Bollinger Innovations, Inc.: Form 10-Q for the period ended Mar 31, 2023

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, as amended, for the year ended September 30, 2022 filed with the SEC on January 30, 2023. 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, as amended, for the year ended September 30, 2022.

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.

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 majority of our revenue will be initially derived from direct sales of Commercial Delivery Vehicles (Class 1 – 6), 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. 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 engineering services in connection with the design of our EVs and development of the prototypes. 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 continue 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, 2023 to the Three Months Ended March 31, 2022

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

Net loss before accrued preferred dividends and noncontrolling interest

Net loss before accrued preferred dividends and noncontrolling interest was $116.9 million and $324.6 million for the three months ended March 31, 2023 and 2022, respectively.

The $207.7 million or 64% decrease in Net loss before accrued preferred dividends and noncontrolling interest was primarily due to a $244.7 million decrease in non-cash financing expenses and revaluation and $37.4 million increase in operating losses to ramp up of development efforts and reflecting the additional expenses from Bollinger and ELMS.

General and Administrative

General and administrative expenses increased by $18.1 million or 62% to $47.4 million for the three months ended March 31, 2023, from $29.3 million in the three months ended March 31, 2022, primarily due to increases in professional services, marketing, and stock compensation related expenses associated with the growth of personnel and resources necessary to develop and launch our electric vehicles.

Research and Development

Research and development expenses increased by $19.3 million or 1,630% to $20.5 million for the three months ended March 31, 2023, compared to $1.2 million in the three months ended March 31, 2022. Research and development expenses primarily consist of engineering, homologation, and prototyping costs. Research and development expenses for the three months ended March 31, 2023 also include $6.8 million costs representing fair value of warrants issued for acquisition of right to assemble, manufacture, and sell the homologated vehicles based on the Qiantu K-50, subject to positive assessment of feasibility and profitability of the project by the Company (see Note 7). The research and development costs are expected to rise with continuing development of our electric vehicle programs. There will also be incremental research and development costs associated with the recent acquisition of Bollinger Motors for the B1/B2 and Class 4 delivery chassis.

Other financing costs – initial recognition of derivative liabilities

Other financing costs for the initial recognition of derivative liabilities was $0 for the three months ended March 31, 2023 as compared to $160.4 million of derivative initial recognition expense for the three months ended March 31, 2022.

Revaluation of derivative liabilities

The revaluation of derivative liabilities losses decreased $83.2 million from $131.7 million for the three months ended March 31, 2022 to $48.4 million for the three months ended March 31, 2023 as more warrants were exercised during the period ended March 31, 2023 and less derivative liabilities are outstanding as of that date.

Interest expense

Interest expense decreased by $0.4 million or 18% to $1.7 million for the three months ended March 31, 2023 from $2.1 million for the three months ended March 31, 2022. The decrease in interest expense year over year is primarily due to unpaid principal balance decreasing from $22.1 million on March 31, 2022 to $7.6 million on March 31, 2023.

Loan amortization expense

Loan amortization expense increased $0.1 million to $0.1 million for the three months ended March 31, 2023 versus zero for the three months ended March 31, 2022.

Deferred tax benefit

Deferred tax benefit was $0.5 million for the three months ended March 31, 2023 as compared to zero for the three months ended March 31, 2022 due to an adjustment in permanent timing differences for amortization expense.

Other income (expense), net

Other income, net was $0.5 million for the three months ended March 31, 2023 as compared to zero of other income, net for the three months ended March 31, 2022. Bollinger earned interest on a money market account opened in January 2023.

Comparison of the Six Months Ended March 31, 2023 to the Six Months Ended March 31, 2022

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

(dollar amounts, except percentages)

Net loss before accrued preferred dividends and noncontrolling interest

Net loss before accrued preferred dividends and noncontrolling interest was $495.4 million and $480.7 million for the six months ended March 31, 2023 and 2022, respectively.

The $14.7 million or 3% increase in Net loss before accrued preferred dividends and noncontrolling interest was primarily due to a $66.5 million decrease in non-cash financing expenses offset by the $97.0 million increase in operating losses to ramp up of development efforts and reflecting the addition expenses after acquisition of Bollinger Motors and after purchase of ELMS assets.

General and Administrative

General and administrative expenses increased by $70.2 million or 167% to $112.4 million for the six months ended March 31, 2023, from $42.2 million in the six months ended March 31, 2022, primarily due to increases in professional services, marketing, and stock compensation related expenses associated with the growth of personnel and resources necessary to develop and launch our electric vehicles.

Research and Development

Research and development expenses increased by $26.8 million, or 1,143%, to $29.1 million for the six months ended March 31, 2023, versus $2.3 million in the six months ended March 31, 2022. Research and development expenses primarily consist of engineering, homologation, and prototyping costs. Research and development expenses for the three months ended March 31, 2023 also include $6.8 million costs representing fair value of warrants issued for acquisition of right to assemble, manufacture, and sell the homologated vehicles based on the Qiantu K-50, subject to positive assessment of feasibility and profitability of the project by the Company (see Note 7). Research and development costs are expected to rise with continuing development of our electric vehicle programs. There may also be incremental research and development costs associated with the recent acquisition of Bollinger Motors for the B1/B2 and Class 4 delivery chassis.

Other financing costs – initial recognition of derivative liabilities

Other financing costs for the initial recognition of derivative liabilities decreased from $269.3 million for the six months ended March 31, 2022, to $256.0 million for the six months ended March 31, 2023.

Gain / (loss) on extinguishment of debt, net

The loss on debt settlement increased $6.5 million from $0.1 million gain for the six months ended March 31, 2022, to a loss of $6.5 million for the six months ended March 31, 2023. The loss on debt settlement increase is primarily due to a settlement with investors claiming losses caused by the Company and the exchange of old note to Esousa for new replacement note.

Revaluation of derivative liabilities

The loss on revaluation of derivative liabilities decreased $53 million from $142.3 million for the six months ended March 31, 2022 to $89.2 million for the six months ended March 31, 2023 as more warrants were exercised during the period ended March 31, 2023 and less derivative liabilities are outstanding as of that date.

Interest expense

Interest expense decreased by $20.0 million or 81% to $4.6 million for the six months ended March 31, 2023 from $24.6 million for the six months ended March 31, 2022, primarily due to the decrease in the convertible debt balance as well as from the paydown of debt principal during the quarter ended March 31, 2023.

Loan amortization expense

Loan amortization expense was $0.1 million for the six months ended March 31, 2023, from zero for the six months ended March 31, 2022.

Deferred tax benefit

Deferred tax benefit increased $1.0 million to $1.0 million for the six months ended March 31, 2023 as compared to zero for the six months ended March 31, 2022 due to an adjustment in permanent timing differences for amortization expense.

Other income (expense), net

Other income, net increased $1.1 million to $1.1 million for the six months ended March 31, 2023, as compared to zero of other income, net for the six months ended March 31, 2022. Bollinger earned interest on a money market account opened in January 2023.

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, 2023, our cash and cash equivalents (excluding restricted cash) amounted to $60.3 million. Included in the $26.4 million restricted cash balance at March 31, 2023, is $26.0 million available for development and operations of Bollinger. The total cash available for operations and development was $86.3 million at March 31, 2023.

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. See Note 2 to the condensed consolidated financial statements.

To maintain compliance with the $1.00 minimum bid price requirement of NASDAQ, the Board of the Company has approved a 1-for-25 reverse stock split, which resulted in a reduction in the number of outstanding shares of common stock and a proportionate increase in the value of each share. The common stock began trading on a reverse split-adjusted basis on the NASDAQ on May 4, 2023 (see further Note 1 to the condensed consolidated financial statements).

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 an insignificant component of our funding.

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 the Company’s assets.

Cash Flows

The following table provides a summary of Mullen’s cash flow data for the six months ended March 31, 2023 and 2022:

Cash Flows used in Operating Activities

Our cash flow used in operating activities to date have primarily been comprised of costs related to research and development, salaries, taxes, benefits, 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 $67.6 million for the six months ended March 31, 2023, a 172% increase from $24.9 million net cash used in activities in the six months ended March 31, 2022.

Cash Flows used in Investing Activities

Our cash flows used in investing activities increased due to the ELMS asset purchase (see Note 4 – Purchase of assets from ELMS).

Net cash used in investing activities was $97.4 million in the six months ended March 31, 2023, an increase from $10.7 million used in investing activities in the six months ended March 31, 2022.

Cash Flows provided by Financing Activities

Through March 31, 2023, we have financed our operations primarily through the issuance of convertible notes, equity securities, and warrants. Net cash provided by financing activities was $167.4 million for the six months ended March 31, 2023, an increase of $66.5 million over the six months ended March 31, 2022.

Contractual Obligations and Commitments

From April 1, 2023 until June 30, 2023, certain investors under the Securities Purchase Agreement have the right, but not the obligation, at any time from time to time, in their sole and absolute discretion to purchase from the Company additional shares of Preferred Stock in an amount equal to such Buyer’s pro rata portion on the same terms and conditions as applicable to the purchase and sale of shares of Series D Preferred Stock as provided under the Securities Purchase Agreement, subject to certain conditions and modifications:

a) All investors under the Securities Purchase Agreement - in amount equal to $100,000,000 (pursuant to Amendment 3 to the Securities Purchase Agreement). Along with the shares of Series D Preferred Stock the buyers shall receive Additional Warrants exercisable for 110% of shares of Common Stock under conditions similar to other warrants issued under the Securities Purchase Agreement.

b) One of the investors under the Securities Purchase Agreement - in amount equal to $20,000,000 (pursuant to Settlement greement and Release entered into on January 13, 2023 to settle over-issuance of shares). Along with the shares of Series D Preferred Stock the buyer shall receive Additional Warrants exercisable for 185% of shares of Common Stock under conditions similar to other warrants issued under the Securities Purchase Agreement.

c) All investors under the Securities Purchase Agreement - in amount equal to $10,000,000 (pursuant to Settlement Agreement and Release entered into on January 13, 2023 to waive possible rights of the investors upon default of the Company to maintain sufficient number of registered shares required by the Securities Purchase Agreement). Along with the shares of Series D Preferred Stock the buyer shall receive Additional Warrants exercisable for 185% of shares of Common Stock under conditions similar to other warrants issued under the Securities Purchase Agreement.

The following tables summarizes our contractual obligations and other commitments for cash expenditures as of March 31, 2023, 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 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. An accounting judgment, estimate or assumption is 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. Management believes none of the accounting estimates are considered critical for the preparation of these condensed consolidated financial statements.

Recent Accounting Pronouncements

Accounting standard updates issued but not yet added were assessed and determined to be either not applicable or not expected to have a material impact on our consolidated financial statements.

Disclosure Controls and Procedures

We are subject to the periodic reporting requirements of the Exchange Act that requires designing disclosure controls and procedures to provide reasonable assurance that information we disclose in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management conducted an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer each concluded, as of the end of the period, our disclosure controls and procedures were not effective as of March 31, 2023, due to material weaknesses in internal control over financial reporting that were disclosed in our Annual Report on Form 10-K, as amended, for the year ended September 30, 2022, and as described below.

Material Weaknesses in Internal Control Over Financial Reporting

As previously disclosed in our Annual report on Form 10-K for the year ended September 30, 2022, we identified material weaknesses in our internal control over financial reporting during the preparation of our financial statements for the year ended September 30, 2022. Under standards established by the PCAOB, a material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.

The material weaknesses in financial reporting as of September 30, 2022, are summarized as follows:

• We determined that we did not have sufficient accounting systems and procedures in place, particularly in the areas of specialized accounting for complex debt and equity transactions.
• We determined that we did not have sufficient policies and procedures to ensure the appropriate review and approval of user access rights to our accounting system; and lack of approval of journal entries and segregation of duties in our financial reporting process.
• We determined that our information technology infrastructure does not provide sufficient safeguards required by the COBIT framework.

Remediation Efforts to Address Previously Identified Material Weaknesses

As previously described in Item 9A of our Annual Report on Form 10-K for the year ended September 30, 2022, we began implementing remediation plans to address the material weaknesses. The weaknesses will not be considered remediated until the applicable controls operate for a sufficient period and management has concluded, through testing, that these controls are operating effectively. We expect that most of the remediation of these material weaknesses will be completed by the end of fiscal 2023.

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, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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, as amended, for the year ended September 30, 2022 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.