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 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 30of 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 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 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." 31 Table of Contents
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
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
believe the recoverability of the tax assets is not more likely than not.
Results of Operations
Comparison of the Three Months Ended
The following table sets forth our historical operating results for the periods indicated: Three Months Ended March 31, 2022 2021 $ Change % Change (dollar amounts, except percentages) Operating costs and expenses: General and administrative $ 29,269,433
$ 4,676,740$ 24,592,693 526 % Research & development 1,183,437 538,271 645,166 120 % Total operating costs and 30,452,870 5,215,011 25,237,859 484 expenses % Loss from operations $ (30,452,870)(5,215,011) (25,237,859) 484 % Other income (expense): Interest expense (2,120,515) (4,092,759) 1,972,244 (48) % Loss on debt settlement - - - 0 % Gain on extinguishment of (10,000) indebtedness, net - 10,000 (100) %
Total other income (expense) (2,120,515) (4,082,759)
1,962,244 (48) % Net loss
$ (32,573,385) $ (9,297,770) $ (23,275,615)250 %
General and Administrative
General and administrative expenses increased by
$24.6 millionor 526% to $29.3 millionin the three months ended March 31, 2022from $4.7 millionin the three months ended March 31, 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
$0.6 millionor 120% to $1.2 millionin the three months ended March 31, 2022from $0.5 millionin the three months ended March 31, 2021. During the quarter ended March 31, 2022, the Engineering Team has been 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 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.
32 Table of Contents Interest Expense
Interest expense decreased by
$1.97 millionor -48% to $2.1 millionin the three months ended March 31, 2022from $4.1 millionin the three months ended March 31, 2021, primarily due to the decrease in the convertible debt portfolio, as well as the paydown of debt principal during the current fiscal year.
Net loss was
Comparison of the Six Months Ended
The following table sets forth our historical operating results for the periods indicated: Six Months Ended March 31, 2022 2021 $ Change % Change (dollar amounts, except percentages) Operating costs and expenses: General and administrative
$ 42,170,516 $ 7,629,418 $ 34,541,098453 % Research & development 2,340,761 1,056,294 1,284,467 122 % Total operating costs and expenses 44,511,277 8,685,712
35,825,565 412 % Loss from operations (44,511,277) (8,685,712) (35,825,565) 412 % Other income (expense): Interest expense (24,559,459) (6,499,089) (18,060,370) 278 %
Gain on extinguishment of debt (41,096) -
(41,096) (100) % Other income (expense), net 74,509 890,581 (816,072) (92) % Total other income (expense) (24,526,046) (5,608,508) (18,917,538) 337 % Net loss
$ (69,037,323) $ (14,294,220) $ (54,743,103)383 % General and Administrative
General and administrative expenses increased by
services, marketing, and compensation related expenses associated with the
growth of personnel and resources.
Research and Development
Research and development expenses increased by
$1.3 millionor 122% from $1.1 millionthrough the six months ended March 31, 2021to $2.3 millionthrough the six months ended March 31, 2022. During the six month period ended March 31, 2022, the development of the Mullen FIVE show cars was completed in November 2021, and the Engineering Team has been 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.
Interest expense increased by
the six months ended
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debt portfolio, coupled with the conversion of these financial instruments to
equity due to merger with
increased the amortization expense.
Gain on extinguishment of debt
the CARES Act loan forgiveness amount of
Net loss was
$69.0 millionfor the six months ended March 31, 2022, an increase of $54.7 millionor 383% from $14.3 millionin the six months ended March 31, 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
March 31, 2022, our cash and cash equivalents amounted to $65.2 millionprimarily due to $43.9 millionfrom 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 millionin net proceeds under the $30 millionEsousa Equity Line, dated September 1, 2021. Total debt of $22.1 millioncontinues its downward trend. Debt has decreased significantly from September 30, 2021due to principal paydowns, debt payoffs, and conversion of convertible debt to equity. Tax liabilities slightly decreased to $2.8 millionfrom $4.2 million, which is comprised of IRSand other tax jurisdictions related to payroll taxes and sales and use taxes. On April 14, 2022, the Company signed an IRSinstallment agreement to pay the remaining balance for federal payroll related liabilities via monthly payments of $45,000. 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 consolidated financial statements included elsewhere in this Quarterly Report.
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
34 Table of Contents 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.
The following is a summary of our debt as of
Net Carrying Value Unpaid Principal Contractual Type of Debt Balance Current Long-Term Interest Rate Maturity Matured Notes $ 3,051,085
$ 3,051,085$ - 0.00% - 15.00 % 2016 - 2021 Promissory Notes 19,331,912 14,331,912 5,000,000 8.99% - 28.00 % 2021 - 2024 Real Estate Note 265,973 37,185 228,788 5.00 % 2023 Loan Advances 557,800 557,800 - 0.00% - 10.00 % 2019 - 2020 Less: Debt Discount (1,118,902) (1,118,902) - NA NA Total Debt $ 22,087,868 $ 16,859,080 $ 5,228,788NA NA
The following is a summary of our debt as of
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 Cash Flows
The following table provides a summary of Mullen’s cash flow data for the six
Six Months Ended
March 31, 20222021
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities 100,849,172 6,540,725
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
$24.9 millionin the six months ended March 31, 2022, an increase from $5.6 millionnet cash used in activities in the six months ended March 31, 2021. 35
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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 $10.7 millionin the six months ended March 31, 2022, an increase from $0.1 millionused in investing activities in the six months ended March 31, 2021.
Cash Flows provided by Financing Activities
March 31, 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, 2022and April 15, 2021, respectively. Net cash provided by financing activities was $100.9 millionfor the six months ended March 31, 2022primarily due to issuance of equity, as compared to $6.5 millionnet cash provided by financing activities for the six months ended March 31, 2021, which included (i) $12.1 millionnet proceeds from issuance of notes payable, which was partially offset by $15.1 millionof payments of notes payable; (ii) $40.1 millionin net proceeds from issuance of Common Stock; and (iii) $63.9 millionin proceeds to issue preferred C shares.
Contractual Obligations and Commitments
The following tables summarizes our contractual obligations and other commitments for cash expenditures as of
March 31, 2022, and the years in which these obligations are due: Operating Lease Commitments Scheduled Years Ended March 31, Payments 2022 (6 months) $ 602,5682023 1,157,693 2024 824,287 2025 436,156 2026 222,787 2027 and Thereafter -
Total Future Minimum Lease Payments
We currently lease our headquarters space in the
lease classified as an operating lease expiring in
executed any binding agreement for leases beyond 2026.
Scheduled Debt Maturities
The following are scheduled debt maturities:
Years Ended March 31, 2022 (6 months) 2023 2024 2025 2026 2027 Thereafter Total Total Debt
$ 16,859,080 $ 228,788 $ 5,000,000$ - $ - $ - $ - $ 22,087,868
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, as defined under
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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 (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 forfeitures occur. Mullen determines the fair value of stock options using the Black-Scholes option pricing model, which is impacted by the following assumptions:
? Expected Term-We use the simplified method when calculating the expected term
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
within the automotive and energy storage industries.
Expected Dividend Yield-The dividend rate used is zero as we have never paid
? any cash dividends on Common Stock and does not anticipate doing so in the
Risk-Free Interest Rate-The 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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