067 | ) | | $ | (63,892,619 | ) |
Deemed dividend for down round provision in warrants | (1) | $ | — | | | $ | — | | | $ | (2,025,000 | ) | | $ | — | |
| | $ | (8,737,003 | ) | | $ | (24,475,320 | ) | | $ | (323,084,067 | ) | | $ | (63,892,619 | ) |
Denominator: | | | | | | | | | | | | |
Weighted-average shares, basic | | | 477,808,766 | | | | 362,260,641 | | | | 432,883,181 | | | | 316,661,487 | |
Weighted-average shares, diluted | | | 477,808,766 | | | | 362,260,641 | | | | 432,883,181 | | | | 316,661,487 | |
Net loss per share | | | | | | | | | | | | |
Basic | | $ | (0.02 | ) | | $ | (0.07 | ) | | $ | (0.75 | ) | | $ | (0.20 | ) |
Diluted | | $ | (0.02 | ) | | $ | (0.07 | ) | | $ | (0.75 | ) | | $ | (0.20 | ) |
(1) Refer to April 2023 Offerings in Note 12.
22
The following potentially dilutive shares were not included in the calculation of diluted shares above as the effect would have been anti-dilutive:
| | | | | | | | | | | | | | | | |
| | Three months ended | | | Nine months ended | |
| | September 30, | | | September 30, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Options | | | 21,529,216 | | | | 32,101,770 | | | | 21,529,216 | | | | 32,101,770 | |
Warrants | | | 122,727,953 | | | | 39,920,919 | | | | 122,727,953 | | | | 39,920,919 | |
DSUs | | | 4,435,396 | | | | 3,647,026 | | | | 4,435,396 | | | | 3,647,026 | |
RSUs | | | 6,994,921 | | | | 6,534,634 | | | | 6,994,921 | | | | 6,534,634 | |
| | | 155,687,486 | | | | 82,204,349 | | | | 155,687,486 | | | | 82,204,349 | |
16. Additional cash flow information
The net changes in working capital balances related to operations during the nine months ended September 30, 2023 consisted of the following:
| | | | | | | | |
| | Nine months ended | |
| | September 30, | |
| | 2023 | | | 2022 | |
Grants receivable | | $ | — | | | $ | 145,704 | |
Inventory | | | 28,446 | | | | (31,543 | ) |
Accounts and other receivables | | | (5,435 | ) | | | (385,541 | ) |
Prepaid expenses and other current assets | | | 3,262,598 | | | | (3,280,831 | ) |
Trade payables and accruals | | | (6,622,388 | ) | | | (445,489 | ) |
Restructuring costs accrual | | | 661,405 | | | | — | |
Due to related party | | | (261 | ) | | | (2,105 | ) |
Operating lease right-of-use asset | | | — | | | | (231 | ) |
Operating lease liabilities | | | (1,111,143 | ) | | | (739,805 | ) |
| | $ | (3,786,778 | ) | | $ | (4,739,841 | ) |
17. Fair value measurements
We use a fair value hierarchy, based on the relative objectivity of inputs used to measure fair value, with Level 1 representing inputs with the highest level of objectivity and Level 3 representing the lowest level of objectivity.
The fair values of cash and cash equivalents, restricted cash, short-term investments, grants and accounts receivable, due from related parties and trade and other payables approximate their carrying values due to the short-term nature of these instruments. The current portion of long-term debt has been included in the below table.
Our initial measurement of our notes and subscriptions receivable at fair value from Next Bridge is classified at Level 3 in the fair value hierarchy. See Note 6 for further details.
The funding obligation (a CA$1.3 million interest free loan obtained from an international engineering and support service provider under the Industrial and Regional Benefits program) was originally recorded at its fair value and had been adjusted based on the estimated timing of the repayment of the loan. During the nine months ended September 30, 2023, we determined that the funding obligation’s carrying value equals its fair value because it is now repayable upon demand. The funding obligation has also been reclassified to current liabilities within the condensed consolidated interim balance sheet.
The fair values of the funding obligation and long-term debt are classified at Level 3 in the fair value hierarchy, as each instrument is estimated based on unobservable inputs including discounted cash flows using the market rate, which is subject to similar risks and maturities with comparable financial instruments as at the reporting date.
Carrying values and fair values of financial instruments that are not carried at fair value are as follows:
| | | | | | | | | | | | | | | | |
| | September 30,
2023 | | | December 31,
2022 | |
Financial liability | | Carrying value | | | Fair value | | | Carrying value | | | Fair value | |
Funding obligation | | $ | 961,538 | | | $ | 961,538 | | | $ | 180,705 | | | $ | 85,411 | |
Long-term debt | | $ | 3,657,269 | | | $ | 4,632,617 | | | $ | 3,553,955 | | | $ | 2,663,460 | |
23
18. Revenue
We have one operating segment based on how management internally evaluates separate financial information, business activities and management responsibility.
Revenue is disaggregated as follows:
| | | | | | | | | | | | | | | | |
| | Three months ended | | | Nine months ended | |
| | September 30, | | | September 30, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Product sales | | $ | 27,484 | | | $ | 432,059 | | | $ | 109,090 | | | $ | 934,299 | |
Contract revenue (1) | | | 1,724,935 | | | | 2,003,953 | | | | 4,619,306 | | | | 7,700,135 | |
Other development revenue | | | 447,743 | | | | 20,000 | | | | 914,549 | | | | 120,000 | |
Development revenue | | | 2,172,678 | | | | 2,023,953 | | | | 5,533,855 | | | | 7,820,135 | |
| | $ | 2,200,162 | | | $ | 2,456,012 | | | $ | 5,642,945 | | | $ | 8,754,434 | |
(1) A portion of contract revenue represents previously recorded deferred revenue that was recognized as revenue after satisfaction of performance obligations either through passage of time or after completion of specific performance milestones.
Customer Concentration
A significant amount of our revenue is derived from contracts with major customers as explained below.
We currently derive a significant portion of our revenue from development services with a G10 central bank. These development services incorporate both nano-optic and optical thin film technologies and are focused on developing authentication features for future banknotes. In 2021, we acquired a development contract for up to $41.5 million over a period of up to five years. In August 2023 and September 2023, we were awarded $2.1 million and $6.2 million purchase orders, respectively, under this contract.
In addition, during the nine months ended September 30, 2023, we entered into a joint development agreement (the "JDA") with a global battery maker under which we provide research and development services in exchange for total consideration of $1.5 million. The contractual term of the JDA is 12-months ("Performance Period"). Because our research and development work, which is a single performance obligation, will be provided evenly throughout the Performance Period, we recognize revenue from the JDA based on a straight-line basis, as a time-based method, in accordance with ASC 606, Revenue Recognition. During the three and nine months ended September 30, 2023, we recognized $0.4 million, and $0.8 million, respectively from the JDA.
For the three and nine months ended September 30, 2023, revenue from those two customers, each representing more than 10% of the total revenue, accounted for $1.8 million, or 82%, and $4.9 million, or 86%, of total revenues, respectively.
For the three and nine months ended September 30, 2022, revenue from the G10 central bank accounted for $2.0 million, or 82%, and $7.5 million, or 86%, respectively, of total revenues.
19. Leases
During the nine months ended September 30, 2023 and 2022, we commenced the following leases:
Billerica Office Lease
On October 1, 2022, we entered into an operating lease agreement for the space of approximately 12,655 square feet on the 2nd Floor of a commercial building located in Billerica, Massachusetts, USA, in two separate sections: 8,097 Rentable Square Footage (the "Phase 1 lease") and 4,558 Rentable Square Footage (the "Phase 2 lease"). The lease term is five years and six months for the Phase 1 lease commencing from July 1, 2023, the delivery date of the Phase 1 lease, on which the space became ready for use (the "lease commencement date"), with an option to renew the lease for an additional five years. The lease term for the Phase 2 lease depends on the delivery of the Phase 2 lease, commencing on the delivery date of Phase 2 lease, on which the space will be made readily available, and ending in December 2028, with an option to renew the lease for an additional five years. Since the lease commencement date, the Phase 1 lease requires monthly lease payments of approximately $19,543 over the entire lease term, subject to 3% annual upward adjustment, and additional monthly lease payments, total of $88,764 over five years for lease improvements made by a landlord. The Phase 2 lease is anticipated to commence in fiscal 2025. We recognized $1.1 million of lease liability and ROU asset for the Phase 1 lease, as of the lease commencement date.
24
Columbia Office Lease
In September 2022, we entered into an operating lease agreement for the space of approximately 11,642 square feet for an office in a building located in Columbia, Maryland, USA for 11 years from the commencement date of June 23, 2023, with an option to renew the lease for an additional 5 years (the "Columbia office lease"). There are step-up lease payments for each 12-month period from lease commencement, with the first 12 months fully abated. The agreement also provides the one-time option to terminate the lease effective as of the last date of the 73rd month of the lease term. We did not include the effects of exercising those options in the lease term to calculate lease liability because we concluded it is not reasonably certain that we will exercise the options. As of September 30, 2023, we recorded $2.3 million of lease liability and $2.2 million of ROU assets associated with the Columbia office lease.
Total operating lease expense included in the condensed consolidated interim statements of operations and comprehensive loss is as follows:
| | | | | | | | | | | | | | | | |
| | Three months ended | | | Nine months ended | |
| | September 30, | | | September 30, | |
| | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Operating lease expense | | $ | 580,792 | | | $ | 440,649 | | | $ | 1,707,358 | | | $ | 1,326,370 | |
Short term lease expense | | | 52,373 | | | | 199,637 | | | | 221,190 | | | | 358,877 | |
Variable and other lease expense | | | 199,123 | | | | 59,678 | | | | 489,826 | | | | 174,021 | |
Total | | $ | 832,288 | | | $ | 699,964 | | | $ | 2,418,374 | | | $ | 1,859,268 | |
We completed our evaluation of the provisions of ASC 842, Leases, and elected the practical expedient to not capitalize any leases with initial terms of less than twelve months on our balance sheet and include them as short-term lease expense in the condensed consolidated interim statements of operations and comprehensive loss.
Future minimum lease payments under non-cancelable operating lease obligations were as follows as of September 30, 2023:
| | | | |
Remainder of 2023 | | $ | 408,458 | |
2024 | | | 1,936,202 | |
2025 | | | 1,712,612 | |
2026 | | | 1,570,449 | |
2027 | | | 1,151,683 | |
2028 | | | 1,160,800 | |
Thereafter | | | 3,770,240 | |
Total minimum lease payments | | | 11,710,444 | |
Less: interest | | | (4,208,543 | ) |
Present value of net minimum lease payments | | | 7,501,901 | |
Less: current portion of lease liabilities | | | (1,391,757 | ) |
Total long-term lease liabilities | | $ | 6,110,144 | |
20. Realignment and Consolidation Plan
On June 6, 2023, our board of directors approved the Realignment and Consolidation Plan for the remainder of 2023 pursuant to which we have begun, but not yet completed, a process for increased focus on key applications with the greatest near-term revenue potential, and of realignment our resources and structure for reduced operating expenses. This strategic initiative is designed to adapt to changing market conditions, accelerate revenue, enhance efficiency, and reduce our cash burn rate.
During the nine months ended September 30, 2023, we recognized $2.3 million of restructuring expense in relation to the plan, which consisted of severance payments for actual and expected terminations under the Realignment and Consolidation Plan. We accrue costs in connection with ongoing restructuring actions. These accruals include estimates primarily related to employee headcount, local statutory benefits, and other employee termination costs. We calculate severance obligations based on standard practices or the contractual obligations if applicable. As of September 30, 2023, we recorded $0.7 million provisions for severance payments when probable and estimable since we committed to the Realignment and Consolidation Plan. These accruals are reviewed on a quarterly basis and changes to restructuring actions are appropriately recognized when identified.
Total estimated restructuring costs are expected to be within the range of $3.2 million to $4.0 million, of which, $2.3 million of employee termination costs and severance benefits had been incurred as of September 30, 2023. The final costs associated with the Realignment and Consolidation Plan remain provisional, as management is currently engaged in a comprehensive evaluation to ascertain the most strategic allocation of resources. The Realignment and Consolidation Plan is expected to be completed by the end of 2023. Cash payments in the nine months ended September 30, 2023 were $1.6 million. The costs related to restructuring activities have been recorded in the restructuring expense on the condensed consolidated interim statement of operations and comprehensive loss.
25
21. Commitments and contingencies
Legal Matters
Securities Class Action:
On January 3, 2022, a putative securities class action lawsuit was filed in the U.S. District Court for the Eastern District of New York captioned Maltagliati v. Meta Materials Inc., et al., No. 1:21-cv-07203, against us, our then current Chief Executive Officer, our then current Chief Financial Officer, Torchlight’s former Chairman of the Board of Directors, and Torchlight’s former Chief Executive Officer. On January 26, 2022, a similar putative securities class action lawsuit was filed in the U.S. District Court for the Eastern District of New York captioned McMillan v. Meta Materials Inc., et al., No. 1:22-cv-00463. The McMillan complaint names the same defendants and asserts the same claims on behalf of the same purported class as the Maltagliati complaint. The complaints, purportedly brought on behalf of all purchasers of our publicly traded securities from September 21, 2020 through and including December 14, 2021, assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, or the Exchange Act, arising primarily from a short-seller report and statements related to our business combination with Torchlight. The complaints seek unspecified compensatory damages and reasonable costs and expenses, including attorneys’ fees. On July 15, 2022, the Court consolidated these actions under the caption In re Meta Materials Inc. Securities Litigation, No. 1:21-cv-07203, appointed lead plaintiffs and approved the lead plaintiffs’ selection of lead counsel. Lead plaintiffs filed a consolidated complaint on August 29, 2022. We moved to dismiss that complaint on October 13, 2022. The Court granted our motion to dismiss on September 29, 2023 and entered judgment on the defendants' behalf on October 3, 2023. On October 27, 2023, the lead plaintiffs filed a motion to vacate judgment and for leave to amend the pleadings. Our opposition to the motion is due November 13, 2023 and the lead plaintiffs’ reply is due November 20, 2023.
Shareholder Derivative Action:
On January 14, 2022, a shareholder derivative action was filed in the U.S. District Court for the Eastern District of New York captioned Hines v. Palikaras, et al., No. 1:22-cv-00248. The complaint names as defendants certain of our current officers and directors, certain former Torchlight officers and directors, and us (as nominal defendant). The complaint, purportedly brought on our behalf, asserts claims under Section 14(a) of the Exchange Act, contribution claims under Sections 10(b) and 21D of the Exchange Act, and various state law claims such as breach of fiduciary duties and unjust enrichment. The complaint seeks, among other things, unspecified compensatory damages in our favor, certain corporate governance related actions, and an award of costs and expenses to the derivative plaintiff, including attorneys’ fees. On March 9, 2022, the Court entered a stipulated order staying this action until there is a ruling on a motion to dismiss in the securities class action.
Nevada Shareholder Action:
On September 21, 2023, a putative shareholder class action was filed in the Eighth Judicial District Court Clark County, Nevada captioned Denton v. Palikaras, et al., No. A-23-878134-C. The complaint names us as defendants along with certain of our former officers and certain former Torchlight officers and directors. The complaint alleges claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, arising from our business combination with Torchlight. The complaint seeks, among other things, unspecified damages, interest, and an award of costs and fees to plaintiffs, including attorneys’ fees.
Westpark Capital Group:
On July 25, 2022, Westpark Capital Group, LLC filed a complaint in Los Angeles County Superior Court against us for breach of contract, alleging that it is owed a $450,000 commission as a placement agent with respect to our June 2022 direct offering. On August 31, 2022, we filed an answer to the complaint. We dispute that WestPark Capital Group placed the investor in the direct offering and is owed a commission.
SEC Investigation
In September 2021, we received a subpoena from the Securities and Exchange Commission, Division of Enforcement, in a matter captioned In the Matter of Torchlight Energy Resources, Inc. The subpoena requested that we produce certain documents and information related to, among other things, the merger involving Torchlight and Metamaterial Inc.
On July 20, 2023, the enforcement staff of the SEC provided us, our former Chief Executive Officer, John Brda, and our former Chief Executive Officer, George Palikaras, with Wells Notices relating to the Investigation (the "Wells Notice"). The Wells Notices each state that the SEC staff has made a preliminary determination to recommend that the SEC file a civil enforcement action against the recipients alleging violations of certain provisions of the U.S. federal securities laws. Specifically, the Wells Notice received by us states that the proposed action would allege violations of Section 17(a) of the Securities Act; Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Exchange Act of 1934 and Rules 10b-5 and 14a-9 thereunder; and Regulation FD.
26
A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law. It allows the recipients the opportunity to address the issues raised by the enforcement staff before a decision is made by the SEC on whether to authorize any enforcement action. If the SEC were to authorize an action against us and/or any of the individuals, it could seek an injunction against future violations of provisions of the federal securities laws, the imposition of civil monetary penalties, and other equitable relief within the SEC’s authority. The SEC could also seek an order barring the individuals from serving as an officer or director of a public company. In addition, the SEC could seek disgorgement of an amount that may exceed our ability to pay.
The results of the Investigation and the Wells Notice process and any corresponding enforcement action against us or any of the individuals discussed above, and the costs, timing, and other potential consequences of responding and complying therewith, including any indemnification obligations of us, are unknown at this time.
No financial impact of a loss contingency has been recognized in the condensed consolidated interim financial statements, as those matters above do not meet the required criteria of being both probable and reasonably estimated at this time.
Contractual Commitments and Purchase Obligations
We are party to various contractual obligations. Some of these obligations are reflected in our financial statements, such as liabilities from debt obligations and commitment in relation to Realignment and Consolidated Plan, while other obligations, such as purchase obligations, are not reflected on our condensed consolidated interim balance sheets. The following table and discussion summarizes our contractual cash obligations as of September 30, 2023, for each of the periods presented:
| | | |
| Long-term debt | Other contractual commitment | Total |
Remainder of 2023 | $220,600 | $1,061,424 | $1,282,024 |
2024 | 863,683 | 382,531 | 1,246,214 |
2025 | 1,065,430 | — | 1,065,430 |
2026 | 1,291,301 | — | 1,291,301 |
2027 | 548,775 | — | 548,775 |
2028 | 543,639 | — | 543,639 |
Thereafter | 648,114 | — | 648,114 |
| $5,181,542 | $1,443,955 | $6,625,497 |
| | | |
Other contractual commitments are legally enforceable agreements to purchase goods or services that have fixed or minimum quantities and fixed or minimum variable price provisions. Amounts in the schedule above approximate the timing of the underlying obligations. Included are the following:
a)In September 2022, we entered into a supply agreement with an American paint and coatings company to purchase at least 20,000 pounds of raw materials (the "Minimum Purchase Obligation") in the three years from September 29, 2022. The total contract price for the minimum purchase obligation is $1.1 million. As of September 30, 2023, we have $1.1 million of non-cancelable orders, for which $0.8 million is expected to be paid in the remainder of 2023 and the remaining $0.4 million is expected to be paid in 2024.
b)On September 30, 2022, we entered into an amended supply agreement with a German manufacturer who supplies holographic raw materials for the three years from November 1, 2020. As of September 30, 2023, we have a non-cancelable order of $0.3 million.
Other commitments not included in the contractual cash obligations table above
a)In 2014, our whole owned subsidiary, Nanotech, acquired direct ownership of principal nanotechnology patents and additional intellectual property in related fields. As such, Nanotech’s products and services are subject to a 3% sales royalty in favor of Simon Fraser University, or SFU, where elements of the nanotechnology originated. Royalties were $3,264 and $484 during the nine months ended September 30, 2023 and 2022, respectively. In 2014, Nanotech prepaid royalties that would offset against future royalties owed as part of the transfer of the intellectual property from SFU, of which $192,176 remains prepaid as at September 30, 2023 (December 31, 2022 - $195,441).
b)During 2018, we arranged a guarantee/standby letter of credit with RBC in favor of Satair A/S for $500,000 in relation to an advance payment received. In the event we fail to deliver the product as per the contract or refuse to accept the return of the product as per the buyback clause of the contract or fails to repay the advance payment in accordance with the conditions of the agreement signed with Satair on September 18, 2018, Satair shall draw from the letter of credit with RBC. Borrowings from the letter of credit with RBC are repayable on demand. The letter of credit is secured by restricted cash. As of September 30, 2023, no amount has been drawn from the letter of credit with RBC.
c)On January 15, 2021, Nanotech purchased six patents for $100,000 and we agreed to share 10% of any revenues related to the patents received from a specific customer for a period of two years and ongoing royalties of 3% to 6% on other revenues derived
27
from these patents for a period of five years. There were no royalties during the nine months ended September 30, 2023 (2022 - $Nil).
d)In March 2022, we adopted the Vlepsis Business Profit Sharing Plan whereby at the end of each year, we will calculate the profits from the Vlepsis business, if any, with certain of the Vlepsis employees. Annually, on the 29th of March for each year between 2023 and 2029, we will measure and allocate a bonus pool equivalent to fifty percent (50%) of the net profits of Vlepsis. These profits are defined as the total revenue generated from the full spectrum of Vlepsis's technological and service operations, including, but not limited to, sales, maintenance, customer support, system customization, intellectual property licensing, franchising, and leasing plus revenues from contracted backlog sales of Vlepsis Business technologies and services, less all pertinent direct costs such as overhead, salaries, and service provision costs by the Company.We have not yet had any profits from this business, but if we ever do, then this obligation to share such profits will impact our return on investment in Vlepsis and require more time to recoup our expenses and show a return.
22. Subsequent events
Subsequent sale of common stock under LPC Purchase Agreement
Subsequent to September 30, 2023, we sold a total of 4,500,000 shares of our common stock under the LPC Purchase Agreement at a weighted average price of $0.17 per share, generating gross proceeds of $0.8 million. On October 30, 2023, our common stock was sold to LPC at $0.097 per share, which resulted in reducing the exercise price of April 2023 Warrants to $0.097 per share. See Note 12, Capital stock, for more information.
28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated interim financial statements and related notes thereto included in Part I, Item I of this Quarterly Report on Form 10-Q. For additional information regarding our financial condition and results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 in the Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2022, filed with the SEC on March 24, 2023, or the Form 10-K/A, as well as our consolidated financial statements and related notes thereto included in Part II, Item 8 of the Form 10-K/A. As discussed in the section titled “Forward-Looking Statements,” the following discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the "Part II, Item 1A (Risk Factors)" and other parts of this Quarterly Report on Form 10-Q and in the Form 10-K/A. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
OVERVIEW
Meta Materials Inc. is an advanced materials and nanotechnology company. We are developing materials that we believe can improve the performance and efficiency of many current products as well as allow new products to be developed that cannot otherwise be developed without such materials. We believe META is positioned for growth, by pioneering a new category of intelligent surfaces, which will allow us to become the metamaterials industry leader. We enable our potential customers across a range of industries - consumer electronics, 5G communications, healthcare, aerospace, automotive, and clean energy - to deliver improved products to their customers. Our principal executive office is located at 60 Highfield Park Drive, Dartmouth, Nova Scotia, Canada.
During the second quarter ended June 30, 2023, we have begun to implement a plan aimed at reducing our operating expenses and focusing on key applications which represent the greatest near-term revenue potential. We are focusing on NCORE™ and NPORE® which provides a solution for safer, lighter, and more sustainable batteries, expansion of our production capacity in our banknote and brand security lines, the commercial launch of QUANTUM™ stripe product and development of our multiple-gigapixel, wide area motion imagery system. For more information regarding our business, see Part I, Item I (Business), of Form 10-K/A filed on March 24, 2023.
Over the third quarter ended September 30, 2023, our net revenues increased compared to the second quarter ended June 30, 2023. Our net development revenue for the nine months ended September 30, 2023 has decreased compared to the nine months ended September 30, 2022 mainly due to reduction in purchase orders received from the G10 central bank, partially offset by an increase from the JDA agreement with a global battery maker. See Note 18 for more details.
Our selling & marketing expenses slightly increased in the third quarter ended September 30, 2023, compared to the second quarter ended June 30, 2023 due to a bonus reversal recognized during the second quarter. Over the past two quarters, our general & administrative expenses have decreased from $6.8 million in the first quarter ended March 31, 2023 to $5.9 million in the second quarter ended June 30, 2023 and $5.9 million in the third quarter ended September 30, 2023 as a result of our ongoing realignment and consolidation plan, excluding non-recurring, non-cash charges such as goodwill impairment. Over the past two quarters, our research and development expenses have been relatively stable. In the fourth quarter ended December 31, 2023, and consistently into the following year, we expect our total operating expenses to decrease as a result of the realignment and consolidation plan, excluding non-recurring, non-cash charges such as impairment of long-term assets.
Recent Developments
SEC Investigation
On July 20, 2023, the enforcement staff of the SEC provided us, our former Chief Executive Officer, John Brda, and our Chief Executive Officer, George Palikaras, with Wells Notices relating to the Investigation. The Wells Notices each state that the SEC staff has made a preliminary determination to recommend that the SEC file a civil enforcement action against the recipients alleging violations of certain provisions of the U.S. federal securities laws. Specifically, the Wells Notice received by us states that the proposed action would allege violations of Section 17(a) of the Securities Act; Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Exchange Act of 1934 and Rules 10b-5 and 14a-9 thereunder; and Regulation FD.
A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law. It allows the recipients the opportunity to address the issues raised by the enforcement staff before a decision is made by the SEC on whether to authorize any enforcement action. If the SEC were to authorize an action against us and/or any of the individuals, it could seek an injunction against future violations of provisions of the federal securities laws, the imposition of civil monetary penalties, and other equitable relief within the SEC’s authority. The SEC could also seek an order barring the individuals from serving as an officer or director of a public company. In addition, the SEC could seek disgorgement of an amount that may exceed our ability to pay.
29
The results of the Investigation and the Wells Notice process and any corresponding enforcement action against us or any of the individuals discussed above, and the costs, timing, and other potential consequences of responding and complying therewith, including any indemnification obligations of us, are unknown at this time.
Our board of directors is reviewing the Wells Notices but has not yet determined its next course of action regarding the Wells Notices. No financial impact of a loss contingency has been recognized in the condensed consolidated interim financial statements, as this matter does not meet the required criteria of being both probable and reasonably estimated at this time.
LPC Purchase Agreement
On September 11, 2023, we entered into a Purchase Agreement with Lincoln Park which allows us to sell up to $50,000,000 of our Common Stock to Lincoln Park over 30 months until March 2026. We have the right, but not the obligation, to require Lincoln Park to purchase our Common Stock, with the number of shares and the timing of these transactions being at our discretion, in accordance with the agreement's terms, provided that the closing sale price per-share of our Common Stock is above $0.10.
The purchase price for shares sold under this agreement is set at 97% of the lower of: (i) the lowest sale price on the purchase date and (ii) the arithmetic average of the three lowest closing sale prices for our Common Stock in the ten business days preceding the purchase date.
The LPC Purchase Agreement includes an Exchange Cap provision which establishes that the aggregate number of shares sold to Lincoln Park should not exceed 95,497,527 shares, that is 19.99% of our outstanding Common Stock immediately prior to the execution of the LPC Purchase Agreement, unless (i) shareholder approval is obtained to issue shares above the Exchange Cap or (ii) the average price per share of all applicable sales of our Common Stock to Lincoln Park under the LPC Purchase Agreement equals or exceeds $0.2134.
The LPC Purchase Agreement may be terminated by us at any time, at our sole discretion, without any cost or penalty, by giving one business day notice to Lincoln Park to terminate the LPC Purchase Agreement. For consideration for entering into the LPC Purchase Agreement, and being obligated to fund up to $50,000,000, we agreed to pay $500,000 to Lincoln Park as an initial commitment fee for its commitment to purchase shares of Common Stock under the LPC Purchase Agreement, and we are obligated to pay an additional commitment fee of $500,000 to Lincoln Park as further described in the LPC Purchase Agreement.
During the three and nine months ended September 30, 2023, we sold a total of 6,000,000 shares of our common stock under the LPC Purchase Agreement at a weighted average price of $0.20 per share, generating proceeds of $1.2 million.
Subsequent to September 30, 2023, we paid the first initial commitment fee $500,000 to Lincoln Park pursuant to the LPC Purchase Agreement which was recorded as a stock issuance cost on our condensed consolidated interim balance sheets as of September 30, 2023. Further, we are obligated to pay an additional commitment fee of $500,000 in December 2023, which has been accrued and recorded as a stock issuance cost as of September 30, 2023.
Termination of ATM Agreement
As previously reported, we entered into an ATM Agreement with Ladenburg Thalmann & Co. Inc. ("Ladenburg") on February 10, 2023. The ATM Agreement was related to the offering of up to $100,000,000 of our Common Stock under the ATM Program. By written notice dated September 5, 2023, Ladenburg terminated its participation as Sales Agent under the ATM Agreement, and accordingly the ATM Agreement was terminated.
Nasdaq Minimum Bid Price Compliance
On March 20, 2023, we received written notice (the “Bid Price Letter”) from The Nasdaq Stock Market LLC ("Nasdaq"), indicating that we were not in compliance with the $1.00 minimum bid price requirement for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). Further, On September 19, 2023, we received notice from Nasdaq indicating that, while we have not regained compliance with the minimum bid price requirement, staff of Nasdaq has determined that we are eligible for an additional 180-day period, or until March 18, 2024, to regain compliance. Staff’s determination was based on (i) meeting the continued listing requirement for market value of our publicly held shares and all other applicable requirements for initial listing on the Nasdaq Capital Market, with the exception of the bid price requirement, and (ii) our written notice to Nasdaq of our intention to cure the deficiency during this second compliance period by effecting a reverse stock split, if necessary. If at any time during this second 180-day period the closing bid price of our Common Stock is at least $1 per share for at least a minimum of 10 consecutive business days, Nasdaq staff have stated they will provide written confirmation of compliance, although Nasdaq may use its discretion to require up to 20 consecutive business days based on certain factors. If compliance cannot be demonstrated by March 18, 2024, Nasdaq staff will provide written notification that the Company’s securities will be delisted. At that time, the Company may appeal staff’s determination to a hearings panel. We can give no assurance that the Company will regain or demonstrate compliance by March 18, 2024. In order to address this non-compliance, we are seeking stockholder approval at the 2023 Annual Meeting of Stockholders of a potential reverse stock split of our securities.
30
Board of directors and other management changes
On April 19, 2023, Maurice Guitton notified our board of his intention to resign and retire effective immediately in order to pursue his retirement more fully.
Also on April 19, 2023, after taking into account Mr. Guitton’s retirement, the board increased its size from seven to eight members and appointed Vyomesh Joshi and Eugenia Corrales to the board. Ms. Corrales was appointed to serve on the Audit Committee of the board and Mr. Joshi was appointed to serve on the Governance and Nominating Committee of the board.
On April 20, 2023, Kenneth Rice was terminated as our Chief Financial Officer (“CFO”) and Chief Operating Officer (“COO”) and decided to retire and on April 21, 2023, Jonathan Waldern was terminated as our Chief Technology Officer.
Also on April 20, 2023, Uzi Sasson was appointed as our CFO and COO.
On July 12, 2023, D. Daniel (Dan) Eaton was hired and appointed as our Chief Legal Officer.
On September 13, 2023, Eric Leslie notified us of his resignation as a member of the board and from all committees of the board on which he served. Prior to his resignation, Mr. Leslie served on the Audit Committee and Human Resources and Compensation Committee of the Board. At such time, Mr. Leslie moved into a Strategic Advisor role at the Company.
On October 6, 2023, our board appointed Philippe Morali to the board to fill the vacancy created by Mr. Leslie's resignation. Mr. Morali was also appointed to serve as a member of the Audit Committee and the Human Resources and Compensation Committee of the Board.
On October 10, 2023, our board removed George Palikaras as our President and CEO, effective immediately. In connection with the removal of Mr. Palikaras as CEO, on October 10, 2023, the board appointed Jim Fusaro as the new CEO of the Company and a member of the board.
On October 18, 2023, the Company hired Jennifer Cheraso as our Chief Human Resources Officer.
On November 4, 2023, Mr. Fusaro resigned as CEO and as a member of the board due to unexpected health issues.
Subsequent to Mr. Fusaro’s resignation, on November 5, 2023, the board promoted Uzi Sasson to CEO of the Company. In connection with the promotion, Mr. Sasson no longer serves as CFO and COO of the Company.
On November 5, 2023, the board promoted Ahmed Shebl to Chief Accounting Officer of the Company, and Mr. Shebl was named Interim CFO of the Company.
Realignment and Consolidation Plan
On June 6, 2023, our board of directors approved the Realignment and Consolidation Plan for the remainder of 2023 pursuant to which we have begun, but not yet completed, the process of realigning our corporate structure aimed at reducing our operating expenses and focusing on key applications which represent the greatest near-term revenue potential. This strategic initiative is designed to adapt to changing market conditions, enhance efficiency, and reduce our cash burn rate. As part of this plan, we are exploring alternatives for certain of our technologies including Holography Technology and Wireless Sensing and Radio Wave Imaging Technology. These alternatives may include a divestiture, entering into a joint venture and/or curtailing our investment in these technologies.
The primary objectives of the Realignment and Consolidation Plan are as follows:
•Cost Reduction: We evaluate all areas of our operations to identify cost-saving opportunities without compromising the quality of our products and services.
•Process Optimization: We review and enhance our internal processes, workflows, and systems to increase operational efficiency and eliminate redundancies.
•Resource Allocation: We realign our resources to focus on core business activities and high-priority projects, allowing us to better allocate our time, talent, and capital.
In order to accomplish the above objectives, we have begun to undertake the following key measures as part of the Realignment and Consolidation Plan:
•Workforce Optimization: We have assessed our current workforce structure and are currently in the process of making necessary adjustments to ensure the right talent is in the right positions. This involves reassignments, redeployments or selective workforce reductions in areas where deemed necessary.
•Departmental Reorganization: We have reviewed the structure of our departments and functions, seeking opportunities for consolidation and realignment to eliminate duplication and improve cross-functional collaboration.
•Operational Efficiency Enhancements: We are in the process of implementing measures to enhance productivity and operational efficiency, such as process reengineering, automation, and technology upgrades where appropriate.
31
•Cost Containment Strategies: We will closely scrutinize all non-essential expenditures and implement cost containment strategies, including supplier contract terminations or renegotiation, resource optimization and expense reduction initiatives across various areas of our business.
Total estimated restructuring expenses are expected to be within the range of $3.2 million to $4.0 million, including employee termination costs and severance benefits, of which, $2.3 million of employee termination costs and severance benefits had been incurred as of September 30, 2023. Our average monthly cash burn rate before we started to implement the Realignment and Consolidation Plan was $5.7 million, which is expected to be reduced to between $3.2 million and $3.8 million, representing a reduction of approximately 44% to 33% respectively, by the end of the year ending December 31, 2023. We are currently engaged in a thorough and comprehensive assessment process to identify the best possible utilization of the assets related to Holography Technology and Wireless Sensing and Radio Wave Imaging Technology. As a result of the assessment, we may recognize additional impairment loss of other long-term assets. The implementation of the Realignment and Consolidation Plan will continue through the remainder of the fiscal year ending December 31, 2023.
Underwritten Public Offering
On April 14, 2023, we entered into the Underwriting Agreement, relating to our public offering of (i) 83,333,334 shares of our common stock, par value $0.001 and (ii) warrants to purchase up to an aggregate of 83,333,334 shares of our common stock. The shares of common stock and warrants were sold together as a fixed combination, consisting of one share of common stock and a warrant to purchase one share of common stock, but are immediately separable and will be issued separately in the offering. Each warrant is exercisable to purchase one share of common stock at a price of $0.375 per share, which was subsequently reduced to $0.174 based on the down round provisions in the case of a Share Combination Event or a Dilutive Issuance as described in Note 12, Capital stock, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on Form 10-Q, and expires five years from the date of issuance. The combined price to the public in the offering for each share of common stock and accompanying warrant was $0.30. After deducting underwriting discounts and commissions and estimated offering expenses payable by us, the net proceeds were $22.1 million. See Note 12, Capital stock, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on Form 10-Q for further information.
Sale of Next Bridge Notes Receivable
On August 7, 2023, we entered into a Loan Sale Agreement with Gregory McCabe, Purchaser, under which we sold and assigned to Purchaser all of our rights, title, interests, and obligations in and to those certain loans due from Next Bridge described in Note 6, Notes receivable, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on Form 10-Q, in exchange for cash consideration of $6.0 million and entered into an SPA for an additional $6.0 million of shares of our common stock. Pursuant to the SPA, the Purchaser will be required to purchase an aggregate of $6.0 million of shares of our common stock beginning on September 1, 2023 in monthly amounts of $250,000 for the first six months and then in monthly amounts of $500,000 for the next nine months thereafter, at a per share purchase price equal to 120% of the 5-day VWAP of our common stock on the trading day preceding the date of each such purchase. As of September 30, 2023, we have received $0.5 million in exchange for 1,851,726 shares of our common stock.
Known Trends and Uncertainties
Impact from the Realignment and Consolidation Plan
With the implementation of the Realignment and Consolidation Plan, we anticipate achieving substantial cost savings and a lower cash burn rate that will positively support our sustainable growth. However, we expect to record total estimated restructuring costs within the range of $3.2 million to $4.0 million during fiscal 2023, excluding non-recurring, non-cash charges such as goodwill impairment and impairment of long-term assets, which will reduce those benefits from the implementation of the Realignment and Consolidation Plan.
Capital Reallocation and Core Business Expansion
In line with our strategic refocusing, we are shifting capital toward the core-business units that are expected to contribute to near-term cash flow, while simultaneously scaling back investments in non-core areas. This reallocation underscores our commitment to optimizing resource distribution, prioritizing the expansion and advancement of infrastructure integral to our core market offerings, which are positioned to support our liquidity profile. This includes new development facilities in Maryland for Electro Optics and IR and in Massachusetts for the Battery Materials team. These activities require capital investments and increased overhead for leased facilities. Further, R&D expense related to our core business is expected to increase as a result of expanding operations of our core business. The timing of new customer programs and revenues associated with these expansions is uncertain and we may require additional financing to support the related cash consumption.
32
Inflation
A prolonged period of inflation in Europe, particularly for energy costs, could cause shortages or material cost increases for certain key raw materials, for which we depend on European suppliers. Specifically, shortages or cost increases in certain polymers used in our Holography products could result in higher costs for these products that may not be able to be passed on to our customers.
Inflation in North America, for labor costs and transportation costs in particular, could elevate our costs of hiring new team members and cause increases in our labor costs for existing team members. In addition, rising transportation costs are likely to increase our costs for shipping our products and the costs associated with our material purchases.
Vehicle Electrification
The transition from internal combustion engine, or ICE, vehicles to electric vehicles, or 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 EVs.
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 the risk of supply chain delays. Outsourced production may increase variable costs and put pressure on gross margins as we scale volumes. We are in negotiations for a strategic partnership to achieve 60cm capacity with a leading consumer electronics manufacturer.
Foreign Currency Fluctuation Risk
As we continue to expand our business globally, we presently have currency exposure arising from both sales and purchases denominated in foreign currencies. We currently do not utilize derivative financial instruments, forward contracts, or any other financial instruments designed to hedge against potential fluctuations in foreign currency exchange rates. Fluctuations in the value of currencies, such as Canadian Dollar, British Pound and Euro against the US Dollar could adversely impact our revenue and operating and labor costs. In addition, items included in the financial statements of each of META and its subsidiaries are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”) while our reporting currency is the US Dollar. As such, our financial results and positions are exposed to changes in exchange rates between the US Dollar and the Canadian Dollar, the British Pound, and the Euro. For the nine months ended September 30, 2023, approximately 83.6% of our consolidated revenue and 17.4% of operating expenses were recorded in our entities whose functional currency is other than the US Dollar and approximately 36.0% of Cash and Cash equivalents, 87.6% of Property and Equipment, and 61.2% of Accounts Payable and Accruals were recorded in such entities whose functional currency is other than the US Dollar as of September 30, 2023.
Basis of Presentation
The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the condensed consolidated interim balance sheet and statements of operation and comprehensive loss presented herein. The following discussion and analysis are based on our condensed consolidated interim financial statements contained in this Quarterly Report, which we have prepared in accordance with U.S. GAAP. You should read the discussion and analysis together with such condensed consolidated interim financial statements and the related notes thereto.
33
Critical Accounting Estimates
Our condensed consolidated interim financial statements and the related notes thereto are prepared in accordance with U.S. GAAP. The preparation of condensed consolidated interim financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
There have been no material changes to our critical accounting estimates as described in our Annual Report on Form 10-K/A for the year ended December 31, 2022.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated interim financial statements, please see Note 2, Significant accounting policies, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on Form 10-Q.
RESULT OF OPERATIONS
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 input method to measure progress towards complete satisfaction of the research activities and associated performance obligations identified within each contract have been satisfied.
Cost of Sales
Cost of Sales 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 overheads allocated to production.
34
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change |
Product sales | | $27,484 | | $432,059 | | $(404,575) | | -94% | | $109,090 | | $934,299 | | $(825,209) | | -88% |
Development revenue | | 2,172,678 | | 2,023,953 | | 148,725 | | 7% | | 5,533,855 | | 7,820,135 | | (2,286,280) | | -29% |
Total revenue | | 2,200,162 | | 2,456,012 | | (255,850) | | -10% | | 5,642,945 | | 8,754,434 | | (3,111,489) | | -36% |
Cost of sales (exclusive of items shown separately below) | | 750,969 | | 514,312 | | 236,657 | | 46% | | 2,096,615 | | 1,921,845 | | 174,770 | | 9% |
Depreciation and amortization included in cost of sales | | 9,980 | | 14,639 | | (4,659) | | -32% | | 37,323 | | 55,298 | | (17,975) | | -33% |
Stock-based compensation included in cost of sales | | 32,744 | | 167,779 | | (135,035) | | -80% | | 173,713 | | 376,250 | | (202,537) | | -54% |
Gross profit | | $1,406,469 | | $1,759,282 | | $(352,813) | | -20% | | $3,335,294 | | $6,401,041 | | $(3,065,747) | | -48% |
Gross profit percentage | | 64% | | 72% | | 138% | | | | 59% | | 73% | | 99% | | |
Comparison of the Three and Nine Months Ended September 30, 2023 to the Three and Nine Months Ended September 30, 2022:
Product Sales
The decrease in product sales for the three and nine months ended September 30, 2023 of $0.4 million and $0.8 million, respectively, as compared to the same periods of 2022, is primarily due to a reduction in sales orders.
Development Revenue
The increase in development revenue for the three months ended September 30, 2023 of $0.1 million is due to a recognition of contract revenue of $0.4 million from a global battery maker and a royalty revenue from Siemens healthcare of $0.1 million, offset by a decrease in lithography revenue of $0.4 million. The decrease in development revenue for the nine months ended September 30, 2023 of $2.3 million is mainly due to the decrease in our lithography revenue - banknotes applications due to larger contracts in 2022, partially offset by $0.4 million of revenue recognized from the joint development agreement with a global battery maker during the three months ended September 30, 2023. We derive a significant portion of our revenue from contract services with a confidential G10 central bank. In 2021, we acquired Nanotech which had a development contract for up to $41.5 million over a period of up to five years. These contract services incorporate both nano-optic and optical thin film technologies and are focused on developing authentication features for future banknotes.
Cost of Sales
The increase in cost of sales for the three months ended September 30, 2023 as compared to the same period ended September 30, 2022 was due to increased production cost, which was driven by more labor intensive tasks required for the current contracts compared to the contracts in the prior year. The increase in cost of sales for the nine months ended September 30, 2023 as compared to the same period ended September 30, 2022 was due to increased production cost, which was driven by more labor intensive tasks required for the current contracts compared to the contracts in the prior year, partially offset by lower material cost.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | Nine months ended September 30, | |
| | 2023 | | | 2022 | | | Change | | | 2023 | | | 2022 | | | Change | |
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Selling & marketing | | $ | 835,405 | | | $ | 874,315 | | | $ | (38,910 | ) | | | -4 | % | | $ | 3,922,990 | | | $ | 2,842,165 | | | $ | 1,080,825 | | | | 38 | % |
General & administrative | | | 5,881,598 | | | | 13,832,656 | | | | (7,951,058 | ) | | | -57 | % | | | 18,564,304 | | | | 35,039,472 | | | | (16,475,168 | ) | | | -47 | % |
Research & development | | | 5,088,556 | | | | 4,967,997 | | | | 120,559 | | | | 2 | % | | | 15,208,926 | | | | 12,174,718 | | | | 3,034,208 | | | | 25 | % |
Depreciation & amortization expense | | | 3,441,812 | | | | 1,871,163 | | | | 1,570,649 | | | | 84 | % | | | 10,034,834 | | | | 5,322,172 | | | | 4,712,662 | | | | 89 | % |
Stock-based compensation expense | | | 278,539 | | | | 2,389,749 | | | | (2,111,210 | ) | | | -88 | % | | | (670,108 | ) | | | 10,250,149 | | | | (10,920,257 | ) | | | -107 | % |
Restructuring expense | | | 809,002 | | | | — | | | | 809,002 | | | | 100 | % | | | 2,278,151 | | | | — | | | | 2,278,151 | | | | 100 | % |
Goodwill impairment | | | — | | | | — | | | | — | | | | 0 | % | | | 282,173,053 | | | | — | | | | 282,173,053 | | | | 100 | % |
Total operating expenses | | $ | 16,334,912 | | | $ | 23,935,880 | | | $ | (7,600,968 | ) | | | -32 | % | | $ | 331,512,150 | | | $ | 65,628,676 | | | $ | 265,883,474 | | | | 405 | % |
Selling & marketing
Selling & marketing expenses for the three months ended September 30, 2023, as compared to the same period of 2022, slightly decreased mainly due to a $0.1 million decrease in trade shows and advertising costs which was partially offset by a slight increase in consulting fees and travel expenses.
35
The $1.1 million increase in selling & marketing expenses for the nine months ended September 30, 2023, as compared to the same period of 2022, was mainly due to a $0.9 million increase in salaries and benefits and a $0.7 million increase in consulting fees, partially offset by a $0.5 million reversal of bonus expense and a $0.1 million decrease in advertising and promotion expenses.
The increased salary and benefit expenses in the nine months ended September 30, 2023 as compared to the same periods of 2022 resulted from increases in headcount in the latter part of 2022 through March 2023.
General & administrative
The $8.0 million decrease in general & administrative expenses for the three months ended September 30, 2023, as compared to the same period of 2022, was primarily due to a $5.1 million decrease in professional fees as a result of a decrease in legal cost associated with the SEC investigation, the related lawsuits, and acquisition costs, a $2.1 million decrease in salaries and benefits, a $0.3 million decrease in software related expenses, a $0.3 million decrease in rent, utilities and insurance costs, a $0.3 million decrease in bonus expense , and $0.2 million decrease in travel and other expenses, partially offset by $0.3 million of inventory write-off recorded in the three months period ended September 30, 2023.
The decrease in general & administrative expenses of $16.5 million for the nine months ended September 30, 2023, as compared to the same period of 2022, primarily resulted from a $13.6 million decrease in professional fees mainly due to a decrease in legal cost associated with the SEC investigation, the related lawsuits and acquisition costs, a $1.6 million decrease in salaries and benefits, and a $1.6 million decrease in bonus expense, a $0.3 million decrease in travel and other expenses and a $0.2 million decrease in software related expenses, partially offset by a $0.3 increase in inventory write-off, a $0.3 million increase in director fees, and a $0.2 million increase in rent, utilities and insurance costs.
Research & development
The increase in research & development expenses of $0.1 million for the three months ended September 30, 2023, as compared to the same period of 2022, was primarily due to a $0.4 million increase in rent and utilities, a $0.2 million increase in R&D materials, and a $0.2 million increase in intellectual property related cost, partially offset by a $0.4 million decrease in travel and other expenses and $0.2 million decrease in bonus expense.
The increase in research & development expenses of $3.0 million for the nine months ended September 30, 2023, as compared to the same period of 2022, was primarily due to a $1.5 million increase in salaries and benefits due to increased headcount as a result of 1) expansion in facilities and laboratories in late 2022 through early 2023 and 2) the acquisitions of PAL and Optodot in Q2 2022, $1.1 million increase in R&D materials, a $0.9 million increase in intellectual property related cost and a $0.3 million increase in outsourcing costs and consulting, partially offset by a $0.9 million reduction in bonus expense and a $0.4 million reduction in travel and other expenses.
Depreciation & amortization expense in Operating expenses
For the three and nine months ended September 30, 2023 as compared to the same periods of 2022, depreciation and amortization expense increased by $1.6 million and $4.7 million, respectively. The increases were mainly due to intangible assets acquired in Q2 2022 as part of the PAL and Optodot acquisitions as well as an increase in depreciation expense due to acquired equipment in different facilities.
Stock-based compensation expense in Operating expenses
For the three and nine months ended September 30, 2023 as compared to the same periods of 2022, stock-based compensation expenses decreased by $2.1 million and $10.9 million, respectively. The decreases were mainly due to less equity-based awards granted during the three and nine months ended September 30, 2023 compared to the same periods ended September 30, 2022 and a significant increase in forfeitures of equity-based awards due to terminations as a result of the realignment and consolidation plan in the three months ended September 30, 2023 compared to the same period ended September 30, 2022.
Restructuring expense
For the three and nine months ended September 30, 2023, we recorded $0.8 million and $2.3 million, respectively, of restructuring expenses in relation to the 2023 Realignment and Consolidation Plan. There were no such expenses during the same periods ended September 30, 2022.
Goodwill impairment
For the nine months ended September 30, 2023, we recorded $282.2 million of goodwill impairment as a result of a sustained decline in our market capitalization. Based on a quantitative interim goodwill impairment test performed at June 30, 2023, we concluded that
36
the carrying value of the reporting unit was higher than its estimated fair value, which was determined using the market valuation method.
This resulted in the impairment of the entire carrying value of goodwill as of June 30, 2023. There was no goodwill impairment recognized during the same periods ended September 30, 2022.
Other Expenses, net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | Nine months ended September 30, | |
| | 2023 | | | 2022 | | | Change | | | 2023 | | | 2022 | | | Change | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net | | $ | (125,482 | ) | | $ | (134,205 | ) | | $ | 8,723 | | | | -6 | % | | $ | (243,002 | ) | | $ | (440,694 | ) | | $ | 197,692 | | | | -45 | % |
Realized gain (loss) on foreign exchange, net | | | 78,602 | | | | 35,691 | | | | 42,911 | | | | 120 | % | | | (319,925 | ) | | | 44,964 | | | | (364,889 | ) | | | -812 | % |
Unrealized gain (loss) on foreign exchange, net | | | (1,526,356 | ) | | | (2,259,324 | ) | | | 732,968 | | | | -32 | % | | | 319,355 | | | | (3,091,919 | ) | | | 3,411,274 | | | | -110 | % |
Gain on sale of notes receivable | | | 6,750,195 | | | | — | | | | 6,750,195 | | | | 100 | % | | | 6,750,195 | | | | — | | | | 6,750,195 | | | | 100 | % |
Other income (expense), net | | | 473,638 | | | | 21,908 | | | | 451,730 | | | | 2062 | % | | | (844,487 | ) | | | (1,324,528 | ) | | | 480,041 | | | | -36 | % |
Total other income (expense), net | | $ | 5,650,597 | | | $ | (2,335,930 | ) | | $ | 7,986,527 | | | | -342 | % | | $ | 5,662,136 | | | $ | (4,812,177 | ) | | $ | 10,474,313 | | | | -218 | % |
Interest expense, net
The slight change in net interest expense, net for the three months ended September 30, 2023, as compared to the same period of 2022, was primarily due to a change in non-cash interest accretion during the quarter ended September 30, 2023.
The change in net interest expense, net, of $0.2 million for the nine months ended September 30, 2023, as compared to the same period of 2022, was primarily due to a $0.1 million decrease in non-cash interest expense and bank charges, and $0.1 million decrease of non-cash interest accretion during the quarter ended September 30, 2023.
Realized gain (loss) on foreign exchange, net
For the three months ended September 30, 2023 as compared to the same period of 2022, the increase in net realized gain on foreign exchange was primarily driven by transaction gains in Canadian subsidiaries due to some invoices denominated in USD currency.
For the nine ended September 30, 2023 as compared to the same period of 2022, the shift from the net realized gain on foreign exchange to the net realized loss on foreign exchange was primarily driven by an interim shift in our banking operations, which involved utilizing a Canadian financial institution for routine transactions following the closure of our checking account with Silicon Bank.
Unrealized gain (loss) on foreign exchange, net
For the three months ended September 30, 2023 as compared to the same period of 2022, the reduction in net unrealized foreign exchange loss was primarily attributable to the revaluation of intercompany balances whereas unrealized loss was reduced primarily due to the Canadian dollar's depreciation against the US dollar being of a lesser extent.
For the nine months ended September 30, 2023 as compared to the same period of 2022, the shift from the net unrealized loss on foreign exchange to the net unrealized gain on foreign exchange primarily driven by favorable currency fluctuations during the second quarter ended June 30, 2023, partially offset by the unrealized loss on foreign currency recognized during the third quarter ended September 30, 2023.
Gain on sale of note receivable
For the three and nine months ended September 30, 2023 the $6.8 million gain on sale of note receivable was a result of the sale of the Torchlight note, see Note 6, Notes receivable, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on Form 10-Q for further information.
Other income (expense), net
Other income, net, for the three months ended September 30, 2023, increased by $0.5 million as compared to the same period of 2022, primarily due to $0.2 million in other income from the SR&ED tax incentive program, a reduction in credit loss provision expense and other income of $0.2 million, and $0.1 million maintenance costs of Oil and Gas ("O&G") assets recorded in the three months ended September 30, 2022. In December 2022, we disposed of O&G assets as part of the Next Bridge spin-off.
Other expenses, net, for the nine months ended September 30, 2023, decreased by $0.5 million as a result of the following changes: a $1.6 million decrease due to the maintenance costs of O&G assets recorded in the nine months ended September 30, 2022 and $0.4 million of other income from the SR&ED tax incentive program and other income recorded in the nine months ended September 30,
37
2023, which were partially offset by a $0.8 million of credit loss provision expense, net of interest income, related to the notes receivable from Next Bridge in accordance with ASC 326 and $0.8 million adjustment made to funding obligation.
Income Tax Recovery
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change |
Income tax (expense) recovery | | $540,843 | | $37,208 | | $503,635 | | 1354% | | $1,455,653 | | $147,193 | | $1,308,460 | | 889% |
The increase in our income tax recovery for the three months ended September 30, 2023, as compared to the same period of 2022, was driven by an increase in accumulated losses that reduced our net deferred tax liability.
The increase in our income tax recovery for the nine months ended September 30, 2023, as compared to the same period of 2022, was driven by an increase in accumulated losses that reduced our net deferred tax liability, partially offset by deferred tax expenses at a foreign entity.
We record deferred income tax liabilities for some of our foreign operations in Canada and the United Kingdom.
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 generate revenue from current and prospective customers, 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 September 30, 2023, we had cash and cash equivalents of $10.2 million including $1.0 million in restricted cash compared to $11.8 million in cash and cash equivalents at December 31, 2022, including $1.7 million in restricted cash.
During the nine months ended September 30, 2023, our principal sources of liquidity included $11.9 million of net proceeds obtained through the issuance of common stock under the ATM Program and $22.1 million of net proceeds obtained from the equity offering in April 2023, $6.1 million in relation to the sale of Next Bridge Notes Receivable, $1.0 million related to the collection from Next Bridge Notes Receivable, $1.2 million from the sale of common stock through the LPC Purchase Agreement, $0.8 million proceeds from stock options exercise and $0.4 million in relation to the SPA with Mr. McCabe. See Note 12, Capital stock, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on Form 10-Q for further information. Subsequent to September 30, 2023, we sold a total of 4,500,000 shares of our common stock under the LPC Purchase Agreement at a weighted average price of $0.17 per share, generating gross proceeds of $0.8 million.
Our primary uses of liquidity for the nine months ended September 30, 2023 included $17.1 million in salaries, $8.0 million in capital expenditures, $8.5 million in professional fees and stock exchange fees, $3.8 million in R&D materials and patents fees, $2.5 million in travel, advertisement and other costs, $3.8 million changes in working capital, $3.2 million in rent and utilities, $2.3 million in restructuring costs and $2.3 million in insurance.
During the nine months ended September 30, 2023, our board of directors approved the Realignment and Consolidation Plan for the remainder of 2023 pursuant to which we have begun, but not yet completed, the process of realigning our corporate structure aimed at reducing our operating expenses and focusing on key applications which represent the greatest near-term revenue potential. Restructuring expenses, not factoring in non-cash losses arising from the impairment of goodwill and long-term assets, are expected to be within the range of $3.2 million and $4.0 million. We expect the Realignment and Consolidation Plan will reduce our operating expenses and drive operational efficiencies, excluding the non-cash losses from impairment of goodwill and long-term assets, during the year ending December 31, 2023 compared to the year ended December 31, 2022. Our average monthly cash burn rate before we started to implement the Realignment and Consolidation Plan was $5.7 million, which is expected to be reduced to between $3.2 million and $3.8 million, representing a reduction of approximately 44% to 33% respectively, by the end of the fiscal 2023. We may incur additional expenses not currently contemplated due to events associated with the revised operating plan. The charges that we expect to incur in connection with the Realignment and Consolidation Plan are estimates subject to a number of assumptions, and actual results may differ materially.
We expect we will require additional funding to continue as a going concern and are dependent on raising capital to expand the commercialization of our products, fund our operations and further our research and development activities and ultimately attain
38
profitable operations. Future capital requirements may vary materially from period to period and will depend on many factors, including the timing and extent of spending on research and development efforts and the ongoing investments to support the growth of our business.
Going Concern
In accordance with 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 condensed consolidated interim financial statements included in this Form 10-Q 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 condensed consolidated interim 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 condensed consolidated interim 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 condensed consolidated interim 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 issuance, 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 condensed consolidated interim 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 twelve months from the date of issuance of the condensed consolidated interim financial statements. See Note 3, Going concern, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on Form 10-Q for further information.
The accompanying condensed consolidated interim 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 condensed consolidated interim 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 our cash flows for the periods presented:
| | | | | | | | |
| | Nine months ended September 30, | |
| | 2023 | | | 2022 | |
Net cash used in operating activities | | $ | (37,086,204 | ) | | $ | (48,516,511 | ) |
Net cash used in investing activities | | | (622,907 | ) | | | (13,802,619 | ) |
Net cash provided by financing activities | | | 36,025,819 | | | | 46,358,934 | |
Net decrease in cash, cash equivalents and restricted cash | | $ | (1,683,292 | ) | | $ | (15,960,196 | ) |
Net cash used in operating activities:
During the nine months ended September 30, 2023, net cash used in operating activities of $37.1 million was primarily driven by a net loss of $321.1 million for the period, and non-cash adjustments of $287.8 million mainly due to goodwill impairment of $282.2 million, depreciation and amortization of $10.1 million, a credit loss expense of $1.8 million related to the Next Bridge Notes Receivable, a $1.4 million non-cash lease expense, a $0.7 million non-cash adjustment to finance expense, a change in deferred revenue of $0.7 million and $0.3 million of inventory write off, partially offset by $6.8 million in gain on sale of Next Bridge Notes Receivable, a $1.5 million decrease due to deferred income tax, a non-cash interest income of $1.0 million and a recovery of stock-based compensation of $0.5 million. In addition, there was $3.8 million cash used by working capital primarily due to a $6.6 million decrease related to a change in trade payables and a $1.1 million decrease related to a change in operating lease liabilities, partially offset by a $3.3 million increase related to a change in prepaid expenses and other current assets and a $0.7 million increase related to a change in restructuring costs accrual.
During the nine months ended September 30, 2022, net cash used in operating activities of $48.5 million was primarily driven by a net loss of $63.9 million for the period, and non-cash adjustments of $20.1 million mainly due to depreciation and amortization of $5.4 million, stock-based compensation including equity awards granted to consultant of $10.6 million, unrealized foreign exchange loss of $2.8 million, and non-cash lease expense of $1.2 million. In addition, there was $4.7 million cash used by working capital primarily due to a $3.3 million decrease related to a change in prepaid and other current assets, a $0.7 million decrease related to a change in Operating
39
lease liabilities, a $0.4 million decrease related to a change in trade payable and accruals and $0.4 million decrease in a change in accounts and other receivables.
Net cash used in investing activities:
During the nine months ended September 30, 2023, net cash used in investing activities of $0.6 million was primarily driven by $8.0 million of capital expenditure associated with the Thurso facility expansion in Quebec, Canada as well as construction of the Highfield Park Facility in Nova Scotia, partially offset by $6.1 million proceeds from sale of Next Bridge Notes Receivable, $1.0 million proceeds from collection of Next Bridge Notes Receivable, and $0.3 million proceeds from a government loan.
During the nine months ended September 30, 2022, net cash used by investing activities of $13.8 million was primarily driven by $12.0 million of capital expenditure associated with the construction of the Highfield Park Facility in Canada as well as the equipment purchases for our facility in California and $3.5 million cash paid for the Optodot acquisition, which was partially offset by proceeds from short-term investments of $1.6 million.
Net cash provided by financing activities:
During the nine months ended September 30, 2023, net cash provided by financing activities of $36.0 million was primarily driven by the $34.3 million net proceeds obtained through the issuance of common stock under the At-the-Market Equity Offering Program and the equity offering in April 2023, the $1.2 million in sale of our common stock through the LPC Purchase Agreement and $0.8 million proceeds from stock options and warrants exercise, partially offset by a $0.3 million repayment of long-term debt.
During the nine months ended September 30, 2022, net cash provided by financing activities of $46.4 million was primarily driven by $46.3 million of net cash obtained through the proceeds from the issuance of common stock and warrants pursuant to the Securities Purchase Agreements with institutional investors for the purchase and sale in a registered direct offering and $0.5 million proceeds from stock options and warrants exercise, partially offset by a $0.5 million repayment of long-term debt.
Commitments and Contractual Obligations
For a description of our commitments and contractual obligations, please see Note 21, Commitments and contingencies, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
Off-balance sheet firm commitments relating to outstanding letters of credit amounted to approximately $0.5 million as of September 30, 2023 which is secured by restricted cash. Please see Note 21, Commitments and contingencies, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on this Form 10-Q. We do not maintain any other off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
This item is not required for a smaller reporting company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Operating Officer as appropriate, to allow for timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2023.
Although management believes there has been significant improvement in the design and implementation of our internal controls over financial reporting during the nine months ended September 30, 2023, we still consider there to be a material weakness in our internal control over financial reporting that has not yet been remediated. Accordingly, our management, with the participation of our Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, concluded that our disclosure controls and procedures were not effective as of September 30, 2023.
40
Nevertheless, giving full consideration to the material weakness and the progress made in addressing them since December 31, 2022, we have concluded that the condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, the results of our operations and our cash flows for each of the periods presented in conformity with U.S. GAAP.
Remediation of Previously Reported Material Weakness
Management has implemented a number of measures to address the material weakness disclosed in the Form 10-K/A for the year ended December 31, 2022. We are currently in the process of testing our key controls with the assistance of a third-party firm, with the intention to continue to strengthen our internal controls over financial reporting to ensure that management can routinely prepare our financial statements under GAAP and remain in compliance with the SEC reporting requirements.
To remediate the weakness described above, we have performed the following:
•Hired qualified individuals in accounting and finance, including our Chief Financial Officer, those experienced in technical accounting and transactional accounting, allowing for proper segregation of duties and reporting structure.
•Hired a finance manager to perform detailed reviews to detect errors in a timely manner.
•Updated and formalized processes and procedures through the creation of multiple process documents including full-cycle flowcharts and a company-wide authorization matrix, which outlines limits of authority for key transactions and commitments. The formalization and documentation of these processes was done with the input of our third-party consultants, with whom we have performed walkthroughs and whom we continue to involve in the implementation of policies and procedures in new acquisitions.
•In order to improve our recordkeeping, our Chief Legal Officer or outside legal counsel attends board meetings and takes minutes (rather than other members of management taking the minutes.)
To remediate the weakness described above, we are in process of implementing the following:
•Establishing and documenting an accounting policies and procedures manual which clarifies the principles or rules that are used to determine decisions and actions, and the courses of action that must be followed to implement a policy consistently.
•Creating reporting tools such as a monthly reporting package which enables us to communicate financial information effectively and efficiently between parent and subsidiaries and ensures application of consistent accounting treatment across the different locations.
Changes in Internal Controls
Except for the remediation activities described above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Internal Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that disclosure controls or internal controls, when effective, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management’s override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Individual persons may perform multiple tasks which normally would be allocated to separate persons and therefore extra diligence must be exercised during the period these tasks are combined.
41
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are subject to threats of litigation or actual litigation in the ordinary course of business, some of which may be material. Other than as disclosed in Note 21, Commitments and contingencies, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on Form 10-Q, we are not currently a party to any pending legal proceedings that, if determined adversely to us, would, in our opinion, have a material effect on our financial position, results of operations, or cash flows or that would not be covered by our existing liability insurance. The results of any litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors
The following factors could materially affect our business, financial condition or results of operations and should be carefully considered in evaluating us and our business, in addition to other information presented elsewhere in this report. Before you invest in our securities, you should be aware that our business faces numerous financial and market risks, including those described below, as well as general economic and business risks. The following discussion provides information concerning the material risks and uncertainties that we have identified and believe may adversely affect our business, our financial condition and our results of operations. Before you decide whether to invest in our securities, you should carefully consider these risk factors together with all of the other information included in this Quarterly Report on Form 10-Q, and in our other public filings, which could materially affect our business, financial condition or future results. Our risk factors are not guarantees that no such conditions exist as of the date of this report and should not be interpreted as an affirmative statement that such risks or conditions have not materialized, in whole or in part.
Risks Related to the Realignment and Consolidation Plan
There is no assurance that we will be able to successfully complete the Realignment and Consolidation Plan, which may affect our ability to mitigate going concern risk.
Our ability to continue as a going concern is dependent upon our ability to consummate the Realignment and Consolidation Plan and to generate sufficient liquidity from the plan to meet our obligations and operating needs. As these plans and actions are complex, unforeseen factors could result in expected savings and benefits being delayed or not realized to the full extent planned (if at all), and our operations and business may be disrupted, which likely would adversely affect our financial condition, operating results and cash flow. These factors, together with our recurring losses from operations and accumulated deficit, create substantial doubt about our ability to continue as a going concern. See Note 20 of the notes to consolidated financial statements contained herein for more information on the Realignment and Consolidation Plan and the risks related thereto.
The Realignment and Consolidation Plan may require a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we may face increased levels of employee attrition.
Our management has spent, and continues to be required to spend, a significant amount of time and effort focusing on the Realignment and Consolidation Plan. This diversion of attention may have an adverse effect on the conduct of our business, and, as a result, on our financial condition and results of operations, particularly if the Realignment and Consolidation Plan is protracted. During the pendency of the Realignment and Consolidation Plan, our employees may face considerable distraction and uncertainty and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a materially adverse effect on our ability to meet customer expectations, thereby adversely affecting our business and results of operations. The failure to retain or attract members of our management team and other key personnel could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations. Likewise, we could experience losses of customers who may be concerned about our ongoing long-term viability.
We may undergo changes in organizational culture and employee morale, transformations in customer and partner relationships, and potential operational disturbances as a result of our Realignment and Consolidation Plan, each of which could adversely affect our overall business performance and stakeholder satisfaction levels.
The Realignment and Consolidation Plan may adversely affect our organizational culture and employee morale. Restructuring often brings about changes in roles, responsibilities, and team dynamics, which may affect employee satisfaction and productivity. If these transformations are not navigated with meticulous care and strategic foresight, this could lead to a decline in team cohesion, loss of valuable employees, and a decrease in overall productivity and performance.
In addition, the Realignment and Consolidation Plan may adversely affect our customer and partner relationships. It could lead to changes in customer-facing teams, communication, and service levels, potentially affecting customer satisfaction and retention.
42
Furthermore, we may face operational disruption during the implementation of the Realignment and Consolidation Plan. It involves changes in workflows and processes, which could disrupt day-to-day operations. This could affect the timely delivery of products or services, impact customer satisfaction, and adversely affect our financial position or results of operations.
A potential divestiture of certain applications under the Realignment and Consolidation Plan may require a recalibration of our business model, potentially affecting our market positioning and competitiveness. We may also face challenges in realizing an adequate return which may result in significant amount of impairment loss.
The contemplation of divesting certain technology applications of our business as per the Realignment and Consolidation Plan could compel a reevaluation and modification of our existing business model. This demands a comprehensive reassessment of our operational methodologies and market engagement strategies to uphold a resilient and competitive posture within the industry. The potential divestiture could markedly recalibrate our market position, influencing external perceptions pertaining to our products and services among consumers and industry counterparts. A failure to adeptly navigate and adapt to these consequential modifications may compromise our capacity to flourish and sustain relevance in a perpetually evolving market environment. In addition, the process of divesting assets carries inherent risk of market fluctuations and economic uncertainties that undermine the value we expect to realize. As a result, we may recognize a significant amount of impairment loss.
Risks Related to our Business
We expect to continue to incur losses from operations and negative cash flows, which raise substantial doubt about our ability to continue as a going concern.
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. These factors raise substantial doubt about our ability to continue as a going concern.
We will seek to obtain additional capital through the issuance of debt or equity financing or other arrangements to fund operations; however, there can be no assurance we will be able to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing shareholders and newly issued shares may contain senior rights and preferences compared to currently outstanding shares of common stock. Issued debt securities may contain covenants and limit our ability to pay dividends or make other distributions to shareholders. If we are unable to obtain such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in our ability to raise capital, we believe that there is substantial doubt as to our ability to continue as a going concern.
We have a limited operating history, which can make it difficult for investors to evaluate our operations and prospects and may increase the risks associated with investing in us.
We have incurred recurring consolidated net losses since our inception and expect our operating costs to continue to increase in future periods as we expend substantial financial and other resources on, among other things, business and headcount expansion in operations, sales and marketing, research and development, and administration as a public company. These expenditures may not result in additional revenues or the growth of our business. If we fail to grow revenues or to achieve profitability while our operating costs increase, our business, financial condition, results of operations and growth prospects will be materially, adversely affected.
We are expected to be subject to many of the risks common to early-stage enterprises for the foreseeable future, including challenges related to laws, regulations, licensing, integrating and retaining qualified employees; making effective use of limited resources; achieving market acceptance of existing and future products; competing against companies with greater financial and technical resources; acquiring and retaining customers; and developing new solutions; and challenges relating to identified material weaknesses in internal control.
We have a history of net losses, and we expect to continue to incur losses for the foreseeable future. If we ever achieve profitability, we may not be able to sustain it.
We have incurred losses from operations since our inception and expect to continue to incur losses from operations for the foreseeable future. We have incurred net losses of $321.1 million, including $282.2 million of goodwill impairment, and $79.1 million for the nine months ended September 30, 2023 and the twelve months ended December 31, 2022, respectively. As a result of these losses, as of September 30, 2023, we had an accumulated deficit of $530.6 million. We expect to continue to incur significant sales and marketing, research and development, regulatory and other expenses as we grow our business. In addition, we expect our general and administrative expenses to increase due to the additional costs associated with being a public company. The net losses that we incur may fluctuate significantly from period to period. We will need to generate significant additional revenue in order to achieve and sustain profitability. Even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time.
43
We will need additional financing to execute our business plan and fund operations, which additional financing may not be available on reasonable terms or at all.
We will need to raise additional capital to expand the commercialization of our products, fund our operations and further our research and development activities. We will pursue sources of additional capital through various financing transactions or arrangements, including the sale/leaseback of certain properties, joint venturing of projects, debt financing, equity financing, or other means. We may not be successful in identifying suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means.
Our ability to obtain financing, if and when necessary, may be impaired by such factors as the capital markets and our limited operating history.
Any additional capital raised through the sale of equity may dilute the ownership percentage of our stockholders. Raising any such capital could also result in a decrease in the fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to our new investors, and may include preferences, superior voting rights and the issuance of other derivative securities, and issuance of incentive awards under equity employee incentive plans, which may have a further dilutive effect.
In addition, we may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely impact our financial condition.
We may need to raise funds through debt financing in the future, which may require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our indebtedness.
We may choose to raise additional funds in debt financing if it is available to us on terms we believe reasonable to increase our working capital, strengthen our financial position or to make acquisitions. Our ability to refinance any future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, any of our future debt agreements may contain restrictive covenants that may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of our debt. Our ability to make scheduled payments of principal of future debt, to pay interest on or to refinance our indebtedness, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional debt financing or equity capital on terms that may be onerous or highly dilutive.
In addition, future indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:
•make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry, and competitive conditions and adverse changes in government regulation;
•limit our flexibility in planning for, or reacting to, changes in its business and industry;
•place us at a disadvantage compared to our competitors who have less debt; and
•limit our ability to borrow additional amounts to fund acquisitions, for working capital, and for other general corporate purposes.
Any of these factors could harm our business, results of operations, and financial condition. In addition, if we incur additional indebtedness, the risks related to our business and its ability to service or repay its indebtedness would increase.
When we hired the employees involved with our Vlepsis business, we agreed to share 50% of the profits, if any, from our Vlepsis business with the Vlepsis employees, thus our investment in the Vlepsis business will take longer to recoup. This may materially impact our profits from the Vlepsis business and impact the rate of return on our investment in the Vlepsis business.
When we hired the Vlepsis team in March 2022, we adopted the Vlepsis Business Profit Sharing Plan whereby at the end of each year, generally, we are to calculate the profits from the Vlepsis business and then share 50% of such profits, if any, with certain of the Vlepsis employees. We have not yet had any profits from this business, but if we ever do, then this obligation to share such profits will impact our return on investment in Vlepsis and require more time to recoup our expenses and show a return. This may materially impact our ability to show an overall profit for the Company or delay overall profitability of the Company, and your investment in the Company may be impacted.
44
Our operating results fluctuate significantly because of a number of factors, many of which are beyond our control.
Given the nature of the markets in which we participate, as well as macroeconomic uncertainties, we cannot reliably predict future revenues and profitability and unexpected changes may cause us to adjust our operations. Large portions of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs. Thus, small declines in revenues could seriously negatively affect our operating results in any given quarter. Our operating results may fluctuate significantly from quarter-to-quarter and year-to-year. Some of the factors that may affect our quarterly and annual results are:
•changes in business and economic conditions, including a downturn in demand or decrease in the rate of growth in demand, whether in the global economy, a regional economy or the industries we address;
•changes in market conditions, potentially including changes in the credit markets, currency exchange rates, expectations for inflation or energy prices;
•the reduction, rescheduling or cancellation of orders by customers;
•fluctuations in timing and amount of customer orders;
•loss of key customers or employees;
•the availability of production capacity, whether internally or from external suppliers;
•competitive pressures on selling prices;
•strategic actions taken by our competitors;
•market acceptance of our products and the products of our customers;
•fluctuations in our manufacturing yields and significant yield losses;
•difficulties in forecasting demand for our products and the planning and managing of inventory levels;
•the availability of raw materials, supplies and manufacturing services from third parties;
•the amount and timing of investments in research and development;
•damage awards or injunctions as the result of litigation;
•changes in our product distribution channels and the timeliness of receipt of distributor resale information; and
•the impact of vacation schedules and holidays, largely during the second and third quarters of our fiscal year.
As a result of these factors, many of which are difficult to control or predict, we may experience materially adverse fluctuations in our future operating results on a quarterly or annual basis. Changes in demand for our products and in our customers’ needs could have a variety of negative effects on our competitive position and our financial results, and, in certain cases, may reduce our revenues, increase our costs, lower our gross margin percentage or require us to recognize impairments of our assets.
We currently rely on revenue from development services and most of our products are in the development stage. Any delay in the development or introduction of our new products could adversely affect our business, financial condition, results of operations, and cash flows.
Most of our revenues are currently derived from development activities. While we strive to develop innovative products available for commercial use, we have not yet achieved mass commercial production or generated substantial revenues from product sales. The success of our future products remains uncertain, and there is no guarantee that we will be able to bring any products to market that are accepted by our customers. As a result, our financial performance and ability to sustain operations may be materially impacted.
We may be unable to develop new products, applications, and end markets for our products.
Our future success will depend in part on our ability to generate sales of our products as well as generating development revenue. Current and potential customers may have substantial investment in, and know-how related to our technologies. Customers may be reluctant to change from incumbent suppliers or cease using their own solutions, or our products may miss the design and procurement cycles of our customers. Many target markets have historically been slow to adopt new technologies. These markets often require long testing and qualification periods or lengthy government approval processes before admitting new suppliers or adopting new technologies. Introduction of new products and product enhancements will require that we effectively transfer production processes from research and development to manufacturing and coordinate efforts with those suppliers to achieve increased production volume rapidly. If we are unable to implement this strategy to develop new applications and end markets for products or develop new products, the business, financial condition, results of operations and growth prospects could be materially adversely affected. In addition, any newly developed
45
or enhanced products may not achieve market acceptance or may be rendered obsolete or less competitive by the introduction of new products by other companies.
For example, we are currently developing VLEPSIS®, a ground-breaking, multiple-gigapixel, turnkey wide area motion imagery system, which tracks and monitors hundreds of objects/locations simultaneously, in stunning detail and resolution. It is set to launch in fiscal 2024. If we are unable to deliver products that meet our customers’ expectations, our business, financial condition, results of operations, and cash flows will be adversely affected.
Our research and marketing development activities and investments may not result in profitable, commercially viable or successfully produced and marketed products.
Although we, ourselves and through our investments, are committed to researching and developing new markets and products and improving existing products, there can be no assurances that such research and market development activities will prove profitable or that the resulting markets and/or products, if any, will be commercially viable or successfully produced and marketed. A failure in the demand for products to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations and financial condition of the companies in which we have or will invest in, and consequently, on us.
Because our products typically have lengthy sales cycles, we may experience substantial delays between incurring expenses related to research and development and the generation of revenues.
The time from initiation of design to volume production of new meta material products often takes 18 months or longer. We first work with customers to achieve a design win, which may take 12 months or longer. Our customers then complete the design, testing and evaluation process and begin to ramp up production, a period that may last an additional nine months or longer. As a result, a significant period of time may elapse between our research and development efforts and our realization of revenues, if any, from volume purchasing of our products by our customers.
We may experience delays in providing sufficient product for future testing of our products due to ongoing supply chain limitations.
Due to current supply chain disruptions, our contract manufacturing organizations may experience an inability to manufacture and produce sufficient quantities of our products as we progress through our regulatory testing and/or approval. Should this happen, we may not be able to provide sufficient quantities of our products which could delay our ability to bring products to market. Such a delay would cause us to use more capital than currently planned which may have a material adverse effect on our projected timing of product launches and financials.
Fluctuations in the mix of products sold may adversely affect our financial results.
Changes in the mix of types of products sold may have a substantial impact on our revenues and gross profit margins. In addition, more recently introduced products tend to have higher associated costs because of initial overall development costs and higher start-up costs. Fluctuations in the mix and types of our products may also affect the extent to which we are able to recover our fixed costs and investments that are associated with a particular product or wafer foundry, and, as a result, can negatively impact our financial results.
Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could cause our stock price to decline.
Variations in the length of our sales cycles could cause our revenues and cash flows, and consequently, our business, financial condition, operating results and cash flows, to fluctuate widely from period to period. This variation could cause our stock price to decline. Our customers generally take a long time to evaluate our systems and many people are involved in the evaluation process. We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our systems. The length of time it takes for us to make a sale depends upon many factors including, but not limited to:
•the efforts of our sales force Premarketing clearance, approval, or certification;
•the complexity of the customer’s fabrication processes;
•the internal technical capabilities and sophistication of the customer; and
•the customer’s budgetary constraints.
Material weaknesses or significant deficiencies in our internal controls could materially and adversely affect our business, results of operations and financial condition.
Our management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a‑15(f). Our internal control over financial reporting is a process designed by and under the
46
supervision of our management, including our Chief Executive Officer and Chief Financial Officer, and effected by our management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. As previously disclosed, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 and, based on this evaluation, concluded that internal control over financial reporting was not effective as of December 31, 2022, due to material weaknesses in internal control over financial reporting. As of September 30, 2023, such material weaknesses had not yet been fully remediated.
Remediation efforts place a significant burden on our management and add increased pressure on our financial reporting resources and processes (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form 10-Q for more information regarding such remediation efforts). If we are unable to successfully remediate these material weaknesses in a timely manner, or if any additional material weaknesses in our internal control over disclosure or financial reporting are identified, the accuracy of our financial reporting and our ability to timely file with the SEC may be adversely impacted. In addition, if our remedial efforts are insufficient, or if additional material weaknesses or significant deficiencies in our internal controls occur in the future, we could be required to restate our financial statements, which could materially and adversely affect our business, results of operations and financial condition, restrict our ability to access the capital markets, require us to expend significant resources to correct the material weaknesses or deficiencies, subject us to regulatory investigations and penalties, harm our reputation, and cause a decline in investor confidence or otherwise cause a decline in our stock price.
If we are unable to maintain effective disclosure controls and procedures, our business, financial position and results of operations could be adversely affected.
We are subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our management has concluded that a material weakness in our internal control over financial reporting exists at December 31, 2022. Management has further concluded that this material weakness resulted in our disclosure controls and procedures not being effective as of December 31, 2022. Please see Item 4 of Part I, Controls and Procedures, for more information about the material weakness that we identified.
Impairment of our goodwill, other intangible assets and other long-term assets could materially and adversely affect our business and operating results.
During the three months ended June 30, 2023, we determined that a triggering event occurred as a result of a sustained decline in our market capitalization; therefore, we performed an interim impairment test for our reporting unit. As a result of the interim impairment testing, we recognized goodwill impairment charges of $282.2 million in the three months ended June 30, 2023.
Adverse events or changes in circumstances may affect the estimated undiscounted future operating cash flows expected to be derived from our goodwill, intangible assets and long-term assets; therefore, we may be required to recognize additional impairment charges. Any impairment charges could have a material adverse effect on our operating results and net asset value in the quarter in which we recognize the impairment charge. We cannot provide assurances that we will not in the future be required to recognize impairment charges. Please see Item 7 of Part II, Management’s Discussion and Analysis of Financial Condition and Results of Operation – Goodwill, of the Form 10-K/A and Note 10, Intangible assets and goodwill, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on Form 10-Q for more information.
We depend on our OEM customers and system integrators to incorporate our products into their systems.
Our revenues depend, in part, on our ability to maintain existing and secure new OEM customers. Our revenues also depend, in part, on the ability of our current and potential OEM customers and system integrators to incorporate our products into their systems, and to sell such systems successfully. Limited marketing resources, reluctance to invest in research and development and other factors affecting these OEM customers and third-party system integrators could have a substantial impact upon demand for our products, and in turn upon our revenues and financial results. If OEM customers or integrators are not able to adapt existing tools or develop new systems to take advantage of the features and benefits of our products or if they perceive us to be an actual or potential competitor, then the opportunities to expand our revenues and increase our margins may be severely limited or delayed. In addition, some of our OEM customers are developing their own competitive products. If they are successful, this may reduce our revenues from these customers.
47
Our revenues may be concentrated in a few customers, and if we lose any of these customers, or these customers do not pay us, our revenues could be materially adversely affected.
We rely on a few customers for a significant portion of our revenues. For the nine months ended September 30, 2023, revenue from two customers, each of which individually represented more than 10% of the total revenue, accounted for $4.9 million or 86.1% of total revenue.
We currently derive a significant portion of our revenue from contract services with a G10 central bank. Although we are developing a new security feature under a framework contract with this customer, there can be no assurance that this project will be successful, or that it will result in long-term production revenue for this security feature.
The markets in which we participate are intensely competitive.
Many of our target markets are intensely competitive. Our ability to compete successfully in our target markets depends on the following factors:
•proper new product definition;
•product quality, reliability and performance;
•timely delivery of products;
•technical support and service;
•design and introduction of new products;
•market acceptance of our products and those of our customers; and
•breadth of product line.
In addition, our competitors or customers may offer new products based on new technologies, industry standards, end-user or customer requirements, including products that have the potential to replace our products or provide lower cost or higher performance alternatives to our products. The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable.
If we are unable to make acquisitions, or successfully integrate them into our business, our results of operations and financial condition could be adversely affected.
We have completed a number of acquisitions during our operating history. We have spent and may continue to spend significant resources identifying and pursuing future acquisition opportunities. Acquisitions involve numerous risks including:
•difficulties in integrating the operations, technologies and products of the acquired companies;
•the diversion of management’s attention from other business concerns;
•the potential loss of key employees of the acquired companies.
•disruption of our ongoing business;
•the potential strain on our financial and managerial controls and reporting systems and procedures;
•unanticipated expenses and potential delays related to integration of an acquired business;
•the risk that we will be unable to develop or exploit acquired technologies;
•the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions;
•the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets;
•the risks of entering new markets in which we have limited experience;
•difficulties in expanding our information technology systems or integrating disparate information technology systems to accommodate the acquired businesses;
48
•the challenges inherent in managing an increased number of employees and facilities and the need to implement appropriate policies, benefits and compliance programs;
•customer dissatisfaction or performance problems with an acquired company’s products or personnel or with altered sales terms or a changed distribution channel;
•adverse effects on our relationships with suppliers;
•the reduction in financial stability associated with the incurrence of debt or the use of a substantial portion of our available cash;
•the costs associated with acquisitions, including amortization expenses related to intangible assets, and the integration of acquired operations;
•assumption of known or unknown liabilities or other unanticipated events or circumstances; and
•failure or fraud in pre-acquisition due diligence.
We cannot assure that we will be able to successfully acquire other businesses or product lines or integrate them into our operations without substantial expense, delay in implementation or other operational or financial problems. Failure to achieve the anticipated benefits of any prior and future acquisitions or to successfully integrate the operations of the acquired companies could have a material and adverse effect on our business, financial condition, and results of operations. Any future acquisitions could also result in potentially dilutive issuance of equity securities, acquisition or divestiture-related write-offs or the assumption of debt and contingent liabilities.
As a result of an acquisition, our financial results may differ from the investment community’s expectations in a given quarter. Further, if one or more of the foregoing risks materialize or market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. If we do not realize the expected benefits or synergies of such transactions, our consolidated financial position, results of operations, cash flows or stock price could be negatively impacted.
Semiconductors included as components in consumer products have shorter product life cycles than other types of products sold by our customers.
We believe that components are subject to shorter product life cycles, because of technological change, consumer preferences, trendiness and other factors, than other types of products sold by our customers. Shorter product life cycles result in more frequent design competitions for the inclusion of semiconductors in next generation consumer products, which may not result in design wins for us. Shorter product life cycles may lead to more frequent circumstances where sales of existing products are reduced or ended.
We may not be able to increase production capacity to meet the present and future demand for our products.
The semiconductor industry has been characterized by periodic limitations on production capacity. These limitations may result in longer lead times for product delivery than desired by many of our customers. If we are unable to increase our production capacity to meet future demand, some of our customers may seek other sources of supply, our future growth may be limited, or our results of operations may be adversely affected.
Our gross margin is dependent on a number of factors, including our level of capacity utilization.
Semiconductor manufacturing requires significant capital investment, leading to high fixed costs, including depreciation expense. We are limited in our ability to reduce fixed costs quickly in response to any shortfall in revenues. If we are unable to utilize our manufacturing, assembly and testing facilities at a high level, the fixed costs associated with these facilities will not be fully absorbed, resulting in lower gross margins. Increased competition and other factors may lead to price erosion, lower revenues and lower gross margins for us in the future.
Our success depends on our ability to manufacture our products efficiently.
We manufacture our products in facilities that are owned and operated by us, as well as in external wafer foundries and subcontract assembly facilities. For various reasons, such as contamination in the manufacturing environment, defects in the masks used in the facilities and manufacturing equipment failures, we could experience a decrease in manufacturing yields. Additionally, if we increase our manufacturing output, the additional demands placed on existing equipment and personnel or the addition of new equipment or personnel may lead to a decrease in manufacturing yields. As a result, we may not be able to cost-effectively expand our production capacity in a timely manner.
Increasing raw material prices could impact our profitability.
From time to time, we have experienced price increases for many raw materials. If we are unable to pass price increases for raw materials onto our customers, our gross margins and profitability could be adversely affected.
49
Our revenues are dependent upon our products being designed into our customers’ products.
Some of our products are incorporated into customers’ products or systems at the design stage. The value of any design win largely depends upon the customer’s decision to manufacture the designed product in production quantities, the commercial success of the customer’s product and the extent to which the design of the customer’s products also accommodates incorporation of components manufactured by our competitors. In addition, our customers could subsequently redesign their products or systems so that they no longer require our products. The development of the next generation of products by our customers generally results in new design competitions for components, which may not result in design wins for us, potentially leading to reduced revenues and profitability. We may not achieve design wins or our design wins, may not result in future revenues.
We rely on our distributors and sales representatives to sell some of our products.
Our distributors and sales representatives could reduce or discontinue sales of our products. They may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect. In addition, we depend upon the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital. These distributors and sales representatives, in turn, depend substantially on general economic conditions and conditions within the semiconductor industry. We believe that our success will continue to depend upon these distributors and sales representatives. Foreign distributors are typically granted longer payment terms, resulting in higher accounts receivable balances for a given level of sales than domestic distributors. Our risk of loss from the financial insolvency of distributors is, therefore, disproportionally weighted to foreign distributors. If any significant distributor or sales representative experiences financial difficulties, or otherwise becomes unable or unwilling to promote and sell our products, our business could be harmed.
Costs related to product defects and errata may harm our results of operations and business.
Costs associated with unexpected product defects and errata (deviations from published specifications) due to, for example, unanticipated problems in our manufacturing processes, include the costs of:
•writing off the value of inventory of defective products;
•disposing of defective products;
•recalling defective products that have been shipped to customers;
•providing product replacements for, or modifications to, defective products; and/or
•defending against litigation related to defective products.
These costs could be substantial and may, therefore, increase our expenses and lower our gross margin. In addition, our reputation with our customers or users of our products could be damaged as a result of such product defects and errata, and the demand for our products could be reduced. These factors could harm our financial results and the prospects for our business.
We order materials and commence production in advance of anticipated customer demand. Therefore, revenue shortfalls may also result in inventory write-downs.
We typically plan our production and inventory levels based on our own expectations for customer demand. Actual customer demand, however, can be highly unpredictable and can fluctuate significantly. In response to anticipated long lead times to obtain inventory and materials, we order materials and production in advance of customer demand. This advance ordering and production may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize.
Our international operations expose us to material risks.
For the nine months ended September 30, 2023, almost all of our consolidated revenue was generated in countries outside of the United States. We expect net revenues from foreign markets to continue to represent a significant portion of total net revenues. We maintain significant business operations in Canada. Some of the risks inherent in doing business internationally are:
•foreign currency fluctuations, particularly in the Canadian Dollar;
•challenges in collecting accounts receivable;
•changes in the laws, regulations or policies of the countries in which we manufacture or sell our products;
•trade restrictions, tariffs, customs, sanctions, embargoes and other barriers to importing/exporting materials and products in a cost effective and timely manner, or changes in applicable tariffs or customs rules;
50
•cultural and language differences;
•limited infrastructure in emerging markets;
•labor and union disputes;
•terrorist attack or war; and
•economic or political instability.
Our financial performance is dependent on economic stability and credit availability in international markets. Actions by governments to address deficits or sovereign or bank debt issues, particularly in Europe, could adversely affect gross domestic product or currency exchange rates in countries where we operate, which in turn could adversely affect our financial results. If our customers or suppliers are unable to obtain the credit necessary to fund their operations, we could experience increased bad debts, reduced product orders and interruptions in supplier deliveries leading to delays or stoppages in our production. Alternatively, governmental actions in China or other emerging markets to address economic problems, such as inflation, asset or other “bubbles” or the transfer of capital out of the country, could also adversely affect gross domestic product or the growth thereof and result in reduced product orders or increased bad debt expense for us. In addition, the laws and courts of certain foreign countries may not protect our products or intellectual property rights to the same extent as do U.S. laws and courts. Therefore, the risk of piracy of our technology and products may be greater when we manufacture or sell our products in certain foreign countries.
Business interruptions may damage our facilities or those of our suppliers.
Our operations and those of our suppliers are vulnerable to interruption by fire, earthquake, flood and other natural disasters, as well as power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan and our backup power sources have only a limited amount of time for the support of critical systems. Some of our facilities are located near major earthquake fault lines and have experienced earthquakes in the past. If a natural disaster occurs, our ability to conduct our operations could be seriously impaired, which could harm our business, financial condition and results of operations and cash flows. We cannot be sure that the insurance we maintain against general business interruptions will be adequate to cover all our losses.
We are exposed to risks that our employees, consultants, or other commercial partners and business associates may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.
We are exposed to the risk that our employees, consultants, and other commercial partners and business associates may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless, or negligent conduct or other unauthorized activities that violate the regulations of the FDA and other regulators (both domestic and foreign), including those laws requiring the reporting of true, complete, and accurate information to such regulators, manufacturing standards, healthcare fraud and abuse laws, and regulations in the United States and internationally or laws that require the true, complete, and accurate reporting of financial information or data. In particular, sales, marketing, and business arrangements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing, and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, and other business arrangements. It is not always possible to identify and deter misconduct by our employees, consultants, and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal, and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid, and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of operations, any of which could adversely affect our business, financial condition and results of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees and reputational harm, and divert the attention of management in defending ourselves against any of these claims or investigations.
51
Compliance with environmental laws and regulations could be expensive, and failure to comply with these laws and regulations could subject us to significant liability.
Our research and development and manufacturing operations involve the use of some hazardous substances and are subject to a variety of federal, state, local, and foreign environmental laws and regulations relating to the storage, use, discharge, disposal, remediation of, and human exposure to, hazardous substances and the sale, labeling, collection, recycling, treatment, and disposal of products containing hazardous substances. Liability under environmental laws and regulations can be joint and several and without regard to fault or negligence. Compliance with environmental laws and regulations may be expensive and noncompliance could result in substantial liabilities, fines and penalties, personal injury and third-party property damage claims and substantial investigation and remediation costs. Environmental laws and regulations could become more stringent over time, imposing greater compliance costs, and increasing risks and penalties associated with violations. We cannot assure you that violations of these laws and regulations will not occur in the future or have not occurred in the past as a result of human error, accidents, equipment failure or other causes. The expense associated with environmental regulation and remediation could harm our financial condition and operating results.
The risk of loss of our intellectual property, trade secrets or other sensitive business or customer confidential information or disruption of operations due to cyberattacks or data breaches could negatively impact our financial results.
Cyberattacks or data breaches could compromise confidential, business-critical information, cause disruptions in our operations, expose us to potential litigation, or harm our reputation. We have important assets, including intellectual property, trade secrets, and other sensitive, business-critical and/or confidential information which may be vulnerable to such incidents. While we are in the process of implementing a cybersecurity program that is continually reviewed, maintained, and upgraded, no assurance can be made that we are invulnerable to cyberattacks and data breaches which, if significant, could negatively impact our business and financial results.
Cybersecurity breaches and information technology failures could harm our business by increasing our costs and negatively impacting our business operations.
We rely extensively on information technology systems, including internet sites, computer software, data hosting facilities and other hardware and platforms, some of which are hosted by third parties, to assist in conducting our business. Our information technology systems, as well as those of third parties we use in our business operations, may be vulnerable to a variety of evolving cybersecurity risks, such as those involving unauthorized access or control, malicious software, data privacy breaches by employees or others with authorized access, cyber or phishing-attacks, ransomware and other security issues. Moreover, cybersecurity threat actors, whether internal or external, are becoming more sophisticated and coordinated in their attempts to access companies’ information technology systems and data, including the information technology systems of cloud providers and other third parties with whom we conduct our business.
The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions.
We manage and store proprietary information and sensitive or confidential data relating to our business and the businesses of third parties. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our partners or customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us, our partners and customers to a risk of loss or misuse of this information; result in regulatory investigations, fines, litigation and potential liability for us; damage our brand and reputation; or otherwise harm our business. In addition, the cost and operational consequences of implementing further data protection measures could be significant. Delayed sales, lower margins or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation.
Changes in laws or regulations relating to privacy, information security and data protection, or any actual or perceived failure by us to comply with such laws and regulations or any other obligations, could adversely affect our business.
Personal privacy, information security and data protection are significant issues worldwide. The regulatory framework governing the collection, use, and other processing of personal data and other information is rapidly evolving. The United States federal and various state and foreign governments have adopted or proposed requirements regarding the collection, distribution, use, security and storage of personally identifiable information and other data relating to individuals, and federal and state consumer protection laws are being applied to enforce regulations related to the online collection, use and dissemination of data.
The costs of compliance with and other burdens imposed by laws, regulations, standards and other actual or asserted obligations relating to privacy, data protection and information security may be substantial, and they may require us to modify our data processing practices
52
and policies. Any actual or alleged noncompliance with any of these laws, regulations, standards, and other actual or asserted obligations may lead to claims and proceedings by governmental actors and private parties, and significant fines, penalties or liabilities.
Changes in laws, regulations or guidelines relating to our business plan and activities could adversely affect our business.
Our current and proposed operations are subject to a variety of laws, regulations and guidelines relating to production, the conduct of operations, transportation, storage, health and safety, medical device regulation and the protection of the environment. These laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter certain aspects of our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of our business plan and result in a material adverse effect on certain aspects of our planned operations.
As an example, we launched a new product, metaAIR® in March 2019 to provide laser glare protection to pilots in the airline industry. Currently, metaAIR® is not subject to any Federal Aviation Administration regulations. However, metaAIR® has yet to receive FDA approval/clearance and could become subject to evolving regulation by governmental authorities as the metaAIR® market evolves further.
Our agreements with various national governments and suppliers to such governments subject us to unique risks.
We must comply with, and are affected by, laws and regulations relating to the award, administration, and performance of various national government contracts. Awards received from such governments may be canceled or lose funding. Such government contracting parties may require us to increase or decrease production of certain products sold to such governments due to changes in strategy, priorities or other reasons, which could impact production of other products or sales to other customers to meet the requirements of such governments. In addition, such governments routinely retain rights to intellectual property developed in connection with government contracts. Such governments could exercise these rights in certain circumstances in the future, which could have the effect of decreasing the benefit we are able to realize commercially from such intellectual property.
National government agencies routinely audit and investigate government contractors and can decrease or withhold certain payments when it deems systems subject to its review to be inadequate. Additionally, any costs found to be misclassified may be subject to repayment. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including reductions of the value of contracts, contract modifications or terminations, forfeiture of profits, suspension of payments, penalties, fines and suspension, or prohibition from doing business with such governments. In addition, we could suffer serious reputational harm if allegations of impropriety were made against it. Any such imposition of penalties, or the loss of such government contracts, could materially adversely affect our business, financial condition, results of operations and growth prospects.
We are subject to the Foreign Corrupt Practices Act and similar anti-bribery and anti-corruption laws, as well as governmental export and import controls, all of which could subject us to liability or impair our ability to compete in international markets.
Our business activities may be subject to the U.S. Foreign Corrupt Practices Act (the FCPA), and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which we operate. These laws generally prohibit companies and their employees and third-party business partners, representatives and agents from engaging in corruption and bribery, including offering, promising, giving or authorizing the provision of anything of value, either directly or indirectly, to a government official or commercial party in order to influence official action, direct business to any person, gain any improper advantage, or obtain or retain business. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. Our business is heavily regulated and therefore involves significant interaction with government officials, including potentially officials of non-U.S. governments.
In addition to our own employees, we may in the future leverage third parties to conduct our business abroad, such as obtaining government licenses and approvals. We and our third-party business partners, representatives and agents may have direct or indirect interactions with officials and employees of government agencies, state-owned or affiliated entities and we may be held liable for the corrupt or other illegal activities of our employees, our third-party business partners, representatives and agents, even if we do not explicitly authorize such activities. There is no certainty that our employees or the employees of our third-party business partners, representatives and agents will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws. Violations of these laws and regulations could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, debarment from U.S. government contracts, substantial diversion of management’s attention, significant legal fees and fines, severe criminal or civil sanctions against us, our officers, or our employees, disgorgement and other sanctions and remedial measures, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, and our business, prospects, operating results, financial condition and stock price.
The U.S. and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of certain products, technologies, and software. We must export our products in compliance with U.S. export controls and we may not
53
always be successful in obtaining necessary export licenses. Our failure to obtain required import or export approval for our products or limitations on our ability to export or sell our products imposed by these laws may harm our international and domestic revenues. Noncompliance with these laws could have negative consequences, including government investigations, penalties and reputational harm.
Changes in our products or changes in export, import and economic sanctions laws and regulations may delay our introduction of new products in international markets, prevent our customers from deploying our products internationally or, in some cases, prevent the export or import of our products to or from certain countries altogether. In addition to the tariffs imposed by the U.S. Government on certain items imported from China, it is possible that additional sanctions or restrictions may be imposed by the United States on items imported into the United States from China. Similarly, in addition to the tariffs imposed by China on certain items imported from the United States, it is possible that additional sanctions or restrictions may be imposed by China on items imported into China from the United States. Any such measures could further adversely affect our ability to sell our products to existing or potential customers and harm our ability to compete internationally and grow our business. In addition, generally, tariffs may materially increase the cost of our raw materials and finished goods, may negatively impact our margins as we may not be able to pass on the additional cost through increasing the prices of our products, and may cause the contraction of certain industries, including the Industrial market. Any change in export or import regulations or legislation, shift or change in enforcement, or change in the countries, persons or technologies targeted by these regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. In such an event, our business, financial condition, results of operations and growth prospects could be materially adversely affected.
Our insurance coverage strategy and programs may not be adequate to cover all risks and resulting liabilities to which we may be subjected to.
We will require insurance coverage for numerous risks related to our business, including our current and future litigations. Although our management believes that the events and amounts of liability covered by our insurance policies will be reasonable, taking into account the risks relevant to our business, and the fact that agreements with users contain limitations of liability, there can be no assurance that such coverage will be available or sufficient to cover claims to which we may become subject. If insurance coverage is unavailable or insufficient to cover any such claims, our financial resources, results of operations and prospects could be adversely affected. For example, a possible monetary penalty as a result of the aforementioned SEC investigation may exceed the insured limit which will adversely affect our financial condition and cash flows.
If we or our contractors fail to comply with healthcare and other governmental regulations, we could face substantial fines and penalties and our business, results of operations and financial condition could be adversely affected.
We are subject to certain federal, state, and foreign fraud and abuse laws, health information privacy and security laws, and transparency laws regarding payments and other transfers of value made to physicians and other healthcare professionals that could subject us to substantial penalties. Additionally, any challenge to, or investigation into, our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business. Our arrangements with physicians, hospitals and medical centers could expose us to broadly applicable fraud and abuse laws and other laws and regulations that may restrict the financial arrangements and relationships through which we may market, sell, and distribute our medical products after we receive the applicable marketing authorization. Our employees, consultants, and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements. Federal and state healthcare laws and regulations that may affect our ability to conduct business, include, without limitation:
•FDA, Department of Justice, and other government authority prohibitions against the advertisement, promotion, and labeling of our products for off-label uses, or uses outside the specific indications approved by the FDA;
•the federal Anti-Kickback Statute, which broadly prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order, or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as Medicare or Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;
•the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false claims, or knowingly using false statements, to obtain payment from the federal government. These laws have been interpreted to apply to arrangements between medical device manufacturers, on the one hand, and prescribers, purchasers, and other healthcare-related professionals on the other. They can apply to manufacturers who provide inaccurate information on coverage, coding, and reimbursement of their products to persons who bill third-party payors. In addition, medical device companies have been prosecuted or faced civil and criminal liability under these laws for a variety of alleged promotional and marketing activities, including violations of the federal Anti-Kickback Statute and engaging in off-label promotion that caused claims to be submitted for non-covered off-label uses. Private individuals can
54
bring False Claims Act “qui tam” actions, on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in amounts paid by the entity to the government in fines or settlement;
•HIPAA, which among other things, also created criminal liability for knowingly and willfully falsifying or concealing a material fact or making a materially false statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
•federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making, or causing to be made, false statements relating to healthcare matters;
•the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier;
•the FCPA and other local anti-corruption laws that apply to our international activities;
•the federal Physician Payment Sunshine Act (Open Payments) and its implementing regulations, which require applicable manufacturers of covered drugs, devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the Centers for Medicare & Medicaid Services (CMS) information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), non-physician healthcare professionals (such as physician assistants and nurse practitioners, among others) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;
•analogous state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers or patients; state laws that require medical device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require medical device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm customers, state laws, governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts; and state laws related to insurance fraud in the case of claims involving private insurers.
The scope and enforcement of each of the laws applicable to our business and products are uncertain and subject to rapid change in the current environment of healthcare reform. The U.S. Department of Justice has increased its scrutiny of interactions between manufacturers and healthcare providers, which has led to a number of investigations, prosecutions, convictions, and settlements in the healthcare industry. Responding to a government investigation is time and resource intensive and may cause harm to our business and reputation even if we are able to successfully defend against it. Any action brought against us for violations of these laws or regulations, even successfully defended, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. We may be subject to private “qui tam” actions brought by individual whistleblowers on behalf of the federal or state governments.
If our operations are found to be in violation of any of the federal, state and foreign laws described above or any other current or future fraud and abuse or other healthcare laws and regulations that apply to us, we may be subject to penalties, including significant criminal, civil, and administrative penalties, damages, fines, imprisonment for individuals, exclusion from participation in government programs, such as Medicare and Medicaid, and we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business and our financial results.
If we fail to obtain and maintain necessary regulatory clearances, approvals, or certifications for our products, or if clearances, approvals or certifications for future products and indications are delayed or not issued, our commercial operations would be harmed.
Our medical products are subject to extensive regulation by the FDA in the United States and by regulatory agencies in other countries outside of the United States. Government regulations specific to medical devices are wide ranging and govern, among other things:
•Product design, development, and manufacture.
•Laboratory, preclinical and clinical testing, labeling, packaging, storage, and distribution.
•Premarketing clearance, approval, or certification.
55
•Product marketing, promotion and advertising, sales, and distribution.
•Post marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals.
Before a new medical device, or a new intended use for an existing product, can be marketed in the United States, a company must first submit and receive 510(k) clearance pursuant to Section 510(k) of the Food, Drug and Cosmetic Act (FDCA), approval of a PMA by the FDA, or grant of a de novo classification request from the FDA, unless an exemption applies.
In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, in order to clear the proposed device for marketing. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data is sometimes required to support substantial equivalence. In the PMA approval process, the FDA must determine that a proposed device is safe and effective for its intended use based on extensive data, including technical, pre-clinical, clinical trial, manufacturing, and labeling data. The PMA process is typically required for devices for which the 510(k) process cannot be used and that are deemed to pose the greatest risk, such as life sustaining, life supporting, or implantable devices. In the de novo classification process, a manufacturer whose novel device under the FDCA would otherwise be automatically classified as Class III and require the submission and approval of a PMA prior to marketing is able to request down-classification of the device to Class I or Class II on the basis that the device presents a low or moderate risk. If the FDA grants the de novo classification request, the applicant will receive authorization to market the device. This device type may be used subsequently as a predicate device for future 510(k) submissions. Modifications to products that are approved through a PMA application generally need prior FDA approval of a PMA supplement. Similarly, some modifications made to products cleared through a 510(k) submission may require a new 510(k) clearance, or such modification may put the device into Class III and require PMA approval or the grant of a de novo classification request.
The PMA approval, 510(k) clearance, and de novo classification processes can be expensive, lengthy, and uncertain. Any delay or failure to obtain necessary regulatory approvals, clearances or certifications would have a material adverse effect on our business, financial condition, and results of operations.
The FDA and foreign bodies can delay, limit, or deny clearance, approval, or certification of a device for many reasons, including:
•our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or notified body that our products are safe or effective for their intended uses or substantially equivalent to a predicate device;
•the disagreement of the FDA or the applicable foreign body with the design, conduct or implementation of our clinical trials or investigations or the analyses or interpretation of data from pre-clinical studies or clinical trials or investigations;
•serious and unexpected adverse device effects experienced by participants in our clinical trials or investigations;
•the data from our pre-clinical studies and clinical trials or investigations may be insufficient to support clearance, de novo classification, approval, or certification, where required;
•our inability to demonstrate that the clinical and other benefits of the device outweigh the risks;
•the applicable regulatory authority or notified body may identify significant deficiencies in our manufacturing processes, facilities, or analytical methods or those of our third-party contract manufacturers;
•the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory submissions insufficient for clearance, de novo classification, approval, or certification; and
•the FDA or foreign regulatory authorities or bodies may audit our clinical trial or investigation data and conclude that the data is not sufficiently reliable to support approval, clearance, or certification.
Upon commercialization of any medical devices for which we receive FDA clearance or approval, we are required to investigate all product complaints we receive, and timely file reports with the FDA, including MDRs that require that we report to regulatory authorities if our products may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. If these reports are not submitted in a timely manner, regulators may impose sanctions and we may be subject to product liability or regulatory enforcement actions, including warning letters, untitled letters, fines, civil penalties, recalls, seizures, operating restrictions, denial of requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to existing products, withdrawal of current 510(k) clearances or premarket approvals, and narrowing of approved or cleared product labeling, all of which could harm our business. In addition, the FDA may provide notice of and conduct additional inspections, such as “for cause” inspections, of our business, sites, and facilities as part of its review process. Similar requirements may apply in foreign countries.
If we initiate a correction or removal action for our products to reduce a significant risk to health posed by our products, we would be required to submit a publicly available correction and removal report to the FDA and, in many cases, similar reports to other regulatory
56
agencies. This report could be classified by the FDA as a device recall which could lead to increased scrutiny from the FDA, other international regulatory agencies, and our customers regarding the quality and safety of our products. Furthermore, the submission of these reports could be used by competitors against us and cause physicians to delay or cancel orders, which could harm our reputation.
The FDA and the Federal Trade Commission (FTC) also regulate the advertising, promotion, and labeling of our products to ensure that the claims we make are consistent with our regulatory authorizations, that there is adequate and reasonable scientific data to substantiate the claims, and that our promotional labeling and advertising is neither false nor misleading in any respect. If the FDA or FTC determines that any of our advertising or promotional claims are misleading, not substantiated, or not permissible, we may be subject to enforcement actions, including adverse publicity and/or warning letters, and we may be required to revise our promotional claims and make other corrections or restitutions.
The FDA, state authorities, and foreign counterparts have broad investigation and enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state agencies, or foreign counterparts, which may include any of the following sanctions:
•adverse publicity, warning letters, fines, injunctions, consent decrees, and civil penalties;
•repair, replacement, refunds, recalls, termination of distribution, administrative detention, or seizure of our products;
•operating restrictions, partial suspension, or total shutdown of production; lawsuit
•denial of our requests for marketing authorizations or certifications for new products, new intended uses, or modifications to existing products;
•withdrawal of marketing authorizations or certifications that have already been granted; and
If any of these events were to occur, our business and financial condition could be harmed. In addition, the FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit, or delay regulatory approval of our products. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval or certification that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business, financial condition, and results of operations.
We are subject to taxation-related risks in multiple jurisdictions, and the adoption and interpretation of new tax legislation, tax regulations, tax rulings, or exposure to additional tax liabilities could materially affect our business, financial condition and results of operations.
We are a U.S. parented multinational group subject to income and other taxes in Canada, the United States, the United Kingdom, and other jurisdictions in which we do business. As a result, our provision for (benefit from) income taxes is derived from a combination of applicable tax rates in the various jurisdictions in which we operate. Significant judgment is required in determining our global provision for (benefit from) income taxes, value added and other similar taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. It is possible that our tax positions may be challenged by tax authorities, which may have a significant impact on our global provision for (benefit from) income taxes. If such a challenge were to be resolved in a manner adverse to us, it could have a material adverse effect on our business, financial condition and results of operations.
Recent or future changes to United States, Canadian, United Kingdom and other non-U.S. tax laws could impact the tax treatment of our earnings. For example, the Inflation Reduction Act of 2022, enacted on August 16, 2022, imposes a one-percent non-deductible excise tax on repurchases of stock that are made by U.S. publicly traded corporations on or after January 1, 2023. In addition, as of January 1, 2022, the Tax Cuts and Jobs Act of 2017 requires research and experimental expenditures attributable to research conducted within the United States to be capitalized and amortized ratably over a five-year period. Any such expenditures attributable to research conducted outside the United States must be capitalized and amortized over a 15-year period. We generally conduct our international operations through wholly owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. The intercompany relationships between our legal entities are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. Although we believe we are compliant with applicable transfer pricing and other tax laws in the United States, Canada, the United Kingdom and other relevant countries, due to changes in such laws and rules, we may have to modify our international structure in the future, which will incur costs and may adversely affect our business, financial condition and results of operations.
If U.S., Canadian, United Kingdom or other non-U.S. tax laws change further, if our current or future structures and arrangements are challenged by a taxing authority, or if we are unable to appropriately adapt the manner in which we operate our business, we may have to undertake further costly modifications to our international structure, which may cause our tax liabilities to increase and adversely affect our business, financial condition and results of operations.
57
Our ability to use our deferred tax assets to offset future taxable income is subject to certain limitations, which may have a material impact on our business, financial condition or results of operations.
As of September 30, 2023, a valuation allowance has been recorded against our deferred tax assets that are more likely than not to be realized in the U.S. federal and state tax jurisdictions. We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. Certain of our deferred tax assets may expire unutilized or underutilized, which could prevent us from offsetting future taxable income. We continue to assess the realizability of our deferred tax assets in the future. Future adjustments in our valuation allowance may be required, which may have a material impact on our quarterly and annual operating results.
Risks Related to Intellectual Property
If we fail to protect and enforce our intellectual property rights and our confidential information, our business could be adversely affected.
We rely on a combination of nondisclosure agreements and other contractual provisions and patent, trade secret and copyright laws to protect our technologies, products, product development and manufacturing activities from unauthorized use by third parties. Our patents do not cover all of our technologies, systems, products and product components and our competitors or others may design around our patented technologies. We cannot guarantee that these mechanisms will adequately protect our technology and intellectual property, nor can we guarantee that a court will enforce our intellectual property rights.
In addition, the laws and enforcement regimes of certain countries do not protect our technology and intellectual property to the same extent as do the laws and enforcement regimes of the U.S. In certain jurisdictions, we may be unable to protect our technology and intellectual property adequately against unauthorized use, which could adversely affect our business.
Our intellectual property revenues are uncertain and unpredictable in timing and amount.
We are unable to discern a pattern in or otherwise predict the amount of any payments for the sale or licensing of intellectual property that we may receive. Consequently, we are unable to plan on the timing of intellectual property revenues and our results of operations may be adversely affected by a reduction in future estimated intellectual property revenues.
We may become involved in material legal proceedings in the future to enforce or protect our intellectual property rights, which could harm our business.
From time to time, we may identify products that we believe infringe on our patents and may have to initiate litigation to enforce our patent rights against those products. Litigation stemming from such disputes could harm our ability to gain new customers, who may postpone licensing decisions pending the outcome of the litigation or who may, as a result of such litigation, choose not to adopt our technologies. Such litigation may also harm our business relationships with existing customers, who may, because of such litigation, cease making royalty or other payments to us or challenge the validity and enforceability of our patents or the scope of our related agreements.
In addition, the costs associated with legal proceedings are typically high, relatively unpredictable and not completely within our control. These costs may be materially higher than expected, which could adversely impair our working capital, affect our operating results and lead to volatility in the price of our common stock. Whether or not determined in our favor or ultimately settled, litigation would divert managerial, technical, legal and financial resources from our business operations. Furthermore, an adverse decision in any of these legal actions could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others, limit the value of our technology or otherwise negatively impact the price of our common stock, business and financial position, results of operations and cash flows.
Even if we prevail in a legal action, significant contingencies may exist to the settlement and final resolution, including the scope of the liability of each party, our ability to enforce judgments against the parties, the ability and willingness of the parties to make any payments owed or agreed upon, and the dismissal of the legal action by the relevant court, none of which are completely within our control. Parties that may have financial obligations to us could be insolvent or decide to alter their business activities or corporate structure, which could affect our ability to collect royalties from such parties.
Our technologies may infringe on the intellectual property rights of others, which could lead to costly disputes or disruptions.
Various business segments in which we operate are characterized by frequent allegations of intellectual property infringement. Any allegation of infringement could be time consuming and expensive to defend or resolve, result in substantial diversion of management resources, cause suspension of operations or force us to enter into royalty, license, or other agreements rather than dispute the merits of such allegation. Furthermore, third parties making such claims may be able to obtain injunctive or other equitable relief that could block our ability to further develop or commercialize some or all of our technologies, and the ability of our customers to develop or commercialize their products incorporating our technologies, in the U.S. and abroad. If patent holders or other holders of intellectual
58
property initiate legal proceedings, we may be forced into protracted and costly litigation. We may not be successful in defending such litigation and may not be able to procure any required royalty or license agreements on acceptable terms or at all.
Risk Related to Industry Adoption of our Products
We cannot provide assurance that markets will accept our various products at the expected market penetration rates, which may adversely affect our business operations and financial position.
We launched our first product, a laser glare protection eyewear named metaAIR®, in March 2019, with a primary focus on the aviation market. We have co-developed this product with Airbus through a strategic partnership. Airbus further extended its support by introducing us to Satair, an Airbus-owned company, which became the global distribution partner for metaAIR® to the aviation market. Since 2016, Airbus and Satair have invested a total of $2,000,000 for the product development and exclusive distribution rights to metaAIR®.
Despite our close collaboration with the Airbus Group and future plans for marketing and sales expansion, there can be no assurance that the aviation market will accept the metaAIR® product at the expected market penetration rates and a slower than forecasted market acceptance may have a material adverse effect on Holography laser glare protection related products and our financial position.
Slower than forecasted market acceptance of Lithography related products, partially in the automotive market, may have a material adverse effect on our financial position.
Our NANOWEB® applications 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 currently have only our first pilot scale, 300mm wide, roll-to-roll line, and we will need to add additional capacity and wider substrates to support our target applications. Broader sales and production are expected to be launched in two to three years’ time after successful completion of automotive and other vertical market product qualifications and product introductions. We believe that the automotive market is a strategic high growth opportunity, however, despite our close collaboration with automotive partners, there can be no assurance that the automotive market will accept the NANOWEB® product at the expected market penetration rates and a slower than forecasted market acceptance may have a material adverse effect on Lithography de-icing/de-fogging, transparent antenna and other related products and our financial position.
If products incorporating our technologies are used in defective products, we may be subject to product liability or other claims.
If our technology is used in defective or malfunctioning products, we could be sued for damages, especially if the defect or malfunction causes physical harm to people. While we will endeavor to carry product liability insurance, contractually limit our liability and obtain indemnities from our customers, there can be no assurance that we will be able to obtain insurance at satisfactory rates or in adequate amounts or that any insurance and customer indemnities will be adequate to defend against or satisfy any claims made against us. The costs associated with legal proceedings are typically high, relatively unpredictable and not completely within our control. Even if we consider any such claim to be without merit, significant contingencies may exist, similar to those summarized in the above risk factor concerning intellectual property litigation, which could lead us to settle the claim rather than incur the cost of defense and the possibility of an adverse judgment. Product liability claims in the future, regardless of their ultimate outcome, could have a material adverse effect on our business, financial condition and reputation, and on our ability to attract and retain customers.
We participate in markets that are subject to rapid technological change and require significant research and development expenses to develop and maintain products that can achieve market acceptance.
The markets for our products are characterized by:
•changing customer needs;
•frequent new product introductions and enhancements;
•increased integration with other functions; and
We operate in a rapidly evolving industry subject to significant technological change and new product introductions and enhancements. Our future performance depends in part on the successful development, introduction and market acceptance of new and enhanced products that address these changes and current and potential customer requirements. To the extent customers defer or cancel orders for existing products due to a slowdown in demand or in the expectation of a new product release, or if there is any delay in development or introduction of our new products or enhancements of our products, our business and financial conditions, results of operations, and
59
growth prospects would be materially adversely affected. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, or to license these technologies from third parties.
Risks Related to Facilities and Human Resources
We may incur claims relating to our use, manufacture, handling, storage or disposal of hazardous materials.
Our research and development and manufacturing processes require the transportation, storage and use of hazardous materials, including chemicals, and may result in the generation of hazardous waste. National and local laws and regulations in many of the jurisdictions in which we operate impose substantial potential liability for the improper use, manufacture, handling, storage, transportation and disposal of hazardous materials as well as for land contamination, and, in some cases, this liability may continue over long periods of time. Despite our compliance efforts, we cannot eliminate the risk of industrial accidents that may lead to discharges or releases of hazardous materials and any resultant injury, property damage or environmental contamination from these materials. For example, real properties that we owned or used in the past or that we own or use now or in the future may contain detected or undetected contamination resulting from our operations at those sites or the activities of prior owners or occupants. We may suffer from expenses, claims or liability which may fall outside of or exceed our insurance coverage.
Furthermore, changes to current environmental laws and regulations may impose further compliance requirements on us that may impair our research, development and production efforts as well as our other business activities. New and evolving regulatory requirements include producer responsibility frameworks and regulations related to addressing climate change or other emerging environmental areas. Increased environment, health and safety laws, regulations and enforcement could result in substantial costs and liabilities to us and could subject our use, manufacture, handling, storage, transportation, and disposal of hazardous materials to additional constraints. Consequently, compliance with these laws could result in capital expenditures as well as other costs and liabilities, thereby adversely affecting business, financial position and results of operations.
Our failure to comply with applicable laws and regulations material to our operations, such as export control, environmental and climate related laws and regulations, or the inability to timely obtain requisite approvals necessary for the conduct of our business, such as fab land and construction approvals, could harm our business and operational results or subject us to potential significant legal liability.
Because we engage in manufacturing activities in multiple jurisdictions and conduct business with our customers located worldwide, such activities are subject to a myriad of governmental regulations. Our failure to comply with any such laws or regulations, as amended from time to time, and our failure to comply with any information and document sharing requests from the relevant authorities in a timely manner could result in:
•Significant penalties and legal liabilities, such as the denial of import or export permits or third party private lawsuits, criminal or administrative proceedings;
•The temporary or permanent suspension of production of the affected products;
•The temporary or permanent inability to procure or use certain production critical chemicals or materials;
•Unfavorable alterations in our manufacturing, assembly and test processes;
•Challenges from our customers that place us at a significant competitive disadvantage, such as loss of actual or potential sales contracts in case we are unable to satisfy the applicable legal standard or customer requirement;
•Restrictions on our operations or sales;
•Loss of tax benefits, including termination of current tax incentives, disqualification of tax credit application and repayment of the tax benefits that we are not entitled to; and
•Damages to our goodwill and reputation.
Complying with applicable laws and regulations, such as environmental and climate related laws and regulations, could also require us, among other things, to do the following: (a) purchase, use or install remedial equipment; (b) implement remedial programs such as climate change mitigation programs; (c) modify our product designs and manufacturing processes, or incur other significant expenses such as obtaining renewable energy sources, renewable energy certificates or carbon credits, substitute raw materials or chemicals that may cost more or be less available for our operations.
Our inability to timely obtain approvals necessary for the conduct of our business could impair our operational and financial results. For example, if we are unable to timely obtain environmental related approvals needed to undertake the development and construction of a new fab or expansion project, then such inability may delay, limit, or increase the cost of our expansion plans that could also in turn adversely affect our business and operational results. In light of increased public interest in environmental issues, our operations and
60
expansion plans may be adversely affected or delayed responding to public concern and social environmental pressures even if we comply with all applicable laws and regulations.
We are highly dependent on the continued service and availability of key management personnel, and failure to successfully execute succession planning could harm our Company.
Our success depends upon our ability to retain highly skilled technical, managerial, marketing and finance personnel, and, to a significant extent, upon the efforts and abilities of our CEO and CFO and other members of senior management. The resignation or departure of our key personnel, including the CEO and CFO, could adversely affect our business, financial condition, and operations. These individuals play crucial roles in our strategic decision-making, day-to-day operations and financial management. Their departure may lead to uncertainties, loss of expertise, and potential disruptions in our business continuity. Additionally, attracting and retaining qualified replacements for such key positions may be challenging, and any delays or difficulties in finding suitable successors could further impact our operations. If we lose the services of or fail to recruit key management personnel, we may not be able to successfully implement our business strategy and our business could be harmed.
On April 20, 2023, Kenneth Rice was terminated as our Chief Financial Officer and Chief Operating Officer and on April 21, 2023, Jonathan Waldern was terminated as our Chief Technology Officer. On April 25, 2023, Uzi Sasson was appointed as our Chief Financial Officer and Chief Operating Officer, effective April 20, 2023. On October 10, 2023, our board of directors removed George Palikaras as President and Chief Executive Officer and appointed Jim Fusaro to serve as Chief Executive Officer. On November 4, 2023, Jim resigned as CEO due to unexpected health issues and our board promoted Uzi Sasson to CEO of the Company. In addition, we have executed a significant management reorganization in 2023 to drive the future growth of the Company. These or other changes in key management could create uncertainty among our employees, suppliers and other business partners and are resulting in changes to the strategic direction of our business, any of which could have a material adverse effect on us. If the new management team is not successful in executing our strategy, our operating results and prospects for future growth may be adversely impacted. Failure to effectively identify, develop and retain other key personnel, recruit high-quality candidates and ensure smooth management and personnel transitions could also disrupt our business and adversely affect our results.
Our future success depends on our ability to attract and retain highly qualified personnel.
Our ability to successfully manage and grow the business and to develop new products depends, in large part, on our ability to recruit and retain qualified employees, particularly highly skilled technical, sales, service, management, and key staff personnel. Competition for qualified resources is intense and other companies may have greater resources available to provide substantial inducements and to offer more competitive compensation packages. If we are not successful in attracting and retaining highly qualified personnel, it could have a material adverse effect on our business, financial condition, and results of operations.
Our results of operations could be adversely affected by labor shortages, turnover, labor cost increases and inflation.
A number of factors may adversely affect the labor force available to us in one or more of our geographies, including high employment levels, increasing market wages and other compensation costs, federal unemployment subsidies, and other government regulations, which include laws and regulations related to workers’ health and safety, wage and hour practices and immigration. These factors can also impact the cost of labor. Increased turnover rates within our employee base can lead to decreased efficiency and increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees. An overall labor shortage or lack of skilled labor, increased turnover or labor inflation could have a material adverse effect on results of operations.
Certain directors and officers may be subject to conflicts of interest.
Certain of our directors and officers may be involved in other business ventures through their direct and indirect participation in corporations, partnerships, joint ventures, etc. that may become potential competitors of the technologies, products and services we intend to provide. Situations may arise in connection with potential acquisitions or opportunities where the other interests of these directors' and officers' conflict with or diverge from our interests. In accordance with applicable corporate law, directors who have a material interest in or who are a party to a material contract or a proposed material contract with us are required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any resolution to approve the contract. In addition, the directors and officers are required to act honestly and in good faith with a view to our best interests. However, in conflict-of-interest situations, our directors and officers may owe the same duty to another company and will need to balance their competing interests with their duties
61
to us. Circumstances (including with respect to future corporate opportunities) may arise that may be resolved in a manner that is unfavorable to us.
Risks Related to Legal Matters
We are, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business and which could adversely affect our business.
We are, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business. We cannot predict the outcome of these proceedings or provide an estimate of potential damage, if any. We believe that the claims in the securities class actions are without merit and intend to defend against them vigorously. Regardless, failure by us to obtain a favorable resolution of the claims set forth in the complaints could require us to pay damage awards or otherwise enter into settlement arrangements for which our insurance coverage may be insufficient. Any such damage awards or settlement arrangements in current or future litigation could have a material adverse effect on our business, operating results or financial condition. Even if plaintiffs’ claims are not successful, defending against class action litigation is expensive and could divert management’s attention and resources, all of which could have a material adverse effect on our financial condition and operations, operating results and financial condition and negatively affect the price of our common stock. In addition, such lawsuits may make it more difficult for us to finance our operations in the future. See Note 21, Commitments and contingencies, in the notes to the condensed consolidated interim financial statements that are included elsewhere in this Quarterly Report on Form 10-Q for more information regarding our legal proceedings.
We and a former CEO of Torchlight and our former CEO (the “CEOs”) have received “Wells Notices” from the SEC staff recommending that the SEC bring enforcement actions against us and the CEOs which could have a material adverse effect on our business, financial condition and results of operations, prospects, and/or our stock price.
In September 2021, we received a subpoena from the SEC, Division of Enforcement, in a matter captioned In the Matter of Torchlight Energy Resources, Inc. The subpoena requested that we produce certain documents and information related to, among other things, the merger involving Torchlight Energy Resources, Inc. and Metamaterial Inc. (the “Investigation”). On July 20, 2023, the enforcement staff of the SEC provided us, our former Chief Executive Officer, John Brda, and our then current Chief Executive Officer, George Palikaras, with “Wells Notices” relating to the Investigation. The Wells Notices each state that the SEC staff has made a preliminary determination to recommend that the SEC file a civil enforcement action against the recipients alleging violations of certain provisions of the U.S. federal securities laws. Specifically, the Wells Notice received by the Company states that the proposed action would allege violations of Section 17(a) of the Securities Act; Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Exchange Act of 1934 and Rules 10b-5 and 14a-9 thereunder; and Regulation FD.
Although a Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law, it is a formal notice that the SEC intends to bring an enforcement action against the recipient. If the SEC were to authorize an action against us and/or any of the individuals named above, it could seek an injunction against future violations of provisions of the federal securities laws, the imposition of civil monetary penalties, and other equitable relief within the SEC’s authority. The SEC could also seek an order barring the individuals from serving as an officer or director of a public company. In addition, the SEC could seek disgorgement of an amount from us that may exceed our ability to pay.
No financial impact of a loss contingency has been recognized in the condensed consolidated interim financial statements, as this matter does not meet the required criteria of being both probable and reasonably estimated at this time. At this time, we cannot predict with certainty the outcome of the Investigation, the Wells Notice process or any corresponding enforcement action against us or any of the individuals discussed above. The Investigation and the Wells Notice process may be expensive and disruptive, and we are subject to indemnifying each of the CEOs for their costs associated with the Wells Notices. Our insurance, to the extent maintained, may not cover all claims that may be asserted against us or the CEOs, and we are unable to predict how long the Investigation will continue. An unfavorable outcome may have an adverse impact on our business, financial condition and results of operations, prospects, or our stock price. Any proceeding could also negatively impact our reputation among our stakeholders.
We are exposed to various risks related to the regulatory environment.
We are subject to various risks related to: (1) new, different, inconsistent or even conflicting laws, rules and regulations that may be enacted by legislative bodies and/or regulatory agencies in the countries in which we operate; (2) disagreements or disputes between national or regional regulatory agencies; and (3) the interpretation and application of laws, rules and regulations. If we are found by a court or regulatory agency not to be in compliance with applicable laws, rules or regulations, our business, financial condition and results of operations could be materially and adversely affected.
The scope, determination, and impact of claims, lawsuits, government and regulatory investigations, enforcement actions, disputes, and proceedings to which we are subject cannot be predicted with certainty, and may result in:
•substantial payments to satisfy judgments, fines, or penalties;
62
•substantial outside counsel, advisor, and consultant fees and costs;
•substantial administrative costs, including arbitration fees;
•additional compliance and licensure requirements;
•loss or non-renewal of existing licenses or authorizations, or prohibition from or delays in obtaining additional licenses or authorizations, required for our business;
•loss of productivity and high demands on employee time;
•criminal sanctions or consent decrees;
•termination of certain employees, including members of our executive team;
•barring of certain employees from participating in our business in whole or in part;
•orders that restrict our business or prevent us from offering certain products or services;
•changes to our business model and practices;
•delays to planned transactions, product launches or improvements; and
•damage to our brand and reputation.
We may be affected by environmental laws and regulations.
We are subject to a variety of laws, rules and regulations related to the use, storage, handling, discharge and disposal of certain chemicals and gases used in our manufacturing process. Any of those regulations could require us to acquire expensive equipment or to incur substantial other expenses to comply with them. If we incur substantial additional expenses, product costs could significantly increase. Failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production or cessation of operations.
Risks Related to our Common Stock
Future sales and issuances of a substantial number of shares of our common stock or rights to purchase common stock by our stockholders in the public market could result in additional dilution of the percentage ownership of our stockholders and cause our stock price to fall.
If our stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline.
We have and may continue to issue equity, convertible securities or other securities to investors in public and private offerings. In addition, we currently have effective resale shelf registration statements which enable the selling stockholders thereunder to sell shares in the public market pursuant thereto.
We also have outstanding as of September 30, 2023, 122,727,953 warrants to purchase 122,727,953 shares of our common stock at a weighted average exercise price of $0.74 per share. These warrants include 82,807,034 warrants issued in the April 2023 registered direct offering with an exercise price of $0.375 per share which is subsequently reduced to $0.174 per share based on the down round provision in the case of a Share Combination Event or a Dilutive Issuance as described in more detail in Note 12, Capital stock, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on Form 10-Q. The down round provision of the warrants issued in April 2023 allows the warrants holder to obtain our common stock with a lower price, which may cause significant dilution to existing shareholders, and otherwise have a material adverse effect on us. All of the warrants issued and outstanding as of September 30, 2023 are eligible for exercise.
On September 11, 2023, we entered into a purchase agreement with Lincoln Park, which provides that, upon the terms and subject to the conditions and limitations set forth therein, we will have the right, but not the obligation, to sell to Lincoln Park up to $50 million of our common stock over the 30-month term of the Purchase Agreement. The aggregate number of shares that the Company can sell to Lincoln Park under the Purchase Agreement may in no case exceed 95,497,527 shares of common stock (the "Exchange Cap"). We are currently seeking stockholder approval for the issuance of shares of our common stock under the Purchase Agreement in excess of the Exchange Cap. The sale of shares to Lincoln Park pursuant to the terms of the Purchase Agreement will have a dilutive effect on the existing stockholders, including the voting power and economic rights of the existing stockholders.
Further, additional capital will be needed in the future to continue our planned operations, including commercialization efforts, expanded research and development activities and costs associated with operating a public company. To raise capital, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner, we determine from time to time.
63
If we sell common stock, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to the holders of our common stock. Additional issuances and sales of our common stock, including shares of our common stock available for issuance to our employees, directors and consultants, or a perception that such shares will be sold in the public market, could result in additional dilution and the trading price of our common stock could decline.
Our failure to satisfy certain Nasdaq listing requirements may result in our common stock being delisted from the Nasdaq Capital Market, which could eliminate the trading market for our common stock.
On March 20, 2023, we received written notice (“The Bid Price Letter”) from Nasdaq indicating that we are not in compliance with the $1.00 minimum bid price requirement for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have a period of 180 calendar days, or until September 18, 2023, to regain compliance with the Bid Price Rule. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during this 180-day period. The Bid Price Letter was a notice of deficiency, not delisting, and does not currently affect the listing or trading of shares of our common stock on The Nasdaq Capital Market, which continues to trade under the symbol “MMAT.” Our Common Stock has not regained compliance with the minimum $1 bid price per share requirement as of that date. By letter dated September 11, 2023, we requested an extension of an additional 180 days in which to regain compliance.
On September 19, 2023, we received notice from Nasdaq indicating that, while we have not regained compliance with the minimum bid price requirement, staff of Nasdaq has determined that we are eligible for an additional 180-day period, or until March 18, 2024, to regain compliance. Staff’s determination was based on (i) meeting the continued listing requirement for market value of our publicly held shares and all other applicable requirements for initial listing on the Capital Market, with the exception of the bid price requirement, and (ii) our written notice to Nasdaq of our intention to cure the deficiency during this second compliance period by effecting a reverse stock split, if necessary. If at any time during this second 180-day period the closing bid price of our Common Stock is at least $1 per share for at least a minimum of 10 consecutive business days, Nasdaq staff have stated they will provide written confirmation of compliance, although Nasdaq may use its discretion to require up to 20 consecutive business days based on certain factors. If compliance cannot be demonstrated by March 18, 2024, Nasdaq staff will provide written notification that the Company’s securities will be delisted. At that time, the Company may appeal staff’s determination to a hearings panel. We can give no assurance that the Company will regain or demonstrate compliance by March 18, 2024.
If the stock is delisted, we may trade on the over-the-counter market, or even in the pink sheets, which would significantly decrease the liquidity of an investment in our common stock. In addition, the stock may be deemed to be a penny stock. If our common stock is considered a penny stock, we would be subject to rules that impose additional sales practices on broker-dealers who sell our securities. For example, broker-dealers would have to make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Also, a disclosure schedule must be prepared prior to any transaction involving a penny stock and disclosure is required about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Monthly statements are also required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock. Because of these additional obligations, some brokers may be unwilling to effect transactions in penny stocks. This could have an adverse effect on the liquidity of our common stock and the ability of investors to sell our common stock.
Subject to various spending levels approved by our board of directors, our management will have broad discretion in the use of the net proceeds from our capital raises and may not use them effectively.
Our management will have broad discretion in the application of the net proceeds from our capital raises, and our stockholders will not have the opportunity as part of their investment decision to assess whether the net proceeds from our capital raises are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from our capital raises, their ultimate use may vary substantially from their currently intended use. You may not agree with our decisions, and our use of the proceeds from our capital raises may not yield any return to stockholders. Our failure to apply the net proceeds of our capital raises effectively could compromise our ability to pursue our growth strategy and we might not be able to yield a significant return, if any, on our investment of those net proceeds. Stockholders will not have the opportunity to influence our decisions on how to use our net proceeds from our capital raises. Pending their use, we may invest the net proceeds from our capital raises in interest and non-interest-bearing cash accounts, short-term, investment-grade, interest-bearing instruments and U.S. government securities. These temporary investments are not likely to yield a significant return.
An active, liquid and orderly trading market may not be sustained for our common stock, and, as a result, it may be difficult for you to sell your shares of our common stock.
The trading market for our common stock on the Nasdaq Capital Market may not be sustained. If the market for our common stock is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices
64
at which our common stock will trade. It is possible that in one or more future periods our results of operations may not meet the expectations of public market analysts and investors, and, as a result of these and other factors, the price of our common stock may fall.
If equities or industry analysts do not publish research or reports about our company, or if they issue adverse or misleading opinions regarding us or our stock, our stock price and trading volume could decline.
The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. If no or few analysts commence coverage of us or if such coverage is not maintained, the market price for our stock may be adversely affected. Our stock price also may decline if any analyst who covers us issues an adverse or erroneous opinion regarding us, our business model, our intellectual property or our stock performance, or if our operating results fail to meet analysts’ expectations. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline and possibly adversely affect our ability to engage in future financing.
The market price of our common stock has been and may continue to be volatile, and the value of your investment could decline significantly.
The trading price of our common stock has been and is likely to continue to be volatile. The trading price of our common stock since June 28, 2021 (the date of completion of the Arrangement) up to September 2023, has ranged from a high of $7.96 to a low of $0.17. Factors that have caused, and could continue to cause, fluctuations in the trading price of our common stock include, but are not limited to, the following:
•sales of our common stock, or securities exercisable for or convertible into our common stock, or the perception that such sales or conversions could occur in the future;
•the impact of public health crises, such as the COVID-19 pandemic, including on macroeconomic conditions and our business, results of operations and financial condition;
•price and volume fluctuations in the overall stock market from time to time;
•changes in operating performance, stock market valuations and volatility in the market prices of other industry peers;
•actual or anticipated quarterly variations in our results of operations or those of our competitors;
•actual or anticipated changes in our growth rate relative to our competitors;
•announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships or capital commitments;
•manufacturing, labor or supply interruptions;
•developments with respect to intellectual property rights;
•developments with respect to litigation;
•our ability to develop and market new and enhanced products on a timely basis;
•commencement of, or our involvement in, litigation;
•major changes in our board of directors or key management;
•changes in governmental regulations or in the status of our regulatory approvals;
•actual or perceived privacy, data protection or cybersecurity breaches or incidents;
•the trading volume of our common stock;
•failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow us, or our failure to meet these estimates or the expectations of investors;
•fluctuations in the values of companies perceived by investors to be comparable to and peers of us;
•the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; and
•general economic conditions and slow or negative growth of related markets.
The stock market in general, and market prices for the securities of similar companies in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. These broad market and industry
65
fluctuations may adversely affect the market price of our common stock, regardless of our operating performance, which might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. In several recent situations when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and materially adversely affect our results of operations. We currently have ongoing lawsuits. See Part 1, Item 3, "Legal Proceedings" in this Annual Report on Form 10-K and Note 21, Commitments and contingencies, in the Notes to the condensed consolidated interim financial statements of this Quarterly Report on Form 10-Q for more information regarding these lawsuits and the SEC’s investigation.
We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.
Our board of directors is authorized, without further stockholder action, and subject to Nasdaq rules, to issue preferred stock in one or more series and to designate the dividend rate, voting rights and other rights, preferences and restrictions of each such series. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. Also, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of our common stock.
Anti-takeover provisions in our articles of incorporation and bylaws, as amended, as well as provisions in Nevada law, might discourage, delay, or prevent a change of control of us or changes in our management and, therefore, depress the trading price of our securities.
Our articles of incorporation and bylaws, as amended, as well as provisions in Nevada law, contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board. Our corporate governance documents include provisions:
•authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;
•limiting the liability of, and providing indemnification to, our directors, including provisions that require us to advance payment for defending pending or threatened claims;
•limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;
•controlling the procedures for the conduct and scheduling of board and stockholder meetings;
•limiting the determination of the number of directors on our board and the filling of vacancies or newly created seats on the board to our Board then in office; and
•providing that directors may be removed by stockholders at any time.
These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management.
As a Nevada corporation, we are also subject to provisions of Nevada corporate law, including Section 78.411, et seq. of the Nevada Revised Statutes, which, among other things, prohibits a publicly-held Nevada corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last two years has owned, 10% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner, and, unless otherwise provided in our articles of incorporation or by-laws, restricts the ability of an acquiring person to obtain a controlling interest of 20% or more of our voting shares. Our articles of incorporation and by-laws, as amended, do not contain any provision which would currently keep the change of control restrictions of Section 78.378 from applying to it.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of us, thereby reducing the likelihood that our stockholders could receive a premium for their common stock in an acquisition.
We are a smaller reporting company. We cannot be certain whether the reduced disclosure requirements applicable to smaller reporting companies will make our common stock less attractive to investors or otherwise limit our ability to raise additional funds.
As of September 30, 2023, we are a “smaller reporting company” under applicable U.S. securities regulations. A smaller reporting company is a company that, as of the last business day of its most recently completed second fiscal quarter, has (i) an aggregate market value of the company’s voting stock held by non-affiliates, or public float, of less than $250 million or (ii) less than $100 million in revenue and less than $700 million in public float. In addition, a smaller reporting company is able to provide simplified executive compensation disclosures in our filings and has certain other reduced disclosure obligations in our SEC filings, including, among other
66
things, only being required to provide two years of audited financial statements in annual reports. Reduced disclosure in our SEC filings due to our status as a smaller reporting company may make it harder for investors to analyze our results of operations and financial prospects.
We have not paid cash dividends in the past and have no immediate plans to pay dividends.
Our current plan is to reinvest earnings, if any, to cover operating costs and otherwise remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable future. We cannot assure you that we would, at any time, generate sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend. Therefore, you should not expect to receive cash dividends on our common stock.
Risks Related to the Spin-Off
Our spin-off of our oil and gas operations could be challenged under various state and federal fraudulent transfer laws.
In December 2022, we distributed all of our 165,472,241 outstanding shares of common stock of Next Bridge to holders of our Series A Non-Voting Preferred Stock on a pro rata basis, or the Spin-Off. It is possible that an unpaid creditor of Next Bridge or an entity vested with the power of such creditor (such as a trustee or debtor-in-possession in a bankruptcy) could claim under various state and federal fraudulent conveyance laws that the Spin-off left Next Bridge insolvent or with unreasonably small capital or that we intended or believed Next Bridge would incur debts beyond its ability to pay such debts as they mature. If a court were to agree with such a plaintiff, then such a court could void the Spin-off as a fraudulent transfer and seek recovery of Next Bridge’s liabilities from us. No assurance can be given as to what standard a court would apply to determine insolvency or that a court would determine that Next Bridge was insolvent at the time of or after giving effect to the Spin-off. Were a court to decide that the Spin-off was a fraudulent transfer and that we are responsible for any part of Next Bridge’s liabilities, our financial condition and results of operations could be materially and adversely affected.
Public attention to and inquiries regarding the “naked” short selling of our previously outstanding Series A Preferred Stock may negatively affect the trading value of our common stock.
Published reports assert that traders engaged in widespread violations of Regulation SHO by effecting “naked” short selling of our Series A Preferred Stock prior to the Spin-Off. The circumstances around the trading of the Series A Preferred Stock have generated significant public interest. We believe that the Financial Institutions Regulatory Authority and other entities may be reviewing the occurrence of naked short selling in general and possibly naked short selling in our Series A Preferred Stock in particular. The resulting public attention may make investors less willing to buy our common stock and could negatively affect the trading price of our common stock.
General Risk Factors
We are exposed to fluctuations in currency exchange rates.
Our majority of revenues are denominated in U.S. dollars which are recognized in the entity located outside of the United States whereas most of cost of revenue and operating expenses incurred in our foreign subsidiaries are denominated in foreign currencies, resulting in a considerable exposure to the volatility of foreign currency exchange rates. Recent events in the global financial markets have been coupled with increased volatility in the currency markets. Fluctuations in the exchange rate between the U.S. dollar, the Canadian dollar and the British Pound may have a material adverse effect on our business, financial condition, and operating results. We may, in the future, establish a program to hedge a portion of our foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements. With appropriate risk management and oversight this may be able to offset future risk, however a hedging strategy will result in additional operating costs.
Uncertain global macroeconomic conditions could adversely affect our results of operations and financial condition.
Uncertain global macroeconomic conditions that affect the economy and the economic outlook of the United States, Canada, Europe, UK and other parts of the world could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition. These uncertainties, including, among other things, sovereign and foreign bank debt levels, the inability of national or international political institutions to effectively resolve economic or budgetary crisis or issues, trade disputes or changes in trading rules and tariffs between nations, consumer confidence, unemployment levels, interest rates, availability of capital, fuel and energy costs, tax rates, and the threat or outbreak of terrorism or public unrest, could adversely impact our customers and vendors, which could adversely affect us. Recessionary conditions and depressed levels of consumer and commercial spending may cause customers to reduce, modify, delay or cancel plans to purchase our products and may cause vendors to reduce their output or change their terms of sales. We generally sell products to customers with credit payment terms. If customers’ cash flow or operating or financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, they may not be able to pay, or may delay payment to us. Likewise, for similar reasons vendors may restrict credit or impose different payment terms. Any inability of current or potential
67
customers to pay us for our products or any demands by vendors for different payment terms may adversely affect our results of operations and financial condition.
Operating as a public company requires us to incur substantial costs and requires substantial management attention. In addition, certain members of our management team have limited experience managing a public company.
As a public company, we incur substantial legal, accounting and other expenses that we did not incur as a private company. For example, we are subject to the reporting requirements of the Exchange Act, the applicable requirements of the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the rules and regulations of the SEC and the listing standards of the Nasdaq Stock Market. For example, the Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business, financial condition and results of operations. We are also required to maintain effective disclosure controls and procedures and internal control over financial reporting. Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs and increase demand on our systems. In addition, as a public company, we may be subject to stockholder activism, which can lead to additional substantial costs, distract management and impact the manner in which we operate our business in ways we cannot currently anticipate. As a result of disclosure of information in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors.
Additionally, certain members of our management team have limited experience managing a publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition and results of operations.
Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our accounting policies.
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” in Part II, Item 7 of the Form 10-K/A). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations.
We have ongoing environmental costs, which could have a material adverse effect on our financial position or results of operations.
Certain of our operations and assets are subject to extensive environmental, health and safety regulations, including laws and regulations related to waste disposal and remediation of contaminated sites. The nature of our operations and products, including the raw materials we handle, exposes us to the risk of liabilities, obligations or claims under these laws and regulations due to the production, storage, use, transportation and sale of materials that can adversely impact the environment or cause personal injury, including, in the case of chemicals, unintentional releases into the environment. Environmental laws may have a significant effect on the costs of use, transportation and storage of raw materials and finished products, as well as the costs of storage, transportation and disposal of wastes.
The ultimate costs and timing of environmental liabilities are difficult to predict. Liabilities under environmental laws relating to contaminated sites can be imposed retroactively and on a joint and several basis. One liable party could be held responsible for all costs at a site, regardless of fault, percentage of contribution to the site or the legality of the original disposal. We could incur significant costs, including clean-up costs, natural resource damages, civil or criminal fines and sanctions and third-party lawsuits claiming, for example, personal injury and/or property damage, as a result of past or future violations of, or liabilities under, environmental or other laws.
In addition, future events, such as changes to or more rigorous enforcement of environmental laws, could require us to make additional expenditures, modify or curtail our operations and/or install additional pollution control equipment. It is possible that regulatory agencies may enact new or more stringent clean-up standards for chemicals of concern, including chlorinated organic products that we manufacture. This could lead to expenditures for environmental remediation in the future that are additional to existing estimates.
Increased scrutiny of our environmental, social and governance responsibilities and practices may result in additional costs, liability risks, and may adversely impact our reputation, our ability to attract and retain a skilled workforce and willingness of customers and suppliers to do business with us.
Investor advocacy groups, institutional investors, proxy advisory services, stockholders, government, regulators, employees, customers and other stakeholders are increasingly focused on environmental, social and governance (“ESG”) practices of companies. Additionally, public interest and legislative pressure related to public companies’ ESG practices continues to grow. If our ESG practices fail to meet regulatory requirements or investor or other stakeholders' evolving expectations and standards for responsible business practices in
68
numerous areas, including climate change and greenhouse gas emissions, environmental stewardship, support for communities where we operate, human and civil rights, director and employee diversity, human capital management, employee health and safety practices, product quality and safety, data security, supply chain management, regulatory compliance, corporate governance and transparency and employing ESG strategies within business operations, our brand, reputation and employee retention may be negatively impacted and customers and suppliers may be unwilling to do business with us. As we work to align our ESG practices with industry standards, we will be dealing with uncertainties and risks resulting from the forward-looking nature of many ESG issues, In addition, we will continue to expand our disclosures in these areas and doing so may result in additional costs and require additional resources to monitor, report, and comply with our various ESG practices. If we fail to adopt ESG standards or practices as quickly as stakeholders desire, report on our ESG efforts or practices accurately, or satisfy the expectations of stakeholders, our reputation, business, financial performance and growth may be adversely impacted.
69
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
70
Item 6. Exhibits
Furnish the exhibits required by Item 601 of Regulation S-K (§ 229.601 of this chapter).
| | | | | | | | |
| | | | Incorporated by Reference |
Exhibit
Number
| | Exhibit Description
| | Form | | Exhibit
Number | | Filing Date |
3.1.0 | | Articles of Incorporation | | 10-K | | 3.1 | | 18-Mar-19 |
3.1.1 | | Certificate of Amendment to Articles of Incorporation dated December 10, 2014 | | 10-Q | | 3.2 | | 15-May-15 |
3.1.2 | | Certificate of Amendment to Articles of Incorporation dated September 15, 2015 | | 10-Q | | 3.3 | | 12-Nov-15 |
3.1.3 | | Certificate of Amendment to Articles of Incorporation dated August 18, 2017. | | 10-Q | | 3.4 | | 9-Nov-18 |
3.1.4 | | Amendment to the Articles of Incorporation of Torchlight Energy Resources, Inc., dated June 14, 2021 | | 8-K | | 3.1 | | 16-Jun-21 |
3.1.5 | | Certificate of Amendment related to the Reverse Stock Split and Name Change, filed June 25, 2021 | | 8-K | | 3.1 | | 29-Jun-21 |
3.2.0 | | Certificate of Designation of Preferences, Rights and Limitations of Series B Special Voting Preferred Stock, dated June 14, 2021 | | 8-K | | 3.3 | | 16-Jun-21 |
3.5.0 | | Amended and Restated Bylaws | | 8-K | | 3.1 | | 26-Oct-16 |
10.1 | | Purchase Agreement, dated September 11, 2023. by and between Meta Materials, Inc. and Lincoln Park Capital Fund, LLC. | | 8-K | | 10.1 | | 11-Sep-23 |
10.2 | | Registration Rights Agreement, dated September 11, 2023, between Meta Materials, Inc. and Lincoln Park Capital Fund, LLC. | | 8-K | | 10.2 | | 11-Sep-23 |
10.3 | | Loan Sale Agreement, dated as of August 7, 2023, by and between Meta Materials Inc. and Gregory McCabe. | | 10-Q | | 10.11 | | 9-Aug-23 |
10.4 | | Purchase Agreement, dated September 8, 2023, by and between Meta Materials, Inc. and Gregory McCabe. | | 8-K | | 10.1 | | 12-Sep-23 |
10.5 | | Registration Rights Agreement, dated September 8, 2023, by and between Meta Materials, Inc. and Gregory McCabe. | | 8-K | | 10.2 | | 12-Sep-23 |
31.1 | | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | Filed Herewith |
31.2 | | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | Filed Herewith |
32.1+ | | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | Furnished Herewith |
32.2+ | | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | Furnished Herewith |
101.INS | | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. | | | | | | Filed Herewith |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | Filed Herewith |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | Filed Herewith |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | Filed Herewith |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | Filed Herewith |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | Filed Herewith |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) | | | | | | Filed Herewith |
| |
+ | The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the registrant under the |
71
| |
| Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. |
72
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | |
| | Meta Materials Inc. |
| | | |
|
|
|
|
Dated: November 13, 2023 |
| By: | /s/ Uzi Sasson
|
|
|
| Uzi Sasson |
|
|
| Chief Executive Officer |
|
|
| (Principal Executive Officer) |
| | | |
| | |
| | | |
|
|
|
|
Dated: November 13, 2023 |
| By: | /s/ Ahmed Shebl
|
|
|
| Ahmed Shebl |
|
|
| Chief Accounting Officer and Interim Chief Financial Officer |
|
|
| (Principal Financial and Accounting Officer) |
73
