You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and related notes included elsewhere in this Report. 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 this Report. Certain amounts in this section may not foot due to rounding. 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 Annual Report.
Components of the 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. 42 Table of Contents 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."
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 / Benefit
Our provision for income taxes consists of an estimate of
43 Table of Contents Results of Operations
Comparison of the completed year
The following table sets forth our historical operating results for the periods indicated: Year Ended September 30, % 2021 2020 $Change Change (dollar amounts in thousands, except percentages) Operating costs and expenses: General and administrative
$ 19,394 $ 10,427 $ 8,84684.84 % Research & development 3,009 1,667 1,342 80.50 % Total operating costs and expenses 22,403
12,094 10,188 84.24 % Loss from operations (22,403) (12,094) (10,188) 84.24 % Other income (expense): Interest expense (22,728) (18,094) (4,634) 25.61 %
Gain on extinguishment of debt 891 - 891 100.00 % Loss on disposal of fixed assets - - - % Other income (expense), net - 10 (10) 100.00 % Total other income (expense) (21,838) (18,084) (3,753) 20.75 % Net loss
$ (44,241) $ (30,178) $ (13,940)46.20 % General and Administrative
General and administrative expenses increased by
$8.8 millionor 84.8% from $10.4 millionin the twelve months ended September 30, 2021to $19.4 millionin the twelve months ended September 30, 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 $1.3 millionor 80.5% from $1.7 millionthrough the twelve months ended September 30, 2020to $3.0 millionthrough the twelve months ended September 30, 2021. During the year, there was minimal activity due to the COVID-19 pandemic. 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.
Interest expense increased by
Gain on debt extinction
Net loss was
$44.2 millionfor the twelve months ended September 30, 2021, an increase of $14 millionor 46.2% from $30.2 millionin the twelve months ended September 30, 2020, mainly for the reasons discussed above. 44
Liquidity and capital resources
As of the date of this Annual 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
September 30, 2021, our cash and cash equivalents amounted to $0.04 millionand our total debt amounted to $39.5 million, of which $3.8 millionis owed to the IRSand other tax jurisdictions related to payroll taxes and sales and use taxes. We agreed to sell $20 millionof Series C Preferred with warrants to an unaffiliated investor immediately prior to the Effective Time of the Merger at a per share exercise price of $0.6877, subject to adjustment in accordance with the terms of the Merger Agreement. Mullen and the investor are negotiating an amendment to such agreement whereby such amount may be increased to an aggregate of $60 millionby mutual agreement of Mullen and the investor. In addition, we entered into an agreement with ESOUSA to provide us with a $30.0 millionequity line of credit on September 1, 2021and a $15 millionnote receivable with CEOcast, Inc.on October 8, 2021.
As part of our agreement with NASDAQ, the Company must complete a qualified offering within six months after regulatory approval. Additionally, the Company has committed to file a registration statement for the Series B and Series C shares, which are expected to result in the increase of common shares outstanding and enhance market capitalization. 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 Annual 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 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. 45 Table of Contents
The following is a summary of our debt at
Net Carrying Value Unpaid Principal Long-Term Contractual Contractual Type of Debt Balance Current 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
The following is a summary of our debt at
Net Carrying Value Unpaid Principal
Contractual Long Term Contractual
Type of Debt Balance Current Interest Rate Maturity Matured Notes $ 4,828,450
$ 4,828,450$ - 0.00% - 15.00 % 2016 - 2019 Promissory Notes 25,288,063 25,288,063 - 0.00% - 28.00 % 2021 - 2022 Demand Note 500,000 500,000 - 27.00 % 2020 Convertible Unsecured Notes 1,867,500 1,867,500 - 20.00 % 2021-2022 Real Estate Note 318,384 34,503 283,881 5.00 % 2023 Loan Advances 1,931,017 1,931,017 - 0.00% - 10.00 % 2019 - 2020 Less: Debt Discount (1,401,062) (1,401,062) - NA NA Total Debt $ 33,332,352 $ 33,048,471 $ 283,881NA NA Cash Flows
The following table presents a summary of Mullen’s cash flow data for the years ended.
September 30, 20212020 (dollar amounts in thousands)
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities 17,693 9,160
Cash flow 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 starts to generate any material cash flow from our business. Net cash used in operating activities was
$17.5 millionin the twelve months ended September 30, 2021, an increase from $10.8 millionnet cash used in the twelve months ended September 30, 2020.
Cash flows used in investing activities
Our cash flows used in investing activities, to date, have been comprised mainly of purchases of equipment and have not been material. We expect these costs to increase substantially in the near future as we ramp up activity ahead of commencing commercial operations. 46
The net cash used in investing activities was
Cash flow generated by financing activities
Net cash provided by financing activities was
$17.7 millionfor the year ended September 30, 2021primarily due to issuance of notes payable, as compared to $9.2 millionnet cash provided by financing activities for the year ended September 30, 2020, which included (i) $12.8 millionnet proceeds from issuance of notes payable; (ii) $4.8 millionin net proceeds from issuance of Common Stock which was partially offset by $.6 millionof payments of notes payable; (iii) $.7 millionin proceeds to issue preferred C shares.
Obligations and contractual commitments
The following tables summarize our contractual obligations and other cash expenditure commitments at the
Operating Lease Commitments Scheduled Years Ended
September 30, Payments 2022 $ 1,213,7282023 1,157,693 2024 824,287 2025 436,155 2026 222,787 2027 and Thereafter -
Total future minimum lease payments
We are currently renting out our head office in the
Expected debt maturities
Here are the debt maturities provided for in
Years Ended December 31, 2021 2022 2023 2024 2025 2026 Thereafter Total Total Debt
$ 39,200,970$ - $ 247,612$ - $ - $ - $ - $ 39,448,582
Off-balance sheet provisions
We are not a party to any off-balance sheet arrangement, as defined under
Critical accounting conventions and estimates
Our financial statements have been prepared in accordance with
U.S.GAAP. In the preparation of these financial statements, our managemnet 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 47
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 audited consolidated financial statements included elsewhere in this annual report. Since we are a non-trading company, management believes that we currently have no 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 and valuation of ordinary shares
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 duration – We use the simplified method to calculate the expected duration
due to insufficient historical exercise data.
Expected volatility – As our stocks were not actively traded during the periods
? shown, volatility is based on a benchmark of comparable companies
in the automotive and energy storage sectors.
Expected dividend yield – The dividend rate used is zero because we never paid
? no cash dividend on common shares and does not plan to do so in the
the foreseeable future.
Risk-free interest rate – The interest rates used are based on the implied return
? Available on
equal to the expected lifetime of the scholarship.
Common stock valuations
The grant date fair value of our Common Stock (pre-merger with
Net Element) was typically be determined by our board of directors with the assistance of management and a third-party valuation specialist. Given our pre-revenue stage of development, management believed that an Option Pricing Model ("OPM") was the most appropriate method for allocating enterprise value to determine the estimated fair value of our Common Stock. Application of the OPM involved the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of future events. Once Mullen's stock became publicly traded, the Board of Directors elected to determine the fair value of our post-merger Common Stock based on the closing market price the day before the date of grant.
Recent accounting positions
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. In July 2021, the FASB issued ASU No. 2021-05, Lessors - Certain Leases with Variable Lease Payments (Topic 842). The amendments in this update affect lessors with lease contracts that have (1) have variable lease payments that do not depend on a reference index or a rate, and (2) would have resulted in the recognition of a selling loss at lease commencement if classified a sales-type or direct financing. The ASU will be effective for fiscal years beginning after 48 Table of Contents
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