MULLEN AUTOMOTIVE INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
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
SECfor 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 SECfor 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 SECon November 12, 2021, our fiscal year end has changed from December 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 30of such year.
As a pre-revenue company with no commercial operations, our activities to date have been limited and were conducted primarily in
the United Statesand 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 operating results
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 costs
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." 38 Table of Contents
Research and development costs
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 Charge/Profit
Our provision for income taxes consists of an estimate of
Comparison of the three months ended
The following table sets forth our historical operating results for the periods indicated: Three Months Ended December 31, 2021 2020 $ Change % Change (dollar amounts in thousands, except percentages) Operating costs and expenses: General and administrative
$ 12,901,084 $ 2,952,678 $ 9,948,406336.93 % Research & development 1,157,323 518,023 639,300 123.41 % Total operating costs and expenses 14,058,407 3,470,701 10,587,706 305.06 % Loss from operations $ (14,058,407)3,470,701 (10,587,706) 305.06 % Other income (expense): Interest expense 22,438,945 2,406,330 16,179,070 832.50 % Loss on debt settlement (41,096) - (41,096) 100.00 % Gain on extinguishment of indebtedness, net 74,509 880,581 (806,072) (91.54) % Total other income (expense) (22,405,532) (1,525,749) (20,879,783) 1368.49 % Net loss $ (36,463,938) $ (4,996,450) $ 31,467,489482.63 % General and Administrative General and administrative expenses increased by $9.9 millionor 336.93% from $2.9 millionin the three months ended December 31, 2020to $12.9 millionin the three months ended December 31, 2021, primarily due to increases in professional services, marketing, and payroll related expenses with the growth of personnel and resources. Research and Development
Research and development expenses increased by
$.63 millionor 123.41% from $.51 millionthrough the three months ended December 31, 2020to $1.1 millionthrough the three months ended December 31, 2021. During the quarter ended December 31, 2021, the development of the Mullen FIVE show cars was completed in November 2021, and the Engineering Team is working on battery development and initial stages of program car development. Research and development costs are expensed as incurred. Research and development expenses primarily consist of the Mullen FIVE EV show car development and are primarily comprised of personnel-related costs for employees and consultants. These costs are expected to rise in the future with continuing development of the Mullen FIVE car program. 39 Table of Contents Interest Expense Interest expense increased by $20.0 millionor 672.35% from $2.4 millionthrough the three months ended December 31, 2020to $22.4 millionthrough the three months ended December 31, 2021, 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.
Gain on extinguishment of debt
The net loss was
Cash 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
December 31, 2021, our cash and cash equivalents amounted to $0.61 millionand our total debt amounted to $19.1 million. Debt has red ced significantly from September 30, 2021due to principal paydowns, debt payoffs, and conversion of convertible debt to equity. Tax liabilities slightly increased to $4.2 millionfrom $3.9 million, which is comprised of IRSand other tax jurisdictions related to payroll taxes and sales and use taxes. During this quarter, the Company received $20 millionfrom the equity purchase of Series C Preferred Stock with warrants to an unaffiliated investor immediately prior to the Effective Time of the Merger. There is approximately $45 millionin equity commitments to assist the Company throughout 2022; an agreement with ESOUSA to provide us with a $30.0 millionequity line of credit beginning in February 2022and a $15 millionnote receivable with CEOcast, Inc.that will begin in 2022 after the registration of common shares with the SEC.
As part of our agreement with NASDAQ, the Company must complete a qualified offer within six months of regulatory approval. In
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. To the extent that our current resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. If the financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to decrease our level of investment in product development or scale back our operations, which could have an adverse impact on our business and financial prospects. See Note 1 to the audited consolidated financial statements included elsewhere in this Quarterly Report. 40 Table of Contents 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 shareholders have provided loans to and hold convertible debt of the Company and are related parties.
Here is a summary of our debt to
Net Carrying Value Unpaid Principal Contractual Type of Debt Balance Current Long-Term Interest Rate Maturity Matured Notes $ 3,718,585
$ 3,718,585$ - 0.00% - 15.00 % 2016 - 2021 Promissory Notes 14,531,554 14,531,554 - 28.00 % 2021 - 2022 Real Estate Note 274,983 36,724 238,259 5.00 % 2023 Loan Advances 618,158 618,158 - 0.00% - 10.00 % 2019 - 2020 Less: Debt Discount - - - NA NA Total Debt $ 19,143,280 $ 18,905,021 $ 238,259NA NA
Here is a summary of our debt to
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 $ 247,612NA NA 41 Table of Contents Cash Flows
The following table provides a summary of Mullen’s cash flow data for the three months ended
Three Months Ended December 31, 2021 2020 (dollar amounts in thousands) Net cash used (provided) in operating activities
$ (14,712,802) $ 85,312Net cash used in investing activities (10,462,219) (72,585) Net cash provided by financing activities 25,194,308 178,192
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
Cash flows used in investing activities
Our cash flows used in investing activities increased due to the purchase of the
Tunica, MSmanufacturing plant in November 2021by 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
Cash flows generated by financing activities
Net cash provided by financing activities was
$25.2 millionfor the three months ended December 31, 2021primarily due to issuance of notes payable, as compared to $.17 millionnet cash provided by financing activities for the three months ended December 31, 2020, which included (i) $7.3 millionnet proceeds from issuance of notes payable; (ii) $10.8 millionin net proceeds from issuance of Common Stock which was partially offset by $13.0 millionof payments of notes payable; and (iii) $5.2 millionin proceeds to issue preferred C shares. 42
Contractual obligations and commitments
The following tables summarize our contractual obligations and other disbursement commitments as of
Operating Lease Commitments Scheduled Years Ended September 30, Payments 2022 (9 months)
$ 908,1492023 1,157,693 2024 824,287 2025 436,155 2026 222,787 2027 and Thereafter -
Total future minimum lease payments
We are currently renting our head office premises in the
Scheduled debt maturities
Here are the scheduled debt maturities:
Years Ended December 31, 2022 (9 months) 2023 2024 2025 2026 2027 Thereafter Total Total Debt
$ 18,905,021 $ 238,259$ - $ - $ - $ - $ - $ 19,143,280
Off-balance sheet arrangements
We are not a party to any off-balance sheet arrangements, as defined in
Significant 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 (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. Because we are a pre-revenue company without commercial operations, management 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.
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 43
confiscations occur. Mullen determines the fair value of stock options using the Black-Scholes option pricing model, which is influenced by the following assumptions:
? Expected duration – We use the simplified method to calculate the expected duration
due to insufficient historical exercise data.
Expected Volatility – As our shares were not actively traded during the periods
? presented, the volatility is based on a benchmark of comparable companies
in the automotive and energy storage sectors.
Expected dividend yield – Dividend rate used is zero because we never paid
? no cash dividend on the common stock and does not expect to do so in the
a foreseeable future.
Risk-free interest rate – Interest rates used are based on the implied yield
? Available on
equal to the expected life of the award.
Recent accounting pronouncements
May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). The ASU will be effective for fiscal years beginning after December 15, 2021, ( December 15, 2023for smaller reporting companies). We have issued debt and equity instruments, the accounting for which could be impacted by this update. Company management is evaluating the impact this guidance on our financial condition and results of operations.
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