UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ___
Commission File Number: 001-34887
MULLEN AUTOMOTIVE INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 90-1025599 |
(State or other jurisdiction of | (I.R.S. Employer |
1405 Pioneer Street |
(Address of principal executive offices) |
(714) 613-1900 |
(Registrant’s Telephone Number, Including Area Code) |
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 per share | MULN | The Nasdaq Stock Market, LLC (Nasdaq Capital Market) | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☒ | Smaller reporting company ☒ |
Emerging growth company ☐ |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of May 13, 2022 a total of 332,443,385 shares of the Registrant’s common stock, par value $0.001, (“Common Stock”) were issued and outstanding.
MULLEN AUTOMOTIVE INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MULLEN AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
See accompanying notes to condensed consolidated interim financial statements.
2
MULLEN AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended March 31, |
| Six months ended March 31, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | |||||||
OPERATING EXPENSES |
|
|
|
|
|
| |||||||
General and administrative | $ | 29,269,433 | $ | 4,676,740 | $ | 42,170,516 | $ | 7,629,418 | |||||
Research and development |
| 1,183,437 |
| 538,271 |
| 2,340,761 |
| 1,056,294 | |||||
Total Operating Expense |
| 30,452,870 |
| 5,215,011 |
| 44,511,277 |
| 8,685,712 | |||||
Loss from Operations |
| (30,452,870) |
| (5,215,011) |
| (44,511,277) |
| (8,685,712) | |||||
Interest expense |
| (2,120,515) |
| (4,092,759) |
| (24,559,459) |
| (6,499,089) | |||||
Loss on debt settlement |
| — |
| — |
| (41,096) |
| — | |||||
Gain on extinguishment of indebtedness, net |
| — |
| 10,000 |
| 74,509 |
| 890,581 | |||||
Net Loss | $ | (32,573,385) | $ | (9,297,770) | $ | (69,037,323) | $ | (14,294,220) | |||||
Net Loss per Share | (0.63) | (1.81) | (1.99) | (2.85) | |||||||||
Weighted average shares outstanding, basic and diluted |
| 51,392,988 |
| 5,135,797 |
| 34,639,857 |
| 5,020,144 | |||||
See accompanying notes to condensed consolidated interim financial statements.
3
MULLEN AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
| Preferred Stock |
|
|
|
|
|
|
|
| Deficiency in | |||||||||||||||||||
Series A | Series B | Series C | Common Stock | Paid-in | Accumulated | Stockholders' | |||||||||||||||||||||||
Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||||||
Balance, September 30, 2020 |
| 116,789 | $ | 116 | 5,567,319 | $ | 5,568 | — | $ | — | 5,086,225 | $ | 5,086 | $ | 63,619,280 | $ | (106,134,069) | $ | (42,504,019) | ||||||||||
Warrant issuances |
| — | — | — | — | — | — | — | — | 2,092,337 | — | 2,092,337 | |||||||||||||||||
Beneficial Conversion Feature -Debt |
| — | — | — | — | — | — | — | — | 172,663 | — | 172,663 | |||||||||||||||||
Stock-based compensation |
| — | — | — | — | — | — | 38,561 | 39 | 1,241,366 | — | 1,241,405 | |||||||||||||||||
Net loss |
| — | — | — | — | — | — | — | — | — | (4,996,450) | (4,996,450) | |||||||||||||||||
Balance, December 31, 2020 |
| 116,789 | 116 | 5,567,319 | 5,568 | — | — | 5,124,786 | 5,125 | 67,125,646 | (111,130,519) | (43,994,064) | |||||||||||||||||
Shares issued for cash |
| — | — | — | — | — | — | 23,126 | 23 | 1,104,779 | — | 1,104,802 | |||||||||||||||||
Warrant issuances |
| — | — | — | — | — | — | — | — | 870,428 | — | 870,428 | |||||||||||||||||
Stock-based compensation |
| — | — | — | — | — | — | — | — | 1,631,660 | — | 1,631,660 | |||||||||||||||||
Beneficial conversion feature of convertible debt |
| — | — | — | — | — | — | — | — | 98,335 | — | 98,335 | |||||||||||||||||
Net loss |
| — | — | — | — | — | — | — | — | — | (9,297,770) | (9,297,770) | |||||||||||||||||
Balance, March 31, 2021 |
| 116,789 | $ | 116 | 5,567,319 | $ | 5,568 | — | $ | — | 5,147,912 | $ | 5,148 | $ | 70,830,848 | $ | (120,428,289) | $ | (49,586,609) | ||||||||||
4
See accompanying notes to condensed consolidated interim financial statements.
5
MULLEN AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended March 31, | ||||||
| 2022 |
| 2021 | |||
Cash Flows from Operating Activities |
|
|
|
| ||
Net Loss | $ | (69,037,323) | $ | (14,294,220) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
| ||
Depreciation and amortization |
| 608,496 |
| 223,331 | ||
Employee stock compensation |
| 3,292,987 |
| 932,872 | ||
Issuance of shares for services |
| 24,042,060 |
| 1,291,129 | ||
Non-cash interest and other operating activities |
| 1,713,103 |
| — | ||
Non-cash lease expense |
| 284,879 |
| 272,067 | ||
Amortization of debt discount |
| 19,400,483 |
| 1,405,450 | ||
Loss on asset disposal |
| 1,298 |
| — | ||
(Gain) on extinguishment of debt |
| (74,509) |
| (890,581) | ||
Loss on debt settlement |
| 41,096 |
| — | ||
Changes in operating assets and liabilities: |
|
|
|
| ||
Other current assets |
| 3,330,474 |
| 123,691 | ||
Other assets |
| (858,692) |
| (158,601) | ||
Accounts payable |
| (1,032,810) |
| 664,093 | ||
Accrued expenses and other liabilities |
| (6,300,181) |
| 5,070,319 | ||
Lease liabilities |
| (283,141) |
| (259,267) | ||
Net cash (used) provided by operating activities |
| (24,871,780) |
| (5,619,717) | ||
Cash Flows from Investing Activities |
|
|
|
| ||
Purchase of equipment |
| (10,491,547) |
| (60,818) | ||
Purchase of intangible assets |
| (246,132) |
| (41,250) | ||
Net cash (used) in investing activities |
| (10,737,679) |
| (102,068) | ||
Cash Flows from Financing Activities |
|
|
|
| ||
Changes in net parent investment |
| (223,067) |
| 2,636,711 | ||
Proceeds from issuance of notes payable |
| 12,142,791 |
| 4,068,500 | ||
Proceeds from issuance of common stock |
| 40,151,308 |
| — | ||
Proceeds from liability to issue preferred C shares |
| 63,925,000 |
| — | ||
Payment of notes payable |
| (15,146,860) |
| (164,486) | ||
Net cash provided by financing activities |
| 100,849,172 |
| 6,540,725 | ||
Increase (decrease) in cash |
| 65,239,713 |
| 818,940 | ||
Cash, beginning of period |
| 42,174 |
| 33,368 | ||
Cash, ending of period | $ | 65,281,887 | $ | 852,308 | ||
Supplemental disclosure of Cash Flow information: |
|
|
|
| ||
Cash paid for interest | $ | 1,489,908 | $ | 7,783 | ||
Supplemental disclosure for non-cash activities: |
|
|
|
| ||
Preferred shares issued in exchange for convertible debt | $ | 24,991,755 | $ | — | ||
See accompanying notes to condensed consolidated interim financial statements.
6
MULLEN AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Mullen Automotive, Inc. (“MAI”, “Mullen”, “we” or the “Company”) is a development-stage electronic vehicle (EV) manufacturer. The Company operated as the EV division of Mullen Technologies, Inc. (“MTI”) until November 5, 2021, at which time the Company underwent a capitalization and corporate reorganization by way of a spin-off by MTI to its shareholders, followed by a reverse merger with and into Net Element, Inc. (“NETE”).
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). Certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, but we believe the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation have been included in the condensed consolidated financial statements included herein. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed with the Commission for the year ended September 30, 2021. The results of operations for the periods presented are not necessarily indicative of results to be expected for the full fiscal year or any other periods.
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Mullen Investment Properties, LLC, which was established in August 2021 to hold our real estate. Intercompany accounts and transactions have been eliminated, if any. As of March 31, 2022, Mullen Investment Properties, LLC holds the Advanced Manufacturing and Engineering Center or “AMEC” in Tunica County, MS.
As MTI has not historically prepared financial statements for Mullen, and Mullen did not exist as a legal entity prior to November 5, 2021, these financial statements have been prepared from the financial records of MTI on a carve-out basis. The condensed consolidated balance sheets include all of the MAI Assets. The condensed consolidated Statements of operations for each of the three and six months ended March 31, 2022 and 2021, reflect all expenses and activities directly attributable to MAI, and an allocation of MTI’s general and administrative expenses incurred in each of those years, as these expenditures were shared by MAI. In some instances, certain expenses were not allocated as they would have related directly to MAI. All inter-entity balances and transactions have been eliminated.
The equity capital presented in the financial statements reflect the retrospective application of the November 5, 2021 capitalization and corporate reorganization arising from the merger transaction with NETE.
These financial statements have been prepared based upon the historical cost amounts recorded by MTI. These financial statements may not be indicative of MAI financial performance and do not necessarily reflect what its financial position, results of operations, and cash flows would have been had Mullen operated as an independent entity during the years presented.
7
NOTE 2 – LIQUIDITY, CAPITAL RESOURCES, AND GOING CONCERN CONSIDERATION
The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern. Our principal source of liquidity consists of existing cash and restricted cash of approximately $65.3 million at March 31, 2022. During the six months ended March 31, 2022, the Company used $27.9 million of cash for operating activities and had net working capital of approximately $40.5 million at March 31, 2022.
During the three months ended March 31, 2022, the Company obtained additional financing in the amount of $5.0 million in notes payable; and $73.6 million in equity issuances. During the six months ended March 31, 2022, the Company obtained additional financing in the amount of $12.2 million in notes payable; $10 million in equity from Net Element merger; and $93.6 million in equity issuances.
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 and disruptive impact on our strategy in EV product development and the ability to obtain external financing to fund its development activities. Company management is unable to 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, our ability to access capital is critical. Our management plans to raise additional capital through a combination of equity and debt financings, strategic alliances, and licensing arrangements. Company management has evaluated whether there are any conditions and events, considered in aggregate, which raise substantial doubt about its ability to continue as a going concern over the next twelve months from the date of filing this report. Since inception, we have incurred significant accumulated losses of approximately $219.4 million, and management expects to continue to incur operating losses over the near future. Proceeds from the business combination with Net Element, the exercise of warrants, and a qualified public offering, should they materialize, are expected to provide Mullen with sufficient liquidity and capital resources to fund its operating expenses and capital requirements for at least the next 12 months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 for the periods presented prior to March 5, 2021 reflect costs and expenses incurred by MTI on behalf of MAI, 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 MAI.
Reverse Merger and Recapitalization
The November 2021 Business Combination with Net Element was accounted for as a reverse merger and recapitalization, with Net Element treated as the “acquired” company for accounting purposes. The Business Combination was accounted as the equivalent of Mullen Automotive, Inc. issuing stock for the net assets of Net Element, accompanied by a recapitalization. Accordingly, these financial statements reflect the share capital and weighted average shares outstanding via a retrospective recapitalization as shares representing the exchange ratio established in the Business Combination.
8
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 condensed consolidated 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 may differ materially from these estimates.
Risks and Uncertainties
We operate 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 our future operations and prospects for commercial success.
Cash and Cash Equivalents
Company management considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at March 31, 2022 or September 30, 2021.
Restricted Cash
Funds that are not available for immediate use and must use for a specific purpose. These funds are refundable deposits for individuals and businesses who have made $100 reservations for the Mullen FIVE SUV, which debuted at the Los Angeles Auto Show in November 2021. At March 31, 2022, the restricted cash balance was $131,793. Customer deposits are accounted for within other liabilities
Deferred Advertising
At March 31, 2022 and September 30, 2021, deferred advertising was $48,855 and $261,550, respectively. The cost were primarily upfront costs paid related to the Los Angeles auto show during November 2021.
Prepaid Expenses and Other Current Assets
Prepaid expenses consist of various advance payments made 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.
9
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. Company management 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, we assess 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, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
Income Taxes
Prior to Mullen’s capitalization and corporate reorganization, our operations were included in the tax filings of MTI. The cash and deferred tax positions between us and MTI and are formalized in a tax sharing agreement.
Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
There are transactions that occur during the ordinary course of business for which the ultimate tax determination may be uncertain. At March 31, 2022 and September 30, 2021, there were no material changes to either the nature or the amounts of the uncertain tax positions.
The Company’s income tax provision consists of an estimate for U.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities, and changes in the tax law. We maintain a full valuation allowance against the value of our U.S. and state net deferred tax assets because management does not believe the recoverability of the tax assets meets the “more likely than not” likelihood at March 31, 2022 and September 30, 2021.
10
Intangible Assets
Intangible assets consist of acquired and developed intellectual property and website development costs. In accordance with ASC 350, “Intangibles—Goodwill and Others,” 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 generally are 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.
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 but not yet paid and are classified within current liabilities on the consolidated balance sheets.
General and Administrative Expenses
General and administrative (“G&A”) expenses include all non-production related expenses incurred by us in any given period. This includes expenses such as professional fees, salaries, rent, repairs and maintenance, utilities and office expense, employee benefits, depreciation and amortization, advertising and marketing, settlements and penalties, taxes, and licenses. Advertising costs are expensed as incurred and are included in G&A expenses. Other than trade show expenses which are deferred until occurrence of the future event, we expense 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 costs associated with the development of our Mullen Five show car.
Share-Based Compensation
We account for share-based awards issued by MAI 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 MAI issued to employees, non-employees and directors. The fair value of non-marketable share-based awards has been estimated based on an independent valuation. The MAI common and preferred share valuations have been appraised by an independent financial valuation advisor, based on assumptions management believes to be
11
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 included within general and administrative expenses. Beginning on July 1, 2021, share based compensation awards have been valued based on valuation of the trading price of Net Element common stock, as adjusted for the share exchange ratio in the merger. See Note 9, MAI Share-Based Compensation, for the amount of share-based compensation expense that is included within General and Administrative expenses for the three and six months ended March 31, 2022 and 2021.
Related Party Transactions
We have related party transactions with certain of our 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
We apply 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. Fair value is defined 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, Company management considers the principal or most advantageous market in which we 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.
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
We maintain 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, our cash balance may exceed these federal limitations and maintains significant cash on hand at certain of its locations. However, we have not experienced any losses in such accounts and management believes we are not exposed to any significant credit risk on these accounts.
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. We adopted ASU 2017-04, on October 1, 2020, which did not have a material impact on our consolidated balance sheets.
In September 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.”
12
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. We adopted ASU 2018-07, on October 1, 2020, which did not have a material impact on our consolidated statements of operations.
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. Company management is evaluating the future impact this guidance on our consolidated financial statements.
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). We have issued debt and equity instruments, the accounting for which could be impacted by this update. Company management is evaluating the impact this guidance on our financial condition and results of operations.
NOTE 4 – INTANGIBLE ASSETS
For the six months ended March 31, 2022 and 2021, we incurred website development and trademark costs of $246,132 and $41,250, respectively. These costs historically have been capitalized, as the website is in the development stage, resulting in improved functionality. Amortization of the website commenced when the website was placed in service for its intended use during the fourth quarter of 2021. Legal fees incurred for registration of trademarks account for all of the costs of trademark at March 31, 2022. Amortization of these costs will commence when the trademark application and registration process has been completed.
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 management’s best estimate of the distribution of the economic value of the identifiable intangible assets.
Total future amortization expense for finite-lived intellectual property is as follows:
Years Ended March 31, |
| Future Amortization | |
2022 (six months) | $ | 443,398 | |
2023 |
| 886,797 | |
2024 |
| 665,099 | |
Thereafter | 300,722 | ||
Total Future Amortization Expense | $ | 2,296,016 | |
For the three and six months ended March 31, 2022, amortization expense for the intangible assets was $221,699 and $445,376, and $5,932 and $11,864 for the three and six months ended March 31, 2021, respectively.
13
NOTE 5 – 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 following is a summary of our indebtedness at March 31, 2022:
Net Carrying Value | |||||||||||||
Unpaid Principal | Contractual | Contractual | |||||||||||
Type of Debt |
| Balance |
| Current |
| Long-Term |
| Interest Rate |
| Maturity | |||
Matured Notes | $ | 3,051,085 | $ | 3,051,085 | $ | — |
| 0.00% - 15.00 | % | 2016 - 2021 | |||
Promissory Notes |
| 19,331,912 |
| 14,331,912 |
| 5,000,000 |
| 8.99% - 28.00 | % | 2021 – 2024 | |||
Real Estate Note |
| 265,973 |
| 37,185 |
| 228,788 |
| 5.00 | % | 2023 | |||
Loan Advances |
| 557,800 |
| 557,800 |
| — |
| 0.00% - 10.00 | % | 2019 – 2020 | |||
Less: Debt Discount |
| (1,118,902) |
| (1,118,902) |
| — |
| NA |
| NA | |||
Total Debt | $ | 22,087,868 | $ | 16,859,080 | $ | 5,228,788 |
| NA |
| NA | |||
The following is a summary of our indebtedness at September 30, 2021:
Scheduled Debt Maturities
The following scheduled debt maturities at March 31, 2022:
| Years Ended March 31, | |||||||||||
| 2022 (6 months) |
| 2023 |
| 2024 |
| Total | |||||
Total Debt | $ | 16,859,080 | $ | 228,788 | $ | 5,000,000 | $ | 22,087,868 | ||||
Notes and Advances
We enter into promissory notes with third parties and company officers to support our operations. Promissory notes typically are for less than three years maturity and carry interest rates from 0% to 28.0%. Company management is working with the creditors to remediate the $3,051,085 in promissory notes and $557,800 in loan advances that are in default. Promissory notes and loan advances that are in default still accrue interest after their scheduled maturity date. There are no financial covenants associated with the promissory notes and loan advances, and there are no compliance waivers that have been received from creditors. We record imputed interest on promissory notes and advances which are deemed to be below the market interest rate. For the three and six months ended March 31, 2022, we recorded interest expense of $2,120,515 and $24,559,459, and $4,092,759 and $6,499,089 for the three and six months ended March 31, 2021, respectively.
14
In some instances, MTI issued shares of common stock or warrants 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 three and six months ended March 31, 2022 and 2021, was $188,307 and $19,400,483, and was $918,574 and $1,405,450 for the three and six months ended March 31, 2021, respectively.
During 2021, 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 six months ended March 31, 2022 and 2021, the carrying amount of indebtedness that was settled via issuance of MTI shares was $23,192,500 and zero, respectively.
NuBridge Commercial Lending LLC Promissory Note
On March 7, 2022, the Company’s wholly owned subsidiary, Mullen Investment Properties, LLC entered into a Promissory Note (the “Promissory Note”) with NuBridge Commercial Lending LLC for a principal amount of $5 million. The Promissory Note bears interest at a fixed rate of 8.99% per annum and the principal amount is due March 1, 2024. Collateral for the loan included the title to the Company’s property at 1 Greentech Drive, Tunica, MS Under the Promissory Note, prepaid interest and issuance costs were withheld from the principal and recorded as a discount on the note of $1.2 million, which will be amortized over the term of the note. As of March 31, 2022, the remaining unamortized discount was 1,118,902.
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 MAI – 5,567,319 Series B Preferred Shares to Drawbridge-DBI.
The amounts owed to Drawbridge-DBI is $27,185,390 and $33,296,648 as of March 31, 2022 and September 30, 2021, respectively, and are in default. The amounts owed to other DBI-affiliated entities is zero and $982,500, as of March 31, 2022 and September 30, 2021, respectively. The 2020 Drawbridge loan is currently recognized within the current portion of debt on the consolidated balance sheet.
On July 16, 2021, the Company and Drawbridge entered into an agreement whereby Drawbridge acknowledged, waived, and consented 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 occurred immediately prior to the consummation of the merger with Net Element. As part of the agreement, Drawbridge was paid $10,000,000, to be applied towards the outstanding principal balance and includes a waiver of default. The principal pay down to Drawbridge occurred on November 15, 2021.
Release of Liability, Debt Paydowns and Payoffs
On March 7, 2022, the Company repaid the $100,000 loan from Chris Langley, which matured on April 27, 2016
On March 11, 2022, the Company repaid the $250,000 loan from Wittels Consulting LLC, which matured on January 19, 2021.
On February 28, 2022, the Company repaid the $200,000 loan from Lee Tran, which matured on January 28, 2022
On March 3, 2022, the Company repaid the $1,000,000 loan from Mark Betor, and $150,000 interest, with a maturity date of April 10, 2022.
On December 27, 2021, the Par Funding/CBSG debt of $74,509 has been deemed satisfied by the authorized agent for the trustee of the creditor. As result of the trustee’s actions, the Company recorded an extinguishment of $74,509.
15
On November 29, 2021, the Company repaid $140,000, and on March 11, 2022 repaid $110,000, on the loan from the NY Group, which had matured on January 24, 2021.
On November 29, 2021, the Company repaid the $25,000 loan from MABM Holdings loan, which matured on January 13, 2021.
On November 19, 2021, the Company repaid $250,000, and on February 1, 2022 repaid $207,500, on the loan from the Royal Business Group LLC, which had matured on July 17, 2020.
On November 11, 2021, the Company executed a release of liability for the EXIM relationship. MAI (through MTI) paid $1,750,000 to EXIM USA to dismiss or release any and all claims, causes of action, lawsuits or other demands upon MTI. The loan matured on October 31, 2019, and the then current balance on the loan was $700,000 plus interest.
On November 9, 2021, the Company executed a release of liability for the Elegant Funding relationship. The lending relationship covered two transactions:
| 1. | $458,000 loan dated May 23, 2018, which had matured on November 23, 2018. The current principal balance was $438,000, and the payoff amount was $604,770. |
| 2. | $185,000 dated September 29, 2018, which had matured on March 29, 2019. The current principal balance is $185,000, and the payoff amount is $222,426. |
On November 9, 2021, MAI (through MTI) repaid a loan from John Gordon, which had matured on May 7, 2019. In consideration for the settlement, MAI (through MTI) received the title to one (1) Qiantu Dragonfly K50 EV car.
Convertible Notes
Between August 2020 and November 2021, MTI issued unsecured convertible notes totaling $23,192,500. The unsecured convertible notes bore interest at 15% and included warrants to acquire shares of common stock based on a specified formula. Interest was accrued in arrears until the last business day of each calendar year quarter. The default rate on the note would increase to 20% if quarterly interest payments are not timely made by MTI.
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. At March 31, 2021, the discount was fully amortized.
Company management evaluated the conversion features embedded in the convertible notes for classification and accounting under the provisions of ASC 815-40 and determined the conversion features met treatment as equity.
NOTE 6 – 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 12 - 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 condensed 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.
16
NOTE 7 – STOCKHOLDERS’ EQUITY
The accompanying financial statements include a retrospective recapitalization to reflect the composition of stockholder’s equity, as if they had existed for the periods presented.
Preferred Stock
On November 5, 2021, we filed an Amended and Restated Articles of Incorporation which included the rights and privileges of Preferred Stock Series A, Series B, and Series C. Under the terms of our Articles of Incorporation, the Board of Directors may determine the rights, preferences and terms of our authorized but unissued shares of preferred stock.
Dividends
The holders of Preferred Stock are entitled to non-cumulative dividends if declared by the Board of Directors. The holders of the Preferred Stock Series A and Series B shall participate on a pro rata basis (on an “as converted” basis to common stock) in any cash dividend paid on common stock. No dividends have been declared or paid during the three and six months ended March 31, 2022 and 2021.
The Series C Preferred Stock bears a cumulative 15.0% per annum fixed dividend payable no later than the 5th day after the end of each month on the Series C Original Issue Price plus unpaid accrued and accumulated dividends. Dividends on the Series C Preferred Stock are prior to any dividends on any other series of Preferred Stock or the Common Stock.
The Company may elect to pay dividends for any month with a paid-in-kind election (“PIK”) if (i) the shares issuable further to the PIK are subject to an effective registration statement, (ii) the Company is then in compliance with all listing requirements of NASDAQ and (iii) the average daily trading dollar volume of the Company’s Common Stock for 10 trading days in any period of 20 consecutive trading days on the NASDAQ is equal to or greater than $2.0 million. There is no mandatory redemption date, but, subject to the conditions set forth below, all, but not less than all, of the shares are redeemable by the Company at any time, provided that if the Company issues notice to redeem, holders of Series C Preferred shall have 15 days to convert such shares to Common Stock prior to the date of redemption.
In addition to the above, the shares are also redeemable by the Company in accordance with the following schedule provided the issuance of shares of Common Stock underlying the shares has been registered and the registration statement 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
17
Liquidation
Based on a reverse ratio of one share of the Company for 12.9485 shares of Mullen Technologies (the “Reverse Ratio”):, (i) the liquidation preference for the Series A Preferred to $1.29 per share from $0.10 per share as set forth in Section 2(c) of Article III(B) of the Certificate, and (ii) the “Series B Original Issue Price” of the Series B Preferred and the “Series C Original Issue Price” of the Series C Preferred to $8.84 per share from $0.6877 per share as set forth in Section 2(a) and Section 2(b), respectively, of Article III(B) of the Certificate.
Subject to applicable law, in the event of any Liquidation Event, the holders of the Series B Preferred will be entitled to receive, prior and in preference to any distribution of 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 Issue Price plus declared but unpaid dividends. The holders of the Series C Preferred will then be entitled to receive, prior and in preference to any distribution of the proceeds to the holders of the Series A Preferred or the Common Stock by reason of their ownership thereof, an amount per share equal to the Series C Original Issue Price plus declared but unpaid dividends. Thereafter, any remaining proceeds will be distributed to holders of the Series A Preferred and Common Stock ratably in proportion to the number of shares of the Series A Preferred and Common Stock held by them, on a fully converted basis.
Conversion
Preferred Stock Series A is convertible at any time at the option of the holder into Common Stock at a conversion rate of for one hundred basis with common shares of at any time after the date of issuance of such shares into such number of fully paid and non-accessible shares of Common Stock. Preferred Stock Series B and Preferred Stock Series C are convertible at any time at the option of the holder into Common Stock at a conversion rate of one for one basis with common shares at any time after the date of issuance of such shares into such number of fully paid and non-accessible shares of Common Stock.
Additionally, all outstanding shares of the Preferred Stock shall automatically convert into shares of the underlying Common Stock upon the Company’s sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act, the public offering price of which results in aggregate cash proceeds to the Company of not less than $50 million, net of underwriting discounts and commissions (a “Qualified IPO”).
Voting Rights
The holders of shares of Common Stock and Preferred Stock shall at all times vote together as a single class on all matters (including the election of directors) submitted to a vote of the stockholders; provided, however, that, any proposal which adversely affects the rights, preferences and privileges of the Series A Preferred, Series B Preferred, or Series C Preferred, as applicable, must be approved by a majority in interest of the affected Series of Preferred Stock, as the case may be. Each holder of Common Stock, Series B Preferred and Series C Preferred to have the right to one vote per share (on a fully converted basis) held of record by such holder and each holder of Series A Preferred have the right to 1,000 votes per share (on a fully converted basis) held of record by such holder.
Common Stock
We have 500,000,000 shares of common stock authorized with $0.001 par value per share. There were 289,784,112 and 7,048,387 shares of common stock and at March 31, 2022 and September 30, 2021.
18
The holders of Common Stock are entitled to one vote for each share of Common Stock held at all meetings of shareholders. In the event of a liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the common shareholders are entitled to receive the remaining assets following distribution of liquidation preferences, if any, to the holders of our preferred stock. The holders of common stock are not entitled to receive dividends unless declared by our Board of Directors. To date, no dividends were declared or paid to the holders of common stock.
Warrants
The Warrants were issued at an initial exercise price of $0.6877 per share, were immediately exercisable upon issuance and have a term of five years from the date of issuance. The exercise price was adjusted as provided in the warrants and further in accordance with the Merger Agreement such that the exercise price is now $8.84 per share. The Warrants were exercisable for an aggregate of 196,005,353 shares of Common Stock as of March 31, 2022.
The Warrants provide that if the Company issues or sells, enters into a definitive, binding agreement pursuant to which he Company is required to issue or sell or is deemed, pursuant to the provisions of the Warrants, to have issued or sold, any shares of Common Stock for a price per share lower than the exercise price then in effect (a “Dilutive Issuance”), subject to certain limited exceptions, then the exercise price of the Warrants shall be reduced to such lower price per share. In addition, the exercise price and the number of shares of Common Stock issuable upon exercise of the Warrants are subject to adjustment in connection with stock splits, dividends or distributions or other similar transactions.
The following table summarizes warrant activity for the six months ended March 31, 2022:
2020-2021 Warrants
The warrants are exercisable for a five-year period commencing upon issuance. The estimated fair value of the MAI warrants was valued 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:
| March 31, 2022 |
| ||
Expected term (in years) |
| 5.0 | ||
Volatility |
| 135 | % | |
Dividend yield |
| 0.00 | % | |
Risk-free interest rate |
| 0.98 % - 1.17 | % | |
Common stock price |
| $ | 4.16 | |
The allocation of the fair value of these warrants was included as a debt discount on the consolidated balance sheet and amortized to interest expense over the scheduled maturity dates of the various promissory notes. All unamortized debt discount was charged to interest at the time of merger on November 5, 2021.
Registration Rights and Registration Statement Form S-3
At the effective time of the Merger, various agreements that Mullen Technologies entered into were assumed by the Company, including the Exchange Agreement, the $20 Million SPA and the Registration Rights Agreement. These agreements caused the Company to be obligated to file one or more registration statements to register the resale of our Common Stock.
19
On April 15, 2022, the SEC deemed the Registration Statement Form S-3 (File No. 333-263880) effective. The Company registered the resale of Conversion Shares and the Warrant Shares as required by that certain Registration Rights Agreement, entered into among Mullen Technologies, Inc (“Mullen Technologies”) and certain of the Selling Stockholders (the “Registration Rights Agreement”) and that certain Exchange Agreement, entered into among Mullen Technologies and certain of the Selling Stockholders (the “Exchange Agreement”). The Offered Shares consisted solely of 51,622,489 shares of our Common Stock, 4,969,357 shares of our Common Stock (the “Conversion Shares”) issuable upon conversion of our preferred stock, and up to 196,517,186 shares of our Common Stock (the “Warrant Shares”) issuable upon exercise of outstanding warrants to purchase shares of our Common Stock (the “Warrants”).
Equity Transactions
$30 Million Esousa Equity Line of Credit
On September 1, 2021, Mullen Technologies and Esousa Holdings LLC (“Esousa”) entered into a Securities Purchase Agreement (the “Equity Line of Credit”) whereby the Esousa Holdings, LLC committed to purchase up to an aggregate of up to $30,000,000. At the effective time of the Merger, the obligations under the Equity Line of Credit were assumed by the Company.
As a condition to the obligation of the investor to fund the Equity Line of Credit, the Company must file an SEC registration statement covering the sale of the Common Stock issued under the Equity Line of Credit and such registration statement must be declared effective. The SEC Registration Statement was filed on February 1, 2022 and was declared effective on February 3, 2022.
As of March 31, 2022 MAI has received net proceeds of $29.6 million from the equity line of credit and Esousa has received 54,811,504 common shares.
NOTE 8 – LOSS PER SHARE
Earnings per common share (“EPS”) is computed by dividing net income allocated to common shareholders by the weighted-average common shares outstanding, excluding unvested common shares subject to repurchase or cancellation. Diluted EPS is computed by dividing income allocated to common shareholders plus dividends on dilutive convertible preferred stock and preferred stock that can be tendered to exercise warrants, by the weighted-average common shares outstanding plus amounts representing the dilutive effect of outstanding warrants and the dilution resulting from the conversion of convertible preferred stock, if applicable.
For the three and six months ended March 31, 2022 and 2021, the shares of Preferred Stock were excluded from the diluted share count because the result would have been antidilutive under the “if-converted method.” The warrants to purchases common shares of stock also were excluded from the computation because the result would have been antidilutive.
NOTE 9 – MAI SHARE- BASED COMPENSATION
MAI 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 MAI’s Board of Directors or its Compensation Committee and following the adoption of an equity incentive plan, employees are issued a specified number of shares of the MAI Common Shares. Employees are vested in 100% of the MAI 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 of service 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. Since we are public company, the employee shares are valued each month, using the MULN closing stock price on the NASDAQ CM.
20
Consulting agreements or MAI shares for services are determined by the number of MAI shares granted within the individual contracts, as well as the services provided by the consultant. The MAI shares specified within the individual agreements are negotiated and approved by our Chief Executive Officer. The consultant earns the MAI shares over the service period. The MAI 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.
NOTE 10 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| March 31, 2022 |
| September 30, 2021 | |||
Accrued Expenses and Other Liabilities |
|
|
|
| ||
Accrued expense - other | $ | 3,281,186 | $ | 2,051,696 | ||
Accrued payroll |
| 4,004,893 |
| 4,586,057 | ||
Accrued interest |
| 14,310,221 |
| 12,489,012 | ||
Total | $ | 21,596,300 | $ | 19,126,765 | ||
Accrued payroll represents salaries and benefits that are owed to employees, including payroll tax liabilities. Delinquent IRS and state tax liabilities as of March 31, 2022 and September 30, 2021 are $2,865,292 and $3,904,720, 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. See Note 17, Contingencies and Claims.
Accrued interest relates to finance charges on debt financing and represents interest on loans, and convertible notes payable throughout 2021. See Note 5, Debt.
NOTE 11 – NOTE RECEIVABLE
On October 8, 2021, MAI (through MTI) and CEOcast, Inc. entered into an agreement, whereby CEOcast, Inc. irrevocably committed to purchase, and MAI irrevocably committed to sell $15 million in warrants to acquire shares of common stock. The aggregate purchase price will be paid to MTI at closing by means of a full recourse promissory note. MAI will issue pre-funded warrants that are registered in the name of CEOcast, Inc. The investor is committed to pay to MAI (through MTI) in the principal amount of $15 million. The note receivable bears no interest.
NOTE 12 – LIABILITY TO ISSUE STOCK
Liability represents stock payable that is accrued for and issuable at a future date for certain consultants and employees and was zero and $7,027,500 as of March 31, 2022 and September 30, 2021, respectively.
21
NOTE 13 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment, and leasehold improvements, net consists of the following:
| March 31, |
| September 30, | |||
2022 | 2021 | |||||
Building | $ | 8,078,757 | $ | 804,654 | ||
Furniture and Equipment |
| 485,534 |
| 111,102 | ||
Vehicles |
| 45,887 |
| 45,887 | ||
Computer Hardware and Software |
| 201,834 |
| 139,742 | ||
Machinery and Equipment |
| 6,946,018 |
| 2,597,654 | ||
Leasehold Improvements |
| 40,368 |
| 66,379 | ||
Subtotal |
| 15,798,398 |
| 3,765,418 | ||
Less: Accumulated Depreciation |
| (2,744,463) |
| (2,583,941) | ||
Property, Equipment and Leasehold Improvements, Net | $ | 13,053,935 | $ | 1,181,477 | ||
Depreciation expense related to property, equipment and leasehold improvements for the three-and-six months ended March 31, 2022 was $81,160 and $165,182, and was $108,972 and $211,467 for the three and six months ended March 31, 2021, respectively.
On November 12, 2021, Mullen Investment Properties, LLC, MAI real estate wholly owned subsidiary, completed the $12,000,000 purchase of the Tunica County, MS property ("Advanced Manufacturing and Engineering Center" or "AMEC"). The property is approximately 127,400 square feet EV manufacturing facility and a small shed for storage. The property is located at 1 Greentech Drive, in the City of Robinsonville, MS. AMEC will be used to class 1 and class 2 EV cargo vans and the Mullen FIVE Crossover. The facility currently occupies 124,000 square feet of manufacturing space. The total available land on the property is over 100 acres. On the expanded site, Mullen plans to build a body shop, fully automated paint shop and a general assembly shop.
NOTE 14 – OTHER ASSETS
Other assets consist of the following:
| March 31, 2022 |
| September 30, 2021 | |||
Other Assets |
|
|
|
| ||
Coda Materials | $ | 76,588 | $ | 76,587 | ||
Show Room Cars |
| 3,716,106 |
| 2,739,995 | ||
Security Deposits |
| 186,640 |
| 186,640 | ||
Deposit on Property (See Note 16) |
| — |
| 1,240,000 | ||
Total Other Assets | $ | 3,979,334 | $ | 4,243,222 | ||
22
NOTE 15 – OPERATING EXPENSES
General and Administrative Expenses consists of the following:
Three months ended March 31, | Six months ended March 31, | ||||||||||||
2022 | 2021 |
| 2022 |
| 2021 | ||||||||
Professional fees |
| $ | 21,725,222 |
| $ | 2,457,846 | $ | 26,864,554 | $ | 3,399,575 | |||
Salaries |
| 4,217,073 |
| 1,082,480 |
| 7,378,993 |
| 2,234,148 | |||||
Depreciation and amortization |
| 302,859 |
| 114,903 |
| 610,558 |
| 223,331 | |||||
Lease |
| 559,583 |
| 379,234 |
| 1,019,118 |
| 735,404 | |||||
Settlements and penalties |
| 589,846 |
| 24,910 |
| 884,832 |
| 79,498 | |||||
Employee benefits |
| 545,108 |
| 88,516 |
| 913,160 |
| 171,546 | |||||
Utilities and office expense |
| 111,419 |
| 72,351 |
| 225,913 |
| 140,234 | |||||
Advertising and promotions |
| 472,803 |
| 223,675 |
| 2,925,593 |
| 253,216 | |||||
Taxes and licenses |
| 210,697 |
| 4,811 |
| 279,488 |
| 11,505 | |||||
Repairs and maintenance |
| 60,482 |
| 56,529 |
| 79,702 |
| 100,335 | |||||
Other |
| 474,341 |
| 171,485 |
| 988,605 |
| 280,626 | |||||
Total | $ | 29,269,433 | $ | 4,676,740 | $ | 42,170,516 | $ | 7,629,418 | |||||
Research and development consist of the following:
Research and development costs are expensed as incurred. Research and development expenses primarily consist of Mullen Five EV development and are primarily comprised of personnel-related costs for employees and consultants.
23
NOTE 16 – LEASES
MTI (now assumed by MAI due to the merger) has entered into various operating lease agreements for certain of its offices, manufacturing and warehouse facilities, and corporate jet. We have 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. We have 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. We calculate 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 our lease assets and liabilities.
Operating lease costs: | For the three months ended March 31, | For the six months ended March 31, |
| ||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||
Fixed lease cost | $ | 452,789 | $ | 140,171 | $ | 739,271 | $ | 485,241 | |||||
Variable lease cost |
| 130,752 |
| 232,283 |
| 260,357 |
| 236,599 | |||||
Short-term lease cost |
| 29,185 |
| 27,795 |
| 125,777 |
| 55,591 | |||||
Sublease income |
| (53,144) |
| (21,013) |
| (106,287) |
| (42,026) | |||||
Total operating lease costs | $ | 559,582 | $ | 379,236 | $ | 1,019,118 | $ | 735,405 | |||||
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.
24
The following table reflects maturities of operating lease liabilities at March 31, 2022:
NOTE 17 – 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, we are subject to asserted and actual claims and lawsuits arising in the ordinary course of business. Company management reviews any such legal proceedings and claims on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. We establish 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 our consolidated financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, management 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. We do not record liabilities when the likelihood is probable, but the amount cannot be reasonably estimated.
Preferred Management Partners, Inc. – Consulting Agreement
On September 23, 2021, MAI entered into a consulting arrangement with Preferred Management Partners, Inc. The Company hereby engages Preferred Management, Inc. to resume negotiations between MAI and Qiantu Motor Cars to enable the Company to procure the intellectual property ownership rights related to the K-50 automobile. As compensation for entering into this agreement and providing services to MAI, the consultant will receive 750,000 unrestricted publicly traded shares of the Company’s common stock registered on Form S-8 registration statement. If the consultant is successful, the Company will pay the consultant an additional 750,000 unrestricted shares of common stock registered on Form S-8 registration statement.
On January 25, 2022, MAI Board of Directors terminated the consulting arrangement and approved the issuance of stock consideration under the S-3 Registration Statement, dated February 3, 2022 and deemed effective on February 4, 2022. The Board approved the issuance of 1,000,000 shares for the termination of Preston Smart obligations and consulting arrangements. The shares were issued in February 2022.
International Business Machines (“IBM”)
We previously recorded a $4.5 million liability associated with a lawsuit with IBM, in which IBM contended that we had not fulfilled our 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. We proposed an offer in settlement
25
to resolve the matter, with the parties proceeding under the Joint Development and Technology License Agreement and all rights restored to us under the Trademark License Agreement. On December 1, 2021, the Supreme Court of the State of New York entered a judgment of $5.6 million to IBM. On December 2, 2021, we filed a Notice of Appeal. As a result, we recorded an additional charge, increasing the liability to the adjudicated amount.
Federal and State Tax Liabilities
We have recorded a $2.8 million liability at March 31, 2022 associated with 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 our assets. On April 14, 2022, the Company entered into an instalment with the IRS to pay $45,000 per month related to unpaid federal payroll liabilities plus accrued interest and penalties.
On April 28, 2021, MTI entered into an installment agreement with the EDD to pay $10,000 per month related to unpaid state payroll tax liabilities of $346,575 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, MTI entered into an agreement with Raymond James & Associates for public offering and placement agent services. The agreement called for payment of 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, we are 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 Guochang Holding Group Co. (a/k/a “Linghang Boao Group, LTD”)
In November 2019, we 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, we 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, our management believes the COVID-19 pandemic represents a Force Majeure event (that is, the pandemic has impacted our 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, we believe there is no breach of contract due to our failure of performance. We sustained 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 March 31, 2022.
Our management notified Linghang Boao Group of the 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 (Refer to Note 19, Subsequent Events, for updated details).
ASC GEM Equity Line Financing
This claim arises out an alleged breached Securities Purchase Agreement dated November 13, 2020. On November 9, 2021, the parties appointed an arbitrator. On January 7, 2022, GEM filed a letter brief with the arbitrator requesting leave to file a dispositive motion addressing a threshold legal issue regarding a defined term within a contract executed by the parties. Mullen filed a response to the letter brief on January 12, 2022.
On January 21, 2022, the arbitrator issued a procedural order granting GEM’s request to file a dispositive motion. GEM filed its dispositive motion is on February 14, 2022. Mullen’s filed its opposition to the dispositive motion on March 3,
26
2022. On April 4, 2022, the court denied GEM’s dispositive motion. The parties exchanged discovery requests on May 10, 2022. Responses are due served on or before June 8, 2022.
Odyssey Group Settlement
On August 13, 2021, MTI and Odyssey Group reached a settlement concerning disputes and differences that arose from collections on invoices and liens pending pursuant to Odyssey’s Client Account and the Odyssey Group Consulting Agreement. Odyssey alleged that the MTI owed $503,637 at March 31, 2021. The parties agreed that Odyssey would receive $50,000 and 500,000 shares of MTI common stock (pre-merger). Additionally, Odyssey will receive an equivalent of $10,000 in cash or common stock from MAI. The obligation to pay Odyssey may be terminated by either party upon 30-days’ notice by either party. A release of liability for the amounts owed on the Consulting arrangement was signed and executed on the settlement date. The Company has issued Odyssey the 500,000 common shares worth $1.25 million and paid $50,000 in cash and common stock. The $10,000 in cash or common stock provision has not been terminated by either party. Odyssey/Adam Grill’s contract was terminated on March 31st and the last effective date of the Consulting Contract was April 30th, 2022.
Net Element Shareholder 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 with a fiduciary duty to its stakeholders. On September 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 September 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 reflected on the financial statements.
NOTE 18 – RELATED PARTY TRANSACTIONS
At March 31, 2022 and September 30, 2021, 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 MAI, since issued MTI shares were exchanged due to the merger.
Drawbridge Related Transactions | ||||||||||||||||
(Cumulative) | March 31, 2022 | September 30, 2021 | ||||||||||||||
Description |
| Loan Principal |
| # of Shares |
| FV of Shares |
| Loan Principal |
| # of Shares |
| FV of Shares | ||||
Various Notes | $ | 13,831,554 |
| — | $ | — | $ | 23,831,554 |
| — | $ | — | ||||
Common Shares |
| — |
| 11,147,443 |
| 91,604,926 |
| — |
| 8,130,384 |
| 66,994,364 | ||||
Preferred Shares - Series A |
| — |
| — |
| — |
| — |
| 2,335 |
| 3,012 | ||||
Preferred Shares - Series B |
| — |
| 2,783,660 |
| 49,215,100 |
| — |
| 5,567,319 |
| 49,215,100 | ||||
Total Related Party Transactions | $ | 13,831,554 |
| 13,931,103 | $ | 116,212,476 | $ | 23,831,554 |
| 13,700,038 | $ | 116,212,476 | ||||
* Shares are MAI common and preferred shares.
The default interest rate on the Drawbridge loans is 28% per annum, and accrued interest is $13,353,836 at March 31, 2022.
27
Chief Executive Officer Loans to MAI
From time to time, the Company’s CEO provides loans to the Company. The outstanding balances for these loans were zero and $479,914 at March 31, 2022 and September 30, 2021. During the three and six months ended March 31, 2022, the Company repaid the outstanding loan balances in full.
William Miltner
William Miltner is a litigation attorney who provides legal services to Mullen Technologies and its subsidiaries. Mr. Miltner also is an elected Director for MAI, beginning his term in August 2021. For the three and six months ended March 31, 2022, Mr. Miltner received $393,997 and $625,480, respectively, for legal services rendered to us. Mr. Miltner has been providing legal services to the Company since 2020.
Mary Winters
On October 26, 2021, MAI entered into a consulting agreement with Mary Winters, Corporate Secretary and Director, to compensate for Corporate Secretary Services and director responsibilities for the period from October 1, 2021 to September 30, 2022, in the amount of $60,000 annually or $5,000 per month. As of March 31, 2022, Ms. Winter has received $15,000 in consulting payments.
Short-Term Financing
On January 14, 2022, MAI executed a Letter of Intent (“LOI”) with Mark Betor, MAI Director, for a 90-day $1,000,000 loan. The loan was be evidenced by a Promissory Note with a maturity date for full repayment of loan no later than April 11, 2022. Total agreed repayment amount was $1,150,000, which included an interest charge of $150,000. Collateral included a first lien position 1 Greentech Drive, Tunica, MS. MAI Board of Directors approved transaction on January 18, 2022. Mr. Betor abstained from voting. As of March 31, 2022 this loan was repaid in full.
NOTE 19 – SUBSEQUENT EVENTS
Company management has evaluated subsequent events through May 16, 2022, which is the date these financial statements were available to be issued. Except as discussed below, management has determined that there were no subsequent events which required recognition, adjustment to or disclosure in the carve-out financial statements:
ATVM Loan Application of Mullen ONE EV Cargo Van Program
The ATVM Loan Program was authorized by the Energy Independence and Security Act of 2007 to support the manufacturing of eligible light-duty vehicles and qualifying components in the United States. On April 29, 2022, MAI filed its ATVM loan application for the Mullen ONE EV Cargo Van Program. Funds will be used to accelerate high volume EV Cargo Van production at Mullen’s manufacturing (AMEC) facility outside Tunica, Mississippi. The Department of Energy invited the Company to formally submit its loan application. The Mullen ONE EV is a Class 1 light commercial cargo van rated under 6,000 pounds GVRW and will be one of the first electric commercial vehicle offerings in this category.
Mullen ONE Van Test Program
The Mullen ONE Project represents Mullen Automotive’s (“Mullen Automotive”, the “Company” or the “Applicant”) entry into the Battery Electric Vehicle (BEV), Commercial Transit Market by leveraging existing technology with accredited partners to ensure speed to market, low-risk product development, and proven manufacturing capabilities. Mullen Automotive, together with its project partners, will execute engineering development for Mullen ONE and establish a scalable manufacturing facility in the United States to assemble up to 5,000 vehicles per year (the “Project”). As a result of the Project, Mullen Automotive anticipates that it will create 101 direct manufacturing jobs in the U. S. -
28
which would enhance the local economy of the manufacturing site and offer a new generation of electric vehicles to further foster and promote the use of electric vehicles.
Gardner Consulting Contract
As of April 27, 2022, the MAI Compensation Committee entered into a consulting agreement with Kathryn Gardner, a Series A Preferred shareholder, regarding investor relations services to the Company. The services required are as follows:
| ● | Monitor, aggregate, and record the general sentiment on popular message boards; |
| ● | Identify other mediums in which the retail investment community consumes content related to equity trading. |
| ● | Package and format the general sentiment of the retail community and various other mediums into an executive summary. |
The terms of the agreement will remain in effect for 60 days. The stock-based compensation is 600,000 unrestricted common shares registered on Form S-8.
Shareholder Lawsuit
On May 5, 2022 a purported class action lawsuit was filed by Margaret Schaub, individually and on behalf of all others similarly situation, in the U.S. District Court of Central California. As of the date of this filing, we have not been served with any such complaint. It is our understanding that the lawsuit alleges that during the period between June 15, 2020 and April 6, 2022 the Company made materially false and misleading statements regarding the Company's business, operations, and compliance policies in violation of federal securities laws. If we are served with any such complaint, we will assess it at that time. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Performance Stock Award Agreement
On May 5, 2022, the MAI Compensation Committee and Board of Directors has granted to David Michery (the “Participant”) a Performance Stock Award for shares of Common Stock on the terms and subject to the conditions of this Performance Stock Award Agreement (the “Agreement”). The performance criteria is based on a series and/or categories of milestones (each, a “Milestone”) and within each Milestone are, multiple performance tranches (each a “Tranche”), with each Tranche representing a portion of shares of Common Stock that may be issued to Participant upon achievement of a Tranche.
Upon the achievement of each Tranche of one of the Milestones and subject to Participant continuing as the Chief Executive Officer as of the date of satisfaction of such Tranche and through the date the Administrator determines, approves and certifies that the requisite conditions for the applicable Tranche have been satisfied (a “Certification”), the Company shall issue shares of Common Stock as specified in the Tranche. The Performance Stock Award Agreement does not become effective until approval by MAI shareholders at the 2022 Annual General Meeting later this year.
Mullen FIVE RS Vehicle Development
In May 2022, MAI signed a proposal with Thurner Design of the vehicle development of the Mullen FIVE RS, a high-performance EV sport crossover vehicle featuring close to 1,100 HP, 0-60 mph in just 1.95 seconds, and close to 200 mph top speed. The proposal includes two phases: 1) design, surfacing and design support and 2) visualization and high imaging. Payments will be made based upon project milestones. The Thurner Design team is responsible for shaping and directing designs and brands like Rolls-Royce Motorcars, Bentley Motors, Bugatti, Porsche, Lamborghini, Aston Martin and Mullen Automotive.
Linghang Guochang Holding Group Co. (a/k/a “Linghang Boao Group LTD”)
29
On May 12, 2022, the Company received official notification that the 2019 contractual arrangement will officially resume under the original contractual terms. They acknowledge that the COVID-19 pandemic had delayed the original plan, and Linghang Boao Group LTD looks forward to resuming the battery partnership with Mullen Automotive.
Farley vs. Net Element, Inc., et al.
On May 10, 2022, in connection with the previous voluntary dismissal of a shareholder lawsuit filed before the reverse merger against Net Element and its then CEO and directors, MAI agreed to pay to the plaintiff a mootness fee of $38,500 filed . A formal release covering all named defendants will be executed between plaintiff and the defendant’s successor, Mullen Automotive Inc.
Warrant Exercises and Preferred C Share Conversions to Common Stock
Below are the warrant exercise activity since March 31, 2022.
Exercised | Common Share | |||
Date of Exercise |
| Warrants (#) |
| Issuance |
Various (Apr-May) |
| 3,961,160 | 40,020,024 | |
Various (Apr-May) |
| 750,000 | 10,050,000 | |
Various (Apr-May) |
| 750,000 | 10,050,000 | |
Various (Apr-May) |
| 37,356 | 234,038 | |
Various (Apr-May) |
| 136,914 | 1,848,509 | |
Various (Apr-May) |
| 141,333 | 1,908,166 | |
Various (Apr-May) |
| 167,568 | 2,262,379 | |
Various (Apr-May) |
| 124,801 | 1,048,945 | |
Various (Apr-May) |
| 33,959 | 258,422 | |
Various (Apr-May) |
| 16,979 | 142,708 | |
Various (Apr-May) |
| 71,315 | 599,396 | |
Various (Apr-May) |
| 124,801 | 1,048,945 | |
Various (Apr-May) |
| 25,469 | 214,065 | |
Various (Apr-May) |
| 28,016 | 235,473 | |
Various (Apr-May) |
| 25,469 | 214,065 | |
Total |
| 6,395,140 |
| 70,135,135 |
Below are the Preferred C Share conversion activity since March 31, 2022.
30
CEOcast, Inc. Drawdowns and Stock Issuance
In late April and early May 2022, MAI received $15M in three, $5M cash increments from CEOcast, Inc. In return, CEOcast, inc. received warrants to acquire shares of common stock. As of this writing, CEOcast, Inc. has exercised its warrants for 12,703,540 MAI common shares. The transaction is reflected within the balance sheet as a $15M note receivable as of March 31, 2022.
As of this writing, below are the common share issuances to CEOcast, Inc.(balance is subject to change).
| Drawdown |
| Common Share | ||
Date of Exercise |
| Amount |
| Issuance | |
4/18/2022 | $ | 5,000,000 |
| 2,893,518 | |
4/20/2022 | $ | 5,000,000 |
| 5,075,174 | |
5/2/2022 | $ | 5,000,000 |
| 4,734,848 | |
1,640,010 | |||||
Total | $ | 15,000,000 |
| 14,343,550 | |
31
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the financial statements and other financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”) and with our audited financial statements and other information presented in our Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2021.This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward- looking statements as a result of many factors, including but not limited to those under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2021.
In connection with the Merger Agreement (as defined below), and as disclosed in our Current Report on Form 8-K filed with the SEC on November 12, 2021, our fiscal year end has changed from March 31 to September 30, effective for our fiscal year ended September 30, 2021. As a result, and unless otherwise indicated, references to our fiscal year 2021 and prior years mean the fiscal year ended on September 30 of such year.
Basis of Presentation
As a pre-revenue company with no commercial operations, our activities to date have been limited and were conducted primarily in the United States and our historical results are reported under accounting principles generally accepted in the United States ("GAAP" or "U.S. GAAP") and in United States ("U.S.") dollars. Upon commencement of commercial operations, we expect to expand our operations substantially into the European Union ("E.U.") and, as a result, we expect our future results to be sensitive to foreign currency transaction and translation risks and other financial risks that are not reflected in our historical financial statements. As a result, we expect that the financial results our reports for periods after we begin commercial operations will not be comparable to the financial results included in this Quarterly Report.
Components of Results of Operations
We are an early-stage company, and our historical results may not be indicative of our future results for reasons that may be difficult to anticipate. Accordingly, the drivers of our future financial results, as well as the components of such results, may not be comparable to our historical or projected results of operations.
Revenues
We have not begun commercial operations and do not currently generate any revenue. Once we commence production and commercialization of our vehicles, we expect that the significant majority of our revenue will be initially derived from direct sales of Sport Utility Vehicles ("SUVs") and, subsequently, from flexible leases of our electric vehicles ("EVs").
Cost of Goods Sold
To date, we have not recorded cost of goods sold, as we have not recorded commercial revenue. Once we commence the commercial production and sale of our EVs, we expect cost of goods sold to include mainly vehicle components and parts, including batteries, direct labor costs, amortized tooling costs, and reserves for estimated warranty expenses.
General and Administrative Expense
General and administrative (“G&A”) expenses include all non-production expenses incurred by us in any given period. This includes expenses such as professional fees, salaries, rent, repairs and maintenance, utilities and office expense, employee benefits, depreciation and amortization, advertising and marketing, settlements and penalties, taxes, licenses, and other expenses. Advertising costs are expensed as incurred and are included in G&A expenses. We expense advertising costs as incurred in accordance with ASC 720-35, “Other Expenses – Advertising Cost.”
32
Research and Development Expense
To date, our research and development expenses have consisted primarily of external engineering services in connection with the design of our initial EV and development of the first prototype. As we ramp up for commercial operations, we anticipate that research and development expenses will increase for the foreseeable future as we expand our hiring of engineers and designers and continues to invest in new vehicle model design and development of technology.
Income Tax Expense / Benefit
Our income tax provision consists of an estimate for U.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities, and changes in the tax law. We maintain a valuation allowance against the full value of our U.S. and state net deferred tax assets because we believe the recoverability of the tax assets is not more likely than not.
Results of Operations
Comparison of the Three Months Ended March 31, 2022 to the Three Months Ended March 31, 2021
The following table sets forth our historical operating results for the periods indicated:
Three Months Ended |
| |||||||||||||||||
March 31, | ||||||||||||||||||
| 2022 | 2021 |
|
| $ Change |
| % Change |
| ||||||||||
| (dollar amounts, except percentages) |
| ||||||||||||||||
Operating costs and expenses: |
|
|
|
|
| |||||||||||||
General and administrative | $ | 29,269,433 | $ | 4,676,740 | $ | 24,592,693 |
| 526 | % | |||||||||
Research & development |
| 1,183,437 |
| 538,271 |
| 645,166 |
| 120 | % | |||||||||
Total operating costs and expenses |
| 30,452,870 |
| 5,215,011 |
| 25,237,859 |
| 484 | % | |||||||||
Loss from operations | $ | (30,452,870) |
| (5,215,011) |
| (25,237,859) |
| 484 | % | |||||||||
Other income (expense): |
|
|
|
|
|
|
|
| ||||||||||
Interest expense |
| (2,120,515) |
| (4,092,759) |
| 1,972,244 |
| (48) | % | |||||||||
Loss on debt settlement | — | — | — | 0 | % | |||||||||||||
Gain on extinguishment of indebtedness, net |
| — |
| 10,000 |
| (10,000) |
| (100) | % | |||||||||
Total other income (expense) |
| (2,120,515) |
| (4,082,759) |
| 1,962,244 |
| (48) | % | |||||||||
Net loss | $ | (32,573,385) | $ | (9,297,770) | $ | (23,275,615) |
| 250 | % | |||||||||
General and Administrative
General and administrative expenses increased by $24.6 million or 526% to $29.3 million in the three months ended March 31, 2022 from $4.7 million in the three months ended March 31, 2021, primarily due to increases in professional services, marketing, and compensation related expenses associated with the growth of personnel and resources.
Research and Development
Research and development expenses increased by $0.6 million or 120% to $1.2 million in the three months ended March 31, 2022 from $0.5 million in the three months ended March 31, 2021. During the quarter ended March 31, 2022, the Engineering Team has been working on battery development and initial stages of program car development.
Research and development costs are expensed as incurred. Research and development expenses primarily consist of the Mullen FIVE EV car development and are primarily comprised of personnel-related costs for employees and consultants. These costs are expected to rise in the future with continuing development of the Mullen FIVE car program.
33
Interest Expense
Interest expense decreased by $1.97 million or -48% to $2.1 million in the three months ended March 31, 2022 from $4.1 million in the three months ended March 31, 2021, primarily due to the decrease in the convertible debt portfolio, as well as the paydown of debt principal during the current fiscal year.
Net Loss
Net loss was $32.6 million for the three months ended March 31, 2022, an increase of $23.3 million or 250% from $9.3 million in the three months ended March 31, 2021, mainly for the reasons discussed above.
Comparison of the Six Months Ended March 31, 2022 to the Six Months Ended March 31, 2021
The following table sets forth our historical operating results for the periods indicated:
General and Administrative
General and administrative expenses increased by $34.5 million or 453% from $7.6 million in the six months ended March 31, 2021 to $42.2 million in the six months ended March 31, 2022, primarily due to increases in professional services, marketing, and compensation related expenses associated with the growth of personnel and resources.
Research and Development
Research and development expenses increased by $1.3 million or 122% from $1.1 million through the six months ended March 31, 2021 to $2.3 million through the six months ended March 31, 2022. During the six month period ended March 31, 2022, the development of the Mullen FIVE show cars was completed in November 2021, and the Engineering Team has been working on battery development and initial stages of program car development.
Research and development costs are expensed as incurred. Research and development expenses primarily consist of the Mullen FIVE EV show car development and are primarily comprised of personnel-related costs for employees and consultants. These costs are expected to rise in the future with continuing development of the Mullen FIVE car program.
Interest Expense
Interest expense increased by $18.1 million or 278% from $6.5 million through the six months ended March 31, 2021 to $24.6 million through the six months ended March 31, 2022, primarily due to the significant increase in the convertible
34
debt portfolio, coupled with the conversion of these financial instruments to equity due to merger with Net Element. The conversion to preferred C stock increased the amortization expense.
Gain on extinguishment of debt
During November 2020, the U.S. Small Business Administration (“SBA”) approved the CARES Act loan forgiveness amount of $875,426 in principal and accrued interest on November 20, 2020.
Net Loss
Net loss was $69.0 million for the six months ended March 31, 2022, an increase of $54.7 million or 383% from $14.3 million in the six months ended March 31, 2021, mainly for the reasons discussed above.
Liquidity and Capital Resources
As of the date of this Quarterly Report, we have yet to generate any revenue from our business operations. To date, we have funded our capital expenditure and working capital requirements through equity and debt capital, as further discussed below. Our ability to successfully commence commercial operations and expand our business will depend on many factors, including our working capital needs, the availability of equity or debt financing and, over time, our ability to generate cash flows from operations.
As of March 31, 2022, our cash and cash equivalents amounted to $65.2 million primarily due to $43.9 million from the issuance of 4,974,214 Series C Preferred Stock and 14,922,667 in associated warrants to the selling stockholders that were listed within the S-3 Registration Statement, deemed effective on April 15, 2022. Additionally, the Company received $29.6 million in net proceeds under the $30 million Esousa Equity Line, dated September 1, 2021.
Total debt of $22.1 million continues its downward trend. Debt has decreased significantly from September 30, 2021 due to principal paydowns, debt payoffs, and conversion of convertible debt to equity. Tax liabilities slightly decreased to $2.8 million from $4.2 million, which is comprised of IRS and other tax jurisdictions related to payroll taxes and sales and use taxes. On April 14, 2022, the Company signed an IRS installment agreement to pay the remaining balance for federal payroll related liabilities via monthly payments of $45,000.
We expect our capital expenditures and working capital requirements to increase substantially in the near term, as we seek to produce our initial EVs, develop our customer support and marketing infrastructure and expand our research and development efforts. We may need additional cash resources due to changed business conditions or other developments, including unanticipated delays in negotiations with OEMs and tier-one automotive suppliers or other suppliers, supply chain challenges, disruptions due to COVID-19, competitive pressures, and regulatory developments, among other developments. To the extent that our current resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. If the financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to decrease our level of investment in product development or scale back our operations, which could have an adverse impact on our business and financial prospects. See Note 1 to the consolidated financial statements included elsewhere in this Quarterly Report.
Debt
To date, our current working capital and development needs have been primarily funded through the issuance of convertible indebtedness and Common Stock. Short-term debt comprises a significant component of our funding needs. Short-term debt is generally defined as debt with principal maturities of one-year or less. Long-term debt is defined as principal maturities of one year of more.
Short and Long-Term Debt
The short-term debt classification primarily is based upon loans due within twelve-months from the balance sheet date, in addition to loans that have matured and remain unpaid. Management plans to renegotiate matured loans with creditors for
35
favorable terms, such as reduce interest rate, extend maturities, or both; however, there is no guarantee favorable terms will be reached. Until negotiations with creditors are resolved, these matured loans remain outstanding and will be classified within short-term debt on the balance sheet. Interest and fees on loans are being accounted for within accrued interest. The loans are secured by substantially all the Company’s assets. Several principal shareholders have provided loans to and hold convertible debt of the Company and are related parties.
The following is a summary of our debt as of March 31, 2022:
The following is a summary of our debt as of September 30, 2021:
Cash Flows
The following table provides a summary of Mullen’s cash flow data for the six months ended March 31, 2022 and 2021:
Six Months Ended March 31, | |||||||
| 2022 |
| 2021 | ||||
Net cash used in operating activities | $ | 24,871,780 | $ | 5,619,717 | |||
Net cash used in investing activities |
| 10,737,679 |
| 102,068 | |||
Net cash provided by financing activities |
| 100,849,172 |
| 6,540,725 | |||
Cash Flows used in Operating Activities
Our cash flow used in operating activities to date has been primarily comprised of costs related to research and development, payroll, and other general and administrative activities. As we continue to ramp up hiring ahead of starting commercial operations, we expect our cash used in operating activities to increase significantly before we start to generate any material cash flow from our business.
Net cash used in operating activities was $24.9 million in the six months ended March 31, 2022, an increase from $5.6 million net cash used in activities in the six months ended March 31, 2021.
36
Cash Flows used in Investing Activities
Our cash flows used in investing activities increased due to the purchase of the Tunica, MS manufacturing plant in November 2021 by our wholly owned subsidiary, Mullen Investment Properties, LLC. We expect these costs to increase substantially in the near future as we ramp up activity ahead of commencing commercial operations and build out the manufacturing facility.
Net cash used in investing activities was $10.7 million in the six months ended March 31, 2022, an increase from $0.1 million used in investing activities in the six months ended March 31, 2021.
Cash Flows provided by Financing Activities
Through March 31, 2022, we have financed our operations primarily through the issuance of convertible notes equity securities, and warrants registered under the S-3 Registration Statements deemed effective February 3, 2022 and April 15, 2021, respectively.
Net cash provided by financing activities was $100.9 million for the six months ended March 31, 2022 primarily due to issuance of equity, as compared to $6.5 million net cash provided by financing activities for the six months ended March 31, 2021, which included (i) $12.1 million net proceeds from issuance of notes payable, which was partially offset by $15.1 million of payments of notes payable; (ii) $40.1 million in net proceeds from issuance of Common Stock; and (iii) $63.9 million in proceeds to issue preferred C shares.
Contractual Obligations and Commitments
The following tables summarizes our contractual obligations and other commitments for cash expenditures as of March 31, 2022, and the years in which these obligations are due:
Operating Lease Commitments
| Scheduled | ||
Years Ended March 31, | Payments | ||
2022 (6 months) | $ | 602,568 | |
2023 |
| 1,157,693 | |
2024 |
| 824,287 | |
2025 |
| 436,156 | |
2026 |
| 222,787 | |
2027 and Thereafter |
| — | |
Total Future Minimum Lease Payments | $ | 3,243,491 | |
We currently lease our headquarters space in the Los Angeles area under a single lease classified as an operating lease expiring in March 2026. We have not executed any binding agreement for leases beyond 2026.
Scheduled Debt Maturities
The following are scheduled debt maturities:
Years Ended March 31, | ||||||||||||||||||||||||
| 2022 (6 months) |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| Thereafter |
| Total | |||||||||
Total Debt | $ | 16,859,080 | $ | 228,788 | $ | 5,000,000 | $ | — | $ | — | $ | — | $ | — | $ | 22,087,868 | ||||||||
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, as defined under SEC rules.
37
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with U.S. GAAP. In the preparation of these financial statements, our management is required to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Management considers an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on the consolidated financial statements.
Our significant accounting policies are described in Note 3 to the condensed consolidated financial statements included elsewhere in this Quarterly Report. Because we are a pre-revenue company without commercial operations, management believes it does not currently have any critical accounting policies or estimates. Management believes that the accounting policies most likely to become critical in the near future are those described below.
Stock-Based Compensation
We recognize the cost of share-based awards granted to employees and directors based on the estimated grant-date fair value of the awards. Cost is recognized on a straight-line basis over the service period, which is generally the vesting period of the award. Our management reverses previously recognized costs for unvested options in the period that forfeitures occur. Mullen determines the fair value of stock options using the Black-Scholes option pricing model, which is impacted by the following assumptions:
| ● | Expected Term—We use the simplified method when calculating the expected term due to insufficient historical exercise data. |
| ● | Expected Volatility—As our shares were not actively traded during the periods presented, the volatility is based on a benchmark of comparable companies within the automotive and energy storage industries. |
| ● | Expected Dividend Yield—The dividend rate used is zero as we have never paid any cash dividends on Common Stock and does not anticipate doing so in the foreseeable future. |
| ● | Risk-Free Interest Rate—The interest rates used are based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. |
Recent Accounting Pronouncements
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). We have issued debt and equity instruments, the accounting for which could be impacted by this update. Company management is evaluating the impact this guidance on our financial condition and results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
38
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. Management has designed disclosure controls and procedures that reasonably enable the management including the CEO and CFO to deliberate and take timely decisions regarding required disclosure.
As required by the SEC Rules 13a-15(b) and 15d-15(b), we are obligated to conduct an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three and six months ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Disclosure Controls and Internal Control over Financial Reporting
Because of their inherent limitations, our disclosure controls and procedures and our internal control over financial reporting may not prevent material errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to risks, including that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate.
39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as set forth below, there have been no material developments during the fiscal quarter covered by this Report for our legal proceedings that were disclosed in our Annual Report on Form 10-K for the year ended September 30, 2021.
We are aware that on May 5, 2022 a purported class action lawsuit was filed by Margaret Schaub, individually and on behalf of all others similarly situation, in the U.S. District Court of Central California. As of the date of this filing, we have not been served with any such complaint. It is our understanding that the lawsuit alleges that during the period between June 15, 2020 and April 6, 2022 the Company made materially false and misleading statements regarding the Company's business, operations, and compliance policies in violation of federal securities laws. If we are served with any such complaint, we will assess it at that time. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
In connection with a dispute with ASC GEM regarding an alleged breached Securities Purchase Agreement dated November 13, 2020, on November 9, 2021, the parties appointed an arbitrator. On January 7, 2022, GEM filed a letter brief with the arbitrator requesting leave to file a dispositive motion addressing a threshold legal issue regarding a defined term within a contract executed by the parties. Mullen filed a response to the letter brief on January 12, 2022. On January 21, 2022, the arbitrator issued a procedural order granting GEM’s request to file a dispositive motion. GEM filed its dispositive motion is on February 14, 2022. Mullen’s filed its opposition to the dispositive motion on March 3, 2022. On April 4, 2022, the court denied GEM’s dispositive motion. The parties exchanged discovery requests on May 10, 2022. Responses are due served on or before June 8, 2022.
During September through November 2021, the following lawsuits that were filed against Net Element and former members of its board of directors in connection with the Business Combination with Mullen were voluntarily dismissed:
| ● | Raquel Ruby v. Net Element, Inc., Oleg Firer, Jon Najarian, John Roland, and Todd Raarup, filed on June 11, 2021 in the United States District Court for the Southern District of New York; |
| ● | Thomas Farley v. Net Element, Inc., Oleg Firer, Jon Najarian, John Roland, and Todd Raarup, filed on June 8, 2021 in the United States District Court for the Eastern District of New York; |
| ● | Michael Gatto v. Net Element, Inc., Oleg Firer, Jon Najarian, John Roland, Todd Raarup, Mullen Automotive, Inc., Mullen Technologies, Inc., and Mullen Acquisition, Inc., filed on June 3, 2021 in the United States District Court of Delaware; |
| ● | Atish Shinde v. Net Element, Inc., Oleg Firer, Howard Ash, Jon Najarian, Todd Raarup, Mullen Technologies, Inc. and Mullen Acquisition, Inc., filed on May 28, 2021 in the United States District Court for the Southern District of New York; |
| ● | Shawn Strickland v. Net Element, Inc., Oleg Firer, Jon Najarian, John Roland, and Todd Raarup, filed on August 10, 2021 in the United States District Court for Delaware; |
| ● | Matthew Whitfield v. Net Element, Inc., Oleg Firer, Jon Najarian, John Roland, Todd Raarup, filed on August 13, 2021 in the United States District Court for the Eastern District of Pennsylvania; and |
| ● | Robert Wilhelm v. Net Element, Inc., Oleg Firer, Jon Najarian, John Roland, Todd Raarup, filed on August 13, 2021 in the United States District Court for the Southern District of New York. |
Item 1A. Risk Factors
In addition to the information set forth in this Report, you should read and consider the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2021 filed with the SEC, which could materially affect our business, financial condition, or future results of operation. The risks described in such
40
report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to have a material adverse effect on our business, financial condition and/or future operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 24, 2022, the Company issued 428,382 shares of common stock to David Michery. The issuance of the shares was made pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended.
In February 2022, the Company issued 1,000,000 shares of common stock in connection with for the termination of consulting arrangements.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
On March 7, 2022, the Company granted to David Michery a bonus of $750,000.
On March 7, 2022, the Company’s wholly owned subsidiary, Mullen Investment Properties, LLC entered into a Promissory Note (the “Promissory Note”) with NuBridge Commercial Lending LLC for a principal amount of $5 million. The Promissory Note bears interest at a fixed rate of 8.99% per annum and the principal amount is due March 1, 2024. Collateral for the loan included the title to the Company’s property at 1 Greentech Drive, Tunica, MS Under the Promissory Note, prepaid interest and issuance costs were withheld from the principal and recorded as a discount on the note of $1.2 million, which will be amortized over the term of the note.
41
Item 6. Exhibits
Exhibit |
| Description |
3.1 | ||
10.1* | ||
10.2* | Letter of Intent dated January 14, 2022 between the Company and Mark Betor | |
10.3 | ||
10.4 | ||
10.4(a)* | Guaranty dated March 7, 2022 between NuBridge Commercial Lending, LLC and David Michery | |
10.5 | ||
31.1* | ||
31.2* | ||
32.1* | ||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101) |
# Indicates management contract or compensatory plan or arrangement.
* Filed herewith (furnished herewith with respect to Exhibit 32.1).
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Mullen Automotive Inc. | ||
May 16, 2022 | By: | /s/ David Michery |
David Michery | ||
Chief Executive Officer, President and Chairman of the Board | ||
(Principal Executive Officer) | ||
/s/ Kerri Sadler | ||
Kerri Sadler | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) | ||
43
Exhibit 10.1
Execution Version
WARRANT
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), FROM REPUTABLE COUNSEL, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
MULLEN AUTOMOTIVE INC.
WARRANT TO PURCHASE COMMON STOCK
Date of Issuance: March 28, 2022 (“Issuance Date”)
Mullen Automotive Inc., a California corporation (the “Company”), hereby certifies that, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, , the registered holder hereof or its permitted assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company, at the Exercise Price (as defined below) then in effect, upon exercise of this Warrant to Purchase Common Stock (including any Warrants to Purchase Common Stock issued in exchange, transfer or replacement hereof, the “Warrant”), at any time or times on or after the Issuance Date, but not after 11:59 p.m., New York time, on the Expiration Date (as defined below), (subject to adjustment as provided herein) fully paid and non-assessable shares of Common Stock (as defined below) (the “Warrant Shares”). Except as otherwise defined herein, capitalized terms in this Warrant shall have the meanings set forth in Section 16. This Warrant is one of the Warrants to purchase Common Stock (the “SPA Warrants”) issued to Holder pursuant to that certain Securities Purchase Agreement by and between the Company and the Holder (the “Securities Purchase Agreement”).
1.EXERCISE OF WARRANT.
(a)Mechanics of Exercise. Subject to the terms and conditions hereof (including, without limitation, the limitations set forth in Section 1(f)), this Warrant may be exercised by the Holder on any day on or after the Issuance Date in whole or in part, by delivery (whether via facsimile or otherwise) of a written notice, in the form attached hereto as Exhibit A (the “Exercise Notice”), of the Holder’s election to exercise this Warrant. Within one (1) Trading Day following an exercise of this Warrant as aforesaid, the Holder shall deliver payment to the Company of an
- 1 -
amount equal to the Exercise Price in effect on the date of such exercise multiplied by the number of Warrant Shares as to which this Warrant was so exercised (in respect of such specific exercise, the “Aggregate Exercise Price”) in cash or via wire transfer of immediately available funds if the Holder did not notify the Company in such Exercise Notice that such exercise was made pursuant to a Cashless Exercise (as defined in Section 1(d)). The Holder shall not be required to deliver the original of this Warrant in order to effect an exercise hereunder. Execution and delivery of an Exercise Notice with respect to less than all of the Warrant Shares shall have the same effect as cancellation of the original of this Warrant certificate and issuance of a new Warrant certificate evidencing the right to purchase the remaining number of Warrant Shares. Execution and delivery of an Exercise Notice for all of the then-remaining Warrant Shares shall have the same effect as cancellation of the original of this Warrant certificate after delivery of the Warrant Shares in accordance with the terms hereof. On or before the first (1st) Trading Day following the date on which the Company has received an Exercise Notice, the Company shall transmit by facsimile an acknowledgment of confirmation of receipt of such Exercise Notice, in the form attached hereto as Exhibit B, to the Holder and the Company’s transfer agent (the “Transfer Agent”). On or before the second (2n d) Trading Day following the date on which the Company has received such Exercise Notice (the “Required Delivery Date”), the Company shall (i) provided that the Transfer Agent is participating in The Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program (which the Company shall cause the Transfer Agent to do at Holder’s request) and provided the legends would be eligible to be removed from such shares of Common Stock pursuant to Section 5(d) of the Securities Purchase Agreement, upon the request of the Holder, credit such aggregate number of shares of Common Stock to which the Holder is entitled pursuant to such exercise to the Holder’s or its designee’s balance account with DTC through its Deposit/ Withdrawal at Custodian system, or (ii) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program or the legends would not be eligible to be removed from such shares of Common Stock pursuant to Section 5(d) of the Securities Purchase Agreement, issue and deliver to the Holder or, at the Holder’s instruction pursuant to the Exercise Notice, the Holder’s agent or designee, in each case, sent by reputable overnight courier to the address as specified in the applicable Exercise Notice, a certificate, registered in the Company’s share register in the name of the Holder or its designee (as indicated in the applicable Exercise Notice), for the number of shares of Common Stock to which the Holder is entitled pursuant to such exercise. Upon delivery of an Exercise Notice, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date such Warrant Shares are credited to the Holder’s DTC account or the date of delivery of the certificates evidencing such Warrant Shares (as the case may be). If this Warrant is submitted in connection with any exercise pursuant to this Section 1(a) and the number of Warrant Shares represented by this Warrant is greater than the number of Warrant Shares being acquired upon an exercise, then, at the request of the Holder and upon surrender hereof by the Holder at the principal office of the Company, the Company shall as soon as practicable and in no event later than three (3) Business Days after any exercise and at its own expense, issue and deliver to the Holder (or its designee) a new Warrant (in accordance with Section 7(d)) representing the right to purchase the number of Warrant Shares purchasable immediately prior to such exercise under this Warrant, less the number of Warrant Shares with respect to which this Warrant is exercised. No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but rather the number of shares of Common Stock to be issued shall be rounded up to the nearest whole number. The Company shall pay any and all taxes and
- 2 -
fees which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant.
(b)Exercise Price. For purposes of this Warrant, “Exercise Price” means $8.8340, subject to adjustment as provided herein.
(c)Company’s Failure to Timely Deliver Securities. If the Company fails to issue and deliver (or cause to be delivered) to the Holder by the Required Delivery Date a certificate representing the Warrant Shares that is free from all restrictive and other legends or credit the balance account of Holder or Holder’s nominee with DTC for such number of Warrant Shares so delivered to the Company, then, in addition to all other remedies available to Holder, at the sole discretion of Holder, the Company shall:
(i)pay in cash to Holder on each Trading Day after the Required Delivery Date that the issuance or credit of such Warrant Shares is not timely effected an amount equal to 1 % of the product of (A) the number of shares of Common Stock not so delivered or credited (as the case may be) to Holder or Holder’s nominee multiplied by (B) the Closing Sale Price of the Common Stock on the Trading Day immediately preceding the Required Delivery Date; or
(ii)if on or after the Required Delivery Date, Holder (or any other Person in respect, or on behalf, of Holder) purchases (in an open market transaction or otherwise) Common Stock (“Replacement Shares”) to deliver in satisfaction of a sale by Holder of all or any portion of the number of shares of Common Stock, or a sale of a number of shares of Common Stock equal to all or any portion of the number of shares of Common Stock, that Holder so anticipated receiving from the Company without any restrictive legend, then, within five (5) Trading Days after Holder’s request and in Holder’s sole discretion, either (A) pay cash to Holder in an amount equal to Holder’s total purchase price (including brokerage commissions and other out-of-pocket expenses, if any) for the Replacement Shares (the “Buy-In Price”), at which point the Company’s obligation to so deliver such certificate or credit Holder’s balance account shall terminate and such shares shall be cancelled, or (B) promptly honor its obligation to so deliver to Holder a certificate or certificates or credit Holder’s DTC account representing such number of shares of Common Stock that would have been so delivered if the Company timely complied with its obligations hereunder and pay cash to Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (1) such number of shares of Common Stock that the Company was required to deliver to Holder by the Required Delivery Date multiplied by (2) the lowest Closing Sale Price of the Common Stock on any Trading Day during the period commencing on the date Holder purchased Replacement Shares and ending on the date of such delivery and payment under this clause (ii).
To the extent permitted by law, the Company’s obligations to issue and deliver the Common Stock upon exercise of the Warrant in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other person of any obligation to the Company or
- 3 -
any violation or alleged violation of law by the Holder or any other person, and irrespective of any other circumstance that might otherwise limit such obligation of the Company to the Holder in connection with the issuance of the Common Stock. Nothing herein shall limit the Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver the Common Stock issuable upon exercise of this Warrant as required pursuant to the terms hereof.
(d)Cashless Exercise. Notwithstanding anything contained herein to the contrary (other than Section 1(f) below) at any time commencing sixty (60) days after the Issuance Date, the Holder may in its sole discretion (and without limiting the Holder’s rights and remedies contained herein or in any of the other Transaction Documents (as defined in the Securities Purchase Agreement)), exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise the “Net Number” of shares of Common Stock determined according to the following formula (a “Cashless Exercise”):
Net Number = (A x B) / C
For purposes of the foregoing formulas:
A= | The total number of shares with respect to which this Warrant is then being exercised. |
B= | The Black Scholes Value (as defined in Section 16 herein). |
C= | The lower of the two Closing Bid Prices of the Common Stock in the two days prior the time of such exercise (as such Closing Bid Price is defined in Section 16 herein), but in any event not less than $0.01(as may be adjusted for stock dividends, subdivisions, or combinations in the manner described in Section 2(a) herein). |
(e)Disputes. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the number of Warrant Shares to be issued pursuant to the terms hereof (including, without limitation, the Net Number), the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed, provided that following such issuance to Holder such dispute shall be resolved in accordance with Section 13.
(f)Limitations on Exercises and Exchanges. Notwithstanding anything to the contrary contained in this Warrant, this Warrant shall not be exercisable or exchangeable by the Holder hereof to the extent (but only to the extent) that the Holder or any of its affiliates would beneficially own in excess of 9.9% of the number of shares of Common Stock outstanding after giving effect to the issuance of Common Stock issuable upon exercise of the Warrants calculated in accordance with Section 13(d) of the Exchange Act (the “Maximum Percentage”). To the extent the above limitation applies, the determination of whether this Warrant shall be exercisable or exchangeable (vis-à-vis other convertible, exercisable or exchangeable securities owned by the Holder or any of its affiliates) and of which such securities shall be exercisable or exchangeable (as among all such securities owned by the Holder) shall, subject to such Maximum Percentage limitation, be
- 4 -
determined on the basis of the first submission to the Company for conversion, exercise or exchange (as the case may be). No prior inability to exercise or exchange this Warrant pursuant to this paragraph shall have any effect on the applicability of the provisions of this paragraph with respect to any subsequent determination of exercisability or exchangeability. 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 1934 Act (as defined in the Securities Purchase Agreement) 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 this Warrant. The holders of Common Stock shall be third party beneficiaries of this paragraph and the Company may not 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 Company shall within two (2) Business Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding, including by virtue of any prior conversion or exercise or exchange of convertible or exercisable or exchangeable securities into shares of Common Stock, including, without limitation, pursuant to this Warrant or securities issued pursuant to the Securities Purchase Agreement.
(g)Reservation of Shares; Insufficient Authorized Shares. The Company shall initially reserve out of its authorized and unissued shares of Common Stock a number of shares of Common Stock equal to 200% of the maximum number of Warrant Shares issuable to satisfy the Company's obligations to issue shares of Common Stock hereunder, and the Company shall at all times keep reserved for issuance under this Warrant a number of shares of Common Stock equal to 200% of the maximum number of Warrant Shares issuable to satisfy the Company’s obligation to issue shares of Common Stock hereunder.
(h)Activity Restrictions. For so long as Holder holds this Warrant or any Warrant Shares, Holder will not: (i) engage or participate in any actions, plans or proposals which relate to or would result in (a) acquiring additional securities of the Company, alone or together with any other Person, which would result in beneficially owning or controlling, or being deemed to beneficially own or control, more than 9.9% of the total outstanding shares of Common Stock or other voting securities of the Company, (b) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving Company, (c) a sale or transfer of a material amount of assets of the Company, (d) any change in the present board of directors or management of the Company, including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the board, (e) any material change in the present capitalization or dividend policy of the Company, (f) any other material change in the Company’s business or corporate structure, including but not limited to, if the Company is a registered closed-end investment company, any plans or proposals to make any changes in its investment policy for which a vote is required by Section 13 of the Investment Company Act of 1940, (g) changes in the Company’s charter, bylaws or instruments corresponding thereto or other actions which may impede the acquisition of control of the Company by any Person, (h) causing a class of securities of the Company to be delisted from a national securities exchange or to cease to be authorized to
- 5 -
be quoted in an inter-dealer quotation system of a registered national securities association, (i) a class of equity securities of the Company becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Act, or (j) any action, intention, plan or arrangement similar to any of those enumerated above, or (ii) request the Company or its directors, officers, employees, agents or representatives to amend or waive any provision of this Section 1(h); provided, however, that notwithstanding anything to the contrary contain in clauses (i) and (ii) above, Holder may vote any shares of Common Stock owned or controlled by it, solicit any proxies, or seek to advise or influence any Person with respect to any voting securities of the Company. Holder may only exercise this Warrant for a cash exercise price if the trading price at the time of exercise is greater than the then applicable Exercise Price.
2.ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 2.
(a)Stock Dividends and Splits. Without limiting any provision of Section 4, if the Company, at any time on or after the date of the Securities Purchase Agreement, (i) pays a stock dividend on one or more classes of its then outstanding shares of Common Stock or otherwise makes a distribution on any class of capital stock that is payable in Common Stock, (ii) subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its then outstanding shares of Common Stock into a larger number of shares or (iii) combines (by combination, reverse stock split or otherwise) one or more classes of its then outstanding shares of Common Stock into a smaller number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or combination. If any event requiring an adjustment under this paragraph occurs during the period that an Exercise Price is calculated hereunder, then the calculation of such Exercise Price shall be adjusted appropriately to reflect such event.
(b)Adjustment Upon Issuance of Common Stock. If, during the Restricted Period (as defined in the Securities Purchase Agreement), the Company effects an Subsequent Financing (as defined in the Securities Purchase Agreement), or in accordance with this Section 2 is deemed to have effected an Subsequent Financing, any Common Stock (including the issuance or sale of Common Stock owned or held by or for the account of the Company) issued or sold or deemed to have been issued or sold) for a consideration per share (the “New Issuance Price”) less than a price equal to the Exercise Price in effect immediately prior to such issue or sale or deemed issuance or sale (such Exercise Price then in effect is referred to as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the Exercise Price then in effect shall be reduced (and in no event increased) to the price per share as determined in accordance with the following formula:
- 6 -
EP2 = EP1 x (A + B) / (A + C)
For purposes of the foregoing formula:
A= | The total number of Warrant Shares with respect to which this Warrant may be exercised. |
B= | The total number of shares of Common Stock that would be issued or issuable under the Dilutive Issuance if issued at a per share equal to EP1. |
C= | The total number of shares of Common Stock actually issued or issuable under the Dilutive Issuance. |
EP1= The Exercise Price in effect immediately prior to a Dilutive Issuance.
EP2= The Exercise Price immediately after such Dilutive Issuance; provided, however, that such price shall in no event be less than $0.01 per share of Common Stock (as may be adjusted for stock dividends, subdivisions, or combinations in the manner described in Section 2(a) herein, the “Floor Price”);
provided, that if such issuance or sale (or deemed issuance or sale) was without consideration, then the Company shall be deemed to have received the Floor Price for each such share so issued or deemed to be issued. For all purposes of the foregoing (including, without limitation, determining the adjusted Exercise Price and consideration per share under this Section 2(b)), the following shall be applicable:
(i)Issuance of Options. If, during the Restricted Period, the Company in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 2(b)(i), the “lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Options or upon conversion, exercise or exchange of any Convertible Securities issuable upon exercise of any such Option” shall be equal to (A) the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the granting or sale of such Option, upon exercise of such Option and upon conversion, exercise or exchange of any Convertible Security issuable upon exercise of such Option minus (B) the sum of all amounts paid or payable to the holder of such Option (or any other Person) upon the granting or sale of such Option, upon exercise of such Option and upon conversion, exercise or exchange of any Convertible Security issuable upon exercise of such Option plus the value of any other consideration received or receivable by, or benefit conferred on, the holder of such Option (or any other Person). Except as contemplated below, no
- 7 -
further adjustment of the Exercise Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion, exercise or exchange of such Convertible Securities.
(ii)Issuance of Convertible Securities. If, during the Restricted Period, the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon the conversion, exercise or exchange thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 2(b)(ii), the “lowest price per share for which one share of Common Stock is issuable upon the conversion, exercise or exchange thereof” shall be equal to (A) the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to one share of Common Stock upon the issuance or sale of the Convertible Security and upon conversion, exercise or exchange of such Convertible Security minus (B) the sum of all amounts paid or payable to the holder of such Convertible Security (or any other Person) upon the issuance or sale of such Convertible Security plus the value of any other consideration received or receivable by, or benefit conferred on, the holder of such Convertible Security (or any other Person). Except as contemplated below, no further adjustment of the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion, exercise or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of this Warrant has been or is to be made pursuant to other provisions of this Section 2(b), except as contemplated below, no further adjustment of the Exercise Price shall be made by reason of such issue or sale.
(iii)Change in Option Price or Rate of Conversion. If, during the Restricted Period, the purchase or exercise price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exercise or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exercisable or exchangeable for Common Stock increases or decreases at any time, the Exercise Price in effect at the time of such increase or decrease shall be adjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities provided for such increased or decreased purchase price, additional consideration or increased or decreased conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 2(b)(iii), if the terms of any Option or Convertible Security that was outstanding as of the date of issuance of this Warrant are increased or decreased in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such increase or decrease. No adjustment pursuant to this Section 2(b) shall be made if such adjustment would result in an increase of the Exercise Price then in effect.
(iv)Calculation of Consideration Received. If, during the Restricted Period, any Option or Convertible Security is issued in connection with the issuance or sale or
- 8 -
deemed issuance or sale of any other securities of the Company, together comprising one integrated transaction, (A) such Option or Convertible Security (as applicable) will be deemed to have been issued for consideration equal to the Black Scholes Value – Consideration thereof and (B) the other securities issued or sold or deemed to have been issued or sold in such integrated transaction shall be deemed to have been issued for consideration equal to the difference of (1) the aggregate consideration received by the Company, minus (2) the Black Scholes Value – Consideration of each such Option or Convertible Security (as applicable). If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the net amount of consideration received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of such consideration received by the Company will be the fair value of such consideration, except where such consideration consists of publicly traded securities, in which case the amount of consideration received by the Company for such securities will be the arithmetic average of the VWAPs of such security for each of the five (5) Trading Days immediately preceding the date of receipt. If any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or publicly traded securities will be determined jointly by the Company and the Holder. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair value of such consideration will be determined within five (5) Trading Days after the tenth (10th) day following such Valuation Event by an independent, reputable appraiser jointly selected by the Company and the Holder. The determination of such appraiser shall be final and binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company.
(v)Record Date. If, during the Restricted Period, the Company takes a record of the holders of Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase (as the case may be).
(c)Reserved.
(d)Reserved.
(e)Other Events. In the event that the Company shall take any action to which the provisions hereof are not strictly applicable, or, if applicable, would not operate to protect the Holder from dilution or if any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided for by such provisions (including, without limitation, the
- 9 -
granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company’s board of directors shall in good faith determine and implement an appropriate adjustment in the Exercise Price and the number of Warrant Shares (if applicable) so as to protect the rights of the Holder, provided that no such adjustment pursuant to this Section 2(e) will increase the Exercise Price or decrease the number of Warrant Shares as otherwise determined pursuant to this Section 2, provided further that if the Holder does not accept such adjustments as appropriately protecting its interests hereunder against such dilution, then the Company’s board of directors and the Holder shall agree, in good faith, upon an independent investment bank of nationally recognized standing to make such appropriate adjustments, whose determination shall be final and binding and whose fees and expenses shall be borne by the Company.
3.RIGHTS UPON DISTRIBUTION OF ASSETS. In addition to any adjustments pursuant to Section 2 above, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, indebtedness, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction, other than a distribution of Common Stock covered by Section 2(a)) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case, provision shall be made so that upon exercise of this Warrant, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Maximum Percentage) immediately before the date on which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder’s right to participate in any such Distributions would result in the Holder exceeding the Maximum Percentage, then the Holder shall not be entitled to participate in such Distribution to such extent (or the beneficial ownership of any such Common Stock as a result of such Distribution to such extent) and such Distribution to such extent shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Maximum Percentage).
4.PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.
(a)Purchase Rights. In addition to any adjustments pursuant to Section 2 above, if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Maximum Percentage) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Maximum Percentage, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial
- 10 -
ownership of such Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Maximum Percentage).
(b)Fundamental Transactions. The Company shall not enter into or be party to a Fundamental Transaction unless the Successor Entity assumes in writing all of the obligations of the Company under this Warrant and the other Transaction Documents related to this Warrant in accordance with the provisions of this Section 4(b) pursuant to written agreements in form and substance reasonably satisfactory to the Holder, including agreements confirming the obligations of the Successor Entity as set forth in this paragraph (b) and (c) and elsewhere in this Warrant and an obligation to deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant, including, without limitation, which is exercisable for a corresponding number of shares of capital stock equivalent to the Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such adjustments to the number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction). Notwithstanding the foregoing, at the election of the Holder upon exercise of this Warrant following a Fundamental Transaction, the Successor Entity shall deliver to the Holder, in lieu of the Common Stock (or other securities, cash, assets or other property (except such items still issuable under Sections 3 and 4(a) above, which shall continue to be receivable thereafter)) issuable upon the exercise of this Warrant prior to the applicable Fundamental Transaction, such shares of common stock (or its equivalent) of the Successor Entity (including its Parent Entity), or other securities, cash, assets or other property, which the Holder would have been entitled to receive upon the happening of the applicable Fundamental Transaction had this Warrant been exercised immediately prior to the applicable Fundamental Transaction; provided, however, that such amount of reserved shares of Common Stock shall be limited by the Maximum Percentage of Common Stock as set forth in Section 1(f).
(c)Black Scholes Value – FT. Notwithstanding the foregoing and the provisions of Section 4(b) above, at the request of the Holder delivered at any time commencing on the earliest to occur of (i) the public disclosure of any Fundamental Transaction, (ii) the consummation of any Fundamental Transaction and (iii) the Holder first becoming aware of any Fundamental Transaction through the date that is ninety (90) days after the public disclosure of the consummation of such Fundamental Transaction, the Company or the Successor Entity, at the election of the Holder, shall purchase this Warrant from the Holder on the date of the consummation of such Fundamental Transaction by paying to the Holder cash in an amount equal to the Black Scholes Value – FT.
(d)Application. The provisions of this Section 4 shall apply similarly and equally to successive Fundamental Transactions and shall be applied as if this Warrant (and any such subsequent warrants issued hereunder) were fully exercisable and without regard to any limitations on the exercise of this Warrant (provided that the Holder shall continue to be entitled to the benefit of the Maximum Percentage, applied however with respect to shares of capital stock registered
- 11 -
under the 1934 Act and thereafter receivable upon exercise of this Warrant (or any such other warrant)).
5.NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will not, by amendment of its certificate of incorporation, bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and will at all times in good faith carry out all the provisions of this Warrant and take all action as may be required to protect the rights of the Holder. Without limiting the generality of the foregoing, the Company (i) shall not increase the par value of any Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, (ii) shall take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock upon the exercise of this Warrant, and (iii) shall, so long as any of the SPA Warrants are outstanding, take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting the exercise of the SPA Warrants, the maximum number of shares of Common Stock as shall from time to time be necessary to effect the exercise of the SPA Warrants then outstanding; provided, however, that such amount of reserved Common Stock shall be limited by the Maximum Percentage of Common Stock as set forth in Section 1(f).
6.WARRANT HOLDER NOT DEEMED A SHAREHOLDER. Except as otherwise specifically provided herein, the Holder, solely in its capacity as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, solely in its capacity as the Holder of this Warrant, any of the rights of a shareholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the Holder of the Warrant Shares which it is then entitled to receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a shareholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Notwithstanding this Section 6, the Company shall provide the Holder with copies of the same notices and other information given to the shareholders of the Company generally, contemporaneously with the giving thereof to the shareholders.
7.REISSUANCE OF WARRANTS.
(a)Transfer of Warrant. If this Warrant is to be transferred, the Holder shall surrender this Warrant to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Warrant (in accordance with Section 7(d)), registered as the Holder may request, representing the right to purchase the number of Warrant Shares being transferred by the Holder and, if less than the total number of Warrant Shares then underlying this Warrant is being transferred, a new Warrant (in accordance with Section 7(d)) to the Holder representing the right to purchase the number of Warrant Shares not being transferred. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be either (i) registered pursuant to an effective registration statement under the Securities Act and
- 12 -
under applicable state securities or blue sky laws or (ii) eligible for resale without volume or manner-of-sale restrictions or current public information requirements pursuant to Rule 144, the Company may require, as a condition of allowing such transfer, that the Holder or transferee of this Warrant, as the case may be, provide to the Company an opinion of counsel selected by the Holder and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred securities under the Securities Act.
(b)Lost, Stolen or Mutilated Warrant. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant (as to which a written certification and the indemnification contemplated below shall suffice as such evidence), and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary and reasonable form and, in the case of mutilation, upon surrender and cancellation of this Warrant, the Company shall execute and deliver to the Holder a new Warrant (in accordance with Section 7(d)) representing the right to purchase the Warrant Shares then underlying this Warrant.
(c)Exchangeable for Multiple Warrants. This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Warrant or Warrants (in accordance with Section 7(d)) representing in the aggregate the right to purchase the number of Warrant Shares then underlying this Warrant, and each such new Warrant will represent the right to purchase such portion of such Warrant Shares as is designated by the Holder at the time of such surrender; provided, however, no warrants for fractional share of Common Stock shall be given.
(d)Issuance of New Warrants. Whenever the Company is required to issue a new Warrant pursuant to the terms of this Warrant, such new Warrant (i) shall be of like tenor with this Warrant, (ii) shall represent, as indicated on the face of such new Warrant, the right to purchase the Warrant Shares then underlying this Warrant (or in the case of a new Warrant being issued pursuant to Section 7(a) or Section 7(c), the Warrant Shares designated by the Holder which, when added to the number of shares of Common Stock underlying the other new Warrants issued in connection with such issuance, does not exceed the number of Warrant Shares then underlying this Warrant), (iii) shall have an issuance date, as indicated on the face of such new Warrant which is the same as the Issuance Date, and (iv) shall have the same rights and conditions as this Warrant.
8.NOTICES. Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall be given in accordance with Section 10(f) of the Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Warrant, including in reasonable detail a description of such action and the reason therefor. Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) as soon as practicable upon each adjustment of the Exercise Price and the number of Warrant Shares, setting forth in reasonable detail, and certifying, the calculation of such adjustment(s) and (ii) at least fifteen (15) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any grants, issuances or sales of any Options, Convertible Securities or rights to purchase stock, warrants, securities, indebtedness, or other property pro rata to holders of Common Stock or (C) for determining rights to vote with respect to any Fundamental Transaction,
- 13 -
dissolution or liquidation, provided in each case that such information (to the extent it constitutes, or contains, material, non-public information regarding the Company shall be made known to the public prior to or in conjunction with such notice being provided to the Holder and (iii) at least ten (10) Trading Days prior to the consummation of any Fundamental Transaction. It is expressly understood and agreed that the time of execution specified by the Holder in each Exercise Notice shall be definitive and may not be disputed or challenged by the Company.
9.AMENDMENT AND WAIVER. Except as otherwise provided herein, the provisions of this Warrant (other than Section 1(f)) may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Holder. The Holder shall be entitled, at its option, to the benefit of any amendment of any other similar warrant issued under the Securities Purchase Agreement. No waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party.
10.SEVERABILITY. If any provision of this Warrant is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect the validity of the remaining provisions of this Warrant so long as this Warrant as so modified continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).
11.GOVERNING LAW. This Warrant shall be governed by and construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Warrant shall be governed by, the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. The Company hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other legal action against the Company in any other jurisdiction to collect on the Company’s obligations to the Holder or to enforce a judgment or other court ruling in favor of the Holder. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF
- 14 -
ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS WARRANT OR ANY TRANSACTION CONTEMPLATED HEREBY.
12.CONSTRUCTION; HEADINGS. This Warrant shall be deemed to be jointly drafted by the Company and the Holder and shall not be construed against any Person as the drafter hereof. The headings of this Warrant are for convenience of reference and shall not form part of, or affect the interpretation of, this Warrant. Terms used in this Warrant but defined in the other Transaction Documents shall have the meanings ascribed to such terms on the Closing Date (as defined in the Securities Purchase Agreement) in such other Transaction Documents unless otherwise consented to in writing by the Holder.
13.DISPUTE RESOLUTION. In the case of a dispute as to the determination of the Exercise Price, the Closing Sale Price, the Closing Bid Price, the Bid Price or fair market value or the arithmetic calculation of the Warrant Shares (as the case may be), the Company or the Holder (as the case may be) shall submit the disputed determinations or arithmetic calculations (as the case may be) via facsimile (i) within two (2) Business Days after receipt of the applicable notice giving rise to such dispute to the Company or the Holder (as the case may be) or (ii) if no notice gave rise to such dispute, at any time after the Holder or the Company (as the case may be) learned of the circumstances giving rise to such dispute. If the Holder and the Company are unable to agree upon such determination or calculation (as the case may be) of the Exercise Price, the Closing Sale Price, the Closing Bid Price, the Bid Price or fair market value or the number of Warrant Shares (as the case may be) within three (3) Business Days of such disputed determination or arithmetic calculation being submitted to the Company or the Holder (as the case may be), then the Company shall, within two (2) Business Days submit via facsimile (a) the disputed arithmetic calculation of the Warrant Shares, the disputed determination of the Exercise Price, the Closing Sale Price, the Closing Bid Price, the Bid Price or fair market value (as the case may be) to an independent, reputable investment bank selected by the Holder, with the consent of the Company (which may not be unreasonably withheld, conditioned or delayed), or (b) if acceptable to the Holder, the disputed arithmetic calculation of the Warrant Shares to the Company’s independent, outside accountant. The Company shall cause at its expense the investment bank or the accountant (as the case may be) to perform the determinations or calculations (as the case may be) and notify the Company and the Holder of the results no later than ten (10) Business Days from the time it receives such disputed determinations or calculations (as the case may be). Such investment bank’s or accountant’s determination or calculation (as the case may be) shall be binding upon all parties absent demonstrable error. The fees and expenses of such investment bank or accountant shall be borne by the parties in the same proportion as the respective amounts by which the investment bank’s or accountant’s determination differs from such party’s calculation.
14.REMEDIES, CHARACTERIZATION, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this Warrant shall be cumulative and in addition to all other remedies available under this Warrant and the other Transaction Documents, at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the right of the Holder to pursue actual damages for any failure by the Company to comply with the terms of this Warrant. The Company covenants to the Holder that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, exercises and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not,
- 15 -
except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the holder of this Warrant shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. The Company shall provide all information and documentation to the Holder that is requested by the Holder to enable the Holder to confirm the Company’s compliance with the terms and conditions of this Warrant (including, without limitation, compliance with Section 2 hereof). The issuance of shares and certificates for shares as contemplated hereby upon the exercise of this Warrant shall be made without charge to the Holder or such shares for any issuance tax or other costs in respect thereof, provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than the Holder or its agent on its behalf.
15.TRANSFER. This Warrant may be offered for sale, sold, transferred or assigned without the consent of the Company.
16.CERTAIN DEFINITIONS. For purposes of this Warrant, the following terms shall have the following meanings:
(a)“Bid Price” means, for any security as of the particular time of determination, the bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg as of such time of determination, or if the foregoing does not apply, the bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg as of such time of determination, or, if no bid price is reported for such security by Bloomberg as of such time of determination, the average of the bid prices of all of the market makers for such security as reported in the “pink sheets” by OTC Markets Group Inc. (formerly Pink Sheets LLC) as of such time of determination. If the Bid Price cannot be calculated for a security as of the particular time of determination on any of the foregoing bases, the Bid Price of such security as of such time of determination shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved in accordance with the procedures in Section 13. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during such period.
(b)“Black Scholes Value” means the Black Scholes value of an option for one share of Common Stock at the date of the applicable Cashless Exercise plus $3.00, as such Black Scholes value is determined, calculated using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to the Exercise Price, as adjusted, (ii) a risk-free interest rate corresponding to the U.S. Treasury rate, (iii) a strike price equal to the Exercise Price in effect at the time of the applicable Cashless Exercise, (iv) an expected volatility equal to 135%, and (v) a deemed remaining term of the Warrant of five (5) years (regardless of the actual remaining term of the Warrant).
- 16 -
(c)“Black Scholes Value – Consideration” means the value of the applicable Option or Convertible Security (as the case may be) as of the date of issuance thereof calculated using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to the Closing Sale Price of the Common Stock on the Trading Day immediately preceding the public announcement of the execution of definitive documents with respect to the issuance of such Option or Convertible Security (as the case may be), (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of such Option or Convertible Security (as the case may be) as of the date of issuance of such Option or Convertible Security (as the case may be) and (iii) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg (determined utilizing a 3 65 day annualization factor) as of the Trading Day immediately following the date of issuance of such Option or Convertible Security (as the case may be).
(d)“Black Scholes Value – FT” means the value of the unexercised portion of this Warrant remaining on the date of the Holder’s request pursuant to Section 4(c), which value is calculated using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to the greater of (A) the highest Closing Sale Price of the Common Stock during the period beginning on the Trading Day immediately preceding the earliest to occur of (1) the public disclosure of the applicable Fundamental Transaction, (2) the consummation of the applicable Fundamental Transaction and (3) the date on which the Holder first became aware of the applicable Fundamental Transaction and ending on the Trading Day of the Holder’s request pursuant to Section 4(c) and (B) the sum of the price per share being offered in cash in the applicable Fundamental Transaction (if any) plus the value of the non-cash consideration being offered in the applicable Fundamental Transaction (if any), (ii) a strike price equal to the Exercise Price in effect on the date of the Holder’s request pursuant to Section 4(c), (iii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the greater of (A) the remaining term of this Warrant as of the date of the Holder’s request pursuant to Section 4(c) and (B) the remaining term of this Warrant as of the date of consummation of the applicable Fundamental Transaction or as of the date of the Holder’s request pursuant to Section 4(c) if such request is prior to the date of the consummation of the applicable Fundamental Transaction and (iv) an expected volatility equal to the greater of 135% and the 100 day volatility obtained from the HVT function on Bloomberg (determined utilizing a 365 day annualization factor) as of the Trading Day immediately following the earliest to occur of (A) the public disclosure of the applicable Fundamental Transaction, (B) the consummation of the applicable Fundamental Transaction and (C) the date on which the Holder first became aware of the applicable Fundamental Transaction.
(e)“Bloomberg” means Bloomberg, L.P.
(f)“Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to remain closed.
(g)“Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the last closing bid price and the last closing trade price, respectively, for such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the average of the bid prices, or the ask
- 17 -
prices, respectively, of all of the market makers for such security as reported in the “pink sheets” by OTC Markets Group Inc. (formerly Pink Sheets LLC). If the Closing Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price (as the case may be) of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved in accordance with the procedures in Section 13. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during such period.
(h)“Common Stock” means the common stock, par value $0.001 per share, of the Company and any other shares of stock issued or issuable with respect thereto (whether by way of a stock dividend or stock split or in exchange for or upon conversion of such shares or otherwise in connection with a combination of shares, distribution, recapitalization, merger, consolidation, other corporate reorganization or other similar event with respect to the Common Stock).
(i)“Convertible Securities” means any capital stock or other security of the Company that is at any time and under any circumstances directly or indirectly convertible into, exercisable or exchangeable for, or which otherwise entitles the holder thereof to acquire, any capital stock or other security of the Company (including, without limitation, Common Stock)..
(j)“Drawbridge Note” means that secured convertible promissory note and security agreement dated July 23, 2020 in the principal amount of $23,831,553.98 issued by the Company to DBI Lease Buyback Servicing LLC.
(k)“Eligible Market” means the New York Stock Exchange, the NYSE Amex, the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market.
(l)“Expiration Date” means the date that is March 28, 2027 or, if such date falls on a day other than a Business Day or on which trading does not take place on the principal securities exchange or trading market where the Common Stock is listed (a “Holiday”), the next date that is not a Holiday.
(m)“Fundamental Transaction” means that (i) the Company shall, directly or indirectly, in one or more related transactions, (1) consolidate or merge with or into (whether or not the Company is the surviving entity) any other Person unless the shareholders of the Company immediately prior to such consolidation or merger continue to hold more than 50% of the outstanding shares of Voting Stock after such consolidation or merger, or (2) sell, lease, license, assign, transfer, convey or otherwise dispose of all or substantially all of its properties or assets to any other Person, in connection with which the Company is dissolved, or (3) allow any other Person to make a purchase, tender or exchange offer that is accepted by the holders of more than 50% of the outstanding shares of Voting Stock of the Company (not including any shares of Voting Stock of the Company held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to, such purchase, tender or exchange offer), or (4) consummate a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with any other Person whereby such other Person acquires more than 50% of the outstanding shares of Voting Stock of
- 18 -
the Company (not including any shares of Voting Stock of the Company held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination), or (ii) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act and the rules and regulations promulgated thereunder) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate ordinary voting power represented by issued and outstanding Voting Stock of the Company.
(n)“Options” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.
(o)“Parent Entity” of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.
(p)“Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity or a government or any department or agency thereof.
(q)“Successor Entity” means the Person (or, if so elected by the Holder, the Parent Entity) formed by, resulting from or surviving any Fundamental Transaction or the Person (or, if so elected by the Holder, the Parent Entity) with which such Fundamental Transaction shall have been entered into.
(r)“Trading Day” means, as applicable, (x) with respect to all price determinations relating to the Common Stock, any day on which the Common Stock is traded on the principal securities exchange or securities market on which the Common Stock is then traded, provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York time) unless such day is otherwise designated as a Trading Day in writing by the Holder or (y) with respect to all determinations other than price determinations relating to the Common Stock, any day on which The New York Stock Exchange (or any successor thereto) is open for trading of securities.
(s)“Voting Stock” of a Person means capital stock of such Person of the class or classes pursuant to which the holders thereof have the general voting power to elect, or the general power to appoint, at least a majority of the board of directors, managers or trustees of such Person (irrespective of whether or not at the time capital stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency).
(t)“VWAP” means, for any security as of any date, the dollar volume-weighted average price for such security on the principal securities exchange or securities market on which
- 19 -
such security is then traded during the period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as reported by Bloomberg through its “Volume at Price” function or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the three highest closing bid prices and the three lowest closing ask prices of all of the market makers for such security as reported in the “pink sheets” by OTC Markets Group Inc. (formerly Pink Sheets LLC). If VWAP cannot be calculated for such security on such date on any of the foregoing bases, the VWAP of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved in accordance with the procedures in Section 13. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during such period.
[signature page follows]
- 20 -
Execution Version
IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock to be duly executed as of the Issuance Date set out above.
| | MULLEN AUTOMOTIVE INC. | |
| | | |
| | | |
| By: | | |
| | Name: | David Michery |
| | Title: | CEO |
Execution Version
EXHIBIT A
EXERCISE NOTICE
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS
WARRANT TO PURCHASE COMMON STOCK
MULLEN AUTOMOTIVE INC.
The undersigned holder hereby exercises the right to purchase shares of the Common Stock (“Warrant Shares”) of Mullen Automotive Inc., a California corporation (the “Company”), evidenced by Warrant to Purchase Common Stock No. (the “Warrant”). Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.
1.Form of Exercise Price. The Holder intends that payment of the Exercise Price shall be made as:
|
| a “Cash Exercise” with respect to Warrant Shares; and/or |
| | a “Cashless Exercise” with respect to Warrant Shares. |
In the event that the Holder has elected a Cashless Exercise with respect to some or all of the Warrant Shares, the Holder represents and warrants that Common Stock are to be delivered pursuant to such Cashless Exercise, as further specified in Annex A to this Exercise Notice.
2.Payment of Exercise Price. In the event that the Holder has elected a Cash Exercise with respect to some or all of the Warrant Shares, the Holder shall pay the Aggregate Exercise Price in the sum of $ to the Company in accordance with the terms of the Warrant.
3.Delivery of Warrant Shares and Net Number of Common Stock. The Company shall deliver to Holder, or its designee or agent as specified below, Common Stock in respect of the exercise contemplated hereby. Delivery shall be made to Holder, or for its benefit, to the following address:
| | |
| | |
| | |
| | |
Date: | | |
| |
Name of Registered Holder | |
By: | | | ||
| Name: | | ||
| Title: | | ||
| Account Number: | | | |
| (if electronic book entry transfer) Transaction Code Number | | ||
| | | ||
| Transaction Code Number: | | | |
| (if electronic book entry transfer) | | ||
- 23 -
Execution Version
ANNEX A TO EXERCISE NOTICE
CASHLESS EXERCISE EXCHANGE CALCULATION
TO BE FILLED IN BY THE REGISTERED HOLDER TO EXCHANGE THE
WARRANT TO PURCHASE COMMON STOCK IN A CASHLESS EXERCISE
PURSUANT TO SECTION 1(d) OF THE WARRANT
Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.
[ ] Net Number = (A x B)/C =shares of Common Stock
For purposes of the foregoing formula:
A= the total number of shares with respect to which the Warrant is then being exercised =
B= Black Scholes Value (as defined in Section 16 of the Warrant) = .
C= the Closing Bid Price of the Common Stock as of two (2) Trading Days prior to the time of such exercise (as such Closing Bid Price is defined in Section 16 of the Warrant) =
Date: | | |
| | |
Name of Registered Holder | | |
By: | | |
| Name: | |
| Title: | |
Execution Version
EXHIBIT B
ACKNOWLEDGMENT
The Company hereby acknowledges this Exercise Notice and hereby directs _____________ to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated ___________, 20__, from the Company and acknowledged and agreed to by __________________.
MULLEN AUTOMOTIVE INC. | ||||
| ||||
By: | | |||
Name: | | |||
Title: | | |||
Exhibit 10.2
PROMISSORY NOTE
U.S. $ | 1,000,000.00 | | Dated as of: | January 14, 2022, |
FOR VALUE RECEIVED, Mullen Automotive, Inc., a Delaware corporation, having its principal office at 1405 Pioneer Street, Brea, CA 9282 l (“Maker”), unconditionally promises to pay to Mark Betor, (together with his successors and assigns, “Payee”), having a place of business at 12451 Heritage Springs Dr. Santa Fe Springs, CA 90670 or at such other place as the holder of this Promissory Note (“Note”) may hereafter direct in writing, the principal sum of One Million and 00/100 Dollars ($1,000,000.00) – the “Loan Amount”.
Maker acknowledges having received Two Hundred Fifty Thousand Dollars ($250,000)- (the “Advance Amount”) from Payee on January 14, 2022 and that the amount payable to Maker upon signature of this Note is Seven Hundred Fifty Thousand Dollars ($750,000) – the “Final Payment”
All payments due under this Note shall be repaid in full no later than April 10, 2022 (“Maturity Date”). The Maturity date will automatically be accelerated and all amount due pursuant hereto shall be fully repayable upon (a) the effectiveness of the S3 Registration Statement that was filed by Maker with the Securities and Exchange Commission (“SEC”) on January 11, 2022 and (b) the first draw down by Mullen of funding from ESOUSA as referenced in Maker’s SEC filings. Maker shall provide Payee written notice within 48 hours of the occurrence of the foregoing events. Payee may in its sole discretion extend the Maturity Date for an additional, one time 90-day period, at all amounts then due shall be subject to a 10% (ten percent) per month default rate. This Payee right shall be in the form of a put and shall be exercised by 5 PM on April 9, 2022 by email to David Michery, CEO of Mullen at david@mullenusa.com. In the event the put is not exercised by Payee, the total amount due under this Note shall be due and payable by the Maturity Date failing which it shall be in default.
Maker’s total agreed Loan Amount repayment is One Million One Hundred Fifty and 00/100 Dollars $1,150,000- (“Repayment Sum”) and shall be payable regardless of whether the Maturity Date has been accelerated. Upon receipt of the Final Payment, Maker shall deliver to Payee a company Check dated April 10, 2022 in the amount of the Repayment Sum (the “Company Check”). The Loan Amount constitutes a “sum certain” and that Maker agrees that there are set-offs, counter claims or any defenses to the repayment thereof. All defenses are hereby waived for purposes of collection and/or any motion for summary judgment.
In the event that payment required hereunder is not received by or on behalf of Payee within seven (7) days after the due date thereof, Maker shall be in default hereunder and the entire Repayment Sum shall become due and payable immediately, without notice or demand, at the election of the Payee, provided that the Payee shall endeavor (but is not required) to provide notice to Maker. Maker waives demand, presentment for payment, protest, notice of protest and notice of nonpayment or dishonor of this Note. Maker shall have the right to prepay the Repayment Sum at any time. Upon repayment of the Repayment Sum, Payee shall return the Company Check to Maker.
All amounts payable under this Note shall be payable with all collection costs and attorneys’ fees. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. TO THE FULLEST EXTENT PERMITTED BY LAW, MAKER, AFTER CONSULTING WITH COUNSEL OR HAVING HAD THE OPPORTUNITY TO DO SO, HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN CONNECTION WITH THIS NOTE.
| Mullen Automotive, Inc. | |
| By: | |
| Printed: | David Michery |
| Title: | CEO |
Exhibit 10.4(a)
GUARANTY
(Payment)
This GUARANTY (Payment) (this “Guaranty”), dated as of March 7, 2022, is executed by the undersigned (“Guarantor”), to and for the benefit of NuBridge Commercial Lending LLC (“Lender”).
RECITALS:
A.Pursuant to that certain Loan and Security Agreement dated as of the date hereof, by and between Mullen Investment Properties, LLC, a limited liability company (“Borrower”) and Lender (as amended, restated, replaced, supplemented or otherwise modified from time to time, the “Loan Agreement”), Lender is making a loan to Borrower in the original principal amount of Five Million and 00/100 Dollars ($5,000,000.00) (the “Mortgage Loan”), as evidenced by that certain Promissory Note dated as of the date hereof, executed by Borrower and made payable to the order of Lender in the amount of the Mortgage Loan (as amended, restated, replaced, supplemented or otherwise modified from time to time, the “Note”).
B.The Note will be secured by, among other things, a Security Instrument (as defined in the Loan Agreement) encumbering the real property described in the Security Instrument (the “Property”).
C.Guarantor has an economic interest in Borrower or will otherwise obtain a material financial benefit from the Mortgage Loan.
D.As a condition to making the Mortgage Loan to Borrower, Lender requires that Guarantor execute this Guaranty.
NOW, THEREFORE, in order to induce Lender to make the Mortgage Loan to Borrower, and in consideration thereof, Guarantor agrees as follows:
AGREEMENTS:
1. | Recitals. |
The recitals set forth above are incorporated herein by reference as if fully set forth in the body of this Guaranty.
2. | Defined Terms. |
Capitalized terms used and not specifically defined herein have the meanings given to such terms in the Loan Agreement.
Guaranty (Payment) | Page 1 of 12 |
Mullen Investment Properties, LLC | Loan # 1005523 |
3.Guaranteed Obligations.
Guarantor hereby absolutely, unconditionally and irrevocably guarantees to Lender the full and prompt payment and performance when due, whether at maturity or earlier, by reason of acceleration or otherwise, and at all times thereafter, of:
(a)the entire Indebtedness;
(b)all amounts, obligations and liabilities owed to Lender under Article 3 (Personal Liability) of the Loan Agreement (including the payment and performance of all indemnity obligations of Borrower described in Section 3.03 (Personal Liability for Indemnity Obligations) of the Loan Agreement and including all of Borrower's obligations under the Environmental Indemnity Agreement); and
(c)all costs and expenses, including reasonable fees and out-of-pocket expenses of attorneys and expert witnesses, incurred by Lender in enforcing its rights under this Guaranty.
4. | Survival of Guaranteed Obligations. |
The obligations of Guarantor under this Guaranty shall survive any Foreclosure Event, and any recorded release or reconveyance of the Security Instrument or any release of any other security for any of the Indebtedness.
5. | Guaranty of Payment; Community Property. |
Guarantor's obligations under this Guaranty constitute a present and unconditional guaranty of payment and not merely a guaranty of collection. If Guarantor (or any Guarantor, if more than one) is a married person, and the state of residence of Guarantor or Guarantor's spouse is a community property jurisdiction, Guarantor (or each such married Guarantor, if more than one) agrees that Lender may satisfy Guarantor's obligations under this Guaranty to the extent of all Guarantor's separate property and Guarantor's interest in any community property.
6. | Obligations Unsecured; Cross-Default. |
The obligations of Guarantor under this Guaranty shall not be secured by the Security Instrument or the Loan Agreement. However, a default under this Guaranty shall be an Event of Default under the Loan Agreement, and a default under this Guaranty shall entitle Lender to be able to exercise all of its rights and remedies under the Loan Agreement and other Loan Documents.
7. | Continuing Guaranty. |
The obligations of Guarantor under this Guaranty shall be unconditional irrespective of the genuineness, validity, regularity or enforceability of any provision of this Guaranty, the Note, the Loan Agreement, the Security Instrument or any other Loan Document. Guarantor agrees that performance of the obligations hereunder shall be a primary obligation, shall not be subject to any
Guaranty (Payment) | Page 2 of 12 |
Mullen Investment Properties, LLC | Loan # 1005523 |
counterclaim, set-off, recoupment, abatement, deferment or defense based upon any claim that Guarantor may have against Lender, Borrower, any other guarantor of the obligations hereunder or any other person or entity, and shall remain in full force and effect without regard to, and shall not be released, discharged or affected in any way by any circumstance or condition (whether or not Guarantor shall have any knowledge thereof), including:
(a)any furnishing, exchange, substitution or release of any collateral secunng repayment of the Mortgage Loan, or any failure to perfect any lien in such collateral;
(b)any failure, omission or delay on the part of Borrower, Guarantor, any other guarantor of the obligations hereunder or Lender to conform or comply with any term of any of the Loan Documents or failure of Lender to give notice of any Event of Default;
(c)any action or inaction by Lender under or in respect of any of the Loan Documents, any failure, lack of diligence, omission or delay on the part of Lender to perfect, enforce, assert or exercise any lien, security interest, right, power or remedy conferred upon it in any of the Loan Documents, or any other action or inaction on the part of Lender;
(d)any Bankruptcy Event, or any voluntary or involuntary bankruptcy, insolvency, reorganization, arrangement, readjustment, assignment for the benefit of creditors, composition, receivership, liquidation, marshaling of assets and liabilities or similar events or proceedings with respect to Guarantor or any other guarantor of the obligations hereunder, or any of their respective property or creditors or any action taken by any trustee or receiver or by any court in such proceeding;
(e)any merger or consolidation of Borrower into or with any entity or any sale, lease or Transfer of any asset of Borrower, Guarantor or any other guarantor of the obligations hereunder to any other Person;
(f)any change in the ownership of Borrower or any change in the relationship between Borrower, Guarantor or any other guarantor of the obligations hereunder, or any termination of such relationship;
(g)any release or discharge by operation of law of Borrower, Guarantor or any other guarantor of the obligations hereunder, or any obligation or agreement contained in any of the Loan Documents; or
(h)any other occurrence, circumstance, happening or event, whether similar or dissimilar to the foregoing, and whether seen or unforeseen, which otherwise might constitute a legal or equitable defense or discharge of the liabilities of a guarantor or surety or which otherwise might limit recourse against Borrower or Guarantor to the fullest extent permitted by law.
Guaranty (Payment) | Page 3 of 12 |
Mullen Investment Properties, LLC | Loan # 1005523 |
8. | Guarantor Waivers. |
Guarantor hereby waives:
(a)the benefit of all principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty (and agrees that Guarantor's obligations shall not be affected by any circumstances, whether or not referred to in this Guaranty, which might otherwise constitute a legal or equitable discharge of a surety or a guarantor);
(b)the benefits of any right of discharge under any and all statutes or other laws relating to guarantors or sureties and any other rights of sureties and guarantors;
(c)diligence in collecting the Indebtedness, presentment, demand for payment, protest and all notices with respect to the Loan Documents and this Guaranty which may be required by statute, rule of law or otherwise to preserve Lender's rights against Guarantor under this Guaranty, including notice of acceptance, notice of any amendment of the Loan Documents, notice of the occurrence of any Event of Default, notice of intent to accelerate, notice of acceleration, notice of dishonor, notice of foreclosure, notice of protest and notice of the incurring by Borrower of any obligation or indebtedness; and
(d) | all rights to require Lender to: |
(1)proceed against or exhaust any collateral held by Lender to secure the repayment of the Indebtedness;
(2)proceed against or pursue any remedy it may now or hereafter have against Borrower or any guarantor, or, if Borrower or any guarantor is a partnership, any general partner of Borrower or general partner of any guarantor; or
(3)demand or require collateral security from Borrower, any other guarantor or any other Person as provided by applicable law or otherwise.
9. | No Effect Upon Obligations. |
At any time or from time to time and any number of times, without notice to Guarantor and without releasing, discharging or affecting the liability of Guarantor:
(a)the time for payment of the principal of or interest on the Indebtedness may be extended or the Indebtedness may be renewed in whole or in part;
(b)the rate of interest on or period of amortization of the Mortgage Loan or the amount of the Monthly Debt Service Payments payable under the Loan Documents may be modified;
(c)the time for Borrower's performance of or compliance with any covenant or agreement contained in any Loan Document, whether presently existing or hereinafter entered into, may be extended or such performance or compliance may be waived;
Guaranty (Payment) | Page 4 of 12 |
Mullen Investment Properties, LLC | Loan # 1005523 |
(d)the maturity of the Indebtedness may be accelerated as provided in the Loan Documents;
(e)any or all payments due under the Loan Agreement or any other Loan Document may be reduced;
(f)any Loan Document may be modified or amended by Lender and Borrower in any respect, including an increase in the principal amount of the Mortgage Loan;
(g)any amounts under the Loan Agreement or any other Loan Document may be released;
(h)any security for the Indebtedness may be modified, exchanged, released, surrendered or otherwise dealt with or additional security may be pledged or mortgaged for the Indebtedness;
(i)the payment of the Indebtedness or any security for the Indebtedness, or both, may be subordinated to the right to payment or the security, or both, of any other present or future creditor of Borrower;
(j)any payments made by Borrower to Lender may be applied to the Indebtedness in such priority as Lender may determine in its discretion; and
(k)any other terms of the Loan Documents may be modified as required by Lender.
10. | Joint and Several (or Solidary) Liability. |
If more than one Person executes this Guaranty as Guarantor, such Persons shall be liable for the obligations hereunder on a joint and several (solidary instead for purposes of Louisiana law) basis. Lender, in its discretion, may:
(a)to the extent permitted by applicable law, bring suit against Guarantor, or any one or more of the Persons constituting Guarantor, and any other guarantor, jointly and severally (solidarily instead for purposes of Louisiana law), or against any one or more of them;
(b)compromise or settle with any one or more of the Persons constituting Guarantor, or any other guarantor, for such consideration as Lender may deem proper;
(c)discharge or release one or more of the Persons constituting Guarantor, or any other guarantor, from liability or agree not to sue such Person; and
(d)otherwise deal with Guarantor and any guarantor, or any one or more of them, in any manner, and no such action shall impair the rights of Lender to collect from Guarantor any amount guaranteed by Guarantor under this Guaranty.
Guaranty (Payment) | Page 5 of 12 |
Mullen Investment Properties, LLC | Loan # 1005523 |
Nothing contained in this Section 10 shall in any way affect or impair the rights or obligations of Guarantor with respect to any other guarantor.
11. | Subordination of Affiliated Debt. |
Any indebtedness of Borrower held by Guarantor now or in the future is and shall be subordinated to the Indebtedness and any such indebtedness of Borrower shall be collected, enforced and received by Guarantor, as trustee for Lender, but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty.
12. | Subrogation. |
Guarantor shall have no right of, and hereby waives any claim for, subrogation or reimbursement against Borrower or any general partner of Borrower by reason of any payment by Guarantor under this Guaranty, whether such right or claim arises at law or in equity or under any contract or statute, until the Indebtedness has been paid in full and there has expired the maximum possible period thereafter during which any payment made by Borrower to Lender with respect to the Indebtedness could be deemed a preference under the Insolvency Laws.
13. | Voidable Transfer. |
If any payment by Borrower is held to constitute a preference under any Insolvency Laws or similar laws, or if for any other reason Lender is required to refund any sums to Borrower, such refund shall not constitute a release of any liability of Guarantor under this Guaranty. It is the intention of Lender and Guarantor that Guarantor's obligations under this Guaranty shall not be discharged except by Guarantor's performance of such obligations and then only to the extent of such performance. If any payment by any Guarantor should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Insolvency Laws relating to a Voidable Transfer, and if Lender is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the advice of its counsel, then the obligations guaranteed hereunder shall automatically be revived, reinstated and restored by the amount of such Voidable Transfer or the amount of such Voidable Transfer that Lender is required or elects to repay or restore, including all reasonable costs, expenses and legal fees incurred by Lender in connection therewith, and shall exist as though such Voidable Transfer had never been made, and any other guarantor, if any, shall remain liable for such obligations in full.
14. | Credit Report/Credit Score. |
Guarantor acknowledges and agrees that Lender is authorized, no more frequently than once in any twelve (12) month period, to obtain a credit report (if applicable) on Guarantor, the cost of which shall be paid for by Guarantor. Guarantor acknowledges and agrees that Lender is authorized to obtain a Credit Score (if applicable) for Guarantor at any time at Lender's expense.
Guaranty (Payment) | Page 6 of 12 |
Mullen Investment Properties, LLC | Loan # 1005523 |
15. | Financial Reporting. |
Guarantor shall deliver to Lender such Guarantor financial statements as required by Section 8.02 (Books and Records; Financial Reporting-Covenants) of the Loan Agreement.
16. | Further Assurances. |
Guarantor acknowledges that Lender (including its successors and assigns) may sell or transfer the Mortgage Loan, or any interest in the Mortgage Loan.
(a) | Guarantor shall, subject to Section 16(b) below: |
(1)do anything necessary to comply with the reasonable requirements of Lender or any Investor of the Mortgage Loan or provide, or cause to be provided, to Lender or any Investor of the Mortgage Loan within ten (10) days of the request, at Borrower's and Guarantor's cost and expense, such further documentation or information as Lender or Investor may reasonably require, in order to enable:
(A) | Lender to sell the Mortgage Loan to such Investor; |
(B)Lender to obtain a refund of any commitment fee from any such Investor; or
(C) | any such Investor to further sell or securitize the Mortgage Loan; |
(2)confirm that Guarantor is not in default under this Guaranty or in observing any of the covenants or agreements contained in this Guaranty (or, if Guarantor is in default, describing such default in reasonable detail); and
(3)execute and deliver to Lender and/or any Investor such other documentation, including any amendments, corrections, deletions or additions to this Guaranty as is reasonably required by Lender or such Investor.
(b)Nothing in this Section 16 shall require Guarantor to do any further act that has the effect of:
(1)changing the essential economic terms of the Mortgage Loan set forth in the related commitment letter between Borrower and Lender;
(2)imposing on Borrower or Guarantor greater personal liability under the Loan Documents than that set forth in the related commitment letter between Borrower and Lender; or
(3)materially changing the rights and obligations of Borrower or Guarantor under the commitment letter.
Guaranty (Payment) | Page 7 of 12 |
Mullen Investment Properties, LLC | Loan # 1005523 |
17. | Successors and Assigns. |
Lender may assign its rights under this Guaranty in whole or in part and, upon any such assignment, all the terms and provisions of this Guaranty shall inure to the benefit of such assignee to the extent so assigned. Guarantor may not assign its rights, duties and obligations under this Guaranty, in whole or in part, without Lender's prior written consent and any such assignment shall be deemed void ab initio. The terms used to designate any of the parties herein shall be deemed to include the heirs, legal representatives, successors and assigns of such parties.
18. | Final Agreement. |
Guarantor acknowledges receipt of a copy of each of the Loan Documents and this Guaranty. THIS GUARANTY REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. All prior or contemporaneous agreements, understandings, representations and statements, oral or written, are merged into this Guaranty. Neither this Guaranty nor any of its provisions may be waived, modified, amended, discharged or terminated except by an agreement in writing signed by the party against which the enforcement of the waiver, modification, amendment, discharge or termination is sought, and then only to the extent set forth in that agreement.
19. | Governing Law. |
This Guaranty shall be governed by and construed in accordance with the substantive law of the Property Jurisdiction without regard to the application of choice oflaw principles that would result in the application of the laws of another jurisdiction.
20. | Property Jurisdiction. |
Guarantor agrees that any controversy arising under or in relation to this Guaranty shall be litigated exclusively in the Property Jurisdiction. The state and federal courts and authorities with jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over all controversies which shall arise under or in relation to this Guaranty or any other Loan Document with respect to the subject matter hereof. Guarantor irrevocably consents to service, jurisdiction and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise.
21. | Time is of the Essence. |
Guarantor agrees that, with respect to each and every obligation and covenant contained in this Guaranty, time is of the essence.
Guaranty (Payment) | Page 8 of 12 |
Mullen Investment Properties, LLC | Loan # 1005523 |
22. | No Reliance. |
Guarantor acknowledges, represents and warrants that:
(a)it understands the nature and structure of the transactions contemplated by this Guaranty and the other Loan Documents;
(b)it is familiar with the provisions of all of the documents and instruments relating to such transactions;
(c)it understands the risks inherent in such transactions, including the risk of loss of all or any part of the Mortgaged Property or of the assets of Guarantor;
(d)it has had the opportunity to consult counsel; and
(e)it has not relied on Lender for any guidance or expertise in analyzing the financial or other consequences of the transactions contemplated by this Guaranty or any other Loan Document or otherwise relied on Lender in any manner in connection with interpreting, entering into or otherwise in connection with this Guaranty, any other Loan Document or any of the matters contemplated hereby or thereby.
23. | Notices. |
Guarantor agrees to notify Lender of any change in Guarantor's address within ten (10) Business Days after such change of address occurs. All notices under this Guaranty shall be:
(a) | in writing and shall be |
(1) | delivered, in person; |
(2) | mailed, postage prepaid, either by registered or certified delivery, return receipt requested; |
(3) | sent by overnight courier; or |
(4) | sent by electronic mail with originals to follow by overnight courier; |
(b)addressed to the intended recipient at the notice addresses provided under the signature block at the end of this Guaranty; and
(c) | deemed given on the earlier to occur of: |
(1) | the date when the notice is received by the addressee; or |
(2)if the recipient refuses or rejects delivery, the date on which the notice is so refused or rejected, as conclusively established by the records of the United States Postal Service or such express courier service.
Guaranty (Payment) | Page 9 of 12 |
Mullen Investment Properties, LLC | Loan # 1005523 |
24. | Construction. |
(a)Any reference in this Guaranty to an “Exhibit” or “Schedule” or a “Section” or an “Article” shall, unless otherwise explicitly provided, be construed as referring, respectively, to an exhibit or schedule attached to this Guaranty or to a Section or Article of this Guaranty.
(b)Any reference in this Guaranty to a statute or regulation shall be construed as referring to that statute or regulation as amended from time to time.
(c)Use of the singular in this Guaranty includes the plural and use of the plural includes the singular.
(d)As used in this Guaranty, the term “including” means “including, but not limited to” or “including, without limitation,” and is for example only, and not a limitation.
(e)Whenever Guarantor's knowledge is implicated in this Guaranty or the phrase “to Guarantor's knowledge” or a similar phrase is used in this Guaranty, Guarantor's knowledge or such phrase(s) shall be interpreted to mean to the best of Guarantor's knowledge after reasonable and diligent inquiry and investigation.
(f)Unless otherwise provided in this Guaranty, if Lender's approval, designation, determination, selection, estimate, action or decision is required, permitted or contemplated hereunder, such approval, designation, determination, selection, estimate, action or decision shall be made in Lender's sole and absolute discretion.
(g)All references in this Guaranty to a separate instrument or agreement shall include such instrument or agreement as the same may be amended or supplemented from time to time pursuant to the applicable provisions thereof.
(h)“Lender may” shall mean at Lender's discretion, but shall not be an obligation.
25. | WAIVER OF JURY TRIAL. |
TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EACH OF GUARANTOR AND LENDER (A) AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS GUARANTY OR ANY LOAN DOCUMENT OR THE RELATIONSHIP BETWEEN THE PARTIES AS GUARANTOR AND LENDER THAT IS TRIABLE OF RIGHT BY A JURY AND (B)WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY GUARANTOR AND LENDER, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL.
Guaranty (Payment) | Page 10 of 12 |
Mullen Investment Properties, LLC | Loan # 1005523 |
26. | Schedules. |
The schedules, if any, attached to this Guaranty are incorporated fully into this Guaranty by this reference and each constitutes a substantive part of this Guaranty.
ATTACHED SCHEDULE. The following Schedule is attached to this Guaranty:
[Remainder of Page Intentionally Blank]
Guaranty (Payment) | Page 11 of 12 |
Mullen Investment Properties, LLC | Loan # 1005523 |
IN WITNESS WHEREOF, Guarantor has signed and delivered this Guaranty under seal (where applicable) or has caused this Guaranty to be signed and delivered under seal (where applicable) by its duly authorized representative. Where applicable law so provides, Guarantor intends that this Guaranty shall be deemed to be signed and delivered as a sealed instrument.
| GUARANTOR | |
| | |
| | |
| David Michery | |
| | |
| Address for Notices: | |
| | |
| | |
| | |
| Email address: |
|
| | |
| | |
| Ottava Automotive, Inc., a California corporation | |
| | |
| | |
| By: David Michery | |
| | |
Guaranty (Payment) | Page 12 of 12 |
Mullen Investment Properties, LLC | Loan # 1005523 |
Exhibit 31.1
CEO Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David Michery, certify that:
| 1. | I have reviewed this report on Form 10-Q of Mullen Automotive Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a |
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Exhibit 31.2
CFO Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Kerri Sadler, certify that:
| 1. | I have reviewed this report on Form 10-Q of Mullen Automotive Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a |
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-Q for the period ended December 31, 2021 of Mullen Automotive Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
| 1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report. |