(EDGAR Online via COMTEX) -- 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 filed with the SEC for the year ended September 30, 2021. 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 filed with the SEC for the year ended September 30, 2021.
In connection with the Merger Agreement (as defined below), and as disclosed in our Current Report on Form 8-K filed with the SEC on November 12, 2021, our fiscal year end has changed from March 31 to September 30, effective for our fiscal year ended September 30, 2021. As a result, and unless otherwise indicated, references to our fiscal year 2021 and prior years mean the fiscal year ended on September 30 of such year.
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. Upon commencement of commercial operations, we expect to expand our operations substantially into the European Union ("E.U.") and, as a result, we expect our future results to be sensitive to foreign currency transaction and translation risks and other financial risks that are not reflected in our historical financial statements. As a result, we expect that the financial results our reports for periods after we begin commercial operations will not be comparable to the financial results included in this Quarterly Report.
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 significant majority of our revenue will be initially derived from direct sales of 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. Advertising costs are expensed as incurred and are included in G&A expenses. We expense advertising costs as incurred in accordance with ASC 720-35, "Other Expenses - Advertising Cost."
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Research and Development Expense
To date, our research and development expenses have consisted primarily of external engineering services in connection with the design of our initial EV and development of the first prototype. 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 continues 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 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 June 30, 2022 to the Three Months Ended
June 30, 2021
The following table sets forth our historical operating results for the periods
indicated:
Three Months Ended
June 30,
2022 2021 $ Change % Change
(dollar amounts, except percentages)
Operating costs and expenses:
General and administrative $ 10,896,800 $ 4,926,154 $ 5,970,646 121 %
Research & development 7,324,365 1,479,399 5,844,966 395 %
Total operating costs and expenses 18,221,165 6,405,553 11,815,612 184 %
Loss from operations $ (18,221,165) (6,405,553) (11,815,612) 184 %
Other income (expense):
Interest expense (5,346,766) (8,339,195) 2,992,429 (36) %
Other financing costs - (506,654) 506,654 (100) %
Incentive fee to creditor for transfer
of note payable (23,085,886) - (23,085,886) 100 %
Loss on disposal of fixed assets (50,574) - (50,574) 100 %
Penalty for insufficient authorized
shares (3,495,000) - (3,495,000) 100 %
Revaluation of Liability to Issue
Shares 3,045,000 - 3,045,000 100 %
Other income (expense), net (12,317,169) - (12,317,169) 100 %
Total other income (expense) (41,250,395) (8,845,849) (32,404,546) 366 %
Net loss $ (59,471,560) $ (15,251,402) $ (44,220,158) 290 %
General and Administrative
General and administrative expenses increased by $5.9 million or 121% to $10.8 million in the three months ended June 30, 2022 from $4.9 million in the three months ended June 30, 2021, primarily due to increases in professional services, marketing, and compensation related expenses associated with the growth of personnel and resources.
Research and Development
Research and development expenses increased by $5.8 million or 395% to $7.3 million in the three months ended June 30, 2022 from $1.5 million in the three months ended June 30, 2021. Research and development expenses primarily consist of engineering, homologation, and prototyping costs as well as personnel-related costs for employees and consultants. These costs are expected to rise in the future with continuing development of the Mullen FIVE car and Mullen One van programs.
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Interest Expense
Interest expense decreased by $3.0 million or (36)% to $5.3 million in the three months ended June 30, 2022 from $8.3 million in the three months ended June 30, 2021, primarily due to the decrease in the convertible debt portfolio, as well as the paydown of debt principal during the current fiscal year.
Incentive fee to creditor for transfer of note payable
During June 2022, Incentive fee to creditor for transfer of note payable increased by $23.1 million due to the valuation of the Series E option, which had been issued in connection to the extinguishment of a promissory note with DBI-Drawbridge.
Penalty for insufficient authorized shares
Penalty for insufficient authorized shares increased $3.5 million, compared to the same period in 2021, due to additional charges the Company has committed to pay, in cash or stock, related to the insufficient number of shares authorized.
Revaluation of Liability to Issue Shares
Revaluation of Liability to Issue Shares increased $3.0 million, compared to the same period in 2021, due to a positive change in the liability to issue 10,500,000 shares related to the conversion of a convertible note.
Other income (expense), net
Other expense, net increased by $12.3 million, compared to the same period in 2021, due to the valuation of derivatives and the liability to issue shares in connection with other convertible instruments.
Net Loss
Net loss was $59.5 million for the three months ended June 30, 2022, an increase of $44.2 million or 290% from $15.3 million in the three months ended June 30, 2021, mainly for the reasons discussed above.
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Comparison of the Nine Months Ended June 30, 2022 to the Nine Months Ended June 30, 2021
The following table sets forth our historical operating results for the periods indicated:
Nine Months Ended
June 30,
2022 2021 $ Change % Change
(dollar amounts, except percentages)
Operating costs and expenses:
General and administrative $ 53,067,316 $ 12,555,572 $ 40,511,744 323 %
Research & development 9,665,126 2,535,693 7,129,433 281 %
Total operating costs and expenses 62,732,442 15,091,265 47,641,177 316 %
Loss from operations (62,732,442) (15,091,265) (47,641,177) 316 %
Other income (expense):
Interest expense (29,906,225) (13,784,976) (16,121,249) 117 %
Other financing costs - (1,559,961) 1,559,961 (100) %
Loss on debt settlement (41,096) - (41,096) 100 %
Gain (loss) on extinguishment of
indebtedness, net 74,509 890,581 (816,072) (92) %
Incentive fee to creditor for
transfer of note payable (23,085,886) - (23,085,886) 100 %
Loss on disposal of fixed assets (50,574) - (50,574) 100 %
Penalty for insufficient authorized
shares (3,495,000) - (3,495,000) 100 %
Revaluation of Liability to Issue
Shares 3,045,000 - 3,045,000 100 %
Other income (expense), net (12,317,170) - (12,317,170) 100 %
Total other income (expense) (65,776,442) (14,454,356) (51,322,086) 355 %
Net loss $ (128,508,884) $ (29,545,621) $ (98,963,263) 335 %
General and Administrative
General and administrative expenses increased by $40.5 million or 323% from $12.6 million in the nine months ended June 30, 2021 to $53.1 million in the nine months ended June 30, 2022, primarily due to increases in professional services, marketing, and compensation related expenses associated with the growth of personnel and resources.
Research and Development
Research and development expenses increased by $7.1 million or 281% from $2.5 million through the nine months ended June 30, 2021 to $9.7 million through the nine months ended June 30, 2022. During the nine month period ended June 30, 2022, the Engineering Team has been working on battery development and various stages of program car development.
Research and development costs are expensed as incurred. Research and development expenses primarily consist of engineering, homologation, and prototyping costs as well as personnel-related costs for employees and consultants. These costs are expected to rise in the future with continuing development of the Mullen FIVE car and Mullen One van programs.
Interest Expense
Interest expense increased by $16.1 million or 117% from $13.8 million through the nine months ended June 30, 2021 to $29.9 million through the nine months ended June 30, 2022, primarily due to the significant increase in the convertible debt portfolio, coupled with the conversion of these financial instruments to equity due to merger with Net Element. The conversion to preferred C stock increased the amortization expense.
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Gain (loss) on extinguishment of debt
During November 2020, the U.S. Small Business Administration approved the CARES Act loan forgiveness amount of $0.9 million in principal and accrued interest on November 20, 2020.
Incentive fee to creditor for transfer of note payable
During June 2022, Incentive fee to creditor for transfer of note payable increased by $23.1 million due to the valuation of the Series E option, which had been issued in connection to the extinguishment of a promissory note with DBI-Drawbridge.
Penalty for insufficient authorized shares
Penalty for insufficient authorized shares increased $3.5 million, compared to the same period in 2021, due to additional charges the Company has committed to pay, in cash or stock, related to the insufficient number of shares authorized.
Revaluation of Liability to Issue Shares
Revaluation of Liability to Issue Shares increased $3.0 million, compared to the same period in 2021, due to a positive change in the liability to issue 10,500,000 shares related to the conversion of a convertible note.
Other income (expense), net
Other expense, net increased by $12.3 million, compared to the same period in 2021, due to the valuation of derivatives and the liability to issue shares in connection with other convertible instruments.
Net Loss
Net loss was $128.5 million for the nine months ended June 30, 2022, an increase of $98.9 million or 335% from $29.6 million in the nine months ended June 30, 2021, mainly for the reasons discussed above.
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 June 30, 2022, our cash and cash equivalents amounted to $61.1 million primarily due to $43.9 million from the issuance of 4,974,214 Series C Preferred Stock and 14,922,667 in associated warrants to the selling stockholders that were listed within the S-3 Registration Statement, deemed effective on April 15, 2022. Additionally, the Company received $29.6 million in net proceeds under the $30 million Esousa Equity Line, dated September 1, 2021. We also received additional financing in the amount of $15.0 million in equity issuances.
Total debt of $8.9 million continues its downward trend. Debt has decreased significantly from September 30, 2021 due to principal paydowns, debt payoffs, and conversion of convertible debt to equity.
On July 26, 2022, MAI stockholders approved a proposal to issue $275 million in Series D Preferred Stock and associated warrants in exchange for cash. The projected capital raise is expected to provide sufficient liquidity and capital resources for 2023. On August 5, 2022, the Company filed a S-3 Registration Statement for selling stockholders. The Company will receive approximately $43 million in cash in exchange for Series C Preferred Stock and associated warrants for the remainder of 2022.
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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 1 to the condensed consolidated financial statements included elsewhere in this Quarterly Report.
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 a significant component of our funding needs. 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 of more.
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 substantially all the Company's assets. Several principal stockholders have provided loans to and hold convertible debt of the Company and are related parties.
The following is a summary of our debt as of June 30, 2022:
Net Carrying Value
Unpaid Principal Contractual
Type of Debt Balance Current Long-Term Interest Rate Maturity
Matured Notes $ 3,049,955 $ 3,049,955 $ - 0.00% - 15.00 % Past Due
Promissory Notes 5,000,000 - 5,000,000 9 % 2024
Demand Note - - - 27 % 2020
Convertible Unsecured Notes 1,096,787 - 1,096,787 28 % 2024
Real Estate Note 256,850 37,651 219,199 5 % 2023
Loan Advances 558,158 558,158 - 0.00% - 10.00 % Past Due
Less: Debt Discount (1,059,375) - (1,059,375) NA NA
Total Debt $ 8,902,375 $ 3,645,764 $ 5,256,611 NA NA
The following is a summary of our debt as of September 30, 2021:
Net Carrying Value
Unpaid Principal Contractual Contractual
Type of Debt Balance Current Long-Term Interest Rate Maturity
Matured Notes $ 5,838,591 $ 5,838,591 $ - 0.00% - 15.00 % 2016 - 2021
Promissory Notes 23,831,912 23,831,912 - 28.00 % 2021 - 2022
Demand Note 500,000 500,000 - 27.00 % 2020
Convertible Unsecured Notes 15,932,500 15,932,500 - 15.00%-20.00 % 2021 - 2022
Real Estate Note 283,881 36,269 247,612 5.00 % 2023
Loan Advances 1,122,253 1,122,253 - 0.00% - 10.00 % 2019 - 2020
Less: Debt Discount (8,060,555) (8,060,555) - NA NA
Total Debt $ 39,448,582 $ 39,200,970 $ 247,612 NA NA
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Cash Flows
The following table provides a summary of Mullen's cash flow data for the nine
months ended June 30, 2022 and 2021:
Nine Months Ended June 30,
Net cash provided by (used in): 2022 2021
Operating activities $ (43,220,594) $ (13,037,107)
Investing activities (11,273,433) (141,439)
Financing activities 115,563,116 13,809,405
Cash Flows used in Operating Activities
Our cash flow used in operating activities to date has been primarily comprised of costs related to research and development, payroll, 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 $43.2 million in the nine months ended June 30, 2022, an increase from $13.0 million net cash used in activities in the nine months ended June 30, 2021.
Cash Flows used in Investing Activities
Our cash flows used in investing activities increased due to the purchase of the Tunica, MS manufacturing plant in November 2021 by our wholly owned subsidiary, Mullen Investment Properties, LLC. We expect these costs to increase substantially in the near future as we ramp up activity ahead of commencing commercial operations and build out the manufacturing facility.
Net cash used in investing activities was $11.2 million in the nine months ended June 30, 2022, an increase from $0.1 million used in investing activities in the nine months ended June 30, 2021.
Cash Flows provided by Financing Activities
Through June 30, 2022, we have financed our operations primarily through the issuance of convertible notes equity securities, and warrants registered under the S-3 Registration Statements deemed effective February 3, 2022 and April 15, 2021, respectively.
Net cash provided by financing activities was $115.6 million for the nine months ended June 30, 2022 primarily due to issuance of equity, as compared to $13.8 million net cash provided by financing activities for the nine months ended June 30, 2021, which included (i) $12.1 million net proceeds from issuance of notes payable, which was partially offset by $15.1 million of payments of notes payable; (ii) $40.1 million in net proceeds from issuance of Common Stock; (iii) $15 Million in proceeds from a Note Receivable and (iv) $63.9 million in proceeds to issue preferred C shares.
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Contractual Obligations and Commitments
The following tables summarizes our contractual obligations and other
commitments for cash expenditures as of June 30, 2022, and the years in which
these obligations are due:
Operating Lease Commitments
Scheduled
Years Ended June 30, Payments
2022 (6 months) $ 294,069
2023 1,157,693
2024 824,287
2025 436,156
2026 222,787
2027 and Thereafter -
Total Future Minimum Lease Payments $ 2,934,992
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.
On June 29, 2022, the Company signed a lease with the Lakeview Business Center, LLC. The leased property is located at Suite 100, 100 Technology Drive, Irvine, CA 92618. The approximate rentable space is 31,603 rentable square feet of office space. The new lease will expire in July 2025, with an option to renew for a further 36 months. Under this lease arrangement, the present value of future lease payments is $654,636.
Beginning August 1, 2022, the Company plans to move into the newly leased space. Various departments will be relocated to the new office space, Engineering Design and Development, Styling, Program Management, Marketing, and Finance teams.
Scheduled Debt Maturities
The following are scheduled debt maturities:
Years Ended June 30, 2022 (6 months) 2023 2024 2025 2026 2027 Thereafter Total Total Debt $ 3,645,764 $ 219,199 $ 5,037,412 $ - $ - $ - $ - $ 8,902,375
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, as defined under SEC rules.
Critical Accounting Policies and 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. Management considers an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and
Our significant accounting policies are described in Note 3 to the condensed consolidated financial statements included elsewhere in this Quarterly Report. Because we are a pre-revenue company without commercial operations, management
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believes it does not currently have any critical accounting policies or estimates. Management believes that the accounting policies most likely to become critical in the near future are those described below.
Stock-Based Compensation
We recognize the cost of share-based awards granted to employees and directors based on the estimated grant-date fair value of the awards. Cost is recognized on a straight-line basis over the service period, which is generally the vesting period of the award. Our management reverses previously recognized costs for unvested options in the period that forfeitures occur. Mullen determines the fair value of stock options using the Black-Scholes option pricing model, which . . .
Aug 12, 2022
COMTEX_412163781/2041/2022-08-12T15:28:36
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