Bollinger Innovations, Inc.: Form 10-Q for the period ended Dec 31, 2021

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 December 31 to September 30, effective for our fiscal year ended September 30, 2021. As a result, and unless otherwise indicated, references to our fiscal year 2021 and prior years mean the fiscal year ended on September 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.”

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 December 31, 2021 to the Three Months Ended December 31, 2020

The following table sets forth our historical operating results for the periods indicated:

(dollar amounts in thousands, except percentages)

General and Administrative

General and administrative expenses increased by $9.9 million or 336.93% from $2.9 million in the three months ended December 31, 2020 to $12.9 million in the three months ended December 31, 2021, primarily due to increases in professional services, marketing, and payroll related expenses with the growth of personnel and resources.

Research and Development

Research and development expenses increased by $.63 million or 123.41% from $.51 million through the three months ended December 31, 2020 to $1.1 million through the three months ended December 31, 2021. During the quarter ended December 31, 2021, the development of the Mullen FIVE show cars was completed in November 2021, and the Engineering Team is working on battery development and initial stages of program car development.

Research and development costs are expensed as incurred. Research and development expenses primarily consist of the Mullen FIVE EV show car development and are primarily comprised of personnel-related costs for employees and consultants. These costs are expected to rise in the future with continuing development of the Mullen FIVE car program.

Interest Expense

Interest expense increased by $20.0 million or 672.35% from $2.4 million through the three months ended December 31, 2020 to $22.4 million through the three months ended December 31, 2021, primarily due to the significant increase in the convertible debt portfolio, coupled with the conversion of these financial instruments to equity due to merger with Net Element. The conversion to preferred C stock increased the amortization expense.

Gain on extinguishment of debt

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 $36.4 million for the three months ended December 31, 2021, an increase of $31.4 million or 629.80% from $4.9 million in the three months ended December 31, 2020, 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 December 31, 2021, our cash and cash equivalents amounted to $0.61 million and our total debt amounted to $19.1 million. Debt has red ced significantly from September 30, 2021 due to principal paydowns, debt payoffs, and conversion of convertible debt to equity. Tax liabilities slightly increased to $4.2 million from $3.9 million, which is comprised of IRS and other tax jurisdictions related to payroll taxes and sales and use taxes.

During this quarter, the Company received $20 million from the equity purchase of Series C Preferred Stock with warrants to an unaffiliated investor immediately prior to the Effective Time of the Merger. There is approximately $45 million in equity commitments to assist the Company throughout 2022; an agreement with ESOUSA to provide us with a $30.0 million equity line of credit beginning in February 2022 and a $15 million note receivable with CEOcast, Inc. that will begin in 2022 after the registration of common shares with the SEC.

We received $7.4 million in net proceeds from the Net Element merger transaction. We also received an additional $7.62 million in convertible notes from TDR Capital and JADR Consulting Group Pty Limited.

As part of our agreement with NASDAQ, the Company must complete a qualified offering within six months after regulatory approval. In February 2022, The Company filed a S-3 Registration Statement that became effective, which are expected to result in the increase of common shares outstanding and enhance market capitalization.

We expect our capital expenditures and working capital requirements to increase substantially in the near term, as we seek to produce our initial EVs, develop our customer support and marketing infrastructure and expand our research and development efforts. We may need additional cash resources due to changed business conditions or other developments, including unanticipated delays in negotiations with OEMs and tier-one automotive suppliers or other suppliers, supply chain challenges, disruptions due to COVID-19, competitive pressures, and regulatory developments, among other developments. To the extent that our current resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. If the financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to decrease our level of investment in product development or scale back our operations, which could have an adverse impact on our business and financial prospects. See Note 1 to the audited consolidated financial statements included elsewhere in this 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 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 December 31, 2021:

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 three months ended December 31, 2021 and 2020:

(dollar amounts in thousands)

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 $14.7 million in the three months ended December 31, 2021, an increase from $.85 million net cash provided by activities in the three months ended December 31, 2020.

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 $10.5 million in the three months ended December 31, 2021, an increase from $.72 million used in investing activities the three months ended December 31, 2020.

Cash Flows provided by Financing Activities

Through December 31, 2021, we have financed our operations primarily through the issuance of convertible notes and equity securities.

Net cash provided by financing activities was $25.2 million for the three months ended December 31, 2021 primarily due to issuance of notes payable, as compared to $.17 million net cash provided by financing activities for the three months ended December 31, 2020, which included (i) $7.3 million net proceeds from issuance of notes payable; (ii) $10.8 million in net proceeds from issuance of Common Stock which was partially offset by $13.0 million of payments of notes payable; and (iii) $5.2 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 December 31, 2021, and the years in which these obligations are due:

Operating Lease Commitments

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:

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements, as defined under SEC rules.

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.

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. Management has not been in a position to make its assessment regarding internal control over financial reporting due to the circumstances described in detail below. Accordingly, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective.

Management’s Report on Internal Control over Financial Reporting

This Quarterly Report and our Annual Report on Form 10-K filed with the SEC for the year ended September 30, 2021 do not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm as we determined that the Company is currently similarly situated to a newly public company due to the relatively recent closing of the Merger, which was accounted for as a reverse merger transaction, in which Mullen Automotive-California is treated as the acquirer for financial accounting purposes. In making this determination, we have considered the timing and effects of the Merger, which closed on November 5, 2021, and after which, there was a complete change in the business, operations, accounting, board of directors and executive management of the Company and all of the business of the Company was that of Mullen Automotive-California. As a result, the internal controls and related material weaknesses previously reported related to the Company’s prior business and no longer exist with respect to the Company’s current business. Management was not in a position to conduct an assessment because of the impending reverse merger transaction which was at an advanced stage at year end. We plan to file our first assessment regarding internal control over financial reporting in our Annual Report on Form 10-K for the year ending September 30, 2022.

Changes in Internal Control over Financial Reporting

Other than what has been described above, there were no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2021 or year ended September 30, 2021, 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.

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 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.