UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
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MULLEN AUTOMOTIVE INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MULLEN AUTOMOTIVE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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| March 31, 2023 |
| September 30, 2022 | ||||
ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents | $ | | $ | | |||
Restricted cash | | | |||||
Inventory | | — | |||||
Prepaid expenses and other current assets |
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TOTAL CURRENT ASSETS |
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Property, equipment and leasehold improvements, net |
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Intangible assets, net |
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Deposit on ELMS purchase | — | | |||||
Note receivable from related party | | — | |||||
Right-of-use assets |
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Goodwill | | | |||||
Other assets |
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TOTAL ASSETS | $ | | $ | | |||
LIABILITIES AND STOCKHOLDERS' EQUITY |
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CURRENT LIABILITIES |
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Accounts payable | $ | | $ | | |||
Accrued expenses and other current liabilities |
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Dividends payable | | | |||||
Derivative liabilities | | | |||||
Liability to issue shares |
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Lease liabilities, current portion |
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Notes payable, current portion | | | |||||
Other current liabilities |
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TOTAL CURRENT LIABILITIES |
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Notes payable, net of current portion |
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Lease liabilities, net of current portion |
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Deferred tax liability | | | |||||
TOTAL LIABILITIES |
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Commitments and contingencies (Note 17) |
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STOCKHOLDERS' EQUITY |
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Preferred stock, $ | |||||||
Preferred Series A; |
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Preferred Series C; | | | |||||
Preferred Series D; | | | |||||
Preferred Series AA; | — | — | |||||
Common stock; $ |
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Common stock owed but not issued; $ | | — | |||||
Additional paid-in capital (*) |
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Accumulated deficit |
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Non-controlling interest | | | |||||
TOTAL STOCKHOLDERS' EQUITY |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | | $ | | |||
(*) Adjusted retroactively for reverse stock split, see Note 1 |
See accompanying notes to unaudited condensed consolidated financial statements.
2
MULLEN AUTOMOTIVE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended March 31, |
| Six months ended March 31, | |||||||||||
| 2023 |
| 2022 | 2023 |
| 2022 | |||||||
OPERATING EXPENSES |
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General and administrative | $ | | $ | | $ | | $ | | |||||
Research and development |
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Total Operating Expense |
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Loss from Operations |
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Other financing costs - initial recognition of derivative liabilities | — | ( | ( | ( | |||||||||
Loss on derivative liability revaluation | ( | ( | ( | ( | |||||||||
Gain / (loss) extinguishment of debt, net | ( | — | ( | | |||||||||
Gain on sale of fixed assets | | — | | — | |||||||||
Interest expense | ( | ( | ( | ( | |||||||||
Loan discount amortization expense | ( | — | ( | — | |||||||||
Loss on debt settlement | — | — | — | ( | |||||||||
Other income, net | | — | | — | |||||||||
Net loss before income tax benefit | ( | ( | ( | ( | |||||||||
Income tax benefit | | — | | — | |||||||||
Net loss before accrued preferred dividends and noncontrolling interest | ( | ( | ( | ( | |||||||||
Net loss attributable to noncontrolling interest | ( | — | ( | — | |||||||||
Net loss attributable to shareholders | ( | ( | ( | ( | |||||||||
Accrued preferred dividends | | ( | | ( | |||||||||
Net Loss attributable to common shareholders after preferred dividends | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Net loss per share | ( | ( | ( | ( | |||||||||
Weighted average shares outstanding, basic and diluted |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
MULLEN AUTOMOTIVE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
| Six Months Ended March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Preferred Stock |
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| Deficiency in | |||||||||||||||||||||||||||
Series A | Series C | Series D | Series AA | Common Stock | Paid-in | Common Stock Owed but not Issued | Accumulated | Non-controlling | Stockholders' | |||||||||||||||||||||||||||||||||
Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Deficit |
| Interest |
| Equity | ||||||||||||
Balance, September 30, 2022 |
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| | $ | | | $ | | — | $ | — | | $ | | $ | | — | $ | — | $ | ( | $ | | $ | | ||||||||||||||
Share-based compensation issued to management, directors, employees, and consultants |
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Shares issued to extinguish penalty | — |
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Cashless warrant exercise - C |
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Cashless warrant exercise - D | — |
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Surplus common stock issued on cashless warrant exercise |
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Issuance of common stock for conversion of preferred stock |
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Dividends accumulated on preferred stock |
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Other transactions |
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Shares issued to settle note payable |
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Shares issued for convertible notes | — | — | — | — | — | — | — | — | | | | — | — | — | — | | ||||||||||||||||||||||||||
Preferred shares issued to officers | — | — | — | — | — | — | | — | - | — | | — | — | — | — | | ||||||||||||||||||||||||||
Net loss allocable to non-controlling interest |
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Net loss |
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Balance, December 31, 2022 |
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Cashless warrant exercise |
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Issuance of common stock for conversion of convertible notes |
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4
Issuance of common stock for conversion of preferred stock | ( | ( | — | — | — | — | — | — | | | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||
Reclassification of derivatives to equity upon authorization of sufficient number of shares | — | — | — | — | — | — | — | — | — | — | | — | — | — | — | — | | |||||||||||||||||||||||||
Preferred shares series AA refund | — | — | — | — | — | — | ( | — | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||
Share-based compensation to consultants | — | — | — | — | — | — | — | — | | | | — | — | — | — | — | | |||||||||||||||||||||||||
Share-based compensation to employees | — | — | — | — | — | — | — | — | | | | — | — | — | — | — | | |||||||||||||||||||||||||
Share-based compensation to officers | — | — | — | — | — | — | — | — | | | | — | — | — | — | — | | |||||||||||||||||||||||||
Share-based compensation to directors | — | — | — | — | — | — | — | — | | | | — | — | — | — | — | | |||||||||||||||||||||||||
Preferred C & D stock dividends |
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Noncontrolling interest |
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Net loss | — | — | — | — | — | — | — | — | — |
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Balance, March 31, 2023 |
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*Adjusted retroactively for reverse stock split, see Note 1
See accompanying notes to unaudited condensed consolidated financial statements.
5
MULLEN AUTOMOTIVE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
| Preferred Stock |
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| Deficiency in | ||||||||||||||||||||
Series A | Series B | Series C | Common Stock | Paid-in | Accumulated | Stockholders' | |||||||||||||||||||||||
Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||||||
Balance, September 30, 2021 |
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| — | $ | — | | $ | | $ | | $ | ( | $ | ( | ||||||||
Common shares issued for cash |
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Common shares issued for asset | — |
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Preferred shares issued for cash |
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Preferred shares issued to settle liability to issue | — |
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Warrant issuances |
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Preferred shares issued in exchange for conversion of debt |
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Stock-based compensation |
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Common shares issued to settle liability to issue |
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Prefunded warrant issuance |
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Issuance of common stock for conversion of preferred stock | ( | ( | — | — | — | — | | | ( | — | — | ||||||||||||||||||
Net Loss |
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Balance, December 31, 2021 |
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Cashless warrant exercise |
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Shares issued for cash |
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Issuance of common stock for conversion of preferred stock | ( | ( | ( | ( | ( | ( | | | | — | — | ||||||||||||||||||
Share-based compensation | — | — | — | — | — | — | | | | — | | ||||||||||||||||||
Dividends accumulated on preferred stock | — | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||
Net Loss | — | — | — | — | — | — | — |
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Balance, March 31, 2022 |
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*Adjusted retroactively for reverse stock split, see Note 1
See accompanying notes to unaudited condensed consolidated financial statements.
6
MULLEN AUTOMOTIVE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended March 31, | ||||||
| 2023 |
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Cash Flows from Operating Activities |
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Net loss before accrued preferred dividends and noncontrolling interest | $ | ( | $ | ( | ||
Adjustments to reconcile net loss attributable to shareholders to net cash used in operating activities: |
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Depreciation and amortization |
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Officer and employee stock compensation |
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Issuance of warrants to suppliers | | — | ||||
Issuance of shares for services |
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Revaluation of derivative liabilities | | | ||||
Initial recognition of derivative liabilities |
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Non-cash interest and other operating activities |
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Non-cash lease expense |
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Amortization of debt discount |
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Loss on asset disposal |
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Loss/(gain) on extinguishment of debt | | ( | ||||
Loss on debt settlement |
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Changes in operating assets and liabilities: |
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Other current assets |
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Other assets |
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Accounts payable |
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Accrued expenses and other liabilities |
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Deferred tax liability | ( | — | ||||
Right of use asset | ( | — | ||||
Lease liabilities |
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Net cash used in operating activities |
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Cash Flows from Investing Activities |
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Purchase of equipment |
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Purchase of intangible assets |
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ELMS asset purchase | ( | — | ||||
Net cash used in investing activities |
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Cash Flows from Financing Activities |
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Changes in net parent investment | — | ( | ||||
Proceeds from issuance of notes payable |
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Proceeds from issuance of common stock |
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Proceeds from issuance of preferred stock |
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Reimbursement for overissuance of shares | | — | ||||
Payment of notes payable |
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Net cash provided by financing activities |
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Increase in cash |
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Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, ending of period | $ | | $ | | ||
Supplemental disclosure of Cash Flow information: |
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Cash paid for interest | $ | | $ | |
7
Cash paid for taxes | $ | | $ | — | ||
Supplemental Disclosure for Non-Cash Activities: |
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Preferred shares issued in exchange for convertible debt | $ | — | $ | | ||
Convertible notes and interest - conversion to common stock | $ | | $ | | ||
Exercise of warrants recognized earlier as liabilities | $ | | $ | — | ||
Reclassification of derivatives to equity upon authorization of sufficient number of shares | $ | | $ | — | ||
Waiver of dividends by stockholders | $ | | $ | — | ||
Warrants issued to suppliers | $ | | $ | — | ||
Common stock issued to extinguish liability to issue stock | $ | | $ | — | ||
Extinguishment of financial liabilities by sale of property | $ | | $ | — | ||
Extinguishment of operational liabilities by sale of property | $ | | $ | — | ||
Debt conversion to common stock | $ | | $ | — |
See accompanying notes to unaudited condensed consolidated financial statements.
8
MULLEN AUTOMOTIVE INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Mullen Automotive Inc., a Delaware corporation (“MAI”, “Mullen”, “we” or the “Company”), is a Southern California-based development-stage electric vehicle company that operates in various verticals of businesses focused within the automotive industry. Mullen Automotive Inc., a California corporation (“Previous Mullen”), was originally formed on April 20 2010, as a developer and manufacturer of electric vehicle technology and operated as the Electric Vehicle (“EV”) division of Mullen Technologies, Inc. (“MTI”) until November 5, 2021, at which time Previous Mullen underwent a capitalization and corporate reorganization by way of a spin-off to its shareholders, followed by a reverse merger with and into Net Element, Inc., which was accounted for as a reverse merger transaction, in which Previous Mullen was treated as the acquirer for financial accounting purposes. (the “Merger”). The Company changed its name from “Net Element, Inc.” to “Mullen Automotive Inc” and the Nasdaq ticker symbol for the Company’s common stock changed from “NETE” to “MULN” on the Nasdaq Capital Market Exchange at the opening of trading on November 5, 2021.
Reverse Stock Split
In January 2023, the Company’s stockholders approved a proposal to authorize the board of directors of the Company (the “Board”) to implement a reverse stock split of the outstanding shares of the Company’s common stock at a ratio up to 1-for-
.Pursuant to such authority granted by the Company’s stockholders, the Board approved a reverse stock split of the Company’s common Stock at a rate of 1-for-
shares of Common Stock (the “Reverse Stock Split”), which resulted in a reduction in the number of outstanding shares of common stock and a proportionate increase in the value of each share. The common stock began trading on a reverse split-adjusted basis on the NASDAQ on May 4, 2023.As the Reverse Stock Split occurred after the balance sheet date but before the financial statements are issued, the Company retroactively adjusted its financial statements to reflect the split. All issued and outstanding common stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented. In addition, a proportionate adjustment was made to the per share exercise price and the number of shares issuable upon the exercise and/or vesting of all warrants to purchase shares of common stock.
A proportionate adjustment was also made to the number of shares reserved for issuance pursuant to the Company’s equity incentive compensation plans to reflect the Reverse Stock Split.
Subsequent Acquisition and Asset Purchase
On September 7, 2022, the Company completed the acquisition of Bollinger Motors, Inc., which provides the Company with a medium duty truck classes 4-6, along with the B1 Sport Utility and B2 Pick Up Trucks. The purchase price was approximately $
On October 13, 2022, the U.S. Bankruptcy Court approved the acquisition of assets from electric vehicle company ELMS (Electric Last Mile Solutions) in an all-cash purchase by the Company. In the Chapter 7 approved transaction, Mullen acquired ELMS’ manufacturing plant in Mishawaka Indiana, all inventory, and intellectual property for their Class 1 and Class 3 vehicles
9
for a total of $
Segment Information
Our CEO and Chairman of the Board, as the chief operating decision maker, makes decisions about resources to be acquired, allocated and utilized and assesses the performance of the Company as
The Company’s long-lived assets are located in the United States of America.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). Certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U. S. GAAP”) have been condensed or omitted pursuant to those rules and regulations, but we believe the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation have been included in the condensed consolidated financial statements included herein. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K/A for the year ended September 30, 2022, filed with the Commission on January 30, 2023. The results of operations for the periods presented are not necessarily indicative of results to be expected for the full fiscal year or any other periods.
The consolidated financial statements include the accounts of the Company and its subsidiaries, Mullen Investment Properties LLC, a Mississippi corporation, Ottava Automotive, Inc., a California corporation, Mullen Real Estate, LLC, a Delaware corporation, and Bollinger Motors Inc., a Delaware corporation. Intercompany accounts and transactions have been eliminated, if any. The financial statements reflect the consolidated financial position and results of operations of Mullen, which have been prepared in accordance with U.S. GAAP.
NOTE 2 – LIQUIDITY, CAPITAL RESOURCES, AND GOING CONCERN CONSIDERATION
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. Our principal source of liquidity consists of existing cash and restricted cash of approximately $
The Company has not generated revenue to date and has accumulated losses since inception. The Company’s ability to continue operating as a going concern is contingent upon, among other things, its ability to raise sufficient additional capital and/or obtaining the necessary financing to support ongoing and future operations and to successfully manufacture and launch its products for sale. While the Company expects to obtain the additional capital and/or financing that is needed, there is no assurance that the Company will be successful in obtaining the necessary funds to bring its product and service offerings to market and support future operations. These factors raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Our management plans to raise additional capital through a combination of equity and debt financing, strategic alliances, and licensing arrangements. Under existing Securities Purchase Agreement, dated June 7, 2022 and as further amended, the Company has sold Series D Preferred Stock and common stock as well as detached warrants for $
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Note 19 – Subsequent Events) and a may obtain additional investment, in the amount of $
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions.
Business Combination
Business acquisitions are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”. FASB ASC 805 requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable tangible and intangible assets acquired, the liabilities assumed and any non-controlling interest in the acquired entity, and recognize and measure goodwill or a gain from the purchase. The acquiree’s results are included in the Company’s consolidated financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Adjustments to fair value assessments are recorded to goodwill over the measurement period (not longer than twelve months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense. The Company completed the acquisition of Bollinger Motors, Inc on September 7, 2022.
Use of Estimates
The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the carve-out financial statements and the reported amounts of total expenses in the reporting periods. Estimates are used for, but not limited to, fair value of long-lived assets, fair value of financial instruments, depreciable lives of property and equipment, income taxes, contingencies, and inputs used to value stock-based compensation, valuation of common and preferred stock and warrants.
Additionally, the rates of interest on several debt agreements have been imputed where there was no stated interest rate within the original agreement. The imputed interest results in adjustments to the debt amounts reported in our condensed consolidated financial statements prepared under U.S. GAAP. Loan valuations issues can arise when trying to determine the debt attributes, such as discount rate, credit loss factors, liquidity discounts, and pricing.
Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for adjustments about the carrying values of assets and liabilities and the recording of costs and expenses that are not readily apparent from other sources. The actual results may differ materially from these estimates.
Risks and Uncertainties
The Company operates within an industry that is subject to rapid technological change, intense competition, and serves an industry that has significant government regulations. It is subject to significant risks and uncertainties, including competitive, financial, developmental, operational, technological, required knowledge of industry governmental regulations, and other risks associated with an emerging business. Any one or combination of these or other risks could have a substantial influence on our future operations and prospects for commercial success.
Reclassification from Other Noncurrent Assets to Property, Equipment and Leasehold Improvements, net
Certain prior period amounts related to Show Room Assets in the condensed consolidated financial statements and notes thereto have been reclassified to conform to the current period presentation. These reclassifications had no impact on previously reported net income or shareholders' equity. In the Condensed Consolidated Balance Sheet as of September 30, 2022, $
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Improvements, net. This reclassification is reflected in all periods presented and all comparative references in the notes to the consolidated financial statements are to the reclassified amounts (See Note 13 and Note 14).
Cash and Cash Equivalents
Company management considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. There were
Restricted Cash
Funds that are not available for immediate use and must be used for a specific purpose. On March 31, 2023, the restricted cash balance was $
Prepaid Expenses and Other Current Assets
Prepaid expenses consist of various advance payments made for goods or services to be received in the future. These prepaid expenses include insurance and other contracted services requiring up-front payments.
Property, Equipment and Leasehold Improvements, Net
Property, equipment, and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated economic useful lives of the assets. Repairs and maintenance expenditures that do not extend the useful lives of related assets are expensed as incurred.
Estimated Useful Lives
Description |
| Life |
Buildings | ||
Furniture and Equipment | ||
Computer and Software | ||
Machinery and Equipment | ||
Leasehold Improvements | Shorter of the estimated useful life or the underlying lease term | |
Vehicles | ||
Intangibles |
Expenditures for major improvements are capitalized, while minor replacements, maintenance and repairs, which do not extend the asset lives, are charged to operations as incurred. Upon sale or disposition, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. Company management continually monitors events and changes in circumstances that could indicate that the carrying balances of its property, equipment and leasehold improvements may not be recoverable in accordance with the provisions of ASC 360, “Property, Plant, and Equipment.” When such events or changes in circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
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Income Taxes
Income taxes are recorded in accordance with ASC 740, Income Taxes, which provides for deferred taxes using an asset and liability approach. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
There are transactions that occur during the ordinary course of business for which the ultimate tax determination may be uncertain. At March 31, 2023 and September 30, 2022, there were no material changes to either the nature or the amounts of the uncertain tax positions.
The Company’s income tax provision consists of an estimate for U.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities, and changes in the tax law. We maintain a full valuation allowance against the value of our U.S. and state net deferred tax assets because management does not believe the recoverability of the tax assets meets the “more likely than not” likelihood at March 31, 2023 and September 30, 2022.
Intangible Assets, net
Intangible assets consist of acquired and developed intellectual property and website development costs. In accordance with ASC 350, “Intangibles—Goodwill and Others,” goodwill and other intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. Intangible assets with determinate lives are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Amortizable intangible assets generally are amortized on a straight-line basis over periods up to
Impairment of Long-Lived Assets
The Company periodically evaluates property, plant and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that a potential impairment may have occurred. If such events or changes in circumstances arise, the Company compares the carrying amount of the long-lived assets to the estimated future undiscounted cash flows expected to be generated by the long-lived assets. If the estimated aggregate undiscounted cash flows are less than the carrying amount of the long-lived assets, an impairment charge, calculated as the amount by which the carrying amount of the assets exceeds the fair value of the assets, is recorded. The fair value of the long-lived assets is determined based on the estimated discounted cash flows expected to be generated from the long-lived assets.
Other Assets
Other assets are comprised primarily of related party loans and security deposits for property leases.
Extinguishment of Liabilities
The Company derecognizes financial liabilities when the Company’s obligations are discharged, cancelled, or expired.
Leases
The Company follows the provisions of ASC 842, “Leases”, which requires a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying leased asset for the lease term.
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Accrued Expenses
Accrued expenses are expenses that have been incurred but not yet paid and are classified within current liabilities on the consolidated balance sheets.
General and Administrative Expenses
General and administrative (“G&A”) expenses include all non-production related expenses incurred by us in any given period. This includes expenses such as professional fees, salaries, rent, repairs and maintenance, utilities and office expense, employee benefits, depreciation and amortization, advertising and marketing, settlements and penalties, taxes, and licenses. Advertising costs are expensed as incurred and are included in G&A expenses. Other than trade show expenses which are deferred until occurrence of the future event, we expense advertising costs as incurred in accordance with ASC 720-35, “Other Expenses – Advertising Cost.”
Research and Development Costs
Research and development costs are expensed as incurred. Research and development expenses consist primarily of costs associated with the development of our electric vehicle product lines.
Share-Based Compensation
We account for share-based awards issued by the Company in accordance with ASC Subtopic 718-10, “Compensation – Share Compensation”, which requires fair value measurement on the grant date and recognition of compensation expense for all common shares of the Company issued to employees, non-employees and directors. The Company’s common and preferred share valuations have been made based on assumptions management believes to be reasonable. Key assumptions and approaches to value used in estimating fair value, includes economic and industry data; business valuation; prior transactions; option value method and other cost, income, and market value approaches. Share-based compensation is included within general and administrative expenses.
Related Party Transactions
We have related party transactions with certain of our directors, officers, and principal stockholders. These transactions are entered into in the ordinary course of business and include receiving operational loans, issuing convertible debt and warrants, providing financial support associated with the borrowing of funds.
Fair Value of Financial Instruments
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, Company management considers the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the hierarchy as per requirements of ASC 820, “Fair value measurements”.
Concentrations of Business and Credit Risk
We maintain cash balances in several financial institutions that are insured by either the Federal Deposit Insurance Corporation or the National Credit Union Association up to certain federal limitations, generally $250,000. At times, our cash balance may exceed these federal limitations and maintains significant cash on hand at certain of its locations. However, we have not experienced any losses in such accounts and management believes we are not exposed to any significant credit risk on these accounts. The amounts in excess of insured limits as of March 31, 2023 and September 30, 2022 are $
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Recently Issued Accounting Standards
Accounting standard updates issued but not yet added were assessed and determined to be either not applicable or not expected to have a material impact on our unaudited condensed consolidated financial statements.
NOTE 4 – PURCHASE OF ASSETS FROM ELMS
On October 13, 2022, the United States Bankruptcy Court for the District of Delaware issued an order approving the sale for approximately $
The ELMS asset acquisition closed on November 30, 2022, and is expected to accelerate the market introduction of our cargo van program and provide us with critical manufacturing capacity at a much lower investment than previously expected to supply the rest of our product portfolio.
ELMS assets include:
● | The factory in Mishawaka, Indiana, providing Mullen with the capability to produce up to |
● | All Intellectual Property, including all manufacturing data that is required for the assembly of the Class 1 van and Class 3 Cab Chassis; |
● | All inventory including finished and unfinished vehicles, part modules, component parts, raw materials, and tooling; and |
● | All property including equipment, machinery, supplies, computer hardware, software, communication equipment, data networks and all other data storage. |
The following details the allocation of purchase price by asset category for the ELMS asset purchase:
Asset Category | Fair Value Allocation | ||
Land | $ | | |
Buildings and site improvements | | ||
Equipment | | ||
Identified intangible: engineering design | | ||
Inventory | | ||
Total Identified Assets | $ | |
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS
As at March 31, 2023 and September 30, 2022, goodwill was $
For the six months ended March 31, 2023, and 2022, the Company recorded intangible asset additions of $
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Intangible assets are stated at cost, net of accumulated amortization. The weighted average useful life of intellectual property is
| March 31, 2023 |
| September 30, 2022 | |||||||||||||||
| Gross |
|
| Net |
| Gross |
|
| Net | |||||||||
| Carrying |
| Accumulated |
| Carrying | Carrying |
| Accumulated |
| Carrying | ||||||||
Finite-Lived Intangible Assets |
| Amount | Amortization |
| Amount |
| Amount | Amortization |
| Amount | ||||||||
Website design and development | $ | | ( | $ | | $ | | $ | ( | $ | | |||||||
Intellectual property |
| | ( |
| |
| |
| ( |
| | |||||||
Patents | | ( | | | ( | | ||||||||||||
Engineer design - ELMS | | ( | | — | — | — | ||||||||||||
Other | | ( | | | ( | | ||||||||||||
Trademark |
| | — |
| |
| |
| — |
| | |||||||
Total Intangible Assets | $ | | $ | ( | $ | | $ | | $ | ( | $ | |
Total future amortization expense for finite-lived intellectual property is as follows:
Years Ended March 31, |
| Future Amortization | |
2023 (six months) | $ | | |
2024 |
| | |
2025 |
| | |
2026 | | ||
2027 | | ||
Thereafter |
| | |
Total Future Amortization Expense | $ | |
For the three and six months ended March 31, 2023, amortization expense for the intangible assets was $
NOTE 6 – DEBT
Short and Long-Term Debt
Short-term debt is generally defined as debt with principal maturities of one-year or less. Long-term debt is defined as principal maturities of one year or more.
The following is a summary of our indebtedness at March 31, 2023:
Net Carrying Value | ||||||||||||
Unpaid Principal | Contractual | Contractual | ||||||||||
Type of Debt |
| Balance |
| Current |
| Long-Term |
| Interest Rate | Maturity | |||
Matured notes | $ | | $ | | $ | - |
| 2019 - 2021 | ||||
Promissory notes |
| - |
| - |
| - |
| NA | NA | |||
Real Estate notes |
| |
| |
| - |
| 2023 - 2024 | ||||
Loans and advances |
| |
| |
| - |
| 2016 - 2018 | ||||
Less: debt discount |
| ( |
| ( |
| - |
| NA | NA | |||
Total Debt | $ | | $ | | $ | — |
|
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The following is a summary of our indebtedness at September 30, 2022:
Net Carrying Value | ||||||||||||
Unpaid Principal | Contractual | Contractual | ||||||||||
Type of Debt |
| Balance |
| Current |
| Long-Term |
| Interest Rate | Maturity | |||
Matured notes | $ | | $ | | $ | — |
| 2019 - 2021 | ||||
Promissory notes |
| |
| — |
| |
| 2024 | ||||
Real Estate note |
| |
| |
| |
| 2023 - 2024 | ||||
Loan advances |
| |
| |
| — |
| 2016 – 2018 | ||||
Less: debt discount |
| ( |
| — |
| ( |
| NA | NA | |||
Total Debt | $ | | $ | | $ | |
|
Scheduled Debt Maturities
The following table represents scheduled debt maturities at March 31, 2023:
| Years Ended March 31, | ||||||||
| 2023 (6 months) |
| 2024 |
| Total | ||||
Total Debt | $ | | $ | | $ | |
Notes and Advances
Total interest is comprised primarily of stated interest, amortization of debt discount and additional interest recognized for warrants issued with convertible notes for the excess in fair value above the face value of the notes. Stated interest was $
In some instances, we issued convertible instruments with detachable warrants, resulting in the recognition of a debt discount, which is amortized to interest expense over the term of the relevant instrument. Debt discount amortization for the three and six months ended March 31, 2023 and 2022, was $
The Company issued shares of common stock to certain creditors for the conversion of convertible notes, satisfaction of debt payments, and in settlement of indebtedness. For the six months ended March 31, 2023, the carrying amount of indebtedness that was settled via issuance of shares of our common stock was $
NuBridge Commercial Lending LLC Promissory Note
On March 7, 2022, the Company’s wholly owned subsidiary, Mullen Investment Properties, LLC entered into a Promissory Note (the “Promissory Note”) with NuBridge Commercial Lending LLC for a principal amount of $
Drawbridge and Amended A&R Note with Esousa
On October 14, 2022, the Company entered into an Amended and Restated Secured Convertible Note and Security Agreement (the “A&R Note”) with Esousa Holdings LLC (“Esousa”), including principal of $
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(having a then carrying value of $
Convertible Notes
On November 14, 2022, the Company entered into Amendment No. 3 to the June 7, 2022 Securities Purchase Agreement (“Amendment No. 3”). The investors paid $
Amendment No. 3 further provided that the remaining $
On November 15, 2022, the Company issued the unsecured convertible Notes aggregating $
As a result, and since the Company had an insufficient number of authorized shares available to settle potential future warrant exercises, the Company recognized a derivative liability of $
On December 23, 2022, the Company defaulted on the Notes by not having sufficient authorized shares to allow for both the Notes to be fully converted and the warrants to be exercised. On January 13, 2023, the Company entered into a Settlement Agreement and Release in which investors waived the default prior to February 1, 2023. In exchange, the Company granted the investors the right to purchase additional shares of Series D Preferred Stock and warrants in an amount equal to such investor’s pro rata portion of $
During February 2023, the remaining balance of the Notes (with the principal of $
As of March 31, 2023, and September 30, 2022, accrued interest on outstanding notes payable was $
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NOTE 7 – WARRANTS AND OTHER DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS
ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
● | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
● | Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. |
● | Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. |
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
Financial Instruments At Carrying Value That Approximated Fair Value
Certain financial instruments that are not carried at fair value on the condensed consolidated balance sheets are carried at amounts that approximate fair value, due to their short-term nature and credit risk. These instruments include cash and cash equivalents, accounts payable, accrued liabilities, and debt. Accounts payable are short-term in nature and generally terms are due upon receipt or within 30 to 90 days.
Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
Non-financial assets are only required to be measured at fair value when acquired as a part of business combination or when an impairment loss is recognized. See Note 13 - Property, Equipment and Leasehold Improvements and Note 5 – Intangible assets for further information.
Financial Liabilities Measured at Fair Value on a Recurring Basis
During the six months ended March 31, 2023, the Company had two main types of financial liabilities measured at fair value on a recurring basis:
1) | Warrant liabilities (that relate to sales of Series C Preferred Stock and Series D Preferred Stock issued pursuant to Securities Purchase Agreements) recognized as liabilities due to requirements of ASC 480 as the variable number of shares to be issued upon cashless exercise is based predominantly on monetary value. |
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Preferred C Warrants
The warrants, which were exercisable for common stock, issued in connection with the sale of Series C Preferred Stock (the “Preferred C Warrants”) in accordance with the November 2021 Merger Agreement and further amendments had an exercise price of $
At each warrant exercise date and each accounting period end the warrant liability for the remaining unexercised warrants was marked-to-market value and the resulting gain or loss was recorded.
On February 10, 2022, the terms of the Prior SPA Warrants were amended, resulting in a change to the calculated derived dollar amount. The effect of these changes in the amount of $
During the year ended September 30, 2022,
During the quarter ending December 31, 2022,
Preferred D Warrants
For every share of Series D Preferred Stock purchased, the investors received
During the year ended September 30, 2022,
During the quarter ended December 31, 2022, all Preferred D Warrants were exercised on a cash-less basis for
In November 2022, the Company received $
At each warrant exercise date and each accounting period end the warrant liability for the remaining unexercised warrants was marked-to-market value and the resulting gain or loss was recorded.
The fair value of warrant obligations on recognition date and on subsequent dates was estimated as a maximum of (i) Black Scholes value for cash exercise of relevant warrants and (ii) current market value of the number of shares the Company would be required to issue upon cashless warrant exercise on a relevant date in accordance with warrant contract
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requirements. The latter valuation, based on observable inputs (level 2), has been higher and reflects the pattern of the warrants exercise since the inception of the Securities Purchase Agreement.
All the warrants mentioned in this section provide that if the Company issues or sells, enters into a definitive, binding agreement pursuant to which he Company is required to issue or sell or is deemed, pursuant to the provisions of the Warrants, to have issued or sold, any shares of common stock for a price per share lower than the exercise price then in effect, subject to certain limited exceptions, then the exercise price of the warrants shall be reduced to such lower price per share. In addition, the exercise price and the number of shares of common stock issuable upon exercise of the warrants are subject to adjustment in connection with stock splits, dividends or distributions or other similar transactions.
From April 1, 2023 until June 30, 2023, certain investors under the Securities Purchase Agreement have the right, but not the obligation, at any time from time to time, in their sole and absolute discretion to purchase from the Company additional shares of Preferred Stock in an amount equal to such Buyer’s pro rata portion on the same terms and conditions as applicable to the purchase and sale of shares of Series D Preferred Stock as provided under the Securities Purchase Agreement, subject to certain conditions and modifications:
a) All investors under the Securities Purchase Agreement - in amount equal to $
b) One of the investors under the Securities Purchase Agreement - in amount equal to $
c) All investors under the Securities Purchase Agreement - in amount equal to $
2) | Other derivative liabilities recognized and remeasured subsequently at fair value correspond to convertible debentures, warrants, and preferred stock, that failed equity presentation when the Company had insufficient number of authorized shares available to settle all potential future conversion transactions. |
Most of these derivative liabilities, except for Qiantu warrants (as described below), were initially recognized on November 15, 2022, when the Company had an insufficient number of authorized shares of common stock available for issuance upon conversion of preferred stock and convertible notes payable and the exercise of outstanding warrants. They have been reclassified to equity upon authorization of increase of common stock available for issuance by stockholder of the Company on January 25, 2023.
Qiantu Warrants
On March 14, 2023, the Company entered into an Intellectual Property and Distribution Agreement (the “IP Agreement”) with Qiantu Motor (Suzhou) Ltd., and
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As a part of consideration for the Company’s entry into the IP Agreement, the Company issued to Qiantu USA warrants to purchase up to
The warrants are exercisable at Qiantu USA’s discretion commencing at any time from September 30, 2023 up to and including September 30, 2024 at
As it was expected that the Company may not have a sufficient number of authorized shares of common stock available for issuance during the term of the contract (up to September 2024), the Qiantu Warrants were recognized at fair value on inception ($
Upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately prior to conversion of the underlying instrument and on the balance sheet date), the Company estimated the fair value of these derivatives using the Black-Scholes Pricing Model and binomial option valuation techniques based on the following assumptions: (1) dividend yield of
Breakdown of items recorded at fair value on a recurring basis in condensed consolidated balance sheets by levels of observable and unobservable inputs as of March 31, 2023 and on September 30, 2022 is presented below:
March 31, | Quoted Prices | Significant | Significant | |||||||||
2023 | in Active | Other | Unobservable | |||||||||
Markets for | Observable | Inputs | ||||||||||
Identical Assets | Inputs | (Level 3) | ||||||||||
(Level 1) | (Level 2) | |||||||||||
Derivative liability | $ | $ | - | $ | $ | |||||||
September 30, | Quoted Prices | Significant | Significant | |||||||||
2022 | in Active | Other | Unobservable | |||||||||
Markets for | Observable | Inputs | ||||||||||
Identical Assets | Inputs | (Level 3) | ||||||||||
(Level 1) | (Level 2) | |||||||||||
Derivative liability | $ | $ | - | $ | $ |
A summary of all changes in warrants and other derivative liabilities is presented below:
Balance, September 30, 2022 | $ | |
Derivative liabilities recognized upon issuance of convertible instruments | | |
Derivative liability upon authorized shares shortfall | | |
| ||
Reclassification of derivative liabilities to equity upon authorization of sufficient common shares | ( | |
Financing loss upon over-issuance of shares from warrants | | |
Receivables upon over-issuance of shares from warrants | | |
Liability to issue shares upon unfinished warrant exercise on period end | ( | |
Conversions of warrants into common shares | ( | |
Conversions of convertible notes and accrued interest into common shares | ( | |
Balance, March 31, 2023 | $ | |
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Balance, September 30, 2021 | $ | - |
Derivative liabilities recognized upon issuance of convertible instruments | | |
| ||
Reclassification of derivative liabilities to equity upon authorization of sufficient common shares | - | |
Conversions of warrants into common shares | ( | |
Conversions of convertible notes and accrued interest into common shares | - | |
Balance, March 31, 2022 | $ | |
NOTE 8 – STOCKHOLDERS’ EQUITY
Common Stock
At the reconvened special meeting of stockholder on January 25, 2023, stockholders approved the proposal to increase the Company’s authorized common stock capital from
At March 31, 2023, the Company had
Effective May 4, 2023, the Company effectuated a 1-for-
reverse stock split, which resulted in a reduction in the number of outstanding shares of common stock (see more information in the Note 1 above).The Company had
The holders of common stock are entitled to
If the Company receives a warrant exercise notice or preferred stock conversion notice close to the balance sheet date, and issues relevant order to a transfer agent which is effectively exercised only after the balance sheet date, relevant shares of common stock are presented in the balance sheet as common stock owed but not issued.
Preferred Stock
Under the terms of our Certificate of Incorporation, the Board may determine the rights, preferences, and terms of our authorized but unissued shares of Preferred Stock. On March 31, 2023, the Company had
The Reverse Stock Split (see Note 1 above) did not affect the number of shares of Preferred Stock but the conversion ratios were proportionately adjusted to decrease the number of shares of common stock to be issued as a result of the Reverse Stock Split ratio of 1-for-
.Redemption Rights
The shares of Preferred Stock are not subject to Mandatory Redemption.
The Series C and Series D Preferred Stock are voluntarily redeemable by the Company in accordance with the following schedule, provided that the issuance of shares of common stock issuable upon conversion has been registered and the registration statement remains effective:
Year 1:
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Year 2: Redemption at
Year 3: Redemption at
Year 4: Redemption at
Year 5: Redemption at
Year 6 and thereafter: Redemption at
The Preferred Stock is also redeemable at any time for a price per share equal to the Issue Price, plus all unpaid accrued and accumulated dividends on such share (whether or not declared), provided: (A) the Preferred Stock has been issued and outstanding for a period of at least
Dividends
The holders of Series A and Series B Preferred Stock are entitled to non-cumulative dividends if declared by the Board of Directors. The holders of the Series A Preferred Stock and Series B Preferred Stock participate on a pro rata basis (on an “as converted” basis to common stock) in any cash dividend paid on common stock.
The Series C Preferred Stock originally provided for a cumulative
The Series D Preferred Stock bears a
The Company may elect to pay dividends for any month with a payment-in-kind (“PIK”) election if (i) the shares issuable further to the PIK are subject to an effective registration statement, (ii) the Company is then in compliance with all listing requirements of NASDAQ and (iii) the average daily trading dollar volume of the Company’s common stock for
Liquidation, Dissolution, and Winding Up
Upon the completion of a distribution pursuant to a Liquidation Event to the Series B Preferred Stock and Series C Preferred Stock, the holders of Series A Preferred Stock are entitled to receive, prior and in preference to any distribution of any proceeds to the holders of the common stock, by reason of their ownership thereof, $
In the event of any Liquidation Event, the holders of the Series B Preferred Stock will be entitled to receive, prior and in preference to any distribution of the proceeds to the holders of the other series of Preferred Stock or the common stock by reason of their ownership thereof, an amount per share equal to the Series B Original Issue Price plus declared but unpaid dividends.
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Upon the completion of a distribution pursuant to a Liquidation Event prior to the Series B Preferred Stock, the holders of the Series C Preferred Stock will be entitled to receive, prior and in preference to any distribution of the proceeds to the holders of the Series A Preferred Stock or the common stock by reason of their ownership thereof, an amount per share equal to the Series C Original Issue Price plus declared but unpaid dividends.
In the event of any Liquidation Event, the holders of the Series D Preferred Stock will be entitled to receive, prior and in preference to any distribution of the proceeds to the holders of the other series of Preferred Stock or the common stock by reason of their ownership thereof, an amount per share equal to the Series D Original Issue Price plus declared but unpaid dividends.
Conversion
Each share of Series A Preferred Stock is convertible at any time at the option of the holder into 4 (giving effect to the Reverse Stock Split – see Note 1) shares of fully paid and non-assessable shares of common stock (rounding up to the nearest share).
Each share of Series B Preferred Stock and each share of Series C Preferred Stock are convertible at the option of the holder at any time into such number of shares of common stock as is determined by dividing the Issue Price by the relevant Conversion Price (in each case, subject to adjustment). As of March 31, 2023 there were
Each share of Series C Preferred Stock will automatically be converted into shares of common stock at the applicable conversion rate at the time in effect immediately upon (A) the issuance of shares of common stock underlying the Series C Preferred Stock being registered pursuant to the Securities Act of 1933 and such registration remaining effective, (B) the trading price for the Company’s common stock being more than
The Series D Preferred Stock is convertible at the option of each holder at any time into the number of shares of common stock determined by dividing the Series D Original Issue Price (plus all unpaid accrued and accumulated dividends thereon, as applicable, whether or not declared), by the Series D Conversion Price, subject to adjustment as set in the Certificate of Designation. The "Series D Original Issue Price" for each share of the Series D Preferred Stock means the lower of (i) $
Each share of Series D Preferred Stock will automatically be converted into shares of common stock at the applicable Conversion Rate at the time in effect immediately upon (A) the issuance of shares of Common Stock underlying the Series D Preferred Stock being registered pursuant to the Securities Act and such registration remaining effective, (B) the trading price for the Company’s common stock being more than
Voting Rights
The holders of shares of common stock and Series A, Series B and Series C Preferred Stock at all times vote together as a single class on all matters (including the election of directors) submitted to a vote of the stockholders; provided, however, that, any proposal which adversely affects the rights, preferences and privileges of the Series A Preferred Stock, Series B Preferred Stock, or Series C Preferred Stock, as applicable, must be approved by a majority in interest of the affected series of Preferred Stock, as the case may be.
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Each holder of common stock, Series B Preferred and Series C Preferred has right to
The holders of Series D Preferred Stock have no voting rights except for protective voting rights (
NOTE 9 – LOSS PER SHARE
Earnings per common share (“EPS”) is computed by dividing net income allocated to common stockholders by the weighted-average common shares outstanding, excluding unvested common shares subject to repurchase or cancellation. Diluted EPS is computed by dividing income allocated to common stockholders plus dividends on dilutive convertible preferred stock and preferred stock that can be tendered to exercise warrants, by the weighted-average common shares outstanding plus amounts representing the dilutive effect of outstanding warrants and the dilution resulting from the conversion of convertible preferred stock, if applicable.
For the three and six months ended March 31, 2023, and 2022, the convertible debt and shares of Preferred Stock were excluded from the diluted share count because the result would have been antidilutive under the “if-converted method.” The warrants to purchases shares of common stock also were excluded from the computation because the result would have been antidilutive.
The following table presents the reconciliation of net income attributable to common stockholders to net income used in computing basic and diluted net income per share of common stock:
Three months ended March 31, |
| Six months ended March 31, | ||||||||||
| 2023 |
| 2022 | 2023 |
| 2022 | ||||||
Net income attributable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Less: accumulated preferred stock dividends | | ( | | ( | ||||||||
Net income used in computing basic net income per share of common stock | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Net loss per share | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Weighted average shares outstanding, basic and diluted | | | | |
NOTE 10 – SHARE-BASED COMPENSATION
The Company has a share incentive plan that is part of its annual discretionary share-based compensation program. The plan includes consultants and employees, including directors and officers. For employees, they are notified of company share incentives during the onboarding process. The employee’s offer letter briefly describes the plan. Subject to the approval of our Board of Directors Compensation Committee, employees are issued a specified number of shares of the Company’s common stock. The total expense recognized for share awards represents the grant date fair value of such awards, which is generally recognized as a charge to income ratably over the vesting period.
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The Company has adopted the CEO Award Incentive Plan, approved by the Board and by stockholder on July 26, 2022 at the 2022 Annual Meeting of Stockholders. Under this plan, the Chief Executive Officer is entitled to share-based awards generally calculated as
Consulting agreements with shares for services have a cost determined by the number of shares granted within the individual contract multiplied by the market value of the shares provided on date of grant. The number of shares specified within the individual agreements are generally negotiated by our Chief Executive Officer and approved by the Board. The consultant typically earns share-based compensation over the service period which is generally recognized as a charge to income ratably over the vesting period. The common stock provided for services are accounted for as professional fees within G&A expense and employee share issuances are part of compensation expense.
For the three months ended March 31, | For the six months ended March 31, | ||||||||||||
Composition of Share-Based Compensation Expense |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Directors, officers and employees share-based compensation | $ | | $ | | $ | | $ | | |||||
Shares issued to consultants for services |
| |
| |
| |
| | |||||
Total share-based compensation expense | $ | | $ | | $ | | $ | |
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NOTE 11 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| March 31, 2023 |
| September 30, 2022 | |||
Accrued Expenses and Other Liabilities |
|
|
|
| ||
Accrued expense - other | $ | | $ | | ||
IRS tax liability | | | ||||
Accrued payroll |
| |
| | ||
Accrued interest |
| |
| | ||
Total | $ | | $ | |
Accrued payroll represents salaries and benefits that are owed to employees, including payroll tax liabilities. Accrued interest of $
NOTE 12 – LIABILITY TO ISSUE STOCK
Liability represents stock payable that is accrued for and issuable at a future date for certain convertible securities and warrants and was $
NOTE 13 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment, and leasehold improvements, net consists of the following:
| March 31, |
| September 30, | |||
2023 | 2022 | |||||
Building | $ | | $ | | ||
Furniture and equipment |
| |
| | ||
Vehicles |
| |
| | ||
Show room assets | | | ||||
Computer hardware and software |
| |
| | ||
Machinery and equipment |
| |
| | ||
Construction-in-progress | | | ||||
Leasehold improvements |
| |
| | ||
Subtotal |
| |
| | ||
Less: accumulated depreciation |
| ( |
| ( | ||
Property, Equipment and Leasehold Improvements, net | $ | | $ | |
Property, plant and equipment assets are stated at cost, net of accumulated amortization. Depreciation expense related to property, equipment, and leasehold improvements for the three and six months ended March 31, 2023, was $
The ELMS asset acquisition closed on November 30, 2022 (See Note 4 – Purchase of assets from ELMS), and include property, plant, and equipment additions of:
● | The Mishawaka, Indiana factory, which consisted of land and building of $ |
● | All property including equipment, machinery, supplies, computer hardware, software, communication equipment, data networks and all other data storage, that totaled $ |
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NOTE 14 – OTHER NONCURRENT ASSETS
Other assets consist of the following:
| March 31, 2023 |
| September 30, 2022 | |||
Other Assets |
|
|
|
| ||
Other assets | $ | | $ | | ||
Other receivables |
| |
| | ||
Security deposits |
| |
| | ||
Total Other Assets | $ | | $ | |
NOTE 15 – OPERATING EXPENSES
General and Administrative Expenses consist of the following:
Three months ended March 31, | Six months ended March 31, | ||||||||||||
2023 | 2022 |
| 2023 |
| 2022 | ||||||||
Professional fees |
| $ | |
| $ | | $ | | $ | | |||
Salaries |
| |
| |
| |
| | |||||
Depreciation |
| |
| |
| |
| | |||||
Amortization | | — | | — | |||||||||
Lease |
| |
| |
| |
| | |||||
Settlements and penalties |
| |
| |
| |
| | |||||
Employee benefits |
| |
| |
| |
| | |||||
Utilities and office expense |
| |
| |
| |
| | |||||
Advertising and promotions |
| |
| |
| |
| | |||||
Taxes and licenses |
| |
| |
| |
| | |||||
Repairs and maintenance |
| |
| |
| |
| | |||||
Executive expenses and directors' fees | | — | | — | |||||||||
Listing and regulatory fees | | — | | — | |||||||||
Other |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | |
Within professional fees is stock based compensation for services rendered to consultants. Salaries include stock based compensation to officers and employees. The expense is recorded at fair value of the shares to be issued (see Note 10 for stock based compensation).
Research and development
Research and development for the three months ended March 31, 2023 and 2022 was $
NOTE 16 – LEASES
We have entered into various operating lease agreements for certain offices, manufacturing and warehouse facilities, and corporate aircraft. Operating leases are included in right-of-use assets, and current and noncurrent portion of lease liabilities, as appropriate. These right-of-use assets also include any lease payments made and initial direct costs incurred at lease commencement and exclude lease incentives. The lease terms may include
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and have elected to account for these as a single lease component. Certain leases provide for annual increases to lease payment based on an index or rate. We calculate the present value of future lease payments based on the index or at the lease commencement date for new leases.
The table below presents information regarding our lease assets and liabilities:
| March 31, 2023 |
| September 30, 2022 |
| |||
Assets: |
|
|
|
| |||
Operating lease right-of-use assets | $ | | $ | | |||
Liabilities: |
|
|
| ||||
Operating lease liabilities, current |
| ( |
| ( | |||
Operating lease liabilities, non-current |
| ( |
| ( | |||
Total lease liabilities | $ | ( | $ | ( | |||
Weighted average remaining lease terms: |
|
|
|
| |||
Operating leases |
|
| |||||
Weighted average discount rate: |
|
|
|
| |||
Operating leases |
| | % |
| | % |
Operating lease costs: | For the three months ended March 31, | For the six months ended March 31, |
| ||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| |||||
Fixed lease cost | $ | | $ | | $ | | $ | | |||||
Variable lease cost |
| |
| |
| |
| | |||||
Short-term lease cost |
| — |
| |
| — |
| | |||||
Sublease income |
| ( |
| ( |
| ( |
| ( | |||||
Total operating lease costs | $ | | $ | | $ | | $ | |
Operating Lease Commitments
Our leases primarily consist of land, land and building, or equipment leases. Our lease obligations are based upon contractual minimum rates. Most leases provide that we pay taxes, maintenance, insurance and operating expenses applicable to the premises. The initial term for most real property leases is typically
The following table reflects maturities of operating lease liabilities at March 31, 2023:
Years ending |
|
| |
March 31, |
| ||
2023 (6 months) |
| $ | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Thereafter |
| | |
Total lease payments | $ | | |
Less: imputed interest |
| ( | |
Present value of lease liabilities | $ | |
NOTE 17 – COMMITMENTS AND CONTINGENCIES
ASC 450 governs the disclosure and recognition of loss contingencies, including potential losses from litigation, regulation, tax and other matters. The accounting standard defines a “loss contingency” as “an existing condition, situation,
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or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur.” ASC 450 requires accrual for a loss contingency when it is “probable that one or more future events will occur confirming the fact of loss” and “the amount of the loss can be reasonably estimated.”
From time to time, we are subject to asserted and actual claims and lawsuits arising in the ordinary course of business. Company management reviews any such legal proceedings and claims on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and it discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our consolidated financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, management evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. We do not record liabilities when the likelihood is probable, but the amount cannot be reasonably estimated.
DBI Lease Buyback Servicing LLC, Drawbridge Investments LLC v. Mullen Automotive Inc.
In June 2022, we entered into a letter agreement with DBI Lease Buyback Servicing LLC (“DBI”) wherein we agreed to provide DBI with a right to purchase up to $
On March 2, 2023, DBI and Drawbridge Investments LLC (collectively, “Drawbridge”) filed a complaint in the Commercial Division of the Supreme Court of the State of New York, County of New York against Mullen. The complaint asserts
Drawbridge also commenced an action by Order to Show Cause whereby plaintiffs, inter alia, sought a temporary restraining order (“TRO”) (a) enjoining Mullen from (i) increasing the number of designated shares for any outstanding stock and (ii) issuing new preferred stock; and (b) requiring Mullen to maintain at least
The Company does not have an estimate of possible loss as of March 31, 2023.
Mullen Technologies Inc. v. Qiantu Motor (Suzhou) Ltd.
This matter arises out of a contract dispute between Mullen and Qiantu Motor (Suzhou) Ltd. (“Qiantu Suzhou”) related to the engineering, design, support, and homologation of Qiantu’s K50 vehicle by Mullen.
On March 14, 2023, the parties entered into a Settlement Agreement providing for full settlement of all pending litigation between the Company and Qiantu Suzhou. The parties also released all claims against each other arising from or in connection with the matters and claims that were subject to the legal proceedings. Pursuant to the Settlement Agreement, (1) the parties agreed to enter into an IP Agreement (as defined and described below) and (2) in connection with the settlement of the Legal Proceedings and for the privilege of entering into the IP Agreement, the Company paid $
In connection with the execution of the Settlement Agreement, on March 14, 2023, the Company entered into an Intellectual Property and Distribution Agreement (the “IP Agreement”) with Qiantu Suzhou, and two of Qiantu Suzhou’s affiliates (herein “Qiantu”). Pursuant to the IP Agreement, Qiantu granted the Company the exclusive license to use certain
31
of Qiantu’s trademarks and the exclusive right to assemble, manufacture, and sell the homologated vehicles based on the Qiantu K-50 model throughout North America (including Canada, Mexico, and the United States of America) and South America for a period of five (5) years, which period does not start until the Company has successfully homologated vehicles based on terms of the IP Agreement (the “Five Year Period”). During the Five Year Period, the Company is also obligated to purchase a certain number of vehicle kits every year from Qiantu. These rights shall be obtained and the commitment shall only be effective upon the Company’s assessment of feasibility and profitability of the project within
As consideration for the Company’s entry into the IP Agreement, (1) the Company issued to Qiantu USA warrants to purchase up to
International Business Machines (“IBM”)
This claim was filed in the Supreme Court of the State of New York on May 7, 2019. This matter arises out of a contract dispute between Mullen and IBM related to a joint development and technology license agreement, patent license agreement, and a logo trademark agreement. On November 9, 2021, the court, pursuant to an inquest order, awarded damages in favor of IBM and on December 1, 2021, the court entered a judgment in favor of IBM in the amount of $
On February 2, 2022, IBM filed a Motion to Amend the Judgment it had obtained to add Mullen Automotive and Ottava as Judgment Debtors. Mullen filed an Appeal on April 8, 2022. A settlement was reached in which Mullen paid the full amount of the Judgment with interest, for a total of approximately $
Federal and State Tax Liabilities
During the third quarter of 2022, the Company entered into an instalment agreement with the IRS to pay $
The GEM Group
On September 21, 2021, the GEM Group filed an arbitration demand and statement of claim against Mullen seeking declaratory relief and damages. This matter arises out of an alleged breach of a securities purchase agreement dated November 13, 2020. On April, 20, 2023, at the direction of the sole arbitrator, closing arguments for the arbitration previously scheduled for April 28, 2023, were rescheduled for May 18, 2023. The Company does not have an estimated of possible loss as of March 31, 2023.
TOA Trading LLC Litigation
This claim arises out of an alleged breach of contract related to an unpaid finder’s fee. On April 11, 2022, TOA Trading LLC and Munshibari LLC, filed a complaint against Mullen Automotive Inc. and Mullen Technologies Inc. in the United States District Court for the Southern District of Florida. On May 18, 2022, the Company filed a Motion to Dismiss or in
32
the Alternative, Transfer Venue, which has not yet been ruled upon. The Company does not have an estimate of possible loss as of March 31, 2023.
Mullen Stockholder Litigation
Margaret Schaub v. Mullen Automotive, Inc. – Securities Class Action
On May 5, 2022, Margaret Schaub, a purported stockholder, filed a putative class action complaint in the United States District Court Central District of California against the Company, as well as its Chief Executive Officer, David Michery, and the Chief Executive Officer of a predecessor entity, Oleg Firer (the “Schaub Lawsuit”). This lawsuit was brought by Schaub both individually and on behalf of a putative class of the Company’s shareholders, claiming false or misleading statements regarding the Company’s business partnerships, technology, and manufacturing capabilities, and alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder. The Schaub Lawsuit seeks to certify a putative class of shareholders, and seeks monetary damages, as well as an award of reasonable fees and expenses. The Company filed a motion to dismiss on November 22, 2022. On April 13, 2023, the court took the April 14, 2023 hearing off calendar after determining that oral argument was not necessary. The Company’s motion to dismiss has been taken under submission. The Company does not have an estimate of possible loss as of March 31, 2023.
Jeff Witt v. Mullen Automotive, Inc.; Hany Morsy v. David Michery, et al. - Consolidated Derivative Action
On August 1, 2022, Jeff Witt and Joseph Birbigalia, purported stockholders, filed a derivative action in the United States District Court for the Central District of California against the Company as a nominal defendant, Mr. Michery, Mr. Firer, and current or former Company directors Ignacio Novoa, Mary Winter, Kent Puckett, Mark Betor, William Miltner and Jonathan New (the “Witt Lawsuit”). On September 30, 2022, Hany Morsy, a purported stockholder, filed a derivative action in the United States District Court for the Central District of California against the Company as a nominal defendant, Mr. Michery, Mr. Firer, former Company officer and director, Jerry Alban, and Company directors Mr. Novoa, Ms. Winter, Mr. Puckett, Mr. Betor, Mr. Miltner, and Mr. New (the “Morsy Lawsuit”). On November 8, 2022, the court consolidated the Witt Lawsuit and Morsy Lawsuit into one case. The consolidated lawsuit asserts claims for breach of fiduciary duty, unjust enrichment, abuse of control, waste of corporate assets, gross mismanagement, and violation of Section 14 of the Exchange Act primarily in connection with the issues and claims asserted in the Schaub Lawsuit. The consolidated lawsuit seeks to direct the Company to improve its corporate governance and internal procedures, monetary damages, pre-judgment and post-judgment interest, restitution, as well as an award of reasonable fees and expenses.
On November 30, 2022, the court stayed this consolidated derivative action pending (1) dismissal of the consolidated securities class action (the Schaub Lawsuit discussed above), or (2) the filing of an answer in the consolidated securities class action and notice by any party that they no longer consent to the voluntary stay of this consolidated derivative action. The case currently remains stayed.
Based upon information presently known to management, the Company believes that the potential liability from this claim, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations. Therefore,
Thomas Robbins v. David Michery, et al.; Patrick V.P. Foley, Jr. and Jeffrey Pudlinski v. David Michery, et al.
On December 7, 2022, Thomas Robbins, a purported stockholder, filed a putative stockholder class action complaint for declaratory and injunctive relief in the Court of Chancery of the State of Delaware against the Company, Mr. Michery, and current or former Company directors Mr. Novoa, Ms. Winter, Mr. Betor, Mr. Anderson, Mr. Miltner, Mr. Puckett, and Mr. New (the “Robbins Lawsuit”). On December 13, 2022, a second putative stockholder class action was filed in the Court of Chancery, styled as Foley v. Michery, et al., (the “Foley Lawsuit” and, together with the Robbins Lawsuit, the “Stockholder Actions”). The Stockholder Actions seek declaratory and injunctive relief related to the vote on a series of proposal at a special meeting of Company stockholders that was held on December 23, 2022, and asserts claims for breach
33
of fiduciary duty against all Company directors (except Mr. New). The consolidated lawsuit also seeks an award of fees and costs related to this action.
On February 3, 2023, the Court entered a stipulated order pursuant to which plaintiffs voluntarily dismissed the Stockholder Actions with prejudice as to themselves only and retained jurisdiction solely for the purpose of deciding any application of plaintiffs’ counsel for an award of attorneys’ fees and expenses. On March 3, 2023, plaintiffs’ counsel filed their motion for an award of attorneys’ fee and expenses for benefits they contend were conferred on the Company and its stockholders in connection with the Stockholder Actions (the “Fee Application”), seeking an award of attorneys’ fee and expenses in the amount of $
On November 30, 2022, the court stayed this consolidated derivative action pending (1) dismissal of the consolidated securities class action (the Schaub Lawsuit discussed above), or (2) the filing of an answer in the consolidated securities class action and notice by any party that they no longer consent to the voluntary stay of this consolidated derivative action. The case currently remains stayed.
Based upon information presently known to management, the Company believes that the potential liability from this claim, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations. Therefore,
NOTE 18 – RELATED PARTY TRANSACTIONS
Affiliate Note Receivable
Prior to its corporate reorganization on November 5, 2021, Previous Mullen operated as a division of Mullen Technologies, Inc. (“MTI”). Subsequent to the corporate reorganization, the Company has provided management and accounting services to MTI. On March 31, 2023, the Company entered a note receivable with an affiliated party. The borrower promises to pay the principal amount of $
Director Provided Services
William Miltner
William Miltner is a litigation attorney who provides legal services to Mullen Automotive and its subsidiaries. Mr. Miltner also is an elected Director for the Company, beginning his term in August 2021. For the three and six months ended March 31, 2023, Mr. Miltner received $
Ignacio Novoa
On June 9, 2022, the Board of Directors of the Company appointed Ignacio Novoa as a director effective as of June 28, 2022. Prior to his appointment, on January 12, 2022, the Company and Mr. Novoa entered into a
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Mary Winter
On October 26, 2021, the Company entered into a
NOTE 19 – SUBSEQUENT EVENTS
Company management has evaluated subsequent events through May 15, 2023, which is the date these condensed consolidated financial statements were available to be issued.
Amendment No. 4 to the Securities Purchase Agreement
On April 3, 2023, the Company entered into Amendment No. 4 (“Amendment No. 4”) to the existing Securities Purchase Agreement dated as of June 7, 2022 and amended on June 23, 2022, September 19, 2022 and November 15, 2022 (the “Securities Purchase Agreement”), the terms of which, including the terms of Series D Convertible Preferred Stock, par value $
Pursuant to Amendment No. 4, the Company irrevocably committed to effect the issuance of Series D Preferred Stock and warrants upon receipt of the remaining $
In connection with this Amendment No. 4, on April 4, 2023, the Company entered into
Agreement effective April 17, 2023, to Securities Purchase Agreement
On April 17, 2023, related to the Securities Purchase Agreement, the Company committed to issuing Series D Convertible Preferred Stock and warrants upon receipt of $
Mullen Advanced Energy Operations LLC
On April 17, 2023, the Company entered into a binding Letter of Agreement with Lawrence Hardge, Global EV Technology, Inc., and EV Technology, LLC to partner on a device known as a Battery Life Enhancing Technology. The parties will form a new corporation called Mullen Advanced Energy Operations to develop, manufacture, market, sell, lease, distribute, and service all products resulting from the technology. The Company will hold a
NOTE 20 - RESTATEMENT
Prior to the initial issuance of the Company's financial statements for the year ended September 30, 2022, management determined that the warrants issued with the preferred stock did not meet the conditions for equity classification, requiring liability treatment and measured at fair value. In addition, management also discovered that it did not reflect the impact of
35
amendments that resulted in modifications in privileges for the warrants issued with the Series C Preferred Stock, which should have been accounted for as a deemed dividend at the time of modification.
The following table summarizes the impacts of these error corrections on the Company's financial statements for each of the periods presented below:
Quarter ended March 31, 2022 (Unaudited) | Impact of correction of error - quarter | Impact of correction of error - year to date | |||||||||
As previously reported |
| Adjustments |
| As restated | As previously reported |
| Adjustments |
| As restated | ||
Loss from operations | ($ | - | ($ | ($ | - | ($ | |||||
Other financing costs - initial recognition of warrants at fair value | - | ( | ( | - | ( | ( | |||||
Revaluation of warrants | - | ( | ( | - | ( | ( | |||||
Others | ( | - | ( | ( | - | ( | |||||
Other income (expense) | ( | ( | ( | ( | ( | ( | |||||
Net loss | ($ | ($ | ($ | ($ | ($ | ($ | |||||
Deemed dividend on preferred stock | - | ( | ( | - | ( | ( | |||||
Net loss attributable to common stockholders | ($ | ($ | ($ | ($ | ($ | ($ | |||||
Loss per share - continuing operations | ( | ( | ( | ( | |||||||
Weighted average common shares outstanding | | | | |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the financial statements and other financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”) and with our audited financial statements and other information presented in our Annual Report on Form 10-K, as amended, for the year ended September 30, 2022 filed with the SEC on January 30, 2023. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward- looking statements as a result of many factors, including but not limited to those under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K, as amended, for the year ended September 30, 2022.
Basis of Presentation
As a pre-revenue company with no commercial operations, our activities to date have been limited and were conducted primarily in the United States and our historical results are reported under accounting principles generally accepted in the United States ("GAAP" or "U.S. GAAP") and in United States ("U.S.") dollars.
Components of Results of Operations
We are an early-stage company, and our historical results may not be indicative of our future results for reasons that may be difficult to anticipate. Accordingly, the drivers of our future financial results, as well as the components of such results, may not be comparable to our historical or projected results of operations.
Revenues
We have not begun commercial operations and do not currently generate any revenue. Once we commence production and commercialization of our vehicles, we expect that the majority of our revenue will be initially derived from direct sales of Commercial Delivery Vehicles (Class 1 – 6), Sport Utility Vehicles ("SUVs") and, subsequently, from flexible leases of our electric vehicles ("EVs").
Cost of Goods Sold
To date, we have not recorded cost of goods sold, as we have not recorded commercial revenue. Once we commence the commercial production and sale of our EVs, we expect cost of goods sold to include mainly vehicle components and parts, including batteries, direct labor costs, amortized tooling costs, and reserves for estimated warranty expenses.
General and Administrative Expense
General and administrative (“G&A”) expenses include all non-production expenses incurred by us in any given period. This includes expenses such as professional fees, salaries, rent, repairs and maintenance, utilities and office expense, employee benefits, depreciation and amortization, advertising and marketing, settlements and penalties, taxes, licenses, and other expenses. We expense advertising costs as incurred in accordance with ASC 720-35, “Other Expenses – Advertising Cost.”
Research and Development Expense
To date, our research and development expenses have consisted primarily of engineering services in connection with the design of our EVs and development of the prototypes. As we ramp up for commercial operations, we anticipate that research and development expenses will increase for the foreseeable future as we expand our hiring of engineers and designers and continue to invest in new vehicle model design and development of technology.
Income Tax Expense / Benefit
Our income tax provision consists of an estimate for U.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities, and changes in the
37
tax law. We maintain a valuation allowance against the full value of our U.S. and state net deferred tax assets because we believe the recoverability of the tax assets is not more likely than not.
Results of Operations
Comparison of the Three Months Ended March 31, 2023 to the Three Months Ended March 31, 2022
The following table sets forth our historical operating results for the periods indicated:
Three Months Ended |
| |||||||||||
March 31, | ||||||||||||
| 2023 |
| 2022 |
| $ Change |
| % Change |
| ||||
|
| |||||||||||
Operating costs and expenses: |
|
|
|
|
| |||||||
General and administrative | $ | 47,412,338 | $ | 29,269,433 | $ | 18,142,905 |
| 62 | % | |||
Research & development |
| 20,478,971 |
| 1,183,437 |
| 19,295,534 |
| 1,630 | % | |||
Total Operating Expense |
| 67,891,309 |
| 30,452,870 |
| 37,438,439 |
| 123 | % | |||
Loss from Operations | $ | (67,891,309) |
| (30,452,870) |
| (37,438,439) |
| 123 | % | |||
Other income (expense): |
|
|
|
|
|
|
|
| ||||
Other financing costs - initial recognition of derivative liabilities | — | (160,364,949) | 160,364,949 | (100) | % | |||||||
Loss on derivative liability revaluation | (48,439,415) | (131,670,146) | 83,230,731 |
| (63) | % | ||||||
Loss extinguishment of debt, net |
| (40,000) | — |
| (40,000) |
| — | % | ||||
Gain on sale of fixed assets | 385,031 | — | 385,031 | — | % | |||||||
Interest expense |
| (1,745,882) |
| (2,120,515) |
| 374,633 |
| (18) | % | |||
Loan discount amortization expense | (142,287) | — | (142,287) |
| — | % | ||||||
Other income, net |
| 482,405 |
| — |
| 482,405 | — | % | ||||
Total other expense |
| (49,500,148) |
| (294,155,610) |
| 244,655,462 |
| (83) | % | |||
Income tax benefit | 482,922 | — | 482,922 | — | % | |||||||
Net loss before accrued preferred dividends and noncontrolling interest | $ | (116,908,535) | $ | (324,608,480) | $ | 207,699,945 |
| (64) | % |
Net loss before accrued preferred dividends and noncontrolling interest
Net loss before accrued preferred dividends and noncontrolling interest was $116.9 million and $324.6 million for the three months ended March 31, 2023 and 2022, respectively.
The $207.7 million or 64% decrease in Net loss before accrued preferred dividends and noncontrolling interest was primarily due to a $244.7 million decrease in non-cash financing expenses and revaluation and $37.4 million increase in operating losses to ramp up of development efforts and reflecting the additional expenses from Bollinger and ELMS.
General and Administrative
General and administrative expenses increased by $18.1 million or 62% to $47.4 million for the three months ended March 31, 2023, from $29.3 million in the three months ended March 31, 2022, primarily due to increases in professional services, marketing, and stock compensation related expenses associated with the growth of personnel and resources necessary to develop and launch our electric vehicles.
Research and Development
Research and development expenses increased by $19.3 million or 1,630% to $20.5 million for the three months ended March 31, 2023, compared to $1.2 million in the three months ended March 31, 2022. Research and development expenses primarily consist of engineering, homologation, and prototyping costs. Research and development expenses for the three
38
months ended March 31, 2023 also include $6.8 million costs representing fair value of warrants issued for acquisition of right to assemble, manufacture, and sell the homologated vehicles based on the Qiantu K-50, subject to positive assessment of feasibility and profitability of the project by the Company (see Note 7). The research and development costs are expected to rise with continuing development of our electric vehicle programs. There will also be incremental research and development costs associated with the recent acquisition of Bollinger Motors for the B1/B2 and Class 4 delivery chassis.
Other financing costs – initial recognition of derivative liabilities
Other financing costs for the initial recognition of derivative liabilities was $0 for the three months ended March 31, 2023 as compared to $160.4 million of derivative initial recognition expense for the three months ended March 31, 2022.
Revaluation of derivative liabilities
The revaluation of derivative liabilities losses decreased $83.2 million from $131.7 million for the three months ended March 31, 2022 to $48.4 million for the three months ended March 31, 2023 as more warrants were exercised during the period ended March 31, 2023 and less derivative liabilities are outstanding as of that date.
Interest expense
Interest expense decreased by $0.4 million or 18% to $1.7 million for the three months ended March 31, 2023 from $2.1 million for the three months ended March 31, 2022. The decrease in interest expense year over year is primarily due to unpaid principal balance decreasing from $22.1 million on March 31, 2022 to $7.6 million on March 31, 2023.
Loan amortization expense
Loan amortization expense increased $0.1 million to $0.1 million for the three months ended March 31, 2023 versus zero for the three months ended March 31, 2022.
Deferred tax benefit
Deferred tax benefit was $0.5 million for the three months ended March 31, 2023 as compared to zero for the three months ended March 31, 2022 due to an adjustment in permanent timing differences for amortization expense.
Other income (expense), net
Other income, net was $0.5 million for the three months ended March 31, 2023 as compared to zero of other income, net for the three months ended March 31, 2022. Bollinger earned interest on a money market account opened in January 2023.
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Comparison of the Six Months Ended March 31, 2023 to the Six Months Ended March 31, 2022
The following table sets forth our historical operating results for the periods indicated:
Six Months Ended |
| |||||||||||
March 31, | ||||||||||||
| 2023 |
| 2022 |
| $ Change |
| % Change |
| ||||
| (dollar amounts, except percentages) |
| ||||||||||
Operating costs and expenses: |
|
|
|
|
| |||||||
General and administrative | $ | 112,408,349 | $ | 42,170,516 | $ | 70,237,833 |
| 167 | % | |||
Research & development |
| 29,100,980 |
| 2,340,761 |
| 26,760,219 |
| 1,143 | % | |||
Total Operating Expense |
| 141,509,329 |
| 44,511,277 |
| 96,998,052 |
| 218 | % | |||
Loss from Operations |
| (141,509,329) |
| (44,511,277) |
| (96,998,052) |
| 218 | % | |||
Other income (expense): |
|
|
|
|
|
|
|
| ||||
Other financing costs - initial recognition of derivative liabilities | (255,960,025) | (269,344,178) | 13,384,153 |
| (5) | % | ||||||
Loss on derivative liability revaluation | (89,221,391) | (142,288,528) | 53,067,137 | (37) | % | |||||||
Gain extinguishment of debt, net |
| (6,452,170) |
| 74,509 |
| (6,526,679) |
| — | % | |||
Gain on sale of fixed assets | 385,031 | — | 385,031 | — | % | |||||||
Interest expense |
| (4,573,971) |
| (24,559,459) |
| 19,985,488 |
| (81) | % | |||
Loan discount amortization expense | (142,287) | — | (142,287) | — | % | |||||||
Loss on debt settlement | — | (41,096) | 41,096 | (100) | % | |||||||
Other income, net | 1,128,286 | — | 1,128,286 | — | % | |||||||
Total other expense |
| (354,836,527) |
| (436,158,752) |
| 81,322,225 |
| (19) | % | |||
Income tax benefit | 976,576 | 976,576 | — | % | ||||||||
Net loss before accrued preferred dividends and noncontrolling interest | $ | (495,369,280) | $ | (480,670,029) | $ | (14,699,251) |
| 3 | % |
Net loss before accrued preferred dividends and noncontrolling interest
Net loss before accrued preferred dividends and noncontrolling interest was $495.4 million and $480.7 million for the six months ended March 31, 2023 and 2022, respectively.
The $14.7 million or 3% increase in Net loss before accrued preferred dividends and noncontrolling interest was primarily due to a $66.5 million decrease in non-cash financing expenses offset by the $97.0 million increase in operating losses to ramp up of development efforts and reflecting the addition expenses after acquisition of Bollinger Motors and after purchase of ELMS assets.
General and Administrative
General and administrative expenses increased by $70.2 million or 167% to $112.4 million for the six months ended March 31, 2023, from $42.2 million in the six months ended March 31, 2022, primarily due to increases in professional services, marketing, and stock compensation related expenses associated with the growth of personnel and resources necessary to develop and launch our electric vehicles.
Research and Development
Research and development expenses increased by $26.8 million, or 1,143%, to $29.1 million for the six months ended March 31, 2023, versus $2.3 million in the six months ended March 31, 2022. Research and development expenses primarily consist of engineering, homologation, and prototyping costs. Research and development expenses for the three months ended March 31, 2023 also include $6.8 million costs representing fair value of warrants issued for acquisition of right to assemble, manufacture, and sell the homologated vehicles based on the Qiantu K-50, subject to positive assessment of feasibility and profitability of the project by the Company (see Note 7). Research and development costs are expected
40
to rise with continuing development of our electric vehicle programs. There may also be incremental research and development costs associated with the recent acquisition of Bollinger Motors for the B1/B2 and Class 4 delivery chassis.
Other financing costs – initial recognition of derivative liabilities
Other financing costs for the initial recognition of derivative liabilities decreased from $269.3 million for the six months ended March 31, 2022, to $256.0 million for the six months ended March 31, 2023.
Gain / (loss) on extinguishment of debt, net
The loss on debt settlement increased $6.5 million from $0.1 million gain for the six months ended March 31, 2022, to a loss of $6.5 million for the six months ended March 31, 2023. The loss on debt settlement increase is primarily due to a settlement with investors claiming losses caused by the Company and the exchange of old note to Esousa for new replacement note.
Revaluation of derivative liabilities
The loss on revaluation of derivative liabilities decreased $53 million from $142.3 million for the six months ended March 31, 2022 to $89.2 million for the six months ended March 31, 2023 as more warrants were exercised during the period ended March 31, 2023 and less derivative liabilities are outstanding as of that date.
Interest expense
Interest expense decreased by $20.0 million or 81% to $4.6 million for the six months ended March 31, 2023 from $24.6 million for the six months ended March 31, 2022, primarily due to the decrease in the convertible debt balance as well as from the paydown of debt principal during the quarter ended March 31, 2023.
Loan amortization expense
Loan amortization expense was $0.1 million for the six months ended March 31, 2023, from zero for the six months ended March 31, 2022.
Deferred tax benefit
Deferred tax benefit increased $1.0 million to $1.0 million for the six months ended March 31, 2023 as compared to zero for the six months ended March 31, 2022 due to an adjustment in permanent timing differences for amortization expense.
Other income (expense), net
Other income, net increased $1.1 million to $1.1 million for the six months ended March 31, 2023, as compared to zero of other income, net for the six months ended March 31, 2022. Bollinger earned interest on a money market account opened in January 2023.
Liquidity and Capital Resources
As of the date of this Quarterly Report, we have yet to generate any revenue from our business operations. To date, we have funded our capital expenditure and working capital requirements through equity and debt capital, as further discussed below. Our ability to successfully commence commercial operations and expand our business will depend on many factors, including our working capital needs, the availability of equity or debt financing and, over time, our ability to generate cash flows from operations.
As of March 31, 2023, our cash and cash equivalents (excluding restricted cash) amounted to $60.3 million. Included in the $26.4 million restricted cash balance at March 31, 2023, is $26.0 million available for development and operations of Bollinger. The total cash available for operations and development was $86.3 million at March 31, 2023.
41
We expect our capital expenditures and working capital requirements to increase substantially in the near term, as we seek to produce our initial EVs, develop our customer support and marketing infrastructure and expand our research and development efforts. We may need additional cash resources due to changed business conditions or other developments, including unanticipated delays in negotiations with OEMs and tier-one automotive suppliers or other suppliers, supply chain challenges, disruptions due to COVID-19, competitive pressures, and regulatory developments, among other developments. See Note 2 to the condensed consolidated financial statements.
To maintain compliance with the $1.00 minimum bid price requirement of NASDAQ, the Board of the Company has approved a 1-for-25 reverse stock split, which resulted in a reduction in the number of outstanding shares of common stock and a proportionate increase in the value of each share. The common stock began trading on a reverse split-adjusted basis on the NASDAQ on May 4, 2023 (see further Note 1 to the condensed consolidated financial statements).
Debt
To date, our current working capital and development needs have been primarily funded through the issuance of convertible indebtedness and common stock. Short-term debt comprises an insignificant component of our funding.
Short and Long-Term Debt
The short-term debt classification primarily is based upon loans due within twelve-months from the balance sheet date, in addition to loans that have matured and remain unpaid. Management plans to renegotiate matured loans with creditors for favorable terms, such as reduce interest rate, extend maturities, or both; however, there is no guarantee favorable terms will be reached. Until negotiations with creditors are resolved, these matured loans remain outstanding and will be classified within short-term debt on the balance sheet. Interest and fees on loans are being accounted for within accrued interest. The loans are secured by the Company’s assets.
Cash Flows
The following table provides a summary of Mullen’s cash flow data for the six months ended March 31, 2023 and 2022:
Six Months Ended March 31, | |||||||
Net cash provided by (used in): |
| 2023 |
| 2022 | |||
Operating activities | $ | (67,567,385) | $ | (24,871,780) | |||
Investing activities |
| (97,420,097) |
| (10,737,679) | |||
Financing activities |
| 167,359,660 |
| 100,849,172 |
Cash Flows used in Operating Activities
Our cash flow used in operating activities to date have primarily been comprised of costs related to research and development, salaries, taxes, benefits, and other general and administrative activities. As we continue to ramp up hiring ahead of starting commercial operations, we expect our cash used in operating activities to increase significantly before we start to generate any material cash flow from our business.
Net cash used in operating activities was $67.6 million for the six months ended March 31, 2023, a 172% increase from $24.9 million net cash used in activities in the six months ended March 31, 2022.
Cash Flows used in Investing Activities
Our cash flows used in investing activities increased due to the ELMS asset purchase (see Note 4 – Purchase of assets from ELMS).
Net cash used in investing activities was $97.4 million in the six months ended March 31, 2023, an increase from $10.7 million used in investing activities in the six months ended March 31, 2022.
42
Cash Flows provided by Financing Activities
Through March 31, 2023, we have financed our operations primarily through the issuance of convertible notes, equity securities, and warrants. Net cash provided by financing activities was $167.4 million for the six months ended March 31, 2023, an increase of $66.5 million over the six months ended March 31, 2022.
Contractual Obligations and Commitments
From April 1, 2023 until June 30, 2023, certain investors under the Securities Purchase Agreement have the right, but not the obligation, at any time from time to time, in their sole and absolute discretion to purchase from the Company additional shares of Preferred Stock in an amount equal to such Buyer’s pro rata portion on the same terms and conditions as applicable to the purchase and sale of shares of Series D Preferred Stock as provided under the Securities Purchase Agreement, subject to certain conditions and modifications:
a) All investors under the Securities Purchase Agreement - in amount equal to $100,000,000 (pursuant to Amendment 3 to the Securities Purchase Agreement). Along with the shares of Series D Preferred Stock the buyers shall receive Additional Warrants exercisable for 110% of shares of Common Stock under conditions similar to other warrants issued under the Securities Purchase Agreement.
b) One of the investors under the Securities Purchase Agreement - in amount equal to $20,000,000 (pursuant to Settlement greement and Release entered into on January 13, 2023 to settle over-issuance of shares). Along with the shares of Series D Preferred Stock the buyer shall receive Additional Warrants exercisable for 185% of shares of Common Stock under conditions similar to other warrants issued under the Securities Purchase Agreement.
c) All investors under the Securities Purchase Agreement - in amount equal to $10,000,000 (pursuant to Settlement Agreement and Release entered into on January 13, 2023 to waive possible rights of the investors upon default of the Company to maintain sufficient number of registered shares required by the Securities Purchase Agreement). Along with the shares of Series D Preferred Stock the buyer shall receive Additional Warrants exercisable for 185% of shares of Common Stock under conditions similar to other warrants issued under the Securities Purchase Agreement.
The following tables summarizes our contractual obligations and other commitments for cash expenditures as of March 31, 2023, and the years in which these obligations are due:
Operating Lease Commitments
| Scheduled | ||
Years Ended March 31, | Payments | ||
2023 (6 months) | $ | 1,763,109 | |
2024 |
| 3,062,953 | |
2025 |
| 2,412,336 | |
2026 |
| 599,369 | |
2027 |
| 405,882 | |
Thereafter |
| 107,972 | |
Total Future Minimum Lease Payments | $ | 8,351,621 |
We currently lease our headquarters space in the Los Angeles area under a single lease classified as an operating lease expiring in March 2026. We have not executed any binding agreement for leases beyond 2026.
43
Scheduled Debt Maturities
The following are scheduled debt maturities:
Years Ended March 31, | ||||||||||||||||||||||||
| 2023 (6 months) |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| 2028 |
| Thereafter |
| Total | |||||||||
Total Debt | $ | 3,162,761 | $ | 4,425,752 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 7,588,513 |
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, as defined under SEC rules.
Critical Accounting Estimates
Our financial statements have been prepared in accordance with U.S. GAAP. In the preparation of these financial statements, our management is required to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported expenses incurred during the reporting periods. An accounting judgment, estimate or assumption is critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on the consolidated financial statements. Our significant accounting policies are described in note 3 to the condensed consolidated financial statements included elsewhere in this Quarterly Report. Management believes none of the accounting estimates are considered critical for the preparation of these condensed consolidated financial statements.
Recent Accounting Pronouncements
Accounting standard updates issued but not yet added were assessed and determined to be either not applicable or not expected to have a material impact on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We are subject to the periodic reporting requirements of the Exchange Act that requires designing disclosure controls and procedures to provide reasonable assurance that information we disclose in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer each concluded, as of the end of the period, our disclosure controls and procedures were not effective as of March 31, 2023, due to material weaknesses in internal control over financial reporting that were disclosed in our Annual Report on Form 10-K, as amended, for the year ended September 30, 2022, and as described below.
44
Material Weaknesses in Internal Control Over Financial Reporting
As previously disclosed in our Annual report on Form 10-K for the year ended September 30, 2022, we identified material weaknesses in our internal control over financial reporting during the preparation of our financial statements for the year ended September 30, 2022. Under standards established by the PCAOB, a material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
The material weaknesses in financial reporting as of September 30, 2022, are summarized as follows:
● | We determined that we did not have sufficient accounting systems and procedures in place, particularly in the areas of specialized accounting for complex debt and equity transactions. |
● | We determined that we did not have sufficient policies and procedures to ensure the appropriate review and approval of user access rights to our accounting system; and lack of approval of journal entries and segregation of duties in our financial reporting process. |
● | We determined that our information technology infrastructure does not provide sufficient safeguards required by the COBIT framework. |
Remediation Efforts to Address Previously Identified Material Weaknesses
As previously described in Item 9A of our Annual Report on Form 10-K for the year ended September 30, 2022, we began implementing remediation plans to address the material weaknesses. The weaknesses will not be considered remediated until the applicable controls operate for a sufficient period and management has concluded, through testing, that these controls are operating effectively. We expect that most of the remediation of these material weaknesses will be completed by the end of fiscal 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three and six months ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information with respect to this item may be found in Note 17 – Commitments and Contingencies of the “Notes to Unaudited Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the information set forth in this Report, you should read and consider the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K, as amended, for the year ended September 30, 2022 which could materially affect our business, financial condition, or future results of operation. The risks described in such report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to have a material adverse effect on our business, financial condition and/or future operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
46
Item 6. Exhibits
Exhibit No. |
| Description |
3.1 | ||
3.2 | ||
4.1 | ||
4.2* | Warrant dated March 14, 2023 issued to Qiantu Motor USA, Inc. | |
10.1 | ||
10.1(a) | ||
10.2 | ||
10.3 | ||
10.3(a) | ||
10.4 | ||
10.5* | ||
10.5(a)+* | ||
10.6#* | Employment Agreement between the Company and Chester Bragado dated March 21, 2023 | |
31.1* | ||
31.2* | ||
32.1* | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. § 1350 | |
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101) |
* | Filed herewith (furnished herewith with respect to Exhibit 32.1). |
# | Indicates management contract or compensatory plan or arrangement. |
+ | Mullen Automotive Inc. has omitted certain exhibits pursuant to Item 601(a)(5) of Regulation S-K and shall furnish supplementally to the Securities and Exchange Commission copies of any of the omitted exhibits upon request by the SEC. |
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Mullen Automotive Inc. | ||
May 15, 2023 | By: | /s/ David Michery |
David Michery | ||
Chief Executive Officer, President and Chairman of the Board | ||
(Principal Executive Officer) | ||
/s/ Jonathan New | ||
Jonathan New | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
48