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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): November 3, 2021

 

MULLEN AUTOMOTIVE INC.

__________________________________________________

(Exact name of registrant as specified in its charter)

 

Delaware 001-34887 86-3289406
(State or other jurisdiction of
incorporation)
(Commission File Number) (IRS Employer Identification No.)

 

1405 Pioneer Street, Brea, California 92821

(Address, including zip code, of principal executive offices)

 

Registrant’s telephone number, including area code (714) 613-1900

Net Element, Inc., 3363 NE 163rd Street, Suite 606, North Miami Beach, Florida 33160

(Former name or former address, if changed since last report.)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 MULN The Nasdaq Stock Market, LLC (Nasdaq Capital Market)

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

 

Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

 

 

 

 

 

INTRODUCTORY NOTE

 

As previously disclosed in Current Reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) by Mullen Automotive Inc. (f/k/a Net Element, Inc.), a Delaware corporation (the “Company”), on July 21, 2021 and August 19, 2021 (collectively, the “Merger Current Report”), the Company entered into a Second Amended and Restated Agreement and Plan of Merger, as amended by a First Amendment entered into on August 18, 2021 (together, the “Merger Agreement”), with Mullen Technologies, Inc., a California corporation (“Mullen Technologies”), Mullen Acquisition, Inc., a California corporation and wholly owned subsidiary of the Company (“Merger Sub”), and Mullen Automotive, Inc., a California corporation (“Mullen Automotive-California”) and a wholly-owned subsidiary of Mullen Technologies, providing for the merger of Merger Sub with and into the Mullen Automotive (the “Merger”), with Mullen Automotive-California surviving the Merger as a wholly-owned subsidiary of the Company.

 

The Company called a special meeting of stockholders (the “Special Meeting”) to approve the Merger Agreement, which Special Meeting was held on August 26, 2021 (that was adjourned on August 26 and resumed and concluded on August 31, 2021). As reported in the Current Report on Form 8-K filed with the SEC on August 31, 2021 (the “August Current Report”), the holders of the requisite number of shares of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”) approved the Merger, adopted the Merger Agreement, approved certain amendments to the Company’s Amended and Restated Certificate of Incorporation and other actions related to the Merger. The Merger closed on November 5, 2021 (the “Closing Date”).

 

The foregoing summary of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement attached as Exhibit 2.1 to the July Current Report, which is incorporated herein by reference.

 

Item 2.01 Completion of Acquisition or Disposition of Assets.

 

The information contained in the Introductory Note of this Current Report on Form 8-K is incorporated by reference into this Item 2.01.

 

The Merger and Issuance of Shares

 

As described in the Introductory Note above, on November 5, 2021, pursuant to the terms of the Merger Agreement, the Company closed the Merger whereby Merger Sub merged with and into the Mullen Automotive-California, with Mullen Automotive-California surviving as a wholly-owned subsidiary of the Company and changed its name to “Ottava Automotive Inc.” At the effective time of the Merger, each share of Mullen Automotive-California common stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock issued and outstanding immediately prior to the Merger Effective Time, other than dissenting shares, were canceled and converted automatically into the right to receive a number of shares of Company Common Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, as the case may be, determined in accordance with the Merger Agreement and as provided in Schedule A to the Merger Agreement. As a result, the Company issued an aggregate of 15,647,321 shares of Common Stock, 1,536,692 shares of Series A Preferred Stock, 5,567,319 shares of Series B Preferred Stock, and 4,973,093 shares of Series C Preferred Stock. Pursuant to the closing of the merger, there are 51,731,640 million shares issued and outstanding on a fully diluted basis, all of Mullen Automotive' s outstanding common and preferred shares were exchanged for Net Element common and preferred stock; an aggregate of 43,971,895 million shares which represents 85 percent of the combined company, were allocated to holders of common stock, preferred stock and reserved for issuance under outstanding warrants.

 

The issuance of 8,000,000 shares of Common Stock, 200,000 shares of Series A Preferred Stock, 12,000,000 shares of Series B Preferred Stock, and 40,000,000 shares of Series C Preferred Stock in connection with the Merger was registered under the Securities Act of 1933, as amended, pursuant to the Company’s registration statement on Form S-4 (File No. 333-256166), as amended, declared effective by the SEC on July 26, 2021 (the “Registration Statement’).

 

Prior to the Merger, the Company (as Net Element, Inc.) transferred its assets and liabilities to RBL Capital Group LLC (“RBL”) in full satisfaction of the outstanding loan balance owed to RBL by Net Element and its subsidiary or affiliated entities pursuant to a Divestiture Agreement, dated July 20, 2021, which was filed with the Registration Statement as exhibit 10.2.

 

The proxy statement/prospectus included in the Registration Statement contains additional information about the Merger and related transactions.

 

 

 

 

Item 3.02 Unregistered Sales of Equity Securities

 

 

Name   Restricted Shares of
Common Stock
 
David Michery     5,154,049  
Elegant Funding Inc.     171,652  
Keith R. Drohan     623  
Tiffany A Drohan     1,946  
Tiffany N Drohan     1,646,456  
HLE Development Inc.     672,595  
Total     7,647,321  

 

Issuance of Exchange Agreement Warrants to purchase 13,481,188 shares of common stock a purchase price of $8.83 per share.

 

Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

 

On the Closing Date and as contemplated by the terms of the Merger Agreement, Oleg Firer, John Roland, Jon Najarian, and Todd Raarup each resigned as a director of the Company (including any committee of the board of directors of the Company) and Jeffrey Ginsberg, Andrey Krotov, Vlad Sadovskiy, and Steven Wolberg resigned as officers of the Company. At such time, as approved at the Special Meeting and reported in the August Current Report, the following became directors of the Company to serve until the annual meeting of the year noted next to their respective Class name and until their respective successors are duly elected and qualified, subject to such directors’ earlier death, resignation, retirement, disqualification or removal:

 

Name of Director   Class
David Michery   Class I – 2022
Jerry Alban   Class 1- 2022
Mary Winter   Class I – 2022
Kent Puckett   Class II – 2023
Mark Betor   Class II – 2023
William Miltner   Class III – 2024
Jonathan New   Class III - 2024

 

Also on the Closing Date and as contemplated by the terms of the Merger Agreement, the following individuals were appointed as officers of the Company:

 

Name   Position
David Michery   Chief Executive Officer
Kerri Sadler   Chief Financial Officer
Jerry Alban   Chief Operating Officer
Mary Winter   Secretary

 

Biographical information about each officer and director, including appointments to the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee is included in, and incorporated herein by reference to, the Registration Statement under the section entitled “Management Following the Merger.”

 

On the Closing Date, each of Oleg Firer, Steven Wolberg, and Jeffrey Ginsberg were granted restricted stock awards for common stock of the Company, in amounts of 150,172 shares, 73,504, and 12,665 shares, respectively, all of which vested in full on the Closing Date.

 

Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year

 

On November 3, 2021, the Company filed an amendment to its Amended and Restated Certificate of Incorporation (the “Certificate Amendment”) with the Delaware Secretary of State, pursuant to which the Company’s name was changed from “Net Element, Inc.” to “Mullen Automotive Inc.” A copy of the Certificate Amendment is included as Exhibit 3.1 hereto.

 

 

 

 

Effective at 12:01 p.m. Pacific Time on November 5, 2021, the Company filed a Second Amended and Restated Certificate of Incorporation (the “Second Amended and Restated Certificate of Incorporation”) with the Delaware Secretary of State of the State to effectuate the following changes, which were approved at the Special Meeting and reported in the August Current Report:

 

· change the par value and to increase the number of authorized shares of common stock from 100,000,000 shares, par value $0.0001, to 500,000,000 shares, par value $0.001;
· (a) to change the par value and increase the number of authorized shares of preferred stock from 1,000,000, par value $0.01, to 58,000,000 shares, par value $0.001 (the “Preferred Stock”); (b) to authorize the issuance of up to 200,000 shares of Series A Preferred Stock, which series carries 1,000 votes per share and converts into Common Stock on a 100-for-1 basis (the “Series A Preferred Stock”); (c) to authorize the issuance of up to 12,000,000 shares of Series B Preferred Stock, which series carries one vote per share and converts into Common Stock on a 1-for-1 basis (the “Series B Preferred Stock”); and (d) to authorize the issuance of up to 40,000,000 shares of Series C Preferred Stock, which series carries one vote per share and converts into Common Stock on a 1-for-1 basis (the “Series C Preferred Stock”);
· classify the Board of Directors; and
· other changes, including removal of the restriction on the right for stockholders to act by written consent.

.

A copy of the Second Amended and Restated Certificate of Incorporation is included as Exhibit 3.2 hereto.

 

In connection with the Merger of Net Element and Mullen Automotive-California, Net Element became the parent company of Mullen Automotive-California. The Merger has been accounted for as a reverse merger transaction, in which Mullen Automotive-California is treated as the acquirer for financial accounting purposes. On November 5, 2021, the Board of Directors approved a change in the Company’s fiscal year end from December 31 to September 30, the fiscal year end of Mullen Automotive-California. In accordance with SEC guidance, a transition report is not required in connection with this change in the Company’s fiscal year end. Accordingly, the Company intends to file its Annual Report on Form 10-K for the fiscal year ended September 30, 2021.

 

Item 7.01 Regulation FD

 

On November 5, 2021, the Company issued a press release announcing trading under Nasdaq stock ticker symbol “MULN.” A Copy of the press release is attached hereto as Exhibit 99.2 and the information therein is incorporated herein by reference.

 

The information contained in this Item 7.01 and in the accompanying Exhibit 99.2 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) , or incorporated by reference in any filing under the Exchange Act or the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.

 

Item 8.01. Other Events.

 

In connection with the Name Change, The Nasdaq Stock Market, LLC (Nasdaq Capital Market) ticker symbol for the Company’s Common Stock changed from “NETE” to “MULN” at the opening of trading on November 5, 2021 (the “Ticker Change”). The new CUSIP number of the Common Stock is 62526P 109.

 

The Name Change and Symbol Change do not affect the rights of the Company’s stockholders. The common stock will continue to be traded on The Nasdaq Stock Market, LLC (Nasdaq Capital Market). Following the Name Change, the stock certificates of the common stock, which reflect the former name of the Company, will continue to be valid. Certificates reflecting the Name Change will be issued in due course as old stock certificates are tendered for exchange or transfer to the Company’s transfer agent.

 

 

 

 

Attached as exhibits and as referenced in Item 9.01 are financial statements required to be filed further to those transactions set forth herein.

 

Item 9.01. Financial Statements and Exhibits

 

(d) Exhibits.

 

Exhibit No.   Description
3.1   Certificate Amendment
3.2   Second Amended and Restated Certificate of Incorporation
99.1(a)   Audited financial statements for the year ended September 30, 2020 and 2019  
99.1(b)     Interim unaudited financial statements for the nine months ended June 30, 2021 and 2020  
99.1(c)   Pro forma financial statements for June 30, 2021 and September 30, 2020
99.2   Press Release dated November 5, 2021
104   Cover Page Interactive Data File (formatted as Inline XBRL)

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

  MULLEN AUTOMOTIVE INC.
   
     
 Date: November 12, 2021 By: /s/ David Michery
    David Michery
    Chief Executive Officer

 

 

 

Exhibit 3.1

 

CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
NET ELEMENT, INC.

 

Net Element, Inc. (the “Corporation”), a corporation organized and existing under the General Corporation Law of the State of Delaware (“DGCL”), hereby certifies as follows:

 

FIRST: The Corporation was originally formed on April 20, 2010 in the jurisdiction of Cayman Islands as Cazador Acquisition Corporation Ltd., which filed its certificate of corporate domestication with the Secretary of State of the State of Delaware on October 2, 2012, and concurrently therewith filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware changing the name of the corporation to Net Element International, Inc. (the “Original Certificate”).

 

SECOND: The Corporation amended the Original Certificate by filing a certificate of amendment on December 5, 2013, changing the name of the Corporation to “Net Element, Inc.” (the “Original Amended Certificate”).

 

THIRD: The Corporation further amended the Original Amended Certificate by filing amendments thereto with the Secretary of State of the State of Delaware on December 16, 2014, April 30, 2015, June 15, 2015, May 24, 2016, June 16, 2016, and October 4, 2017 (as amended and together with the Original Amended Certificate, the “Certificate of Incorporation”).

 

FOURTH: This Certificate of Amendment amends certain provisions of the Corporation’s Certificate of Incorporation.

 

FIFTH: ARTICLE ONE of the Certificate of Incorporation is amended and restated in its entirety to read as follows:

 

“The name of the Corporation is Mullen Automotive Inc.”

 

SIXTH: Pursuant to a written consent of the Board of Directors of the Corporation setting forth this proposed amendment to the Certificate of Incorporation, declaring said amendment to be advisable and in the best interest of the Corporation, the Board of Directors of the Corporation voted in favor of the amendment.

 

SEVENTH: This Certificate of Amendment was duly adopted in accordance with the Section 141(f) (by written consent of the Board of Directors of the Corporation) of the DGCL.

 

EIGHTH: All other provisions of the Certificate of Incorporation shall remain in full force and effect.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed this 3rd day of November, 2021.

 

  By: /s/ Oleg Firer
      Name: Oleg Firer
    Title: Chief Executive Officer  

 

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Exhibit 3.2

 

SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF MULLEN AUTOMOTIVE INC.

 

a Delaware corporation

 

MULLEN AUTOMOTIVE INC., a corporation organized and existing under the General Corporation Law of the State of Delaware, hereby certifies as follows:

 

FIRST: The corporation was originally formed on April 20, 2010 in the jurisdiction of Cayman Islands as Cazador Acquisition Corporation Ltd. (“Cazador”), which filed its certificate of corporate domestication with the Secretary of State of the State of Delaware on October 2, 2012, and concurrently therewith filed a certificate of merger with Cazador, including a restated certificate of incorporation changing the name of the corporation to Net Element International, Inc. (the “Corporation”) (the “Original Certificate”).
   
SECOND: The Corporation amended the Original Certificate by filing a certificate of amendment on December 5, 2012, changing the name of the Corporation to “Net Element, Inc.” (the “Original Amended Certificate”).
   
THIRD: The Corporation further amended the Original Amended Certificate by filing amendments thereto with the Secretary of State of the State of Delaware on December 16, 2014, April 30, 2015, June 15, 2015, May 24, 2016, June 16, 2016, and October 4, 2017 (as amended and together with the Original Amended Certificate, the “Further Amended Certificate”).
   
FOURTH: The Corporation amended the Further Amended Certificate by filing a certificate of amendment on November 3, 2021, changing the name of the Corporation to “Mullen Automotive Inc.” (as amended and together with the Further Amended Certificate, the “Certificate of Incorporation”).
   
FIFTH: The Certificate of Incorporation of the Corporation is hereby amended and restated in its entirety as set forth in the Second Amended and Restated Certificate of Incorporation hereinafter provided for.
   
SIXTH: Pursuant to resolution of the Board of Directors of the Corporation setting forth this proposed amendment of the Certificate of Incorporation, declaring said amendment to be advisable and calling a meeting of the shareholders of said corporation for consideration and approval, among other agenda items, of this proposed amendment, a special meeting of the shareholders of said corporation was duly called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware (the “D.G.C.L”), at which meeting the necessary number of shares as required by statute were voted in favor of the amendment.

 

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SEVENTH: This amendment was duly adopted in accordance with the provisions of Sections 242 and 245 of the D.G.C.L.  This Second Amended and Restated Certificate of Incorporation shall become effective as of its filing with the Secretary of State of the State of Delaware (the “Effective Time”).
   
EIGHTH: This Second Amended and Restated Certificate of Incorporation of the Corporation shall, at the Effective Time, read as follows:

 

ARTICLE I

 

The name of the Corporation is Mullen Automotive Inc.

 

ARTICLE II

 

The address of the registered office of the Corporation in the State of Delaware is 3500 South DuPont Highway, in the City of Dover, County of Kent, Zip Code 19901. The name of the Registered Agent at such address upon whom process against this Corporation may be served is Incorporating Services, Ltd.

 

ARTICLE III

 

A.            Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, common stock and preferred stock. The total number of shares that this corporation is authorized to issue is 558,000,000. The total number of shares of common stock authorized to be issued is Five Hundred Million (500,000,000), par value $0.001 per share (the “Common Stock”). The total number of shares of preferred stock authorized to be issued is Fifty Eight Million (58,000,000), par value $0.001 per share (the “Preferred Stock”), of which Two Hundred Thousand (200,000) shares are designated as “Series A Preferred Stock,” Twelve Million (12,000,000) shares are designated as “Series B Preferred Stock,” and Forty Million (40,000,000) shares are designated as “Series C Preferred Stock.”

 

B.            Rights, Preferences and Restrictions of Preferred Stock. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series and, by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereon. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock. The rights, preferences, privileges and restrictions granted to and imposed on the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock are as set forth below in this Article Ill(B).

 

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1.             Dividends.

 

(a)            From and after the date of issuance of any share of the Series C Preferred Stock, a cumulative dividend shall accrue, whether or not declared by the board of directors of this corporation and whether or not there are funds legally available for the payment of dividends, on a daily basis in arrears at the rate of 15.0% per annum on the sum of the Series C Original Issue Price (as defined below) plus all unpaid accrued and accumulated dividends thereon. All accrued dividends on any share of the Series C Preferred Stock shall be paid in cash only when, as and if declared by the Board out of funds legally available therefor or upon a liquidation or redemption of the Series C Preferred Stock in accordance with the provisions of Article III(B)2(b) or Article III(B)3 (a); provided, that to the extent not paid on the fifth (5th) calendar day after the last day of each month (each such date, a “Series C Dividend Payment Date”), all accrued dividends on any share of the Series C Preferred Stock shall accumulate and compound on the applicable Series C Dividend Payment Date whether or not declared by the board of directors of this corporation and shall remain accumulated, compounding dividends until paid pursuant hereto or converted pursuant to Article III(B)4. All accrued and accumulated dividends on the shares of the Series C Preferred Stock as accrued pursuant to this Article III(B)1(a) shall be prior and in preference to any dividend on any other series of Preferred Stock or the Common Stock and shall be fully declared and paid before any dividends are declared and paid, or any other distributions or redemptions are made, on any other series of Preferred Stock or the Common Stock, other than to declare or pay any dividend or distribution payable on the Common Stock in shares of Common Stock. This corporation may elect to pay dividends for any month with a paid-in-kind election (“PIK”) if (i) the issuance of the shares of Common Stock issuable further to the PIK has been registered pursuant to the Securities Act of 1933 and such registration remains effective, (ii) this corporation is then in compliance with all listing requirements of the Nasdaq Capital Market and (iii) the average daily trading dollar volume of this corporation’s common stock for ten trading days in any period of twenty consecutive trading days on the Nasdaq Capital Market is equal to or greater than $2 million.

 

(b)            Any dividends or distributions, other than dividends or distributions accruing or paid on shares of the Series C Preferred Stock pursuant to Article III(B)1(a), shall be distributed among all holders of Common Stock and Preferred Stock in proportion to the number of shares of Common Stock that would be held by each such holder if all shares of Preferred Stock were converted to Common Stock at the then effective conversion rate without regard to any limitations on the conversion of the Preferred Stock contained in these Amended and Restated Certificate of Incorporation.

 

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2.             Liquidation Preference.

 

(a)            In the event of any Liquidation Event (as defined below), either voluntary or involuntary, the holders of Series B Preferred Stock shall be entitled to receive, prior and in preference to any distribution of the proceeds of such Liquidation Event (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 Price (as defined below), plus declared but unpaid dividends on such share. If, upon the occurrence of such event, the Proceeds thus distributed among the holders of the Series B Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire Proceeds legally available for distribution shall be distributed ratably among the holders of the Series B Preferred Stock in proportion to the full preferential amount that each such holder is otherwise entitled to receive under this subsection (a). For purposes of these Amended and Restated Certificate of Incorporation, “Series B Original Issue Price” shall mean $0.6877 per share for each share of the Series B Preferred Stock (as adjusted for any stock splits, stock dividends, combinations, recapitalizations or the like with respect to the Series B Preferred Stock).

 

(b)            Upon the completion of the distribution required by subsection (a) of this Section 2, the holders of Series C Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any Proceeds to the holders of the Series A Preferred Stock or the Common Stock, and after the holders of the Series B Preferred Stock, by reason of their ownership thereof, an amount per share equal to the Series C Original Price (as defined below), plus declared but unpaid dividends on such share. If, upon the occurrence of such event, the Proceeds thus distributed among the holders of the Series C Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire Proceeds legally available for distribution shall be distributed ratably among the holders of the Series C Preferred Stock in proportion to the full preferential amount that each such holder is otherwise entitled to receive under this subsection (b). For purposes of these Amended and Restated Certificate of Incorporation, “Series C Original Issue Price” shall mean $0.6877 per share for each share of the Series C Preferred Stock (as adjusted for any stock splits, stock dividends, combinations, recapitalizations or the like with respect to the Series C Preferred Stock).

 

(c)            Upon the completion of the distribution required by subsections (a) and (b) of this Section 2, the holders of Series A Preferred Stock shall be 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, $0.10 per share for each share of the Series A Preferred Stock (as adjusted for any stock splits, stock dividends, combinations, recapitalizations or the like with respect to the Series A Preferred Stock), plus declared but unpaid dividends on such share. If, upon the occurrence of such event, the Proceeds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire Proceeds legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the full preferential amount that each such holder is otherwise entitled to receive under this subsection (c). Upon the completion of the distribution required by subsection (a), (b) and the first and second sentence of this subsection (c) of this Section 2, any remaining Proceeds available for distribution to shareholders shall be distributed among the holders of Common Stock pro rata, based on the number of shares of Common Stock held by each (assuming full conversion of all such Preferred Stock).

 

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(d)            Notwithstanding the above, for purposes of determining the amount each holder of shares of Preferred Stock is entitled to receive with respect to a Liquidation Event, each such holder of shares of a series of Preferred Stock shall be deemed to have converted (regardless of whether such holder actually converted) such holder’s shares of such series into shares of Common Stock immediately prior to the Liquidation Event (without regard to any limitations on the conversion of the Preferred Stock contained in these Amended and Restated Certificate of Incorporation) if, as a result of an actual conversion, such holder would receive, in the aggregate, an amount greater than the amount that would be distributed to such holder if such holder did not convert such series of Preferred Stock into shares of Common Stock. If any such holder shall be deemed to have converted shares of Preferred Stock into Common Stock pursuant to this paragraph, then such holder shall not be entitled to receive any distribution that would otherwise be made to holders of Preferred Stock that have not converted (or have not been deemed to have converted) into shares of Common Stock.

 

(e)            (i) For purposes of this Section 2, a “Liquidation Event” shall include (A) the closing of the sale, transfer or other disposition of all or substantially all of this corporation’s assets, (B) the consummation of the merger or consolidation of this corporation with or into another entity (except a merger or consolidation in which the holders of capital stock of this corporation immediately prior to such merger or consolidation continue to hold at least 50% of the voting power of the capital stock of this corporation or the surviving or acquiring entity), (C) the closing of the transfer (whether by merger, consolidation or otherwise), in one transaction or a series of related transactions, to a person or group of affiliated persons (other than an underwriter of this corporation’s securities), of this corporation’s securities if, after such closing, such person or group of affiliated persons would hold 50% or more of the outstanding voting stock of this corporation or (D) a liquidation, dissolution or winding up of this corporation; provided, however, that a transaction shall not constitute a Liquidation Event if its sole purpose is to change the state of this corporation’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held this corporation’s securities immediately prior to such transaction. Notwithstanding the prior sentence, the sale of shares of Series B Preferred Stock or Series C Preferred Stock in a financing transaction shall not be deemed a “Liquidation Event.” The treatment of any particular transaction or series of related transactions as a Liquidation Event may be waived by the vote or written consent of the holders of a majority of each outstanding class or series of Preferred Stock.

 

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(ii)            In any Liquidation Event, if the consideration received by this corporation is other than cash, its value will be deemed its fair market value as determined in good faith by the corporation’s Board of Directors (the “Board of Directors”) of this corporation. Any securities shall be valued as follows:

 

(A)          Securities not subject to investment letter or other similar restrictions on free marketability covered by (B) below:

 

(1)            If traded on a securities exchange or through the Nasdaq, the value shall be deemed to be the average of the closing prices of the securities on such exchange or system over the twenty (20) trading day period ending three (3) trading days prior to the closing;

 

(2)            If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the twenty (20) trading day period ending three (3) trading days prior to the closing; and

 

(3)            If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Board of Directors of this corporation and the holders of at least a majority of the voting power of each class or series of outstanding Preferred Stock.

 

(B)           The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a shareholder’s status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (A) (1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by this corporation and the holders of at least a majority of the voting power of each class or series of outstanding Preferred Stock.

 

(C)           The foregoing methods for valuing non-cash consideration to be distributed in connection with a Liquidation Event may be superseded by any determination of such value set forth in the definitive agreements governing such Liquidation Event.

 

(iii)           In the event the requirements of this Section 2 are not complied with, this corporation shall forthwith either:

 

(A)          cause such closing to be postponed until such time as the requirements of this Section 2 have been complied with; or

 

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(B)            cancel such transaction, in which event the rights, preferences and privileges of the holders of the Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in subsection 2(d)(iv) hereof.

 

(iv)           This corporation shall give each holder of record of Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the shareholders’ meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and this corporation shall thereafter give such holders prompt notice of any changes. The transaction shall in no event take place sooner than twenty (20) days after this corporation has given the first notice provided for herein or sooner than ten (10) days after this corporation has given notice of any changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that (i) are entitled to such notice rights or similar notice rights and (ii) represent at least a majority of the voting power of all then outstanding shares of such class or series of Preferred Stock. The holders of the outstanding Preferred Stock can waive the notice requirements described in this subsection (iv) upon the affirmative vote or written consent of the holders of at least a majority of the shares of each class or series of Preferred Stock then outstanding.

 

3.             Redemption.

 

(a)            Subject to the conditions and other provisions of this Article III(B)3(a), this corporation shall have the right to elect to redeem, out of funds legally available therefore, all (but not less than all) of the then outstanding shares of the Series C Preferred Stock in accordance with the following conditions:

 

(i)            at any time for a price per share equal to the Series C Original Issue Price, plus all unpaid accrued and accumulated dividends on such share (whether or not declared) (the “Series C Redemption Price”), provided: (A) the Series C Preferred Stock has been issued and outstanding for a period of at least one (1) year, (B) the issuance of the shares of Common Stock underlying the Series C Preferred Stock has been registered pursuant to the Securities Act of 1933 and such registration remains effective, and (C) the trading price for this corporation’s Common Stock is less than the Series C Conversion Price for twenty (20) trading days in any period of thirty (30) consecutive trading days on the Nasdaq Capital Markets; or

 

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(ii)            in accordance with the following schedule; provided the issuance of shares of Common Stock underlying the Series C Preferred Stock has been registered pursuant to the Securities Act of 1933 and such registration remains effective:

 

Year 1 No Redemption
Year 2 Redemption at 120% of the Series C Redemption Price
Year 3 Redemption at 115% of the Series C Redemption Price
Year 4 Redemption at 110% of the Series C Redemption Price
Year 5 Redemption at 105% of the Series C Redemption Price
Year 6 and thereafter Redemption at 100% of the Series C Redemption Price

 

Any such redemption shall occur not less than fifteen (15) days following receipt by the holders of the Series C Preferred Stock of a written election notice (the “Series C Election Notice”) from this corporation stating this corporation’s intent to exercise this election and the date upon which such redemption shall take effect (the “Series C Redemption Date”). Upon receipt of a Series C Election Notice, all holders of the Series C Preferred Stock shall be deemed to have consented to have all of their shares of the Series C Preferred Stock redeemed pursuant to this Article III(B)3(a); provided, that notwithstanding anything to the contrary contained herein, each holder of shares of Series C Preferred Stock shall have the right to elect prior to the Series C Redemption Date to give effect to the conversion rights contained in Article III(B)4 instead of giving effect to the provisions contained in this Article III(B)3(a) with respect to the shares of Series C Preferred Stock held by such holder. (b) The Series A Preferred Stock and Series B Preferred Stock are not redeemable.

 

4.             Conversion. The holders of the Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):

 

(a)            Right to Convert. Each share of Series B Preferred Stock and each share of Series C Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series B Original Issue Price or Series C Original Issue Price (plus all unpaid accrued and accumulated dividends thereon, as applicable, whether or not declared), by the Series B Conversion Price or Series C Conversion Price, as applicable (in each case, the “Conversion Rate”), determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial “Series B Conversion Price” shall be the Series B Original Issue Price and the initial “Series C Conversion Price” shall be the Series C Original Issue Price; provided, however, that the Series B Conversion Price and the Series C Conversion Price shall be subject to adjustment as set forth in this Section 4. Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of this corporation or any transfer agent for such stock, into one hundred (100) fully paid and nonassessable shares of Common Stock (as adjusted for any stock splits, stock dividends, combinations, recapitalizations or the like with respect to the Common Stock).

 

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(b)            Automatic Conversion.

 

(i)            Subject to subsection 4(d) below, each share of Series C Preferred Stock shall 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 this corporation’s Common Stock being more than two times the Series C Conversion Price for twenty (20) trading days in any period of thirty (30) consecutive trading days on the Nasdaq Capital Market, and (C) the average daily trading dollar volume of this corporation’s Common Stock during such twenty (20) trading days is equal to or greater than $4.0 million.

 

(ii)            Subject to subsection 4(d) below, each share of Series B Preferred Stock shall automatically be converted into shares of Common Stock at the applicable Conversion Rate at the time in effect immediately upon the earlier of (i) this corporation’s sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 or Form S-3 under the Securities Act of 1933, as amended, the public offering price of which was not less than $100,000,000 in the aggregate (a “Qualified Public Offering”) or (ii) the date specified by written consent or agreement of the holders of the then outstanding shares of Series B Preferred Stock.

 

(iii)           Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock on a 100-for-1 basis (as adjusted for any stock splits, stock dividends, combinations, recapitalizations or the like with respect to the Common Stock) upon the earlier of (i) a Qualified Public Offering or (ii) the date specified by written consent or agreement of the holders of the then outstanding shares of Series A Preferred Stock.

 

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(c)            Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to voluntarily convert the same into shares of Common Stock, he or she shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Preferred Stock, and shall give written notice to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the persons entitled to receive the Common Stock upon conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. If the conversion is in connection with Automatic Conversion provisions of subsection 4(b)(ii) above, such conversion shall be deemed to have been made on the conversion date described in the shareholder consent approving such conversion, and the persons entitled to receive shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holders of such shares of Common Stock as of such date.

 

(d)            Limitations on Conversion. Notwithstanding anything to the contrary contained in these Amended and Restated Certificate of Incorporation, the Series B Preferred Stock and Series C Preferred Stock shall not be convertible by a holder to the extent (but only to the extent) that the holder or any of its Affiliates would beneficially own in excess of 9.99% (the “Maximum Percentage”) of the Common Stock. To the extent the above limitation applies, the determination of whether the holder’s Series B Preferred Stock or Series C Preferred Stock shall be convertible (vis-a-vis other convertible securities owned by the holder or any of its Affiliates) and of which such securities shall be convertible (as among all such securities owned by the holder) shall, subject to such Maximum Percentage limitation, be determined on the basis of the first submission to the corporation for conversion. No prior inability to convert the Series B Preferred Stock or Series C Preferred Stock pursuant to this paragraph shall have any effect on the applicability of the provisions of this paragraph with respect to any subsequent determination of convertibility. For the purposes of this paragraph, beneficial ownership and all determinations and calculations (including, without limitation, with respect to calculations of percentage ownership) shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. The provisions of this paragraph shall be implemented in a manner otherwise than in strict conformity with the terms of this paragraph to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Maximum Percentage beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such Maximum Percentage limitation. The limitations contained in this paragraph shall apply to a successor holder of the Series B Preferred Stock or a successor holder of the Series C Preferred Stock, as applicable. The holders of Common Stock shall be third party beneficiaries of this paragraph and the corporation may not amend or waive this paragraph without the consent of holders of a majority of its Common Stock. For any reason at any time, upon the written or oral request of the holder, the corporation shall within one (1) Business Day confirm orally and in writing to the holder the number of shares of Common Stock then outstanding, including by virtue of any prior conversion of convertible securities into Common Stock, including, without limitation, pursuant to these Amended and Restated Certificate of Incorporation or securities issued pursuant to these Amended and Restated Certificate of Incorporation. By written notice to the corporation, any holder may increase or decrease the Maximum Percentage to any other percentage not in excess of 9.99% specified in such notice; provided that (i) any such increase will not be effective until the 61st day after such notice is delivered to the corporation, and (ii) any such increase or decrease will apply only to such holder sending such notice and not to any other holder.

 

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(e)           Conversion Price Adjustments of Series B Preferred Stock and Series C Preferred Stock for Certain Dilutive Issuances, Splits and Combinations. The Series B Conversion Price and the Series C Conversion Price shall be subject to adjustment from time to time as follows:

 

(i)            (A)          If this corporation shall issue, on or after the date upon which these Amended and Restated Certificate of Incorporation are accepted for filing by the Secretary of State of the State of California (the “Filing Date”), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Series B Conversion Price and/or Series C Conversion Price, as applicable, in effect immediately prior to the issuance of such Additional Stock, the Series B Conversion Price and/or Series C Conversion Price, as applicable, in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying the Series B Conversion Price and/or Series C Conversion Price, as applicable, by a fraction, the numerator of which shall be (1) the number of shares of Common Stock Outstanding immediately prior to such issuance plus (2) the number of shares of Common Stock that the aggregate consideration received by this corporation for such issuance would purchase at the then-existing Series B Conversion Price and/or Series C Conversion Price, as applicable; and the denominator of which shall be the number of shares of Common Stock Outstanding immediately prior to such issuance plus the number of shares of such Additional Stock. For purposes of this subsection 4(e)(i)(A), the term “Common Stock Outstanding” shall mean and include the following: (1) outstanding Common Stock, (2) Common Stock issuable upon conversion of outstanding Preferred Stock (without regard to any limitations on the conversion of the Preferred Stock contained in these Amended and Restated Certificate of Incorporation), (3) Common Stock issuable upon exercise of outstanding stock options, and (4) Common Stock issuable upon exercise (and, in the case of warrants to purchase Preferred Stock, conversion) of outstanding warrants. Shares described in (1) through (4) above shall be included whether vested or unvested, whether contingent or non-contingent and whether exercisable or not yet exercisable.

 

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(B)          No adjustment of the Series B Conversion Price and/or Series C Conversion Price shall be made in an amount less than one cent per share, provided that any adjustments that are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this subsection 4(e)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment.

 

(C)          In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof.

 

(D)          In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors, irrespective of any accounting treatment.

 

(E)           In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock, or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 4(e)(i) and subsection 4(e)(ii):

 

(1)            The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 4(e)(i)(C) and (e)(i)(D)), if any, received by this corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby.

 

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(2)            The aggregate maximum number of shares of Common Stock deliverable upon conversion of, or in exchange for (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments), any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof, shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by this corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by this corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 4(e)(i)(C) and (e)(i)(D)).

 

(3)            In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof; the Series B Conversion Price and/or Series C Conversion Price, as applicable, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities.

 

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(4)            Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Series B Conversion Price and/or Series C Conversion Price, as applicable, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities that remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities.

 

(5)            The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 4(e)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 4(e)(i)(E)(3) or (4).

 

(ii)           “Additional Stock” shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 4(e)(i)(E)) by this corporation on or after the Filing Date other than:

 

(A)          Common Stock issued pursuant to a transaction described in subsection 4(e)(iii) hereof;

 

(B)           Common Stock issued to employees, directors, consultants and other service providers for the primary purpose of soliciting or retaining their services pursuant to plans or agreements approved by this corporation’s Board of Directors, provided, however, that the total number of shares exempt pursuant to this sub-section shall not exceed 10% of the corporation’s total number of shares of Common Stock issued and outstanding on a fully diluted basis at such time of issuance;

 

(C)          Common Stock issued pursuant to a Qualified Public Offering;

 

(D)          Common Stock issued pursuant to the conversion or exercise of convertible or exercisable securities outstanding on the Filing Date;

 

(E)           Common Stock issued in connection with a bona fide business acquisition of or by this corporation, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise;

 

(F)           Common Stock issued or deemed issued pursuant to subsection 4(e)(i)(E) as a result of a decrease in the Conversion Price of any series of Preferred Stock resulting from the operation of this subsection 4(e);

 

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(G)           Common Stock issued or deemed issued in connection with bank debt, equipment leases or similar credit facilities, provided such issuances are for other than primarily equity financing purposes and approved by the Board of Directors; or

 

(H)          Common Stock issued upon conversion of the Preferred Stock.

 

(iii)          In the event this corporation should at any time or from time to time after the Filing Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock without a corresponding split or subdivision of the Series B Preferred Stock and/or Series C Preferred Stock, as applicable, or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as “Common Stock Equivalents”) without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series B Preferred Stock and/or Series C Preferred Stock, as applicable, shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in subsection 4(e)(i)(E).

 

(iv)          If the number of shares of Common Stock outstanding at any time after the Filing Date is decreased by a combination of the outstanding shares of Common Stock, without a corresponding decrease of the Series B Preferred Stock and/or Series C Preferred Stock, as applicable, then, following the record date of such combination, the Series B Conversion Price and/or Series C Conversion Price, as applicable, shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares.

 

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(f)            Other Distributions. In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(e)(iii), then, in each such case for the purpose of this subsection 4(f), the holders of the Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of this corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of this corporation entitled to receive such distribution without regard to any limitations on the conversion of the Preferred Stock contained in these Amended and Restated Certificate of Incorporation.

 

(g)           Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2) the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion of the Preferred Stock the number of shares of stock or other securities or property of this corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Series B Conversion Price and/or Series C Conversion Price then in effect and the number of shares purchasable upon conversion of the Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable.

 

(h)           No Fractional Shares and Certificate as to Adjustments.

 

(i)            No fractional shares shall be issued upon the conversion of any share or shares of the Preferred Stock and the aggregate number of shares of Common Stock to be issued to particular shareholders, shall either, at the corporation’s option, be rounded (A) up to the nest whole share or (b) down to the nearest whole share and the corporation shall pay in cash the fair value of any fractional shares as of the time when entitled to receive such fractions are determined, provided, however, that the corporation may not round down if the nearest whole share is less than one (1).

 

(ii)           Upon the occurrence of each adjustment or readjustment of the Series B Conversion Price and/or Series C Conversion Price pursuant to this Section 4, this corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series B Preferred Stock and/or Series C Preferred Stock, as applicable, a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Series B Conversion Price and/or Series C Conversion Price, as applicable, at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property that at the time would be received upon the conversion of a share of Series B Preferred Stock and/or Series C Preferred Stock, as applicable.

 

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(i)            Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, this corporation shall mail to each holder of Preferred Stock, at least ten (10) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, and the amount and character of such dividend or distribution.

 

(j)            Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock (without regard to any limitations on the conversion of the Preferred Stock contained in these Amended and Restated Certificate of Incorporation); and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to these Amended and Restated Certificate of Incorporation.

 

(k)           Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation.

 

(l)            Waiver of Adjustment to Conversion Price. Notwithstanding anything herein to the contrary, any downward adjustment of the Series B Conversion Price and/or Series C Conversion Price, as applicable, may be waived, either prospectively or retroactively or in a particular instance, by the consent or vote of all holders of the outstanding shares of Series B Preferred Stock (with regard to the Series B Conversion Price) or Series C Preferred Stock (with regard to the Series C Conversion Price). Any such waiver shall bind all future holders of shares of Series B Preferred Stock and/or Series C Preferred Stock, as applicable.

 

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5.             Voting Rights. The holder of each share of Series B Preferred Stock and each share of Series C Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series B Preferred Stock and/or Series C Preferred Stock, as applicable, could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any shareholders’ meeting in accordance with the bylaws of this corporation, shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. The holder of each share of Series A Preferred Stock shall have the right to one thousand (1,000) votes for each share of Series A Preferred Stock, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any shareholders’ meeting in accordance with the bylaws of this corporation, shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward).

 

6.             Protective Provisions.

 

(a)          This corporation shall not consummate a Liquidation Event without first obtaining the approval (by vote or written consent, as provided by law) of the holders of each of a majority of the then outstanding shares of Series B Preferred Stock, Series C Preferred Stock and Series A Preferred Stock, voting separately;

 

(b)          This corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of each of a majority of the then outstanding shares of Series B Preferred Stock and Series C Preferred Stock, voting separately:

 

(i)            authorize or issue, or obligate itself to issue, any equity security (including any other security convertible into or exercisable for any such equity security) having a preference over or parity with the Series B Preferred Stock and/or Series C Preferred Stock, as applicable, with respect to dividends, liquidation, redemption or voting;

 

(ii)           amend these Amended and Restated Certificate of Incorporation or the corporation’s bylaws to adversely affect the rights, preferences and privileges of the Series B Preferred Stock and/or Series C Preferred Stock, as applicable;

 

(iii)          enter into, or consummate the merger or consolidation of this corporation with or into another entity, or

 

(iv)          Any voluntary dissolution, liquidation or winding up of the affairs of the corporation or voluntary petition for bankruptcy or assignment for the benefit of creditors.

 

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(c)           This corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Series A Preferred Stock:

 

(i)            authorize or issue, or obligate itself to issue, any equity security (including any other security convertible into or exercisable for any such equity security) having a preference over the Series A Preferred Stock with respect to dividends, liquidation, redemption or having a preference over or parity with the Series A Preferred Stock with respect to voting; or

 

(ii)           amend this corporation’s Certificate of Incorporation or bylaws to materially adversely affect the rights, preferences and privileges of the Series A Preferred Stock.

 

7.             Status of Converted Stock. In the event any shares of Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be cancelled and shall not be issuable by this corporation. The Amended and Restated Certificate of Incorporation of this corporation shall be appropriately amended to effect the corresponding reduction in this corporation’s authorized capital stock.

 

C.            Common Stock. The rights, preferences, privileges and restrictions granted to and imposed on the Common Stock are as set forth below in this Article III(C).

 

1.             Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of this corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors.

 

2.             Liquidation Rights. Upon the liquidation, dissolution or winding up of this corporation, the assets of this corporation shall be distributed as provided in Section 2 of Article III(B) hereof.

 

3.             Redemption. The Common Stock is not redeemable at the option of the holder.

 

4.             Voting Rights. The holder of each share of Common Stock shall have the right to one vote for each such share, and shall be entitled to notice of any shareholders’ meeting in accordance with the bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law.

 

ARTICLE IV

 

The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders:

 

A.           The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Second Amended and Restated Certificate of Incorporation or the Bylaws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation.

 

19

 

 

B.            The directors of the Corporation need not be elected by written ballot unless the Bylaws so provide.

 

C.            Special meetings of stockholders of the Corporation may be called only by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, or the President (in the absence of a Chief Executive Officer).

 

ARTICLE V

 

A.            The number of directors shall initially be seven (7) and, thereafter, shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). Each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal.

 

B.            Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided, with respect to the time for which they severally hold office, into three classes designated as Class I, Class II and Class III, respectively (the “Classified Board”). The Board may assign members of the Board already in office to the Classified Board, which assignments shall become effective at the same time the Classified Board becomes effective. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board, with the number of directors in each class to be divided as nearly equal as reasonably possible. The initial term of office of the Class I directors shall expire at the Corporation’s first annual meeting of stockholders following the date hereof, the initial term of office of the Class II directors shall expire at the Corporation’s second annual meeting of stockholders following the date hereof and the initial term of office of the Class III directors shall expire at the Corporation’s third annual meeting of stockholders following the date hereof. At each annual meeting of stockholders following the date hereof, directors elected to succeed those directors of the class whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election.

 

C.            There shall be no cumulative voting in the election of directors. Election of directors need not be by written ballot unless the bylaws of the Corporation so provide.

 

D.            Newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation or other cause (including removal from office by a vote of the stockholders) may be filled only by a majority vote of the directors then in office, though less than a quorum, or by the sole remaining director, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires, and until their respective successors are elected, except in the case of the death, resignation or removal of any director. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

 

20

 

 

E.            Any directors, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class.

 

ARTICLE VI

 

[IN1ENTIONALLY OMITTED]

 

ARTICLE VII

 

The Board of Directors is expressly empowered to adopt, amend, alter or repeal the Bylaws of the Corporation. The stockholders shall also have power to adopt, amend, alter or repeal the Bylaws of the Corporation. Any adoption, amendment, alteration or repeal of the Bylaws of the Corporation by the stockholders shall require, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Second Amended and Restated Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class.

 

ARTICLE VIII

 

A.            A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) under Section 174 of the D.G.C.L., or (iv) for any transaction from which the director derived an improper personal benefit.

 

B.            If the D.G.C.L. is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the D.G.C.L., as so amended. Any repeal or modification of the foregoing provisions of this ARTICLE VIII by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of, or increase the liability of any director of the Corporation with respect to actions or omissions occurring prior to, such repeal or modification.

 

21

 

 

ARTICLE IX

 

A.            Each person (and the heirs, executors or administrators of such person) who was or is a party or is threatened to be made a party to, or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by Delaware Law. The right to indemnification conferred in this ARTICLE IX shall also include the right to be paid by the Corporation the expenses incurred in connection with any such proceeding in advance of its final disposition to the fullest extent authorized by Delaware Law. The right to indemnification conferred in this ARTICLE IX shall be a contract right.

 

B.            The Corporation may, by action of its Board of Directors, provide indemnification to such of the employees and agents of the Corporation to such extent and to such effect as the Board of Directors shall determine to be appropriate and authorized by Delaware Law.

 

C.            The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss incurred by such person in any such capacity or arising out of such person’s status as such, whether or not the Corporation would have the power to indemnify such person against such liability under Delaware Law.

 

D.            The rights and authority conferred in this ARTICLE IX shall not be exclusive of any other right which any person may otherwise have or hereafter acquire. Neither the amendment nor repeal of this ARTICLE IX, nor the adoption of any provision of this Second Amended and Restated Certificate of Incorporation or the Bylaws of the Corporation, nor, to the fullest extent permitted by Delaware Law, any modification of law, shall eliminate or reduce the effect of this ARTICLE IX in respect of any acts or omissions occurring prior to such amendment, repeal, adoption or modification.

 

ARTICLE X

 

To the fullest extent permitted by law, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director or officer of the corporation to the corporation or the corporation’s stockholders, (iii) any action asserting a claim against the corporation arising pursuant to any provision of the D.G.C.L. or the Corporation’s Second Amended and Restated Certificate of Incorporation or Bylaws, or (iv) any action asserting a claim against the Corporation governed by the internal affairs doctrine.

 

22

 

 

ARTICLE XI

 

The Corporation reserves the right to amend or repeal any provision contained in this Second Amended and Restated Certificate of Incorporation in any manner now or hereafter permitted by the laws of the State of Delaware and all rights of the stockholders of the Corporation are granted subject to this reservation; provided, however, that, notwithstanding any other provision of this Second Amended and Restated Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of this Corporation required by law or by this Second Amended and Restated Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal this ARTICLE XI or ARTICLE VII.

 

***

 

23

 

 

IN WITNESS WHEREOF, this Second Amended and Restated Certificate of Incorporation has been executed by a duly authorized officer of this corporation on this 5th day of November, 2021.

 

  MULLEN AUTOMOTIVE INC.
     
  By: /s/ David Michery
    David Michery, Chief Executive Officer

 

24

 

Exhibit 99.1(a)

 

  Page
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Carve-out financial statements:  
   
Consolidated Balance Sheets as of September 30, 2020 and 2019 F-3
   
Consolidated Statements of Operations and Deficiency in Net Assets for the Years Ended September 30, 2020 and 2019 F-4
   
Consolidated Statements of Cash Flows for the Years Ended September 30, 2020 and 2019 F-5
   
Notes to Consolidated Financial Statements F-6

  

The accompanying notes are an integral part of the consolidated financial statements.

 

F-1 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Mullen Technologies, Inc.

Brea, California

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying carve-out consolidated balance sheets of the Mullen-EV component of Mullen Technologies, Inc. (the “Company”) at September 30, 2020 and 2019, and the related carve-out consolidated statements of operations and deficiency in net assets, and cash flows for each of the years in the two-year period ended September 30, 2020, and the related notes (collectively referred to as the carve-out consolidated financial statements). In our opinion, the carve-out consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern Uncertainty

 

The accompanying carve-out consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the carve-out consolidated financial statements, the Company has sustained net losses, has indebtedness in default, and has liabilities in excess of assets of approximately $42.5 million at September 30, 2020, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2. The carve-out consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

 

Carve-out Financial Statements

 

As discussed in Note 1, the Mullen-EV business is a component of Mullen Technologies, Inc. and is not a stand-alone entity. The carve-out consolidated financial statements of the Company reflect the assets, liabilities and expenses directly attributable to the Mullen-EV, as well as allocations deemed reasonable by management, to present the financial position, results of operations and deficiency in net assets, and cash flows of Mullen-EV on a stand-alone basis and do not necessarily reflect the financial position, results of operations, changes in deficiency in net assets and cash flows of Mullen-EV in the future or what they would have been had Mullen-EV been a separate, stand-alone entity during the periods presented.

 

Change in Accounting Principle

 

As discussed in Note 3 to the carve-out consolidated financial statements, the Company has changed its method of accounting for leases upon adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), effective October 1, 2019.

 

Basis for Opinion

 

These carve-out consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Daszkal Bolton LLP
 

We have served as the Company’s auditor since 2020.

 

Fort Lauderdale, Florida

April 30, 2021

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-2 

 

 

MULLEN TECHNOLOGIES, INC.

(Carve-out of Certain Operations of Mullen Technologies, Inc.)

CONSOLIDATED BALANCE SHEETS

  

    September 30, 2020     September 30, 2019  
ASSETS                
     CURRENT ASSETS                
     Cash and cash equivalents   $ 33,368     $ 2,221,824  
     Materials and supplies     43,083       31,538  
     Deferred advertising     15,054,000       15,054,000  
     Other current assets     201,067       191,365  
     TOTAL CURRENT ASSETS     15,331,518       17,498,727  
     Property, equipment and leasehold improvements, net     1,541,996       1,973,563  
     Intangible assets, net     2,622,796       2,350,012  
     Right-of-use assets     1,729,112       -  
     Other assets     762,008       1,070,589  
     TOTAL ASSETS     21,987,430       22,892,891  
                 
LIABILITIES AND DEFICIENCY IN NET ASSETS                
     CURRENT LIABILITIES                
     Accounts Payable     2,688,176       1,946,961  
     Accrued expenses and other current liabilities     22,151,589       20,052,858  
     Lease liabilities, current portion     336,765       -  
     Notes payable, current portion     33,048,471       20,007,874  
     TOTAL CURRENT LIABILITIES     58,225,001       42,007,693  
     Notes payable, net of current portion     283,881       10,260,906  
     Lease liabilities, net of current portion     1,482,569       -  
     Other liabilities     4,500,000       4,500,000  
     TOTAL LIABILITIES     64,491,451       56,768,599  
     Commitments and Contingencies (Note 15)                
                 
DEFICIENCY IN NET ASSETS     (42,504,021 )     (33,875,708 )
TOTAL LIABILITIES AND DEFICENCY IN NET ASSETS   $ 21,987,430     $ 22,892,891  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-3 

 

 

MULLEN TECHNOLOGIES, INC.

(Carve-out of Certain Operations of Mullen Technologies, Inc.)

CONSOLIDATED STATEMENTS OF OPERATIONS

AND DEFICIENCY IN NET ASSETS 

 

    For the Year Ended September 30,  
    2020     2019  
OPERATING EXPENSES                
General and administrative   $ (10,427,141 )   $ (11,326,099 )
Research and development     (1,667,077 )     (873,561 )
     Total Operating Expenses     (12,094,218 )     (12,199,660 )
Loss from Operations     (12,094,218 )     (12,199,660 )
                 
Interest expense     (18,094,234 )     (29,170,183 )
Gain on extinguishment of indebtedness, net     -       603,549  
Loss on disposal of fixed assets     -       (73,061 )
Other income (expense), net     10,490       (454 )
Net Loss   $ (30,177,962 )   $ (40,839,809 )
                 
Deficiency in net assets, beginning of year     (33,875,708 )     (9,615,016 )
                 
MTI net increase to net assets     8,628,313       24,260,692  
                 
Deficiency in net assets, end of year   $ (42,504,021 )   $ (33,875,708 )

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-4 

 

 

MULLEN TECHNOLOGIES, INC.

(Carve-out of Certain Operations of Mullen Technologies, Inc.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For the Year Ended September 30,  
    2020     2019  
Cash Flows Used in Operating Activities                
Net Loss   $ (30,177,962 )   $ (40,839,809 )
Adjustments to reconcile net loss to net cash used in operating activities:                
  Depreciation and amortization     725,796       866,771  
  Impairment charge     93,244       721,360  
  Loss on disposal of fixed assets     -       73,061  
  Employee stock compensation     1,037,102       875,765  
  Issuance of MTI shares for services     2,929,179       3,025,733  
  Non-cash interest and other operating expenses     2,019,642       792,695  
  Non-cash lease expense     270,854       -  
  Amortization of debt discount     16,008,454       28,377,488  
  Gain on extinguishment of debt     -       (603,549 )
                 
Changes in operating assets and liabilities:                
  Material and supplies     (11,545 )     (69,322 )
  Other current assets     (9,701 )     (115,064 )
  Other assets     215,336       (189,941 )
  Accounts payable     741,215       995,475  
  Accrued expenses and other liabilities     2,031,050       2,541,146  
  Lease liabilities     (244,257 )     -  
        Net cash used in operating activities     (4,371,593 )     (3,548,191 )
                 
Cash Flows from Investing Activities                
  Purchase of equipment     (270,501 )     7,227  
  Purchase of intangible assets     (296,511 )     (720,920 )
        Net cash used in investing activities     (567,012 )     (713,693 )
                 
Cash Flows from Financing Activities                
  Changes in net parent investment     (4,781,497 )     (7,550,985 )
  Issuance of notes payable     12,118,309       18,371,569  
  Payment of notes payable     (4,586,663 )     (5,103,912 )
        Net cash provided by financing activities     2,750,149       5,716,672  
                 
Increase (decrease) in cash     (2,188,456 )     1,454,788  
Cash, beginning of year     2,221,824       767,036  
Cash, ending of year   $ 33,368     $ 2,221,824  
                 
Supplemental disclosure of Cash Flow information:                
    Cash paid for interest   $ 800,423     $ 268,413  
                 
Supplemental disclosure for non-cash financing activities:                
    Refinance of existing debt   $ 43,923,042     $ 18,961,207  
    Initial recognition of right-of-use assets and lease liabilities   $ 1,383,447     $ -  
    Right-of-use assets obtained in exchange for lease liabilities   $ 680,144     $ -  
    Deferred advertising   $ -     $ 15,054,000  
    Indebtedness settled via issuance of MTI stock   $ 38,912,640     $ 51,936,093  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-5 

 

 

MULLEN TECHNOLOGIES, INC.

(Carve-out of Certain Operations of Mullen Technologies, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

 

Basis of Presentation

 

These carve-out financial statements reflect the financial position, statement of operations, deficiency in net assets and cash flows related to the assets and liabilities of (the “Mullen EV Net Assets”) (“Mullen-EV”) which management plans to transfer to Mullen Acquisition Corporation (“Mullen AC” or “the Company”) by its parent company Mullen Technologies, Inc. (“MTI”) in 2021.

 

As MTI has not historically prepared financial statements for the Mullen EV Net Assets, and Mullen AC did not exist as a legal entity prior to 2021, the carve-out financial statements have been prepared from the financial records of MTI on a carve-out basis. The Carve-out consolidated Statements of Financial Position include all of the Mullen EV Net Assets. The Carve-out consolidated Statements of Operations for each of the years ended September 30, 2020 and 2019 reflect all expenses and activity directly attributable to the Mullen EV Net Assets, and an allocation of MTI’s general and administrative expenses incurred in each of those years, as these expenditures were shared by the Mullen EV Net Assets. In some instances, certain expenses were not allocated as they would have related directly to Mullen-EV. All inter-entity balances and transactions have been eliminated.

 

The carve-out financial statements of Mullen-EV have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“US GAAP”).

 

These carve-out financial statements have been prepared based upon the historical cost amounts recorded by MTI. These carve-out financial statements may not be indicative of Mullen-EV financial performance and do not necessarily reflect what its financial position, results of operations, and cash flows would have been had Mullen-EV operated as an independent entity during the years presented.

  

Organization

 

The carve-out financial statements consist of the electric vehicle division of MTI, including the MTI asset acquisition of CarHub, Inc., which the Company plans to offer an interactive data management solution for the automotive industry (collectively, Mullen-EV or “the Company”). MTI has two electric vehicles under development which it expects to commercialize and begin delivery of in the second quarter of 2024.

  

NOTE 2 – LIQUIDITY, CAPITAL RESOURCES, AND GOING CONCERN

 

The accompanying carve-out financial statements have been prepared on the basis that the Company will continue as a going concern. The Company’s principal sources of liquidity at September 30, 2020 consists of existing cash of approximately $33,000. During the year ended September 30, 2020, the Company consumed $4.37 million of cash for operating activities. Subsequent to September 30, 2020, the Company obtained additional financing in the amount of approximately $4.49 million in unsecured convertible notes.

 

The Coronavirus (“COVID-19”) continues to impact countries, communities, supply chains and markets, global financial markets, and various industries. To date, COVID-19 has had a material impact on the Company’s strategy in EV product development and the ability to obtain external financing to fund its development activities. The Company cannot predict whether the global pandemic will continue to have a material impact on our future financial condition and results of operations.

 

The Company has not generated any revenues since inception, and operations have been funded with proceeds from the MTI’s sale and issuance of equity securities and indebtedness. The Company has sustained losses of $30.2 million during the year ended September 30, 2020. The losses are primarily the result of research and development costs associated with the planned commercialization of the Company’s technology, combined with start-up, financing, and general and administrative costs.

 

Going Concern

 

As an early-stage development company, Mullen-EV’s ability to access capital is critical. Management plans to raise additional capital through a combination of debt financings, strategic alliances and licensing arrangements.

 

Due to the conditions described above, management believes that there is substantial doubt about the Company’s ability to continue as a going concern in the foreseeable future. The Company plans to raise additional capital from the sale of equity securities or the incurrence of indebtedness by MTI to allow the Company to continue operations. There can be no assurance that additional financing will be available on acceptable terms, or at all. If MTI cannot raise needed funds, the Company might be forced to curtail or make substantial reductions in its development activities, which would adversely affect the Company’s ability to implement its business plan.

 

To date, the Company’s existing cash resources and existing borrowing capability is not sufficient to support planned development operations for the next 12 months. As a result, management may need to consider restructuring changes to streamline operations and manage expenses, in addition to debt refinancing and capital plan. Management is seeking merger opportunities to become a public company to gain access to the capital markets for liquidity, funding, and capital needs. See note 17, subsequent events. 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-6 

 

 

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.

 

Push-Down Accounting

 

The carve-out financial statements reflect costs and expenses incurred by MTI on behalf of Mullen-EV, including interest costs. As a result, share-based compensation and other equity transactions (such as issuances of warrants and stock conversion rights embedded in issuances of indebtedness) are reflected in these carve-out financial statements. Accordingly, the classification of debt and equity issuances by MTI have been pushed down and reflected with similar classification in these carve-out financial statements. In addition, certain right-of-use assets and related lease liabilities of MTI have been pushed down to Mullen-EV.

 

Use of Estimates

 

The preparation of carve-out 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 issued by MTI.

 

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 carve-out 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 the Company experiences 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 the future operations and prospects for commercial success of the Company.

 

Deferred Advertising

 

Deferred advertising represents a marketing campaign, financed by a third party, that is carried as an asset on the consolidated balance sheets until used or consumed. At September 30, 2020 and 2019, these deferred advertising charges of $15.1 million are associated with the AirSign advertising contract and the RedRock Outdoor Advertising Display advertising contract.

 

Prepaid Expenses and Other Current Assets

 

Prepaid expenses consist of various advance payments made by the Company 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   30 years
Furniture and Equipment   5 years
Computer and Software   1 - 3 years
Machinery and Equipment   5 years
Leasehold Improvements   Shorter of the estimated useful life or the underlying lease term
Vehicles   5 years

 

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. The Company 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, the Company assesses 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, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-7 

 

 

Intangible Assets

 

Intangible assets consist of acquired and developed intellectual property, and website development costs. In accordance with ASC 350, “Intangibles—Goodwill and Other,” 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 are generally amortized on a straight-line basis over periods up to 36 months. The costs to periodically renew our intangible assets are expensed as incurred.

 

Other Assets

 

Other assets are comprised primarily of Coda electric vehicles, related parts and security deposits related to the Company’s property leases related to the EV business only.

 

Extinguishment of Liabilities

 

The Company derecognizes financial liabilities when the Company’s obligations are discharged, cancelled, or expired.

 

Leases

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, “Leases” (ASU 2016-02). The core principle of ASU 2016-02 is that lessees should recognize on its balance sheet assets and liabilities arising from a lease. In accordance with that principle, ASU 2016-02 requires that a lessee 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. Lessees shall classify all leases as finance or operating leases. The Company adopted ASU 2016-02, on October 1, 2019, which resulted in the recognition of the right-of-use assets and related obligations on its carve-out financial statements.

 

Accrued Expenses

 

Accrued expenses are expenses that have been incurred by the Company but not yet paid. They are properly accounted for within current liabilities on the consolidated balance sheets.

 

General and Administrative Expenses

 

General and administrative (“G&A”) expenses include all non-production expenses incurred by the Company 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. Advertising costs are expensed as incurred and are included in G&A expenses. The Company expenses 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, and includes a loss on impairment of $93,244 and $721,360 for the years ended September 30, 2020 and 2019, respectively.

 

MTI Share-Based Compensation

 

The Company accounts for is share-based awards issued by MTI 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 share of MTI issued to employees, non-employees and directors. The fair value of our non-marketable share has been estimated based on an independent valuation. The MTI common and preferred share valuations have been appraised by an independent financial valuation advisor, 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 accounted for within G&A expenses.

 

Related Party Transactions

 

The Company has related party transactions with its directors, officers and principal shareholders. These transactions, which are primarily long-term in nature, include operational loans, convertible debt, and warrants for financial support associated with the borrowing of funds and are entered into in the ordinary course of business.

 

Fair Value of Financial Instruments

 

The Company applies 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. The Company 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 that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company 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 following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

The accompanying notes are an integral part of the consolidated financial statements. 

 

F-8 

 

 

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

 

Concentrations of Business and Credit Risk

 

The Company maintains 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. At times, the Company’s cash balance exceeds these federal limitations and maintains significant cash on hand at certain of its locations. However, the Company has not experienced any losses in such accounts and management believes the Company is not exposed to any significant credit risk on these accounts. The amount in excess of insured limitations was $0 and $1,971,824 on September 30, 2020 and 2019, respectively.

 

Recently Issued and Adopted Accounting Standards

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, “Leases” (ASU 2016-02). The core principle of ASU 2016-02 is that lessees should recognize on its balance sheet assets and liabilities arising from a lease. In accordance with that principle, ASU 2016-02 requires that a lessee 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. The standard requires lessees to classify leases as either finance or operating leases. This classification determines whether the related expense is recognized based on asset amortization and interest on the obligation (finance leases) or on a straight-line basis over the term of the lease (operating lease). We recorded a ROU asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. We have elected the practical expedient to not apply these recognition requirements to leases with a term of 12 months or less. Instead, we recognize the lease payments on a straight-line basis over the lease term.

 

This new accounting guidance was effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted ASU 2016-02, on October 1, 2019 which resulted in the initial recognition of $1,383,447 in right-of-use assets and lease liabilities on its consolidated carve-out financial statements. The adoption of the ASUs did not have a material impact on the consolidated statement of operations or the consolidated statement of cash flows.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-01 (ASU 2017-01) “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 provides guidance to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. The Company adopted ASU 2017-01 on a prospective basis to transactions after October 1, 2018. The acquisition of the controlling interest in CarHub was accounted for as a group of assets which were not considered a business.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (ASU 2017-04) (Topic 350), “Intangibles - Goodwill and Others. ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for annual periods beginning after December 15, 2019 (October 1, 2020 for the Company) including interim periods within those periods. The Company does not expect the standard to have a material impact on its carve-out financial statements and related disclosures.

 

In June 2018, the FASB issued Accounting Standards Update No. 2018-07 (ASU 2018-07) ASU No. 2018-07 (Topic 718), “Compensation—Stock Compensation: Improvements to Nonemployee Share- Based Payment Accounting”. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606. The new standard will be effective for the Company on October 1, 2020. Adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations.

 

NOTE 4 –ASSET ACQUISITION

 

The Company continually evaluates potential acquisitions that strategically fit within the Company’s business strategy. On October 26, 2018, the Company entered into an Asset Agreement with CarHub, Inc. (“CarHub”) pursuant to which the Company purchased 95% of the then issued and outstanding shares of stock of CarHub in exchange for 1,150,000 shares of MTI common stock.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-9 

 

 

The transaction was valued based on the share consideration paid by MTI for their acquiring interest of the entity. The total consideration paid by MTI was $934,950, which represents 95.83% of the issued and outstanding shares of CarHub. The non-controlling interest was recorded at $40,684. The assets acquired are primarily concentrated within website design and development, or similar group of intangible assets.  Based on the relative fair values within the CarHub balance sheet:

 

Assets Acquired:      
Website design and development   $ 1,579,660  
Intellectual property     71,182  
IPR&D     184,903  
      1,835,745  
Less:  IPR&D expenses     (184,903 )
     Net assets acquired     1,650,842  
         
Liabilities Assumed:        
Accounts payable and accrued expenses     (134,850 )
Other liabilities     (540,358 )
     Total liabilities assumed     (675,208 )
         
Consideration Paid:        
Allocation of MTI interest     975,634  
Allocation of NCI     (40,684 )
     Total purchase price – MTI interest   $ 934,950  

 

When an acquisition of a group of assets includes intangible assets, those intangible assets are recognized at their relative fair values in accordance with ASC 350-30-25.  The cost allocation of the acquired intangible assets were allocated amongst three primary classes: website design and development, intellectual property, and in process research & development (“IPR&D”). IPR&D is expensed immediately. The net acquisition price of approximately $0.9 million resulted in the value of net assets acquired at $1.65 million and liabilities assumed at $0.67 million.

 

Management has determined that CarHub will be an integral part of the EV business, since these acquired assets may be integral and influential in developing the future: virtual brand, digital marketing and revenue stream, and value creation. The planned website will incorporate interactive data for consumers and the capacity to make online reservations for electric vehicles, beginning in mid-2021. Future website plans include online vehicle ordering, allowing customers full online vehicle purchase, with trade-in quote, financing and insurance options. The current, acquired technology will be upgraded to be more customer-centric and interactive with such features as online reservations, virtual test drives and other sales/service offerings for electric vehicles. MTI has financed the website design and development since its purchase in 2018. The amortization of this intangible asset will begin when the website is brought into actual use and becomes fully operational.

 

NOTE 5 – INTANGIBLE ASSETS

 

For the year ended September 30, 2020 and 2019, the Company incurred website development costs of $296,511 and $720,920, respectively. These costs have been capitalized, as the website is in the development stage, resulting in improved functionality. Amortization of the website will begin when the Mullen EV website is ready for its intended use.

 

The weighted average useful life of the intellectual property is 3.0 years. Identifiable intangible assets with definite lives are amortized over the period of estimated benefit using the straight-line method and the estimated useful lives of three years. The straight-line method of amortization represents the Company’s best estimate of the distribution of the economic value of the identifiable intangible assets.

 

Information regarding our intangible assets from the CarHub acquisition reflects the intellectual property acquired with an amortization life of three years, using the straight-line method.

 

    September 30, 2020     September 30, 2019  
Finite-Lived Intangible Assets   Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
 
Website design and development   $ 2,597,091     $ -     $ 2,597,091     $ 2,300,580     $ -     $ 2,300,580  
Intellectual property     71,182       (45,477 )     25,705       71,182       (21,750 )     49,432  
Total Finite-Lived Intangible Assets   $ 2,668,273     $ (45,477 )   $ 2,622,796     $ 2,371,762     $ (21,750 )   $ 2,350,012  

 

Total future amortization expense for finite -lived intangible assets was estimated:

 

Years Ended September 30,   Future Amortization  
2021   $ 23,728  
2022     1,977  
Total Future Amortization Expense   $ 25,705  

 

The accompanying notes are an integral part of the consolidated financial statements. 

 

F-10 

 

 

 

NOTE 6 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

 

Property, equipment, and leasehold improvements, net consists of the following:

 

    Years Ended September 30  
    2020     2019  
Building   $ 807,154     $ 807,154  
Furniture and Equipment     114,879       109,879  
Vehicles     45,887       26,431  
Computer Hardware and Software     129,967       115,182  
Machinery and Equipment     2,615,311       2,617,812  
Leasehold Improvements     76,675       76,675  
   Subtotal     3,789,873       3,753,133  
Less:  Accumulated depreciation     (2,247,877 )     (1,779,570 )
Property, Equipment and Leasehold Improvements, Net   $ 1,541,996     $ 1,973,563  

 

Depreciation expense related to property, equipment and leasehold improvements for the years ended September 30, 2020 and 2019 was $702,068 and $845,021, respectively.

 

NOTE 7 – OTHER ASSETS

 

    Years Ended September 30,  
Other Assets   2020     2019  
Coda materials   $ 206,998     $ 267,377  
Prepaids     51,806       269,174  
Notes Receivable     79,939       79,469  
Show Room Cars     210,483       302,858  
Security Deposits     212,782       151,711  
Total Other Assets   $ 762,008     $ 1,070,589  

 

NOTE 8 – DEBT

 

Short-term debt comprises a significant component of the Company’s 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 or 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 loans with creditors for favorable terms, such as reduce interest rate, extend maturities, or both. Until negotiations with creditors are resolved, these matured loans remain outstanding and are classified within short-term debt on the balance sheet. Interest and fees on loans are being accounted for within accrued interest. Although the loans were issued by MTI, 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 accompanying notes are an integral part of the consolidated financial statements.

 

F-11

 

 

The following is a summary of the Company debt at September 30, 2020:

 

    Net Carrying Value              
Type of Debt   Unpaid Principal
Balance
    Current     Long-Term     Contractual
Interest Rate
    Contractual
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  
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     $ 283,881       NA       NA  

 

The following is a summary of the Company debt at September 30,2019:

 

    Net Carrying Value              
Type of Debt   Unpaid Principal Balance     Current     Long-Term     Contractual Interest Rate     Contractual Maturity  
Matured Notes   $ 4,604,533     $ 4,604,533     $ -       0.00% - 15.00%       2016 - 2019  
Promissory Notes     52,927,336       14,427,336       38,500,000       10.00%       2020 – 2022  
Real Estate Note     351,208       32,824       318,384       5.00%       2023  
Loan Advances     1,240,591       1,240,591       -       0.00% - 10.00%       2019  
  Less: Debt Discount     (28,854,888 )     (297,410 )     (28,557,478 )     NA       NA  
Total Debt   $ 30,268,780     $ 20,007,874     $ 10,260,906       NA       NA  

 

Scheduled Debt Maturities

 

The following are scheduled debt maturities at September 30, 2020:

 

    Years Ended September 30,      
    2020     2021     2022     2023     2024     2025     Thereafter     Total  
Total Debt   $ 33,048,471     $      -     $    -     $ 283,881     $        -     $     -     $       -     $ 33,332,352  

 

Notes and Advances

 

The Company enters into promissory notes with third parties and officers of the Company to support operations of the Company. Promissory notes are typically for less than three years maturity and carry interest rates from 0% to 28.0%. For many of the notes listed above the scheduled maturity date has passed and the Company is currently in default of the loan. The Company is working with the lenders to remediate the promissory notes that are currently in default. Promissory notes that are in default still accrue interest after the scheduled maturity date. The Company notes that there are no financial covenants associated with the promissory notes, and there are no compliance waivers received from creditors. The Company records imputed interest on promissory notes which are deemed to be below the market interest rate. For the year ended September 30, 2020 and 2019, the Company recorded interest expense of $18,094,234 and $29,170,183, respectively.

 

In some instances, the Company will issue MTI shares accompanies with the promissory notes, as a result a debt discount is recorded and accreted to interest expense over the term of the promissory note when issued. Debt discount amortization for the year ended September 30, 2020 and 2019, was $16,008,454 and $28,377,488, respectively.

 

During 2020 and 2019, MTI issued shares of stock to certain creditors in satisfaction of debt payments or in settlement of indebtedness. These agreements essentially exchanged a predetermined amount of stock to settle debt. As of September 30, 2020 and 2019, the carrying amount of indebtedness that was settled via issuance of MTI shares was $38,912,640 and $51,936,093, respectively.

 

Drawbridge Relationship

 

During 2019, MTI entered into a series of loan and financing arrangements with Drawbridge Investments, LLC and DBI Leaseback Servicing LLC (“Drawbridge-DBI”), in addition to receiving advances from and issuing other indebtedness to DBI-affiliated entities. During September 2019, MTI entered into a $35 million sale-leaseback-purchase option (“S-LB”) transaction consisting of certain tangible and intangible assets. In connection with the transaction, MTI issued 15 million common shares to Drawbridge-DBI. Due to the existence of the purchase option and the new and existing MTI shares held by Drawbridge-DBI, the transaction did not meet the conditions to be treated as a sale, resulting in the transaction being accounted for as a debt financing. The balance of the S-LB financing obligation on September 30, 2019 was $49,500,000 with a discount of $28,577,478.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-12

 

 

During July 2020, Drawbridge-DBI and MTI entered into a settlement agreement (the “Agreement”) to restructure the aggregate obligations owed to Drawbridge-DBI and the other DBI-affiliated entities. In connection with the Agreement, (a) the S-LB obligation in the amount of $49,500,000 was replaced by a new note with a face value of $23,831,554, (b) the other indebtedness and advances from DBI-affiliated entities with a net book value of $9,935,086 were extinguished, and (c) MTI issued 44,866,534 Series B Preferred Shares to Drawbridge-DBI. As a result of the Agreement, the Company recorded the net settlement “gain” in the amount of $15,335,715 as an increase to equity (that is, a decrease in deficiency in net assets) in the balance sheet.

 

The amounts owed to Drawbridge-DBI is $23,831,554 as of September 30, 2020 and is in default. The amounts owed to other DBI-affiliated entities is $1,082,500 at September 30, 2020. The 2020 Drawbridge loan is currently recognized within the current portion of debt on the balance sheet.

 

SBA Loans

 

On April 14, 2020, the Company entered into a promissory note (the “Note”) evidencing an unsecured loan (the “Loan”) in the amount of $885,426 made to the Company under the Paycheck Protection Program (the “PPP”). The Note matures on April 14, 2022 and bears interest at a rate of 1% per annum. Pursuant to the terms of the Coronavirus, Aid, Relief and Economic Security Act (“CARES Act”) and the PPP, the Company applied to the Lender for forgiveness for the amount due on the Loan. The amount eligible for forgiveness is based on the amount of Loan proceeds used by the Company (during the eight-week period after the Lender makes the first disbursement of Loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), interest on mortgage obligations, rent and utilities, subject to certain limitations and reductions in accordance with the CARES Act and the PPP. Subsequent to September 30, 2020, the U.S. Small Business Administration (“SBA”) approved the loan forgiveness amount of $875,426 in principal and $5,155 in interest on November 20, 2020.

 

In June 2020, the Company entered into a promissory note (the "Note") in the amount of $10,000 made to the Company by the SBA under the Economic Injury Disaster Loan (“EIDL”) program. Monthly installment payments on the Note will begin twelve months from the date of the Note, with the balance of any accrued principal and interest at 3.75% annually, payable thirty years from the date of the Note. The Company applied to the Lender for loan forgiveness, which was approved for the full amount on February 18, 2021.

 

Convertible Notes

 

On August 26, 2020 and September 25, 2020, MTI issued convertible notes with a face amount of $1,867,500. The notes bear interest at 20%, which will mature on August 26, 2021 and September 25, 2021, and are convertible into common shares of MTI. Because the market price for MTI common stock on the date of the note exceeded the note’s conversion price of $1.00 per share, a beneficial conversion feature in the amount of $1,061,359 was recorded as a discount on the note. The discount is being amortized as additional interest over the life of the note. On September 30, 2020, the unamortized discount is $1,005,517.

 

The Company evaluated the conversion features embedded in the two notes payable described above for derivative accounting in accordance with ASC 815-40, Derivatives and Hedging embedded in the modified notes payable for derivative accounting in accordance with the criteria for classification in equity.

 

NOTE 9 – FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

 

Non-financial assets, such as property, equipment and leasehold improvements is required to be measured at fair value only when acquired or when an impairment loss is recognized. See “Note 6 - Property, Equipment and Leasehold Improvements, Net” for further information on impairment of fixed assets.

 

Financial instruments for which carrying value approximates fair value

 

Certain financial instruments that are not carried at fair value on the 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. We believe that the carrying value of term debt approximates fair value due to the variable rates associated with these obligations. Accounts payable are short-term in nature and generally terms are due upon receipt or within 30 to 90 days.

 

NOTE 10 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

    Years Ended September 30,  
Accrued Expenses and Other Liabilities   2020     2019  
Accrued expense - other   $ 15,633,812     $ 15,911,258  
Accrued payroll     3,771,874       2,566,039  
Interest payable     2,358,273       1,138,929  
Liability for future issuance of stock     387,630       436,632  
Total   $ 22,151,589     $ 20,052,858  

 

Accrued expenses – other includes the $13 million AirSign advertising contract and $1.5 million RedRock Outdoor Advertising, Inc. contract as of September 30, 2020 and 2019. The Company entered into these agreements to promote its electric vehicle capabilities with various national sporting events and within the New York market. In 2021, the Company received a release of liability from AirSign, Inc. and RedRock Outdoor Advertising, Inc. Both liabilities, along with the associated deferred advertising, were derecognized subsequent to September 30, 2020. See Subsequent Events, Note 17.

 

Accrued payroll represents salaries and benefits that are owed to employees.  More importantly, the payroll tax liabilities are reported within this account.  Delinquent IRS and state tax liabilities on September 30, 2020 and 2019, are $3,987,596 and $2,232,815, respectively. These tax liabilities have priority liens over MTI assets due to nonpayment of tax debt.  The lien protects the government’s interest in all MTI property, including real estate, personal property and financial assets.  Refer to Note 15, Contingencies and Claims.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-13

 

 

NOTE 11 – GENERAL & ADMINISTRATIVE EXPENSES

 

    Years Ended September 30,  
General & Administrative   2020     2019  
Professional Fees   $ 5,260,142     $ 4,832,224  
Salaries     2,437,934       2,544,138  
Depreciation and amortization     725,796       866,771  
Lease     905,231       913,127  
Settlements and penalties     219,655       69,572  
Employee benefits     216,349       136,482  
Utilities and office expense     213,361       200,396  
Advertising and promotions     156,241       1,504,863  
Taxes and licenses     67,607       28,836  
Repairs and maintenance     55,050       89,966  
Other     169,775       139,724  
Total   $ 10,427,141     $ 11,326,099  

 

Within professional fees is MTI shares for services, which is the issuance of MTI shares for services rendered to consultants and professional service firms. The expense is recorded at fair value of MTI shares issued. For the year ended September 30, 2020 and 2019, the Company recorded $2,929,179 and $3,025,733, respectively. Salaries expense includes Chairman of the Board, CEO and President David Michery also receives annual equity compensation of 1,000,000 MTI shares, or $2,500,000 each year.

 

NOTE 12 – MTI WARRANTS

 

    MTI shares     Weighted Average
Exercise Price
 
Warrants outstanding at September 30, 2019     1,250,000     $ 5.00  
Warrants exercised     -     $ -  
Warrants granted     5,698,341     $ 0.69  
Warrants expired     -     $ -  
Warrants outstanding at September 30, 2020     6,948,341     $ 1.47  

 

2020 Warrants

 

In August and September 2020, MTI issued warrants to purchase an aggregate of 5,698,341 shares of its common stock at an exercise price of $0.6877 in connection with the issuance of convertible notes. The warrants are exercisable for a period commencing upon issuance of the notes and ending 12 months after issuance of the financing. The estimated fair value of the warrants issued is $2,470,372 using the Black-Scholes option valuation model. The allocation of the fair value of these warrants was included as a contra debt account on the consolidated balance sheet and accreted to interest expense over the scheduled maturity dates of the various promissory notes.

 

NOTE 13 – MTI SHARE- BASED COMPENSATION

 

MTI has a share incentive plan as part of its annual discretionary share-based compensation programs. 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 MTI’s Board of Directors or its Compensation Committee and following the adoption by the Company of an equity incentive plan, employees are issued a specified number of shares of the MTI Common Shares. Employees are vested in 100% of the MTI shares after 12 months of continuous service. Additional MTI shares may be issued to employees over the next two years at anniversary date. Any disruption or separation from the Company results in the forfeiture of common shares. 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.

 

Consulting agreements or MTI shares for services are determined by the number of MTI shares granted within the individual contracts, as well as the services provided by the consultant. The MTI shares specified within the individual agreements are negotiated and approved by the Company’s Chief Executive Officer. The consultant earns the MTI shares over the service period. The MTI shares are accounted for as professional fees within G&A expenses. Employee share issuances are part of Salaries expense. The 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.

 

    Years Ended September 30,  
Composition of Stock-Based compensation expense   2020     2019  
Employee MTI share issuance   $ 1,037,102     $ 875,765  
MTI shares for services     2,929,179       3,025,733  
MTI Share-Based compensation expense   $ 3,966,281     $ 3.901.498  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-14

 

 

NOTE 14 – LEASES

 

MTI has entered into various operating lease agreements for certain of its offices, manufacturing and warehouse facilities, and corporate jet. The Company has implemented the provisions of ASC 842, on October 1, 2019. Operating leases are included in right-of-use assets, and current and noncurrent portion of lease liability, as appropriate. These right-of-use assets also includes any lease payments made and initial direct costs incurred at lease commencement and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements which require payments for both lease and non-lease components and has 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. The Company calculates 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 the Company’s lease assets and liabilities.

 

   

Year Ended
September 30, 2020

 
Assets:        
Operating lease right-of-use assets   $ 1,729,112  
         
Liabilities:        
Operating lease liability current   $ (336,765 )
Operating lease liability non-current     (1,482,569 )
     Total lease liabilities   $ (1,819,334 )
         
Weighted average remaining lease terms:        
Operating leases     4.51 years  
         
Weighted average discount rate:        
Operating leases     28 %
         
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash outflows from operating lease   $ 1,096,054  

 

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 1 to 3 years, with renewal options of 1 to 5 years, and may include rent escalation clauses. For financing obligations, a portion of the periodic lease payments is recognized as interest expense and the remainder reduces the obligations. For operating leases, rent is recognized on a straight-line basis over the lease term, including scheduled rent increases and rent holidays. The Company’s net lease expense for the years ended September 30, 2020 and 2019 was $905,231 and $913,127, respectively. Netted in the Company’s lease expense is sublease income of $81,993 and $135,085, respectively.

 

The following table reflects maturities of operating lease liabilities at September 30, 2020:

 

Years ending      
September 30,      
2021   $ 805,789  
2022     671,290  
2023     540,716  
2024     552,921  
2025     532,017  
Thereafter     218,986  
Total lease payments   $ 3,321,719  
Less: Imputed Interest     (1,502,385 )
Present value of lease liabilities   $ 1,819,334  

 

NOTE 15 – CONTINGENCIES AND CLAIMS

 

ASC 450 governs the disclosure and recognition of loss contingencies, including potential losses from litigation, regulatory, tax and other matters. The accounting standard defines a “loss contingency” as “an existing condition, situation, 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 the Company is subject to asserted and actual claims and lawsuits arising in the ordinary course of business. The Company reviews any such legal proceedings and claims on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes 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 the Company’s consolidated carve-out financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, the Company 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. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-15

 

 

International Business Machines (“IBM”)

 

The Company has recorded a $4.5 million liability attributed to a lawsuit with IBM, in which IBM has contended the Company has not fulfilled its obligations pursuant to a contract entered into during 2017. On April 28, 2020, the Supreme Court of the State of New York granted summary judgment in favor of IBM’s claim for breach of contract. The Court, however, found that a trial (inquest) was required to determine the damages to which IBM is entitled.  The Company has proposed an offer in settlement to resolve the matter, with the parties proceeding under the Joint Development and Technology License Agreement and all rights restored to Mullen under the Trademark License Agreement.

 

Federal and State Tax Liabilities

 

The Company has recorded a $3.9 million liability on September 30, 2020 ($2.2 million at September 30, 2019), owed to the Internal Revenue Service (“IRS”) and the Employment Development Department of California (“EDD”) for failing to remit payroll taxes associated with MTI and the Company’s employees. The IRS has filed a lien on substantially all of the Company’s assets. The EDD intends to file a lien on the outstanding liability pursuant to an installment agreement, see Subsequent Events, Note 17.

 

Raymond James and Associates (“RJA”) – Investment Banking Services Agreement

 

On May 5, 2020, the Company entered into an agreement with Raymond James & Associates for public offering and placement agent services. The agreement called for the Company to pay a cash retainer of $50,000, which remains unpaid. Upon the closing of any public offering, regardless of whether RJA procured the agreement regarding the offering, the Company is obligated to pay a financing fee of equal to the greater of a) 6.0% of aggregate gross proceeds and b) $3,000,000.

 

Linghang Boao Group, LTD

 

In November 2019, the Company entered into a three-year Strategic Cooperation Agreement (“SCA”) with Linghang Boao Group LTD to co-develop a Solid- State Battery Management system with a 480 - 720-mile Driving Range. The Company’s total financial commitment under the SCA is $2,196,000. On December 3, 2019, the Company paid the first installment of $390,000. The remaining installments are payable upon the earlier of certain dates or the achievement of defined milestones.

 

The contractual target dates and milestones have been severely disrupted due to the occurrence COVID-19. As a result, Company management believes the COVID-19 pandemic represents a Force Majeure event (that is, the pandemic has impacted the Company’s and Linghang Boao Group LTD’s ability to meet their respective contractual obligations due to restriction in movement, stoppage of production, increase in costs due to scarcity of raw materials components, labor shortages, shortage of funds, disruption in the supply chains, U.S. governmental closures of ports/borders and travel restrictions). Based on the foregoing, there is no breach of contract due to failure of performance by MTI. Unfortunately, the Company has incurred a loss of $390,000 due to contract nonperformance and force majeure. There are no accrued liabilities recorded for any remaining milestone payments at September 30, 2020.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-16

 

 

NOTE 16 – RELATED PARTY TRANSACTIONS

 

At September 30, 2020 and 2019, respectively, the Drawbridge Investments, LLC relationship comprised various loans and advances, common shares, and preferred shares.

 

The Drawbridge loans are currently within default. The Common and Preferred Shares reflect shares issued by MTI.

 

Drawbridge Related Transactions         September 30,        
(Cumulative)   2020     2019  
Description   Loan Principal     # of Shares     FV of Shares     Loan Principal     # of Shares     FV of Shares  
Various Notes   $ 24,106,554       -     $ -     $ 49,500,000       -     $ -  
Common Shares     -       17,705,000       14,730,560       -       31,750,000       26,416,000  
Preferred Shares - Series A             30,000       2,496,000               25,000       2,080,000  
Preferred Shares - Series B     -       44,866,534       31,367,945       -       -       -  
Total Related Party Transactions   $ 24,106,554       62,601,534     $ 48,594,505     $ 49,500,000       31,775,000     $ 28,496,000  

 

*Shares are MTI common and preferred shares.

 

At September 30, 2020 and 2019, the Drohan relationship comprised three (3) loans, common shares, and preferred shares.

 

The Drohan loans are accounted within short-term debt since they are in default.

 

Drohan Related Transactions         September 30,        
(Cumulative)   2020     2019  
Description   Loan Principal     # of Shares     FV of Shares     Loan Principal     # of Shares     FV of Shares  
Various Notes   $ 1,323,000       -     $ -     $ 1,343,000       -     $ -  
Common Shares     -       11,202,300       9,320,314       -       11,202,300       9,320,314  
Preferred Shares - Series A     -       211,000       17,555,200       -       211,000       17,555,200  
Total Related Party Transactions   $ 1,323,000       11,413,300     $ 26,875,514     $ 1,343,000       11,413,300     $ 26,875,514  

 

*Shares are MTI common and preferred shares.  

 

At September 30, 2020 and 2019, the Baker relationship comprised various loans, advances, and common shares.

 

The loans are accounted within short term debt since they are in default.

 

Baker Related Transactions         September 30,        
(Cumulative)   2020     2019  
Description   Loan Principal     # of Shares     FV of Shares     Loan Principal     # of Shares     FV of Shares  
Various Notes   $ 2,717,804       -     $ -     $ 2,717,804       -     $ -  
Common Shares     -       1,000,000       832,000       -       1,000,000       832,000  
Total Related Party Transactions   $ 2,717,804       1,000,000     $ 832,000     $ 2,717,804       1,000,000     $ 832,000  

 

*Shares are MTI common and preferred shares.

 

Chief Executive Officer Loans

 

From time to time, David Michery provides loans to the Company. The outstanding balances for these loans at September 30, 2020 and 2019 are $172,791 and $367,791, respectively.

 

NOTE 17 – SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through April 30, 2021, which is the date the carve-out financial statements were issued. The Company has determined that there were no subsequent events which required recognition, adjustment to or disclosure in the carve-out financial statements except as below and except as discussed below.

 

Net Element Reverse Merger & Amendment

 

On August 4, 2020, Net Element, Inc. (“Net Element”) and MTI announced the execution of a definitive agreement to a stock-for-stock reverse merger. In which MTI stockholders will receive a majority of the outstanding stock in the post -merger company. Under the terms of the agreement, Net Element’s wholly owned, newly formed subsidiary will acquire all the outstanding shares of Mullen.  Upon completion of the merger, Net Element shareholders will own 15% and Mullen shareholders will own 85% of the issued and outstanding shares of the combined Company.  Net Element has the right to acquire up to an additional 6.7% of the combined Company depending on the amount of loans from Net Element to Mullen prior to closing.

 

On December 29, 2020, Net Element entered into the First Amendment to the Agreement and Plan of Merger dated as of August 4, 2020. The basic provisions state the Form S-4 Registration statement if the document is not filed with SEC on or prior January 15, 2021, then MTI agrees to pay the sum of $13,333 per day until the registration is filed with the SEC. Additionally, the merger effective time is extended until April 30, 2021.

 

Mullen Technologies Inc. Related Agreements

 

Mullen Technologies, Inc. (“MTI”) and Net Element have settled upon a plan for the completion of the reverse merger and divestiture of certain businesses. These proposed plans are documented within several agreements:

 

· Master Distribution Agreement – The agreement addresses the steps as to the legal separation of the two divisions of MTI: Electric Vehicles and Automotive. The purpose of the separation is to allow the Mullen -EV to become a stand-alone, independent public traded company. The Automotive Division will remain a private company.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-17

 

 

· Separation Agreement – The agreement addresses and governs how the assets, liabilities, and equity of the EV business and Automotive business will be separated into two distinct businesses.
· Contribution and Spin-Off Agreement – The agreement governs how the contribution and spin-off of the two MTI divisions will occur. Each division will be responsible for its own legal, accounting, service providers and advisors.
· Transition Services Agreement – This agreement governs how to facilitate and provide for an orderly transition in connection with the contribution and spin-off of the two divisions.
· Tax Sharing Agreement – This agreement governs the payment of tax liabilities and entitlement to refunds thereof, allocate responsibility for, and cooperation in, the filing of Tax Returns, and provide for certain other matters relating to Taxes.

 

Prior to consummation of the Separation and the Distribution, MTI will be the common parent corporation of an affiliated group of corporations within the meaning of Section 1504 of the Code that includes Automotive.

 

GEM Equity Line Financing

 

On January 4, 2021, MTI entered into an $350,000,000 equity line financing agreement with GEM Global Yield LLC (“Purchaser”) and GEM Yield Bahamas Limited (“GEM”). MTI plans to issue and sell common shares to GEM up to the number of common shares having an aggregate value of $350,000,000. The Purchaser will buy MTI shares based on the operational needs and/or drawdowns of the Company. If the aggregate limit has been reached, the Purchaser will increase the aggregate limit in an amount up to $150,000,000. The commitment fee, equal to 2% of the Aggregate Limit, will be charged for each draw-down. The fee may be paid in cash or freely tradeable MTI common shares of the Company. The commitment begins when the Company effects the public listing of MTI common stock for trading on a U.S. national securities exchange. The agreement matures in 36 months after the public listing of MTI common shares.

 

Convertible Debt Issuances and Warrants

 

The Company received loan financing through MTI entering into five, executed Securities Purchase Agreements (“SPA”). The first SPA is up to $3,000,000 of unsecured, convertible notes with 15% interest and a maturity of one year, along with warrants to acquire up to an aggregate of 13,087,100 warrant shares. The date of issuance is October 12, 2020. The notes are issued in $660,000 monthly increments, with an original issue discount of 10%. The associated warrants for each convertible debt issuance are 2,617,420 each month. The conversion price is $0.6877 per common share and expire five years from the date of issuance.

 

The second SPA is up to $150,000 in 15% convertible, unsecured notes that matures in one year, along with warrants to acquire up to an aggregate of 654,355 warrant shares. The date of issuance is October 12, 2020. The notes are issued in $33,000 monthly increments, with an original issue discount of 10%. The associated warrants for each convertible debt issuance are 130,871 each month. The conversion price is $0.6877 per common share and expire five years from the date of issuance.

 

The third SPA is up to $125,000 in 15% convertible, unsecured notes that matures in one year, along with warrants to acquire up to an aggregate of 545,300 warrant shares. The date of issuance is October 12, 2020. The notes are issued in $27,500 monthly increments, with an original issue discount of 10%. The associated warrants for each convertible debt issuance are 109,060 each month. The warrants have an exercise price of $0.6877 per common share and expire five years from the date of issuance.

 

The fourth SPA is up to $165,000 in 15% convertible, unsecured notes that matures in one year, along with warrants to acquire up to an aggregate of 545,296 common shares. The note is dated December 15, 2020. Interest payments are quarterly, beginning March 31, 2021. Note is convertible into fully paid and non-assessable shares of Mullen common stock. The conversion price is $0.6877 per common share. The conversion is at the option of the holder, and the note can be converted at any time. The conversion is based upon the following formula: conversion amount/conversion price. If interest payments are not made, then the interest rate shall automatically increase to 20%. Loan will be in default. The convertible debt maturity date is December 15, 2021. The warrants expire on December 15, 2025.

 

The fifth SPA is up to $165,000 in 15% convertible, unsecured notes that matures in one year, along with warrants to acquire up to an aggregate of 545,296 common shares. The note is dated December 15, 2020. Interest payments are quarterly, beginning March 31, 2021. Note is convertible into fully paid and non-assessable shares of Mullen common stock. The conversion price is $0.6877 per common share. The conversion is at the option of the holder, and the note can be converted at any time. The conversion is based upon the following formula: conversion amount/conversion price. If interest payments are not made, then the interest rate shall automatically increase to 20%. Loan will be in default. The convertible debt maturity date is December 15, 2021. The warrants expire on December 15, 2025.

 

On January 7, 2021, the Company received loan financing through MTI entering into three, unsecured convertible note agreements. Each convertible note is issued at OID of 10%; interest rate of 15% and a maturity date of one year. The first convertible note is $660,000 is an unsecured financial instrument with detached warrants to acquire up to 2,617,420 MTI common shares. The second convertible note is $33,0000 is an unsecured financial instrument with detached warrants to acquire up to 130,871 MTI common shares. The third convertible note is $27,500 is an unsecured financial instrument with detached warrants to acquire up to 109,060 MTI common shares. The warrant conversion price is $0.6877 per common share and expire five years from the date of issuance.

 

On March 10, 2021, the Company received loan financing through MTI entering into three, unsecured convertible note agreements. Each convertible note is issued at OID of 10%; interest rate of 15% and a maturity date of one year. The first convertible note is $660,000 is an unsecured financial instrument with detached warrants to acquire up to 2,617,420 MTI common shares. The second convertible note is $33,0000 is an unsecured financial instrument with detached warrants to acquire up to 130,871 MTI common shares. The third convertible note is $27,500 is an unsecured financial instrument with detached warrants to acquire up to 109,060 MTI common shares. The warrant conversion price is $0.6877 per common share and expire five years from the date of issuance.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-18

 

 

Regulation D Offering – Cambria Capital, LLC

 

On January 4, 2021 and amended on January 8, 2021, MTI entered into a placement agent agreement with Cambria Capital, LLC (“Cambria”), an SEC registered broker-dealer that is a FINRA member and SIPC member. Cambria will receive at closing (i) a cash placement fee of 6% of proceeds raised at closing from investors that have been introduced to MTI, and (ii) five-year warrants to purchase 6% of the common shares issuable under convertible notes sold in the offering to investors introduced by the firm. To date, Cambria raised $525,000 ($172,500 net of OID of 10%) for the issuance of 1-year convertible notes of MTI at a placement agent cost of $31,500 plus warrants to purchase 26,174 shares of MTI.

 

Cambria submitted 4 investors to MTI. The investments are unsecured convertible notes with an original issue discount of 10%.

 

· Two $192,5000 convertible notes issued at 10% original issue discount
· $110,000 convertible note issued at 10% original issue discount
· $82,500 convertible note issued at 10% original issue discount

 

The notes are convertible into fully paid and non-assessable shares of MTI common stock. The associated warrants have an exercise price of $0.6877 per common share. The conversion is at the option of the holder, and the note can be converted at any time. Maturity date is one year. The associated warrants expire on January 7, 2026.

 

The table below reflects the note issuances subsequent to September 30, 2020.

 

Date of
Issuance
    Convertible
Note ($)
    Interest
Rate
    Maturity
Date
    Warrants (#)     Expiration
Date
    Exercise
Price
 
10/12/2020     $ 660,000       15 %     10/12/2021     2,617,420       10/12/2025     $ 0.6877  
10/12/2020       33,000       15 %     10/12/2021     130,871       10/12/2025     $ 0.6877  
10/12/2020       27,500       15 %     10/12/2021     109,060       10/12/2025     $ 0.6877  
11/9/2020       660,000       15 %     11/9/2021     2,617,420       11/9/2025     $ 0.6877  
11/9/2020       33,000       15 %     11/9/2021     130,871       11/9/2025     $ 0.6877  
11/9/2020       27,500       15 %     11/9/2021     109,060       11/9/2025     $ 0.6877  
12/7/2020       660,000       15 %     12/7/2021     2,617,420       12/7/2025     $ 0.6877  
12/7/2020       33,000       15 %     12/7/2021     130,871       12/7/2025     $ 0.6877  
12/7/2020       27,500       15 %     12/7/2021     109,060       12/7/2025     $ 0.6877  
12/15/2020       157,500       15 %     12/15/2021     545,296       12/15/2025     $ 0.6877  
12/15/2020       157,500       15 %     12/15/2021     545,296       12/15/2025     $ 0.6877  
1/7/2021       660,000       15 %     1/7/2022     2,617,420       1/7/2026     $ 0.6877  
1/7/2021       33,000       15 %     1/7/2022     130,871       1/7/2026     $ 0.6877  
1/7/2021       27,500       15 %     1/7/2022     109,060       1/7/2026     $ 0.6877  
1/7/2021       -       -       -     26,174 *     1/7/2026     $ 0.6877  
1/7/2021       192,500       15 %     1/7/2022     763,414       1/7/2026     $ 0.6877  
1/7/2021       82,500       15 %     1/7/2022     327,178       1/7/2026     $ 0.6877  
1/7/2021       192,500       15 %     1/7/2022     763,414       1/7/2026     $ 0.6877  
1/7/2021       110,000       15 %     1/7/2022     436,237       1/7/2026     $ 0.6877  
3/10/2021       660,000       15 %     3/10/2022     2,617,420       3/10/2026     $ 0.6877  
3/10/2021       33,000       15 %     3/10/2022     130,871       3/10/2026     $ 0.6877  
3/10/2021       27,500       15 %     3/10/2022     109,060       3/10/2026     $ 0.6877  
Total     $ 4,495,000       -       -     17,693,764       -       -  

 

* As part of placement agent, Cambria received five-year warrants to purchase 6% of the MTI common shares issuable under convertible notes sold in the Regulation D offering to investors introduced by the firm.

 

Debt Financing

 

Pursuant to the Net Element Definitive Merger Agreement, the Company will receive $9.5 million, less loan advances, in debt financing upon completion of the merger with Net Element. On August 11, 2020, the Company issued a $500,000 demand note with an interest rate of 14%. The note is in default, and the interest rate is now 27%. The completion of the merger is subject to shareholder and NASDAQ approval, as well as other conditions referenced in the merger agreement. The merger agreement was executed on August 5, 2020 and amended on December 29, 2020.

 

Release Liability Claims

 

On January 29, 2021, the Company received an executed release liability claim from RedRock Outdoor Advertising, Inc. (“RedRock”). Mullen entered into an agreement with RedRock for $1.5 million in advertising services. With the executed release liability claim, the liability and associated deferred charge was derecognized on that date.

 

On January 26, 2021, the Company received an executed release liability claim from AirSign, Inc. (“AirSign”). Mullen entered into an agreement with AirSign for $13 million in advertising services. With the executed release liability claim, the liability and associated deferred charge was derecognized on that date.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-19

 

 

Electric Vehicle Plans – Battery Management System

 

Subsequent to September 30, 2020, MTI management notified Linghang Boao Group of its decision to invoke the force majeure provision of the Strategic Cooperation Agreement due to the inability of the parties to perform caused by the global Pandemic.

 

On February 23, 2021, Mullen Technologies, Inc and NexTech Batteries, Inc signed a non-binding Memorandum of Understanding (“MOU”) to provide advanced batteries in the field of electric vehicles (“EV”). The MOU outlines how both parties intend to collaborate and exchange best practices; develop a supply chain of lithium batteries; and allocate duties and responsibilities in their respective fields of expertise. Parties intend to collaborate in the field of lithium batteries and solid-state batteries for EVs.

 

Lease Agreement and Letter of Intent to purchase Manufacturing Plant in Robinsonville (Tunica County), MS

 

On March 9 2021, MTI entered into an agreement with Saleen Motors International LLC to purchase 127,400 SF manufacturing plant on 100 acres located at One Greentech Drive, Robinsonville (Tunica County), MS. The purchase price is $12,000,000. On April 27, 2021, MTI entered into a lease agreement to lease the aforementioned property from May 1, 2021 through July 31, 2021 for $50,000 per month with the first three months being prepaid by May 3. The lease agreement will terminate on the earlier of the (a) closing of the purchase of the property, or (b) MTI’s termination of the lease. MTI has deposited $240,000 into escrow for the asset purchase. Consummation of the purchase is contingent upon completion of satisfactory inspection, review of environmental report, etc. Furnitures, fixtures, equipment and other assets are included as part of the purchase. All lease payments made by MTI will be credited against the purchase price upon closing.

 

Leasing Interest – Manufacturing Plant in Memphis, TN

 

On March 8, 2021, the Company entered into a license agreement to lease property located at 8400 Winchester Road in Memphis, TN. The license agreement term is six months. The license fee is $817,274 to be paid 50% at execution and the remaining 50% on or before June 30, 2021. Full license execution is targeted to occur on or before May 15, 2021. The former Nike Distribution Center is located at 8400 Winchester Road in Memphis, TN. The expected lease term is 193 months with an initial base rent of $3.41 per sf. With tenant improvements, the base rent is $4.50/sf or $3,677,733. Annual escalations are 2.25%. MTI will have one five-year renewal option at an ongoing 2.25% annual escalation above the prevailing rent rate.

 

Agreement with EDD

 

On April 28, 2021, MTI has entered into an installment agreement with the EDD to pay $10,000 per month related to unpaid state payroll tax liabilities (see Note 15) of $429,637.32 plus accrued interest. Payments will begin on May 17, 2021 and will continue until paid in full.

 

Show Car Development

 

In December 2020, the Company entered into an agreement with Thurner, Inc. to design and develop two show electric vehicles. The planned finalization is expected to occur in 2021. The total cost for Phase 1 is $483,254.

 

In December 2020, MTI entered into a $1,652,608 Statement of Work with Phiaro, Inc. for its show car development. The program start began in January 2021. The initial show car development is the MX-05, which is a mid-size electric SUV. The contract is based on progress payments, which are as follows:

 

· Program Start January 15, 2021 $500,000
· MX-05 Exterior May 31, 2021 $500,000
· MX-05 Dry Fit July 20,2021 $500,000
· MX-05 Completion September 1, 2021 $152,608

 

COVID-19 and Loan Forgiveness

 

The COVID-19 outbreak has developed rapidly in 2020, with a significant number of infections. Measures taken by various governments to contain the virus have affected economic activity and the Mullen’s business in various ways. Governments in the countries in which we operate have also announced the implementation of government assistance measures which may mitigate the impact of the COVID-19 outbreak on our results and liquidity.

 

On April 22, 2020, the Company received loan proceeds in the amount of approximately $885,426 under the PPP. The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after 24 weeks if Mullen uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.

 

On November 20, 2020, Mullen management received a loan forgiveness notice for the $875,426 note and interest of $5,155. The $10,000 unforgiven portion of the PPP loan is payable over 18 months.

 

On June 4, 2020, the Company received loan proceeds in the amount of $10,000 under the EIDL. This SBA loan program is designed to provide economic relief to businesses that are currently experiencing a temporary loss of revenue. On February 18, 2021, Mullen received a loan forgiveness notice from ExWorks Capital, LLC. The lender received an SBA payment of $10,082.22, which represents forgiveness of the EIDL $10,000 loan. Since Mullen had paid $1,788.46 in payments on the loan, this amount was returned to the Company via wire transfer.

 

The reduction of economic activity also disrupted some contractual obligations due to work stoppage requirements. Some employees chose the option to work from home rather than come to the office. As a result, there were some reductions in employee productivity, employee layoffs, and employee salaries.

 

Depending on the duration of the COVID-19 crisis and continued negative impact on economic activity, the company may experience further negative results, liquidity restraints and incur additional impairments on its assets in 2020. The exact impact on our activities in the remainder of 2020 and thereafter cannot be predicted. We also refer to Note 2, Liquidity, Capital Resources, and Going Concern and Going Concern Memorandum for additional details.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-20

 

 

Exhibit 99.1(b)

 

MULLEN TECHNOLOGIES, INC.

(Carve-out of Certain Operations of Mullen Technologies, Inc.)

FINANCIAL STATEMENTS (Unaudited)

June 30, 2021 and September 30 2020

  

 

 

  

Page

 

Condensed Consolidated Carve-out Financial Statements (unaudited):
 
Condensed Consolidated Balance Sheets at June 30, 2021 and September 30, 2020 F-3
   
Condensed Consolidated Statements of Operations and Deficiency in Net Assets for the Three- and Nine-Months Ended June 30, 2021 and 2020 F-4
   
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2021 and 2020 F-5
   
Notes to Condensed Consolidated Financial Statements F-6

  

 

 

 

MULLEN TECHNOLOGIES, INC.

(Carve-out of Certain Operations of Mullen Technologies, Inc.)

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  

    June 30, 2021     September 30, 2020  
    (Unaudited)        
ASSETS                
CURRENT ASSETS                
Cash   $ 664,227     $ 33,368  
Materials and supplies     55,753       43,083  
Deferred advertising     -       15,054,000  
Other current assets     765,236       201,067  
TOTAL CURRENT ASSETS     1,485,216       15,331,518  
Property, equipment and leasehold improvements, net     1,299,610       1,541,996  
Intangible assets, net     2,668,300       2,622,796  
Right-of-use assets, net     2,466,682       1,729,112  
Other assets     776,522       762,008  
TOTAL ASSETS     8,696,330       21,987,430  
                 
LIABILITIES AND DEFICIENCY IN NET ASSETS                
CURRENT LIABILITIES                
Accounts payable     4,606,944       2,688,176  
Accrued expenses and other current liabilities     15,497,954       22,151,589  
Lease liabilities, current portion     569,367       336,765  
Notes payable, current portion     35,740,404       33,048,471  
TOTAL CURRENT LIABILITIES     56,414,669       58,225,001  
Notes payable, net of current portion     256,850       283,881  
Lease liabilities, net of current portion     2,002,469       1,482,569  
Other liabilities     4,500,000       4,500,000  
TOTAL LIABILITIES     63,173,988       64,491,451  
Commitments and Contingencies (Note 14)                
                 
DEFICIENCY IN NET ASSETS     (54,477,658 )     (42,504,021 )
TOTAL LIABILITIES AND DEFICENCY IN NET ASSETS   $ 8,696,330     $ 21,987,430  

 

See notes to the unaudited condensed consolidated financial statements.

 

F-3 

 

 

MULLEN TECHNOLOGIES, INC.

(Carve-out of Certain Operations of Mullen Technologies, Inc.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND DEFICIENCY IN NET ASSETS

(Unaudited)

 

    Three Months Ended June 30,     Nine Months Ended June 30,    
    2021     2020     2021     2020  
                         
OPERATING EXPENSES                                
General and administrative   $ (4,926,154 )   $ (2,246,064 )   $ (12,555,572 )   $ (6,569,965 )
Research and development     (1,479,399 )     -       (2,535,693 )     (26,563 )
Total Operating Expense     (6,405,553 )     (2,246,064 )     (15,091,265 )     (6,596,528 )
                                 
Loss from Operations     (6,405,553 )     (2,246,064 )     (15,091,265 )     (6,596,528 )
                                 
Interest expense     (8,339,195 )     (5,265,904 )     (13,784,976 )     (15,236,819 )
Other financing costs     (506,654 )     -       (1,559,961 )     -  
Gain on extinguishment of indebtedness, net     -       -       890,581       -  
Loss on disposal of fixed assets     -       -       -       (5,679 )
Net Loss     (15,251,402 )     (7,511,968 )     (29,545,621 )     (21,839,026 )
                                 
Deficiency in net assets, beginning of period                     (42,504,021 )     (33,875,708 )
MTI net increases in net assets                     11,973,637       17,619,500  
Deficiency in net assets, end of period                   $ (54,477,658 )   $ (51,495,208 )

  

See notes to the unaudited condensed consolidated financial statements.

 

F-4 

 

  

MULLEN TECHNOLOGIES, INC.

(Carve-out of Certain Operations of Mullen Technologies, Inc.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  

    Nine Months Ended June 30,  
    2021     2020  
Cash Flows from Operating Activities                
Net Loss   $ (29,545,621 )   $ (21,839,026 )
Adjustments to reconcile net loss to net cash used in operating activities:                
  Depreciation and amortization     338,321       436,710  
  Impairment charge     74,495       24,563  
  Loss on disposal of fixed assets     -       5,679  
  Employee stock compensation     2,024,426       803,278  
  Issuance of MTI shares for services     1,731,779       1,098,998  
  Non-cash lease expense     391,433       315,879  
  Amortization of debt discount     4,817,504       14,620,139  
  Gain on extinguishment of debt     (890,581 )     -  
                 
Changes in operating assets and liabilities:                
  Material and supplies     (87,165 )     (30,241 )
  Other current assets     (564,168 )     (1,556,025 )
  Other assets     (14,515 )     10,579  
  Accounts payable     1,918,768       873,187  
  Accrued expenses and other liabilities     7,144,718       383,845  
  Lease liabilities     (376,501 )     (192,026 )
        Net cash used in operating activities     (13,037,107 )     (5,044,461 )
                 
Cash Flows from Investing Activities                
  Purchase of equipment     (78,140 )     (43,021 )
  Additions to intangible assets     (63,299 )     -  
        Net cash used in investing activities     (141,439 )     (43,021 )
                 
Cash Flows from Financing Activities                
  Changes in net parent investment     6,157,956       (2,539,073 )
  Issuance of notes payable     8,068,500       9,966,235  
  Payment of notes payable     (417,051 )     (4,536,828 )
        Net cash provided by financing activities     13,809,405       2,890,334  
                 
Increase (decrease) in cash     630,859       (2,197,148 )
Cash, beginning of year     33,368       2,221,824  
Cash, ending of period   $ 664,227     $ 24,676  
                 
Supplemental disclosure of Cash Flow information:                
     Cash paid for interest   $ 11,514     $ 12,765  
Supplemental disclosure for non-cash financing activities:                
    Refinance of existing debt   $ -     $ 4,928,853  
    Initial recognition of right-of-use assets and lease liabilities   $ -     $ 1,383,447  
    Right-of-use assets obtained in exchange of operating lease liabilities   $ 1,129,003     $ 680,144  
    Indebtedness settled via issuance of MTI stock   $ -     $ 38,871,040  
                 

 

F-5 

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

 

Basis of Presentation

 

These condensed consolidated carve-out financial statements reflect the financial position, statement of operations, deficiency in net assets and cash flows related to the assets and liabilities of the “Mullen EV Net Assets” (“Mullen-EV”) which management plans to transfer to Mullen Acquisition Corporation (“Mullen AC” or “the Company”) by its parent company Mullen Technologies, Inc. (“MTI”) in 2021.

 

As MTI has not historically prepared financial statements for the Mullen EV Net Assets, and Mullen AC did not exist as a legal entity prior to 2021, the condensed consolidated carve-out financial statements have been prepared from the financial records of MTI on a carve-out basis. The condensed consolidated carve-out Statements of Financial Position include all of the Mullen EV Net Assets. The condensed consolidated carve-out Statements of Operations for the three and nine months ended June 30, 2021 and 2020, reflect all expenses and activity directly attributable to the Mullen EV Net Assets, and an allocation of MTI’s general and administrative expenses incurred in the three and nine months ended June 30, 2021 and 2020, as these expenditures were shared by the Mullen EV Net Assets. In some instances, certain expenses were not allocated as they would have related directly to Mullen-EV. All inter-entity balances and transactions have been eliminated.

 

The condensed consolidated carve-out financial statements of Mullen-EV are unaudited and have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”). However, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In our opinion, the condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements not misleading. Operating results for the three and nine months ended June 30, 2021 are not necessarily indicative of the final results that may be expected for the year ending September 30, 2021.

  

These condensed consolidated carve-out financial statements have been prepared based upon the historical cost amounts recorded by MTI. These condensed carve-out financial statements may not be indicative of Mullen-EV financial performance and do not necessarily reflect what its financial position, results of operations, and cash flows would have been had Mullen-EV operated as an independent entity during the periods presented.

 

Proposed Business Combination 

 

Net Element Reverse Merger & Amendments to the Agreement and Plan of Merger

 

On May 14, 2021, Net Element and Mullen Technologies entered into an Amended and Revised Agreement and Plan of Merger (the “Amendment”), which restated and replaced in its entirety the August 4, 2020 Agreement and Plan of Merger, and its subsequent amendments. Pursuant to the provisions of the Amendment, the Merger is terminable by Net Element or the Company if the Merger Effective Time has not occurred by August 31, 2021. The Merger agreement was updated and on July 20, 2021, Net Element and Mullen have entered into a Second Amended and Restated Plan of Merger (see Note 16 - Subsequent Events).

 

Mullen Technologies Inc. Related Agreements

 

On May 12, 2021, MTI Board of Directors approved and executed the formation documents for Mullen Automotive, Inc., which will be public entity for the electric vehicle business upon a plan for the completion of the reverse merger and divestiture of certain businesses. The executed documents are listed below:

 

· Master Distribution Agreement – The agreement addresses the steps as to the legal separation of the two divisions of MTI: Electric Vehicles and Automotive. The purpose of the separation is to allow the Mullen-EV to become a stand-alone, independent public traded company. The Automotive Division will remain a private company.
· Separation Agreement – The agreement addresses and governs how the assets, liabilities, and equity of the EV business and Automotive business will be separated into two distinct businesses.
· Contribution and Spin-Off Agreement – The agreement governs how the contribution and spin-off of the two MTI divisions will occur. Each division will be responsible for its own legal, accounting, service providers and advisors.
· Transition Services Agreement – This agreement governs how to facilitate and provide for an orderly transition in connection with the contribution and spin-off of the two divisions.
· Tax Sharing Agreement – This agreement governs the payment of tax liabilities and entitlement to refunds thereof, allocate responsibility for, and cooperation in, the filing of Tax Returns, and provide for certain other matters relating to Taxes.

F-6 

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS, continued

 

The actual transfer of assets and spin-off will occur together immediately prior to the merger. Upon the merger effective date, MTI will assign and transfer to Mullen Automotive all of its electric vehicle business related assets, business and operations, and Mullen assumed certain debt and liabilities of Mullen Technologies. Prior to the effective time of the Merger, Mullen Technologies is contemplating a spin off, via share dividend, of all of the capital stock of Mullen to the stockholders of Mullen Technologies as of the effective date of such spin off. After such spin off and immediately prior to the effective time of the Merger, the capital structure (including its issued and outstanding common and preferred stock) of Mullen Automotive will mirror the capital structure of Mullen Technologies.

 

Organization

 

The condensed consolidated carve-out financial statements consist of the electric vehicle division of MTI, including the MTI asset acquisition of CarHub, Inc., which the Company plans to offer an interactive data management solution for the automotive industry (collectively, Mullen-EV or “the Company”). MTI has two electric vehicles under development which it expects to commercialize and begin delivery of in the third quarter of 2024.

 

NOTE 2 – LIQUIDITY, CAPITAL RESOURCES, AND GOING CONCERN

 

The accompanying condensed consolidated carve-out financial statements have been prepared on the basis that the Company will continue as a going concern. The Company’s principal sources of liquidity as of June 30, 2021, consists of existing cash of approximately $664,000. During the nine months ended June 30, 2021, the Company sustained a loss of approximately $29.5 million and had a deficiency in working capital of approximately $54.9 million. Subsequent to June 30, 2021, the Company obtained additional financing in the amount of $3.2 million in unsecured convertible notes (See Note 16 – Subsequent Events).

 

The Coronavirus (“COVID-19”) continues to impact countries, communities, supply chains and markets, global financial markets, and various industries. To date, COVID-19 has had a material impact on the Company’s strategy in EV product development and the ability to obtain external financing to fund its development activities. The Company cannot predict whether the global pandemic will continue to have a material impact on our future financial condition and results of operations.

 

Going Concern

 

As an early-stage development company, Mullen-EV’s ability to access capital is critical. Management plans to raise additional capital through a combination of debt financings, strategic alliances and licensing arrangements.

 

Due to the conditions described above, management believes that there is substantial doubt about the Company’s ability to continue as a going concern in the foreseeable future. The Company plans to raise additional capital from the sale of equity securities or the incurrence of indebtedness by MTI to allow the Company to continue operations. There can be no assurance that additional financing will be available on acceptable terms, or at all. If MTI cannot raise needed funds, the Company might be forced to curtail or make substantial reductions in its development activities, which would adversely affect the Company’s ability to implement its business plan.

 

To date, the Company’s existing cash resources and existing borrowing capability is not sufficient to support planned development operations for the next 12 months. As a result, management may need to consider restructuring changes to streamline operations and manage expenses, in addition to debt refinancing and capital plan. Management is seeking merger opportunities to become a public company to gain access to the capital markets for liquidity, funding, and capital needs (See Note 16 - Subsequent Events).

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Push-Down Accounting

 

The condensed consolidated carve-out financial statements reflect costs and expenses incurred by MTI on behalf of Mullen-EV, including interest costs. As a result, share-based compensation and other equity transactions (such as issuances of warrants and stock conversion rights embedded in issuances of indebtedness) are reflected in these carve-out financial statements. Accordingly, the classification of debt and equity issuances by MTI have been pushed down and reflected with similar classification in these carve-out financial statements. In addition, certain right-of-use assets and related lease liabilities of MTI have been pushed down to Mullen-EV.

 

F-7 

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Use of Estimates

 

The preparation of the condensed consolidated carve-out 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 condensed consolidated 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 issued by MTI.

 

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 carve-out 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.

 

Use of Estimates

 

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 the Company experiences 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 the future operations and prospects for commercial success of the Company.

 

Cash and Cash Equivalents

 

The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company did not have any cash equivalents at June 30, 2021 and September 30, 2020.

  

Deferred Advertising

 

Deferred advertising represented a marketing campaign, financed by a third party, that was carried as a deferred charge on the condensed consolidated balance sheets until launched. At September 30, 2020, these deferred advertising charges of $15.1 million were associated with the AirSign advertising contract and the RedRock Outdoor Advertising Display advertising contract. During the first quarter of 2021, the Company received a release of liability from both AirSign, Inc. and RedRock Outdoor Advertising, Inc. Both liabilities, along with the associated deferred advertising, were derecognized in January 2021.

 

Prepaid Expenses and Other Current Assets

 

Prepaid expenses consist of various advance payments made by the Company 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.

 

F-8 

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Estimated Useful Lives

 

Description   Life
Buildings   30 Years
Furniture and Equipment   5 Years
Computer and Software   1 - 3 years
Machinery and Equipment   5 Years
Leasehold Improvements   Shorter of the estimated useful life or the underlying lease term
Vehicles   5 Years

 

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. The Company 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, the Company assesses 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, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.

 

Intangible Assets

 

Intangible assets consist of acquired and developed intellectual property and website development costs. In accordance with ASC 350, “Intangibles—Goodwill and Other,” 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 are generally amortized on a straight-line basis over periods up to 36 months. The costs to periodically renew our intangible assets are expensed as incurred.

 

Other Assets

 

Other assets are comprised primarily of Coda electric vehicles, related parts and security deposits related to the Company’s property leases related to the EV business only.

 

Extinguishment of Liabilities

 

The Company derecognizes financial liabilities when the Company’s obligations are discharged, cancelled, or expired.

 

Leases

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, “Leases” (ASU 2016-02). The core principle of ASU 2016-02 is that lessees should recognize on its balance sheet assets and liabilities arising from a lease. In accordance with that principle, ASU 2016-02 requires that a lessee 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. Lessees shall classify all leases as finance or operating leases. The Company adopted ASU 2016-02, on October 1, 2019, which resulted in the recognition of the right-of-use assets and related obligations on its carve-out financial statements.

 

F-9 

 

  

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Accrued Expenses

 

Accrued expenses are expenses that have been incurred by the Company but not yet paid. They are properly accounted for within current liabilities on the consolidated balance sheets.

 

General and Administrative Expenses

 

General and administrative (“G&A”) expenses include all non-production expenses incurred by the Company 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. Advertising costs are expensed as incurred and are included in G&A expenses. The Company expenses 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 primarily consist of Mullen Five show car development and are primarily comprised of personnel-related costs for employees and consultants.

 

MTI Share-Based Compensation

 

The Company accounts for its share-based awards issued by MTI 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 MTI issued to employees, non-employees and directors. The fair value of our non-marketable shares has been estimated based on an independent valuation. The MTI common and preferred share valuations have been appraised by an independent financial valuation advisor, 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 classified within general and administrative expenses.

 

Other Financing Costs

 

Pursuant to the terms of the First Amendment to the Agreement and Plan of Merger with Net Element, a $13,333 daily penalty commenced on January 16, 2021. As of June 30, 2021, Net Element has invoiced the Company $1,559,961 through May 13, 2021, as the Form S-4 was filed with the SEC on May 14, 2021. This amount is included in the condensed consolidated statement of operations for the nine months ended June 30, 2021, and included in accounts payable in the condensed balance sheet at June 30, 2021.

 

Related Party Transactions

 

The Company has related party transactions with its directors, officers and principal shareholders. These transactions, which are primarily long-term in nature, include operational loans, convertible debt, and warrants for financial support associated with the borrowing of funds and are entered into in the ordinary course of business.

 

Fair Value of Financial Instruments

 

The Company applies 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. The Company 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 that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company 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 following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

F-11

 

  

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

 

Concentrations of Business and Credit Risk

 

The Company maintains 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, the Company’s cash balance exceeds these federal limitations and maintains significant cash on hand at certain of its locations. However, the Company has not experienced any losses in such accounts and management believes the Company is not exposed to any significant credit risk on these accounts in excess of insured limits at June 30, 2021 and September 30, 2020.

 

Recently Issued and Adopted Accounting Standards

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (ASU 2017-04) (Topic 350), “Intangibles - Goodwill and Others”. ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for annual periods beginning after December 15, 2019 including interim periods within those periods. The Company adopted ASU 2017-04, on October 1, 2020. The adoption of the ASU did not have a material impact on the condensed consolidated balance sheets.

 

In June 2018, the FASB issued Accounting Standards Update No. 2018-07 (ASU 2018-07) ASU No. 2018-07 (Topic 718), “Compensation—Stock Compensation: Improvements to Nonemployee Share- Based Payment Accounting”. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606. Adoption of this guidance is not expected to have a material impact on the Company’s financial condition or results of operations. The Company adopted ASU 2018-07, on October 1, 2020. The adoption of the ASU did not have a material impact on the condensed consolidated statements of operations.

 

In January 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815”, which clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting under Topic 323, and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements.

 

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity's own equity, and also improves and amends the related earnings per share guidance for both Subtopics. The ASU will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years and early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements.

 

F-12

 

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Recently Issued and Adopted Accounting Standards, continued

 

In 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, 2023 for smaller reporting companies). The Company has warrants attached to debt and potential debt modifications and convertible instruments that are addressed in this update. The Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements

 

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 December 15, 2021. The Company is currently evaluating the impact this guidance will have on its condensed consolidated financial statements.

 

NOTE 4 – INTANGIBLE ASSETS

 

For the nine months ended June 30, 2021, the Company incurred website development costs of $63,299. These costs have been historically capitalized, as the website is in the development stage, resulting in improved functionality. Amortization of the website will commence when the Mullen EV website is placed in service for its intended use, expected during the Company’s fourth quarter of 2021.

 

The weighted average useful life of the intellectual property is 3.0 years. Identifiable intangible assets with definite lives are amortized over the period of estimated benefit using the straight-line method and the estimated useful lives of three years. The straight-line method of amortization represents the Company’s best estimate of the distribution of the economic value of the identifiable intangible assets.

 

    June 30, 2021     September 30, 2020  
Finite-Lived Intangible Assets   Gross
Carrying Amount
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
 
Website design and development   $ 2,660,391     $ -     $ 2,660,391     $ 2,597,091     $ -     $ 2,597,091  
Intellectual property     71,182       (63,273 )     7,909       71,182       (45,477 )     25,705  
Total Finite-Lived Intangible Assets   $ 2,731,573     $ (63,273 )   $ 2,668,300     $ 2,668,273     $ (45,477 )   $ 2,622,796  

 

Total future amortization expense for finite-lived intellectual property is as follows:

 

Years Ended June 30, 2021   Future Amortization  
2021 (Remaining 3 months)   $ 227,631  
2022     888,774  
2023     886,797  
2024     665,098  
Total Future Amortization Expense   $ 2,668,300  

 

For the three months ended June 30, 2021 and 2020, amortization expense for the intangible assets was $5,932; and $17,796 for the nine months ended June 30, 2021 and 2020, respectively.

 

F-13

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 

 

NOTE 5 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

 

Property, equipment, and leasehold improvements, net consists of the following:

  

    June 30,
2021
    September 30,
2020
 
Building   $ 804,654     $ 807,154  
Furniture and Equipment     111,102       114,879  
Vehicles     61,735       45,887  
Computer Hardware and Software     135,784       129,967  
Machinery and Equipment     2,625,954       2,615,311  
Leasehold Improvements     62,483       76,675  
   Subtotal     3,801,712       3,789,873  
Less:  Accumulated Depreciation     (2,502,102 )     (2,247,877 )
Property, Equipment and Leasehold Improvements, Net   $ 1,299,610     $ 1,541,996  

 

Depreciation expense related to property, equipment and leasehold improvements for the three months ended June 30, 2021, and 2020 was $109,058 and $108,884, respectively. For the nine months ended June 30, 2021 and 2020, depreciation expense was $320,525 and $418,914, respectively.

 

NOTE 6 – OTHER ASSETS

 

    June 30,
2021
    September 30,
2020
 
Other Assets                
     Coda Materials   $ 76,588     $ 206,998  
     Prepaids     4,375       51,806  
     Notes Receivable     79,939       79,939  
     Show Room Cars     192,368       210,483  
     Security Deposits     423,252       212,782  
Total Other Assets   $ 776,522     $ 762,008  

 

NOTE 7 – DEBT

 

Short-term debt comprises a significant component of the Company’s 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 or 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 loans with creditors for favorable terms, such as reduce interest rate, extend maturities, or both. Until negotiations with creditors are resolved, these matured loans remain outstanding and are classified within short-term debt on the balance sheet. Interest and fees on loans are being accounted for within accrued interest. Although the loans were issued by MTI, 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 the Company debt as of June 30, 2021:

 

    Net Carrying Value              
Type of Debt   Unpaid Principal
Balance
    Current     Long-Term     Contractual
Interest Rate
    Contractual
Maturity
 
Matured Notes   $ 5,960,574     $ 5,960,574     $ -       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     10,762,500       10,762,500       -       15.00%-20.00 %     2021 - 2022  
Real Estate Note     292,669       35,819       256,850       5.00 %     2023  
Loan Advances     934,298       934,298       -       0.00% - 10.00 %     2019- 2020  
  Less: Debt Discount     (6,284,699 )     (6,284,699 )     -                 NA             NA  
Total Debt   $ 35,997,254     $ 35,740,404     $ 256,850                 NA             NA  

  

F-14

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 7 – DEBT, continued

 

Scheduled Debt Maturities

 

The following scheduled debt maturities as June 30, 2021:

 

    Years Ended June 30,  
    2021     2022     2023     Total  
Total Debt   $ 35,740,404     $ -     $ 256,850     $ 35,997,254  

 

The following is a summary of the Company debt as of September 30, 2020:

 

    Net Carrying Value              
Type of Debt   Unpaid Principal
Balance
    Current     Long-Term     Contractual
Interest Rate
    Contractual
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  
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     $ 283,881                 NA             NA  

 

Notes and Advances

 

The Company enters into promissory notes with third parties and officers of the Company to support operations of the Company. Promissory notes are typically for less than three years maturity and carry interest rates from 0% to 28.0%. For many of the notes listed above the scheduled maturity date has passed, and the Company is currently in default of the loan. The Company is working with the creditors to remediate the $5,960,574 in promissory notes and loan advances that are currently in default. Promissory notes and loan advances that are in default still accrue interest after the scheduled maturity date. The Company notes that there are no financial covenants associated with the promissory notes and loan advances, and there are no compliance waivers received from creditors. The Company records imputed interest on promissory notes and advances which are deemed to be below the market interest rate. For the three and nine months ended June 30, 2021 and 2020, the Company recorded interest expense of $8,339,195 and $5,265,904, and $13,784,976 and $15,236,819, respectively.

 

In some instances, MTI issues shares of common stock along with the issuance of promissory notes, resulting in the recognition of a debt discount which is amortized to interest expense over the term of the promissory note. Debt discount amortization for the nine-month period ended June 30, 2021, and 2020, was $4,817,504 and $14,620,139, respectively.

 

During 2020, MTI issued shares of stock to certain creditors in satisfaction of debt payments or in settlement of indebtedness. These agreements essentially exchanged a predetermined amount of stock to settle debt. For the nine-month period ended June 30, 2021 and 2020, the carrying amount of indebtedness that was settled via issuance of MTI shares was $0 and $38,871,040, respectively.

 

Convertible Debt Issuances and Warrants

 

On May 16, 2021, the Company received debt financing through MTI entering into an unsecured $4.4 million convertible note agreement with TDR Capital. The convertible note is issued at OID of 10% or $400,000; carries an interest rate of 15% and has a maturity date of one year. The convertible note is unsecured and includes detached warrants to acquire up to 17,446,000 shares of MTI common stock. The warrant exercise price is $0.6877 per common share and expires five years from the date of issuance. The value ascribed to the warrants was $24,358,875, resulting in an additional debt discount of $3,726,816 and a beneficial conversion discount of $673,184. These discounts are being amortized over the 12-month term of the debt. The number of conversion shares issuable upon conversion of the conversion amount shall be determined according to the formula: Conversion Amount/Conversion Price of $0.6877, subject to certain adjustments. However, upon conversion, TDR Capital (together with their affiliates) is limited to a 9.9% ownership cap in shares of MTI’s common stock then outstanding after giving effect to the issuance of common stock issuable upon exercise of the warrants.

 

F-15

 

  

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 7 – DEBT, continued

 

Convertible Debt to Equity Conversion

 

On May 7, 2021, and amended on May 20, 2021, MTI executed an exchange agreement with its existing convertible debt investors who hold $10,762,500 in MTI convertible debt. Upon consummation of the proposed merger with Net Element, the Company and the investors agreed to exchange the convertible debt for shares of MTI’s Series C Preferred Stock, par value $0.001 per share. The right to additional purchases of preferred stock expires 12 months from the merger close date between Net Element and MTI. MTI originally issued 42,759,290 in detached warrants to purchase shares of MTI common stock as part of the convertible debt agreements with investors (See Note 16 – Subsequent Events).

 

Drawbridge Relationship

 

During July 2020, Drawbridge-DBI and MTI entered into a settlement agreement (the “Agreement”) to restructure the aggregate obligations owed to Drawbridge-DBI and the other DBI-affiliated entities. In connection with the Agreement, (a) the Sale-Leaseback obligation in the amount of $49,500,000 was replaced by a new note with a face value of $23,831,554, (b) the other indebtedness and advances from DBI-affiliated entities with a net book value of $9,935,086 were extinguished, and (c) MTI issued 71,516,534 Series B Preferred Shares to Drawbridge-DBI.

 

The amounts owed to Drawbridge-DBI is $23,831,554 as of June 30, 2021, and September 30, 2020, and are in default (See Note 16 – Subsequent Events). The amounts owed to other DBI-affiliated entities is $982,500 and $1,082,500, as of June 30, 2021, and September 30, 2020, respectively. The 2020 Drawbridge loan is currently recognized within the current portion of debt on the condensed consolidated balance sheet.

 

SBA Loans

 

On April 14, 2020, the Company entered into a promissory note (the “Note”) evidencing an unsecured loan (the “Loan”) in the amount of $885,426 made to the Company under the Paycheck Protection Program (the “PPP”). The Note matures on April 14, 2022 and bears interest at a rate of 1% per annum. Pursuant to the terms of the Coronavirus, Aid, Relief and Economic Security Act (“CARES Act”) and the PPP, the Company applied to the Lender for forgiveness for the amount due on the Loan. The amount eligible for forgiveness is based on the amount of Loan proceeds used by the Company (during the eight-week period after the Lender makes the first disbursement of Loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), interest on mortgage obligations, rent and utilities, subject to certain limitations and reductions in accordance with the CARES Act and the PPP. During November 2020, the SBA approved the loan forgiveness amount of $875,426 in principal and $5,155 in interest on November 20, 2020. The loan forgiveness is accounted for as a gain on debt extinguishment of $890,581 within the Condensed Consolidated Statement of Operations.

 

In June 2020, the Company entered into a promissory note (the "Note") in the amount of $10,000 made to the Company by the SBA under the EIDL program. Monthly installment payments on the Note will begin twelve months from the date of the Note, with the balance of any accrued principal and interest at 3.75% annually, payable thirty years from the date of the Note. The Company applied to the Lender for loan forgiveness, which was approved for the full amount on February 18, 2021.

 

Convertible Notes

 

As of June 30, 2021, MTI unsecured convertible notes totaled $10,762,500, of which $6,418,500 were issued between January and June 2021. The new issuances bear interest at 15% and mature in one year, along with warrants to acquire common shares based on a specified formula. Interest is accrued in arrears until the last business day of each calendar year quarter. The default rate on the note increases to 20% when quarterly interest payments are not timely made by MTI.

 

F-16

 

  

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 7 – DEBT, continued

 

Convertible Notes

 

Date of
Issuance
    Convertible
Note ($)
    Interest
Rate
    Default
Interest
Rate
    Maturity
Date
    Warrants
(#)
    Exercise
Date
    Exercise
Price ($)
 
8/26/2020     $ 1,000,000       15 %     20 %     8/26/2021       2,908,244       8/26/2025     $ 0.6877  
8/26/2020       200,000       15 %     20 %     8/26/2021       581,649       8/26/2025     $ 0.6877  
8/26/2020       200,000       15 %     20 %     8/26/2021       581,649       8/26/2025     $ 0.6877  
8/26/2020       100,000       15 %     20 %     8/26/2021       290,824       8/26/2025     $ 0.6877  
9/25/2020       105,000       15 %     20 %     9/25/2021       381,707       9/25/2025     $ 0.6877  
9/25/2020       157,500       15 %     20 %     9/25/2021       572,561       9/25/2025     $ 0.6877  
9/25/2020       105,000       15 %     20 %     9/25/2021       381,707       9/25/2025     $ 0.6877  
10/12/2020       660,000       15 %     20 %     10/12/2021       2,617,420       10/12/2025     $ 0.6877  
10/12/2020       33,000       15 %     20 %     10/12/2021       130,871       10/12/2025     $ 0.6877  
10/12/2020       27,500       15 %     20 %     10/12/2021       109,060       10/12/2025     $ 0.6877  
11/9/2020       660,000       15 %     20 %     11/9/2021       2,617,420       11/9/2025     $ 0.6877  
11/9/2020       33,000       15 %     20 %     11/9/2021       130,871       11/9/2025     $ 0.6877  
11/9/2020       27,500       15 %     20 %     11/9/2021       109,060       11/9/2025     $ 0.6877  
12/7/2020       660,000       15 %     20 %     12/7/2021       2,617,420       12/7/2025     $ 0.6877  
12/7/2020       33,000       15 %     20 %     12/7/2021       130,871       12/7/2025     $ 0.6877  
12/7/2020       27,500       15 %     20 %     12/7/2021       109,060       12/7/2025     $ 0.6877  
12/15/2020       157,500       15 %     20 %     12/15/2021       572,561       12/15/2025     $ 0.6877  
12/15/2020       157,500       15 %     20 %     12/15/2021       572,561       12/15/2025     $ 0.6877  
1/7/2021       660,000       15 %     -       1/7/2022       2,617,420       1/7/2026     $ 0.6877  
1/7/2021       33,000       15 %     -       1/7/2022       130,871       1/7/2026     $ 0.6877  
1/7/2021       27,500       15 %     -       1/7/2022       109,060       1/7/2026     $ 0.6877  
 1/7/2021       -       -       -       -       26,174 *     1/7/2026     $ 0.6877  
1/7/2021       192,500       15 %     -       1/7/2022       763,414       1/7/2026     $ 0.6877  
1/7/2021       82,500       15 %     -       1/7/2022       327,178       1/7/2026     $ 0.6877  
1/7/2021       192,500       15 %     -       1/7/2022       763,414       1/7/2026     $ 0.6877  
1/7/2021       110,000       15 %     -       1/7/2022       436,237       1/7/2026     $ 0.6877  
3/10/2021       660,000       15 %     -       3/10/2022       2,617,420       3/10/2026     $ 0.6877  
3/10/2021       33,000       15 %     -       3/10/2022       130,871       3/10/2026     $ 0.6877  
3/10/2021       27,500       15 %     -       3/10/2022       109,060       3/10/2026     $ 0.6877  
5/16/2021       4,400,000       15 %     20 %     5/16/2022       17,446,000       5/16/2026     $ 0.6877  
5/7/2021       -       -       -       -       1,057,544 **     5/7/2026     $ 0.6877  
5/7/2021       -       -       -       -       427,975 **     5/7/2026     $ 0.6877  
5/7/2021       -       -       -       -       134,927 **     5/7/2026     $ 0.6877  
5/7/2021       -       -       -       -       246,209 **     5/7/2026     $ 0.6877  
Total     $ 10,762,500       -       -       -       42,759,290       -       -  

* As part of placement agent, Cambria received five-year warrants to purchase 6% of the MTI common shares issuable under convertible notes sold in the Regulation D offering to investors introduced by the firm.

** On May 7, 2021, additional warrants of 1,866,665 were added to the Exchange Agreement for no additional consideration to acquire additional common shares of common stock to four convertible debt holders given changes in the exchange share calculation, which will be consistent with the exchange share calculation of other convertible debt holders. The Exchange Agreement supersedes the original agreements that were issued by MTI and allows the convertible debt holder to exchange their debt for the newly created Series C Preferred Stock, par value of $0.001. The new series of preferred stock will be created upon the merger effectiveness date between Net Element and Mullen Automotive.

 

F-17

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 7 – DEBT, continued

 

Convertible Notes

 

Because the market price for MTI common stock on the date of the notes exceeded the notes’ conversion price of $0.6877 per share, a beneficial conversion feature in the amount of $10,613,630 was recorded as a discount on the notes. The discount is being amortized as additional interest over the life of the notes. On June 30, 2021, the unamortized discount is $6,284,699.

 

The Company evaluated the conversion features embedded in the convertible notes described above for derivative accounting in accordance with ASC 815-40, Derivatives and Hedging embedded in the modified notes payable for derivative accounting in accordance with the criteria for classification in equity.

 

NOTE 8 – FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

 

Non-financial assets, such as property, equipment and leasehold improvements is required to be measured at fair value only when acquired or when an impairment loss is recognized. See “Note 6 - Property, Equipment and Leasehold Improvements, Net” for further information on impairment of fixed assets.

 

Financial instruments for which carrying value approximates fair value

 

Certain financial instruments that are not carried at fair value on the 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. We believe that the carrying value of term debt approximates fair value due to the variable rates associated with these obligations. Accounts payable are short-term in nature and generally terms are due upon receipt or within 30 to 90 days.

 

NOTE 9 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

    June 30, 2021     September 30, 2020  
Accrued Expenses and Other Liabilities                
Accrued expense - other   $ 1,062,245     $ 15,633,812  
Accrued payroll     4,312,219       3,771,874  
Accrued interest     8,480,213       2,358,273  
Liability for future issuance of stock     1,643,277       387,630  
Total   $ 15,497,954     $ 22,151,589  

 

Accrued expenses – other at September 30, 2020 includes the $13.6 million AirSign advertising contract and $1.4 million RedRock Outdoor Advertising, Inc. contract as of December 31, 2020 and September 30, 2020. The Company entered into these agreements to promote its electric vehicle capabilities with various national sporting events and within the New York market. In 2021, the Company received a release of liability from AirSign, Inc. and RedRock Outdoor Advertising, Inc. Both liabilities, along with the associated deferred advertising, were derecognized during January 2021.

 

Accrued payroll represents salaries and benefits that are owed to employees.  More importantly, the payroll tax liabilities are reported within this account.  Delinquent IRS and state tax liabilities on June 30, 2021, and September 30, 2020, are $3,583,709 and $3,987,596, respectively. These tax liabilities have priority liens over MTI assets due to nonpayment of tax debt.  The lien protects the government’s interest in all MTI property, including real estate, personal property and financial assets.  Refer to Note 14, Contingencies and Claims.

 

Accrued interest represents interest on loans.  Refer to Note 7, Debt.

 

F-18

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 10 – OPERATING EXPENSES

 

General & Administrative Expenses

    Three Months Ended June 30,     Nine Months Ended June 30,  
General & Administrative   2021     2020     2021     2020  
Professional fees   $ 1,458,969     $ 1,084,092     $ 4,858,544     $ 2,796,815  
Salaries     2,125,097       501,792       4,359,245       1,810,237  
Depreciation and amortization     114,991       114,817       338,321       436,710  
Lease     513,169       275,716       1,248,573       684,974  
Settlements and penalties     57,017       20,997       136,515       176,562  
Employee benefits     82,092       75,370       253,638       184,019  
Utilities and office expense     99,475       44,084       239,709       161,964  
Advertising and promotions     17,104       20,276       270,320       151,878  
Taxes and licenses     33,744       17,829       45,248       32,084  
Repairs and maintenance     66,501       13,482       166,836       41,941  
Other     357,995       77,609       638,623       92,781  
Total   $ 4,926,154     $ 2,246,064     $ 12,555,572     $ 6,569,965  

 

Within professional fees is MTI shares for services, which is the issuance of MTI shares for services rendered to consultants and professional service firms. The expense is recorded at fair value of MTI shares issued (see Note 12). For the three months ended June 30, 2021 and 2020, the Company recorded $440,650 and $512,765, respectively, for shares for services. For the nine months ended June 30, 2021 and 2020, the Company recorded $1,731,779 and $1,098,998, respectively.

 

    Three Months Ended June 30,     Nine Months Ended June 30,  
Research & Development   2021     2020     2021     2020  
Professional fees   $ 1,479,399     $ -     $ 2,535,693     $ 26,563  
Total   $ 1,479,399     $ -     $ 2,535,693     $ 26,563  

 

Research and development costs are expensed as incurred. Research and development expenses primarily consist of Mullen Five EV show car development and are primarily comprised of personnel-related costs for employees and consultants.

 

In December 2020, the Company entered into an agreement with Thurner, Inc. to design and develop two show electric vehicles. The planned finalization is expected to occur in 2021. The total cost for Phase 1 is $483,254.

 

In December 2020, MTI entered into a Statement of Work with Phiaro, Inc. for its show car development for approximately $1.6 million. The show car project program started in Dec 2020 and is anticipated to be finished November 2021. The program is for the initial show car development of the Mullen Five, which is a mid-size electric SUV. The program start began in January 2021. The initial show cars in development consist of two mid-size electric SUVs.

 

NOTE 11 – MTI WARRANTS

    MTI shares     Weighted Average
Exercise Price
 
Warrants outstanding at September 30, 2020     6,948,341     $ 1.47  
Warrants exercised     -     $ -  
Warrants granted     37,060,949     $ 0.69  
Warrants expired     (1,250,000 )   $ 5.00  
Warrants outstanding at June 30, 2021     42,759,290     $ 0.69  

 

F-19

 

 

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

 

NOTE 11 – MTI WARRANTS, continued

 

2020-2021 Warrants

 

The warrants are exercisable for a period commencing upon issuance of the notes and ending 12 months after issuance of the financing. The estimated fair value of the warrants issued and outstanding is $54,114,665 using the Black-Scholes option valuation model. The assumptions used that represent management’s best estimates of the fair value of the Company’s warrants issued and outstanding were as follows:

 

    June 30, 2021  
Expected term (in years)     5.0  
Volatility     63.9 %
Dividend yield     0.00 %
Risk-free interest rate       0.34%-0.82 %
Common stock price   $ 1.87  

 

The allocation of the fair value of these warrants was included as a debt discount on the condensed consolidated balance sheet and amortized to interest expense over the scheduled maturity dates of the various promissory notes.

 

NOTE 12 – MTI SHARE- BASED COMPENSATION

 

MTI has a share incentive plan as part of its annual discretionary share-based compensation programs. 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 MTI’s Board of Directors or its Compensation Committee and following the adoption by the Company of an equity incentive plan, employees are issued a specified number of shares of the MTI Common Shares. Employees are vested in 100% of the MTI shares after 12 months of continuous service. Additional MTI shares may be issued to employees over the next two years at anniversary date. Any disruption or separation from the Company results in the forfeiture of common shares. 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.

 

Consulting agreements or MTI shares for services are determined by the number of MTI shares granted within the individual contracts, as well as the services provided by the consultant. The MTI shares specified within the individual agreements are negotiated and approved by the Company’s Chief Executive Officer. The consultant earns the MTI shares over the service period. The MTI shares are accounted for as professional fees within G&A expenses. Employee share issuances are part of Salaries expense. The 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.

 

    Three Months Ended June 30,     Nine Months Ended June 30,  
Composition of Stock-Based compensation expense   2021     2020     2021     2020  
Employee MTI share issuance   $ 1,091,555     $ 249,051     $ 2,024,426     $ 803,278  
MTI shares for services     440,650       512,765       1,731,779       1,098,998  
MTI Share-Based compensation expense   $ 1,532,205     $ 761,816     $ 3,756,205     $ 1,902,276  

 

NOTE 13 – LEASES

 

MTI has entered into various operating lease agreements for certain of its offices, manufacturing and warehouse facilities, and corporate jet. The Company has implemented the provisions of ASC 842, on October 1, 2019. 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 includes any lease payments made and initial direct costs incurred at lease commencement and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements which require payments for both lease and non-lease components and has 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. The Company calculates the present value of future lease payments based on the index or at the lease commencement date for new leases.

F-20

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

  

NOTE 13 – LEASES, continued

 

The table below presents information regarding the Company’s lease assets and liabilities.

 

    June 30, 2021     September 30, 2020  
Assets:            
Operating lease right-of-use assets   $ 2,466,682     $ 1,729,112  
Liabilities:                
Operating lease liabilities, current     (569,367 )     (336,765 )
Operating lease liabilities, non-current     (2,002,469 )     (1,482,569 )
     Total lease liabilities   $ (2,571,836 )   $ (1,819,334 )
Weighted average remaining lease terms:                
Operating leases     3.56 years        4.51 years  
Weighted average discount rate:                
Operating leases     28 %     28 %
Cash paid for amounts included in the measurement of lease liabilities for the nine months ended June 30, 2021, and 2020   $ 726,892     $ 460,050  

 

             
Operating lease costs:   Three Months Ended June 30,     Nine Months Ended June 30,  
    2021     2020     2021     2020  
Fixed lease cost   $ 280,169     $ 228,809     $ 765,409     $ 645,949  
Variable lease cost     126,218       53,243       362,817       74,522  
Short-term lease cost     127,795       18,530       183,386       74,121  
Sublease income     (21,013 )     (24,866 )     (63,039 )     (109,618 )
Total operating lease costs   $ 513,169     $ 275,716     $ 1,248,573     $ 684,974  

 

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 1 to 3 years, with renewal options of 1 to 5 years, and may include rent escalation clauses. For financing obligations, a portion of the periodic lease payments is recognized as interest expense and the remainder reduces the obligations. For operating leases, rent is recognized on a straight-line basis over the lease term, including scheduled rent increases and rent holidays.

 

On April 27, 2021, MTI entered into a 4-month lease agreement to lease a 127,400 square-foot manufacturing plant on 100 acres located at One Greentech Drive, Robinsonville (Tunica County), MS from May 1, 2021 through July 31, 2021 for $50,000 per month. MTI also has an option to purchase the property for $12.0 million. The lease agreement will terminate on the earlier of the (a) closing of the purchase of the property or (b) MTI’s termination of the lease. On March 12, 2021, MTI paid $240,000 into escrow for the asset purchase. Consummation of the purchase is contingent upon completion of satisfactory inspection, review of environmental report, etc. Furnitures, fixtures, equipment and other assets are included as part of the purchase. See Note 16 for Subsequent Events related to this agreement.

 

The following table reflects maturities of operating lease liabilities as of June 30, 2021:

 

Years ending      
September 30,      
2021 (Remaining 3 months)   $ 303,195  
2022     1,209,166  
2023     1,153,132  
2024     807,168  
2025     444,153  
Thereafter     218,988  
Total lease payments   $ 4,135,802  
Less: Imputed interest     (1,563,966 )
Present value of lease liabilities   $ 2,571,836  

 

F-21

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 14 – CONTINGENCIES AND CLAIMS

 

ASC 450 governs the disclosure and recognition of loss contingencies, including potential losses from litigation, regulatory, tax and other matters. The accounting standard defines a “loss contingency” as “an existing condition, situation, 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 the Company is subject to asserted and actual claims and lawsuits arising in the ordinary course of business. The Company reviews any such legal proceedings and claims on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes 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 the Company’s condensed consolidated carve-out financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, the Company 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. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated.

 

Equity Financing

 

On May 7, 2021, MTI executed a $20,000,000 equity purchase agreement with the Acuitas Group, who plans to purchase shares of the MTI Series C Preferred Stock at a price of $0.6877 per share. Upon NASDAQ uplifting and trading volume of stock, this equity will commence funding.

 

International Business Machines (“IBM”)

 

The Company has recorded a $4.5 million liability attributed to a lawsuit with IBM, in which IBM has contended the Company has not fulfilled its obligations pursuant to a contract entered into during 2017. On April 28, 2020, the Supreme Court of the State of New York granted summary judgment in favor of IBM’s claim for breach of contract. The Court, however, found that a trial (inquest) was required to determine the damages to which IBM is entitled.  The Company has proposed an offer in settlement to resolve the matter, with the parties proceeding under the Joint Development and Technology License Agreement and all rights restored to Mullen under the Trademark License Agreement.

 

Federal and State Tax Liabilities

 

The Company has recorded a $3.6 million liability as of June 30, 2021, this includes past due amounts owed to the Internal Revenue Service (“IRS”) and the Employment Development Department of California (“EDD”) for failing to remit payroll taxes associated with MTI and the Company’s employees.

 

The IRS has filed a lien on substantially all of the Company’s assets. On April 28, 2021, MTI has entered into an installment agreement with the EDD to pay $10,000 per month related to unpaid state payroll tax liabilities of $429,637 plus accrued interest. Monthly payments of $10,000 are being made and will continue until paid in full.

 

Raymond James and Associates (“RJA”) – Investment Banking Services Agreement

 

On May 5, 2020, the Company entered into an agreement with Raymond James & Associates for public offering and placement agent services. The agreement called for the Company to pay a cash retainer of $50,000, which remains unpaid. Upon the closing of any public offering, regardless of whether RJA procured the agreement regarding the offering, the Company is obligated to pay a financing fee of equal to the greater of a) 6.0% of aggregate gross proceeds and b) $3,000,000.

 

Linghang Boao Group, LTD

 

In November 2019, the Company entered into a three-year Strategic Cooperation Agreement (“SCA”) with Linghang Boao Group LTD to co-develop a Solid- State Battery Management system with a 480 - 720-mile Driving Range. The Company’s total financial commitment under the SCA is $2,196,000. On December 3, 2019, the Company paid the first installment of $390,000. The remaining installments are payable upon the earlier of certain dates or the achievement of defined milestones.

 

The contractual target dates and milestones have been severely disrupted due to the occurrence COVID-19. As a result, Company management believes the COVID-19 pandemic represents a Force Majeure event (that is, the pandemic has impacted the Company’s and Linghang Boao Group LTD’s ability to meet their respective contractual obligations due to restriction in movement, stoppage of production, increase in costs due to scarcity of raw materials components, labor shortages, shortage of funds, disruption in the supply chains, U.S. governmental closures of ports/borders and travel restrictions). Based on the foregoing, there is no breach of contract due to failure of performance by MTI. Unfortunately, the Company has incurred a loss of $390,000 at September 30, 2020 due to contract nonperformance and force majeure. There are no accrued liabilities recorded for any remaining milestone payments at June 30, 2021.

 

MTI management has notified Linghang Boao Group of its decision to invoke the force majeure provision of the Strategic Cooperation Agreement due to the inability of the parties to perform caused by the global Pandemic.

 

F-22

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 14 – CONTINGENCIES AND CLAIMS, continued

 

ASC GEM Equity Line Financing

 

On January 4, 2021, MTI entered into a $350,000,000 equity line financing agreement with GEM Global Yield LLC (“Purchaser”) and GEM Yield Bahamas Limited (“GEM”). MTI plans to issue and sell common shares to GEM up to the number of common shares having an aggregate value of $350,000,000. The Purchaser will buy MTI shares based on the operational needs and/or drawdowns of the Company. If the aggregate limit has been reached, the Purchaser will increase the aggregate limit in an amount up to $150,000,000. The commitment fee, equal to 2% of the Aggregate Limit, will be charged for each draw-down. The fee may be paid in cash or freely tradeable MTI common shares of the Company. The commitment begins when the Company effects the public listing of MTI common stock for trading on a U.S. national securities exchange. The agreement matures in 36 months after the public listing of MTI common shares.

 

Pursuant to the GEM Agreement, the commitment begins on the “Public Listing Date”, which is defined as the date the Company effects (i) a “Reverse Merger Transaction” (defined in the GEM Agreement as a reverse merger of a similar transaction between the Company and a special purpose acquisition company whose securities are publicly traded) or (ii) the direct listing of the Company’s common stock on a public market. Further to the GEM Agreement, the Company is obligated to issue warrants providing GEM the right to purchase up to 6.6% of the Company’s common shares outstanding on the Public Listing Date. As the Company is not effecting a Reverse Merger Transaction (that is, Net Element is not a special purpose acquisition company) nor is the Company effecting a direct listing of its common shares, the Company does not believe it is obligated under the GEM Agreement to pay fees nor issue warrants to GEM. In addition, the Company has agreed with a lender of its convertible promissory notes that the Company would not initiate utilization of the GEM Agreement.

 

Litigation

 

On May 28, 2021, a Net Element shareholder filed a complaint against Net Element and Mullen Acquisition, Inc. and certain named individuals regarding the proposed merger transaction. The complaint alleges, among other things, a potential dilution of the value of Net Elements stock and a failure to act in a fiduciary duty to its stakeholders 

 

On June 3, 2021, a Net Element shareholder filed a lawsuit against Net Element, Mullen Technologies, Inc. and Mullen Acquisition, Inc. and certain individuals regarding the proposed merger agreement. The lawsuit alleges material omissions regarding the merger transaction and seeks to prevent the consummation of the merger agreement, as well as certain other equitable relief.

 

Based upon information presently known to management, the Company believes that the potential liability from the May 2021 complaint and June 2021 lawsuit, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations. Therefore, no liability has been accrued on the financial statements as of June 30, 2021.

 

NOTE 15 – RELATED PARTY TRANSACTIONS

 

At June 30, 2021 and September 30, 2020, respectively, the Drawbridge Investments, LLC relationship comprised various loans and advances, common shares, and preferred shares.

 

The Drawbridge loans are currently in default. The Common and Preferred Shares presented are shares in MTI that have been issued by MTI.

 

Drawbridge Related Transactions                  

 

(Cumulative)   June 30, 2021     September 30, 2020  
Description   Loan Principal     # of Shares     FV of Shares     Loan Principal     # of Shares     FV of Shares  
Various Notes   $ 24,081,554       -     $ -     $ 24,106,554       -     $ -  
Common Shares     -       17,705,000       14,730,560       -       17,705,000       14,730,560  
Preferred Shares - Series A     -       30,000       2,496,000       -       30,000       2,496,000  
Preferred Shares - Series B     -       71,516,534       59,501,756       -       44,866,534       31,367,945  
Total Related Party Transactions   $ 24,161,554       89,251,534     $ 76,728,316     $ 24,106,554       62,601,534     $ 48,594,505  

*Shares are MTI common and preferred shares.

 

The default interest rate on the Drawbridge loans is 28% per annum, and accrued interest is $6,252,355 as of June 30, 2021.

 

Chief Executive Officer Loans

 

From time to time, the Company’s CEO provides loans to the Company. The outstanding balances for these loans as of June 30, 2021, and September 30, 2020, are $61,498 and $172,791, respectively.

 

F-23

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 16 – SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through August 16, 2021, which is the date the condensed consolidated carve-out financial statements were available to be issued. The Company has determined that there were no subsequent events which required recognition, adjustment to or disclosure in the carve-out financial statements except as below and except as discussed below.

 

Second Amended and Restated Agreement and Plan of Merger

 

The Company entered a Second Amendment and Restated Plan of Merger with Net Element on July 20, 2021 (the “Merger Agreement”). This Merger Agreement restated and replaced in its entirety the August 4, 2020 Agreement and Plan of Merger, and its subsequent amendments and restatements. Pursuant to the provisions of the Amendment, the Merger is terminable by Net Element or the Company if the Merger Effective Time has not occurred by August 31, 2021. On July 22, 2021, Net Element filed a Form S-4/A with the SEC in connection with the proposed merger with MTI. This filing was deemed effective by the SEC on July 26, 2021.

 

Debt Financing

 

Pursuant to the Net Element Definitive Merger Agreement, the Company will receive $9.5 million, less loan advances, in debt financing upon completion of the merger with Net Element. On August 11, 2020, the Company issued a $500,000 demand note with an interest rate of 14%. The note is in default, and the interest rate is now 27%. The completion of the merger is subject to shareholder and NASDAQ approval, as well as other conditions referenced in the merger agreement. The merger agreement was executed on August 5, 2020, and amended on December 29, 2020, March 30, 2021, and amended and restated on May 14, 2021 and July 20, 2021.

 

Convertible Debt Issuances and Warrants

 

On July 22, 2021, the Company received debt financing through MTI entering into an unsecured $2.4 million convertible note agreement with Digital Power Lending, LLC. The convertible note carries an interest rate of 15% and has a maturity date of one year. The convertible note is unsecured and includes detached warrants to acquire up to 9,595,300 shares of MTI common stock. The warrant exercise price is $0.6877 per common share and expires five years from the date of issuance. The number of conversion shares issuable upon conversion of the conversion amount shall be determined according to the formula: Conversion Amount/Conversion Price of $0.6877, subject to certain adjustments. However, upon conversion, Digital Power Lending, LLC (together with their affiliates) is limited to a 9.9% ownership cap in shares of MTI’s common stock then outstanding after giving effect to the issuance of common stock issuable upon exercise of the warrants.

 

On July 26, 2021, the Company received debt financing through MTI entering into an unsecured $1.1 million convertible note agreement dated July 22, 2021, with TDR Capital Pty Limited. The convertible note is issued at OID of 10% or $100,000; carries an interest rate of 15% and has a maturity date of one year. The convertible note is unsecured and includes detached warrants to acquire up to 4,361,500 shares of MTI common stock. The warrant exercise price is $0.6877 per common share and expires five years from the date of issuance. The number of conversion shares issuable upon conversion of the conversion amount shall be determined according to the formula: Conversion Amount/Conversion Price of $0.6877, subject to certain adjustments. However, upon conversion, TDR Capital Pty Limited (together with their affiliates) is limited to a 9.9% ownership cap in shares of MTI’s common stock then outstanding after giving effect to the issuance of common stock issuable upon exercise of the warrants.

 

Leasing Interest – Manufacturing Plant in Memphis, TN

 

On March 8, 2021, MTI entered into a license agreement to lease property located at 8400 Winchester Road in Memphis, TN. The license fee is $817,274 and was to be paid 50% at execution and the remaining 50% on or before June 30, 2021. As of August 16, 2021, the Company has not paid the license fee to the prospective landlord per the agreement and lease proposal as the lease proposal was not intended to be a binding offer, but an outline of the general business terms and conditions of a license agreement and lease, should they be executed by both parties. Unless the parties fully execute a license agreement and/or lease, both parties shall not have any continuing obligations to one another.

 

Lease Agreement for Manufacturing Plant in Robinsonville (Tunica County), MS

 

On April 27, 2021, MTI entered into a 4-month lease agreement to lease a 127,400 square-foot manufacturing plant on 100 acres located at One Greentech Drive, Robinsonville (Tunica County), MS from May 1, 2021 through July 31, 2021 for $50,000 per month. MTI also has an option to purchase the property for $12.0 million. The lease agreement will terminate on the earlier of the (a) closing of the purchase of the property or (b) MTI’s termination of the lease. On March 12, 2021, MTI paid $240,000 into escrow for the asset purchase. Consummation of the purchase is contingent upon completion of satisfactory inspection, review of environmental report, etc. Furnitures, fixtures, equipment and other assets are included as part of the purchase. On July 23, 2021, the parties entered into a first amendment to the agreement, whereby the lease is extended for an additional six months. On July 26, 2021, MTI paid $1,000,000 (“extension payment”) pursuant to the first amendment to the lease agreement (payments will remain at $50,000 per month through January 31, 2022). The source of the funds to make the extension payment came from proceeds received from the issuance of a convertible note with TDR Capital Pty Limited. The extension payment deposited into escrow will be credited to the purchase price upon closing.

 

F-24

 

 

MULLEN TECHNOLOGIES, INC.
(Carve-out of Certain Operations of Mullen Technologies, Inc.)
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 16 – SUBSEQUENT EVENTS, continued

 

Employment Agreements

 

On July 7, 2021, the Company entered into an employment agreement with Calin Popa as President of Mullen Automotive. According to the employment contract he will receive an annual salary of $304,000 and 100,000 shares per year.

 

Cambria – Investment Banking Services Agreement

 

On July 16, 2021, the Company agreed to a proposal with Cambria for placement agent services for investment offerings up to $3,000,000. As a result of the agreement, the Company is obligated to pay a financing fee of 6.0% of aggregate gross proceeds and warrants equal to 6.0% of the offering.

 

Drawbridge Acknowledgement, Waiver and Consent

 

On July 16, 2021, the Company and Drawbridge entered into an agreement whereby Drawbridge acknowledges, waives, and consents to the contribution and spin-off of Mullen’s EV assets into a new entity. As indicated in Note 1 to the financial statements, the spin-off is to occur immediately prior to the merger with Net Element. As part of the agreement, Drawbridge will be repaid $10,000,000 that will be applied towards the outstanding principal balance and includes a waiver of default.

 

Convertible Debt to Equity Conversion

 

On May 7, 2021, and amended on May 20, 2021, MTI executed an exchange agreement with its existing convertible debt investors who hold $10,762,500 in MTI convertible debt. On July 26, 2021, the exchange agreement was updated to reflect the $1.1 million convertible note; 10% OID with TDR Capital Pty Limited. The associated warrants of 4,361,500 mature in five years from the issuance date and the exercise price is $0.6877 per share. As a result, the convertible note and warrants were added to and is referred to as Amendment #2 and Joinder to Exchange Agreement (see above). Additionally on July 22, 2021, the small upsize in the $2.2 million to $2.4 million convertible note with Digital Power Lending LLC resulted in Amendment #3 and Joinder Exchange Agreement. Upon consummation of the proposed merger with Net Element, the Company and the investors agreed to exchange the convertible debt for shares of MTI’s Series C Preferred Stock, par value $0.001 per share. The right to additional purchases of preferred stock expires 12 months from the merger close date between Net Element and MTI. MTI originally issued 42,759,290 in detached warrants to purchase shares of MTI common stock as part of the convertible debt agreements with investors.

 

F-25 

 

 

 

 

 

 

  

 

Exhibit 99.1(C)

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2020

(in thousands, except share and per share data)

 

    NETE*     Mullen-EV     P-F Adjustments           Pro Forma
Combined
 
Revenues, net:                                        
Service fees   $ 62,936     $ -     $ (62,936 )     [a]     $ -  
Total revenues     62,936       -       (62,936 )             -  
Operating costs and expenses:                                        
Cost of service fees     53,878       -       (53,878 )     [a]       -  
General and administrative     7,608       10,427       (7,608 )     [a]       11,549  
                      1,122       [b]          
Research and development     -       1,667       -               1,667  
Non-cash compensation     1,150       -       (1,150 )     [a]       -  
Bad debt expense     1,513       -       (1,513 )     [a]       -  
Depreciation and amortization     3,067       -       (3,067 )     [a]       -  
Total operating costs and expenses     67,216       12,094       (66,094 )             13,216  
Operating loss     (4,280 )     (12,094 )     3,158               (13,216 )
                                         
Other income (expense):                                        
Interest expense     (1,395 )     (18,094 )     1,395       [a]       (18,094 )
Other income (expense)     130       10       (130 )     [a]       10  
Goodwill impairment charge     (1,327 )     -       1,327       [a]       -  
Total other expense     (2,592 )     (18,084 )     2,592               (18,084 )
Net loss from continuing operations     (6,872 )     (30,178 )     6,872               (31,300 )
Net income attributable to the non-controlling interest     61       -       (61 )    

[a]

      -  
Net Loss     (6,811 )     (30,178 )     6,811               (31,300 )
Foreign currency translation     36       -       (36 )     [a]       -  
Comprehensive loss attributable to common stockholders   $ (6,775 )   $ (30,178 )   $ 6,775             $ (31,300 )
Net loss per share:                                      
Basic and diluted   $ (0.61 )                         $ (0.61 )
      -                               -  
Weighted average common shares outstanding adjusted for merger completion     11,250,000                       [c]       51,731,641  

 

 

* Statement of operations for NETE are derived from the 10K ending December 31, 2020, plus the 4th quarter 2019, less the 4th quarter of 2020.

 

[a] Adjusted to eliminate the results of operations of Net Element as a result of the Divestiture.

[b] Adjusted to reflect regulatory compliance costs applicable if the merger occurred on October 1, 2019. Costs in G&A are detailed below: These costs the expenses of being a public reporting entity (for example legal and accounting, investor & filing fees, and corporate taxes).

[c] Derived by the number of adjusted shares outstanding and capital raises resulting from the reverse merger: 51,731,641 in total.

Net Element's adjusted shares have been adjusted to reflect 15% of the total outstanding shares.

[d] Does not give effect to the amended and restated employment agreement for the Chief Executive Officer and Chief Operating Officer.

 

   

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED JUNE 30, 2021

(in thousands, except share and per share data)

 

    NETE*     Mullen-EV     P-F Adjustments         Pro Forma
Combined
    Pro Forma
Combined
Adjusted
 
Revenues, net:                                            
Service fees   $ 76,492     $ -     $ (76,492 )   [a]   $ -     $ -  
Total revenues     76,492       -       (76,492 )         -       -  
Operating costs and expenses:                                            
Cost of service fees     66,833       -       (66,833 )   [a]     -          
General and administrative     5,630       12,556      

(5,630)

350

   

[a]

[b]

   

12,556

350

      12,566350  
Research and development     -       2,536       -           2,536       2,536  
Non-cash compensation     1,605       -       (1,605 )   [a]     -          
Bad debt expense     1,708       -       (1,708 )   [a]     -          
Depreciation and amortization     1,999       -       (1,999 )   [a]     -          
Total operating costs and expenses     77,775       15,092       (77,425 )         15,442       15,442  
Operating loss     (1,283 )     (15,092 )     933     [a]     (15,442 )     (15,442 )
                                             
Other income (expense):                                            
Interest expense     (1,116 )     (13,785 )     1,116     [a]
    (13,785 )     (13,758 )
Other income (expense)     2,010       (1,560 )     (2,010 )   [a]     (1,560 )     (1,560 )
Gain on extinguishment of indebtedness, net     -       891       -           891       891  
Total other expense     894       (14,454 )     (894 )         (14,454 )     (14,454 )
Net loss from continuing operations     (389 )     (29,546 )     39     [a]     (29,896 )     (29,896 )
Net income attributable to the non-controlling interest     24       -       (24 )    [a]     -          
Net Loss     (365 )     (29,546 )     15           (29,896 )     (29,896 )
Foreign currency translation     (64 )     -       (64 )   [a]     -       -  
Comprehensive loss attributable to common stockholders   $ (301 )   $ (29,546 )   $ (49 )       $ (29,896 )     (29,896 )
Net loss per share:                                            
Basic and diluted   $ (0.03 )                       $ (0.58 )     (0.58 )
Weighted average common shares outstanding adjusted for merger completion     11,250,000                      [c]     51,731,641       51,731,641  

 

* Statement of operations for NETE are derived from the 10K ending December 31, 2020, less the first three quarters of 2020.

** Statement of operations for NETE are from the filed June 2021 10-Q second quarter.

[a] Adjusted to eliminate the results of operations of Net Element as a result of the Divestiture.

[b] Per the merger agreement, the amount to be settled is up to $350,000.

[c] Derived by the number of adjusted shares outstanding and capital raises resulting from the reverse merger: 51,731,641 total. Net Element's adjusted shares have been adjusted to reflect 15% of the total outstanding shares.

[d] Does not give effect to the amended and restated employment agreement for the Chief Executive Officer and Chief Operating Officer.

 

   

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

JUNE 30, 2021

(in thousands)

 

    NETE     Mullen - EV     Pro Forma
Adjustments
        Pro Forma
Combined
    Pro Forma
Adjustments
   

Pro Forma,

As Adjusted*

 
ASSETS                                                    
Current assets:                                                    
Cash and cash equivalents   $ 3,926     $ 664     $ (3,926 )   [a]   $ 39,234     $ 15,000     $ 54,234  
           

20,000

10,000

   

[d]

[e]

           
                      11,200     [g]                        
                      (350 )   [f]                        
            (2,280 )   [h]            
Accounts receivable, net     10,760       -       (10,760 )   [a]     -                  
Due from Mullen Technologies,Inc.     2,040       -       (2,040 )   [a]     -                  
Materials and supplies     -       56       141     [h]     197               197  
Note receivable, current     -       -       15,000     [i]     15,000               15,000  
Other current assets     1,710       765       (1,710 )   [a]     765               765  
Total current assets, net     18,436       1,485       35,275           55,196       15,000       70,196  
Non-current assets:                                                    
Property and equipment, net     -       1,300       -           1,300               1,300  
Goodwill     7,681       -       (7,681 )   [a]     -                  
Intangibles, net     2,802       2,668       (2,802 )   [a]     2,668               2,668  
Right-of-use assets     732       2,467       (732 )   [a]     2,467               2,467  
Other assets     1,122       776       (1,122 )   [a]     776               776  
Total non-current assets     12,337       7,211       (12,337 )         7,211               7,211  
TOTAL ASSETS     30,773       8,696       22,938           62,407       15,000       77,407  
LIABILITIES AND STOCKHOLDERS’ EQUITY                                          
Current liabilities:                                                    
Accounts payable     10,043       4,607      

(10,043

)   [a]     3,047               3,047  
                (1,560 )   [h]                    
Accrued expenses and other current liabilities     3,083       15,498       (3,083 )   [a]     15,419               15,419  
                    (79 )   [h]                        
Deferred revenue     1,461       -       (1,461 )   [a]     -                  
Lease liabilities, current portion     73       569       (73 )   [a]     569               569  
Notes payable, current portion     520       35,740      

(520

)   [a]     24,477               24,477  
                  (10,763 )   [c]                    
                    (500 )   [h]                        
Due to related party     346       -       (346 )   [a]     -                  
Total current liabilities     15,526       56,414       (28,428 )         43,512               43,512  
Non-current liabilities:                                                    
Notes payable, net of current portion     8,428       257       (8,428 )   [a]     257               257  
Lease liabilities, net of current portion     661       2,003       (661 )   [a]     2,003               2,003  
Other liabilities     -       4,500       -           4,500               4,500  
Total non-current liabilities     9,089       6,760       (9,089 )   [a]     6,760               6,760  
TOTAL LIABILITIES     24,615       63,174       (37,517 )         50,272               50,272  
STOCKHOLDERS’ EQUITY                                                    
Preferred Stock A
Preferred Stock B
    -       -      

2

6

   

[c]

[d]

    13               13  
Preferred Stock C                     5     [g]                        
Common stock     1       -      

7

17

   

[a]

[e]

    25       15     * 40
                                                     
Paid-in-capital     191,722       -       (191,730 )   [a]     12,447       14,985     * 27,432  
                      (54,478 )   [b]                        
               

10,761

  [c]              
                      19,994     [d]                        
                      9,983     [e]                        
                      11,195     [g]                        
                      15,000     [j]                        
Accumulated OCI     (2,147 )     -       2,147     [a]     -                  
Non-controlling interest     (294 )     -       294     [a]     -                  
Accumulated deficit          

183,124

    [a]     -          
      (183,124 )             (350 )   [f]     (350 )             (350 )
          (54,478 )     54,478     [b]     -                  
TOTAL STOCKHOLDERS’ EQUITY     6,158       (54,478 )     60,455           12,135       15,000       27,135  
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY   $ 30,773     $ 8,696     $ 22,938         $ 62,407     $ 15,000     $ 77,407  

 

Adjustments to the pro forma condensed combined balance sheet:

 

[a] Reflects deconsolidation of NETE business.

[b] Reclassifies Mullen deficit.

[c] Reflects the exchange agreement of $10.8 million in convertible debt to equity transaction that was executed on May 7, 2021.

[d] Reflects equity purchase; $20M issuance of Series C Preferred Stock to Acuitas.

Note: Mullen has entered into an agreement with Esousa to provide a $30.0 million equity line of credit immediately after the Effective Date. This equity line is not included within the Pro Forma Combined Financial Statements.

[e] Pursuant to the merger agreement, NETE is committed to fund $10.0 million, less the amounts set forth in Section 6.05(a) of the Second Amended and Restated Agreement and Plan of Merger among Mullen, Net Element Inc., Mullen Technologies, Mullen Acquisition, Inc., a California corporation and wholly owned subsidiary of Net Element Inc. (see footnotes (f) and (h) below).

[f] Reflects the costs associated with the merger of $350,000.

[g] Reflect the amendments to the Exchange Agreement of $11.2 million in convertible debt to equity transactions that was executed on various dates, beginning July 22, 2021 to September 3, 2021.

[h] Reflects the payment of $1.56 million to Net Element related to late fees associated with the initial Form S-4 filing on May 14, 2021 and the payment of a $.5 million note payable, including accrued interest of $.08 million to Net Element, dated August 11, 2020.

[i] Reflects the issuance of pre-funded warrants to purchase $15.0 million in shares of common stock for $15.0 million promissory note receivable pursuant to agreement with CEO cast, Inc. to be executed on or before the effective date of the merger.

[j] Does not give effect to the amended and restated employment agreement for the Chief Executive Officer and Chief Operating Officer.

[k] Included within Paid-in-capital above is 14,864,314 of Investor Warrants that are exercisable into common shares at $.6877 per share.

* Pro Forma Adjusted Financial Statements include 6 months of $2.5M payments from the $30M Esousa equity line through December 31, 2021.

 

   

 

 

Exhibit 99.2

Mullen Automotive Commences Trading on NASDAQ

Company begins trading under Nasdaq stock ticker symbol “MULN”

 

BREA, Calif., Nov. 05, 2021 Mullen Automotive, Inc. (NASDAQ: MULN) (“Mullen” or the “Company”), an emerging electric vehicle (“EV”) manufacturer, is pleased to announce that the Company begins trading today on the Nasdaq Stock Market LLC (“Nasdaq”) under new stock ticker symbol “MULN.”

 

“Today is a monumental day for Mullen Automotive. I am especially proud of our team, investors and all who have believed in Mullen and taken us to this point as a publicly traded company on the Nasdaq capital markets,” says David Michery, CEO and chairman of Mullen Automotive. “Trading on Nasdaq now opens us up to new investors, both institutional and retail shareholders, and broadens our awareness and company profile, while increasing awareness of Mullen and our technology platform and opening new opportunities in EV and beyond. The road ahead has never been brighter for Mullen and I am proud to lead us into the future.”

 

Mullen will debut to the world, for the first time, the FIVE EV Crossover on Nov. 17, 2021, at the Los Angeles International Auto Show (LAIAS). The FIVE will debut in the South Hall (Booth S-101) on Day One of the international media and press days. The FIVE will continue on display in the South Hall during the consumer days of the show, Nov. 19 – 28, 2021. Mullen will display multiple variants of the FIVE model while also showcasing powertrain, battery and charging technology.

 

The FIVE is built on a EV Crossover skateboard platform that offers multiple powertrain configurations and trim levels in a svelte design that is Strikingly DifferentTM and exciting to experience in person. Learn more about the Mullen FIVE on MullenUSA.com.

 

About Mullen

 

Mullen is a Southern California-based automotive company that owns and partners with several synergistic businesses working toward the unified goal of creating clean and scalable energy solutions. Mullen has evolved over the past decade in sync with consumers and technology trends. Today, the Company is working diligently to provide exciting EV options built entirely in the United States and made to fit perfectly into the American consumer’s life. Mullen strives to make EVs more accessible than ever by building an end-to-end ecosystem that takes care of all aspects of EV ownership.

 

Forward-Looking Statements

This press release contains "forward-looking statements." Words such as "may," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar expressions, as well as statements in future tense, often signify forward-looking statements. These forward-looking statements include, without limitation, statements relating to the reverse merger, the Nasdaq approval process and listing, and proposed debut date of the Mullen FIVE (formerly MX-05) midsize crossover. These forward-looking statements are, by their nature, subject to significant risks and uncertainties.

 

Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information that the Company has when those statements are made or management's good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements, including factors beyond the Company's control. As a result of these and other risks, uncertainties and assumptions, forward-looking events and circumstances discussed herein might not occur in the way the Company expects or at all. Accordingly, readers should not place reliance on any forward-looking information or statements. The Company assumes no obligation to publicly update or revise its forward-looking statements as a result of new information, future events or otherwise. All forward-looking statements herein are qualified by reference to the cautionary statements set forth in this section.

 

Contact:

 

Mullen Automotive, Inc.

+1 (714) 613-1900

www.MullenUSA.com

 

For more information, please visit https://www.mullenusa.com/