Bollinger Innovations, Inc.: Form 10-Q for the period ended Jun 30, 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.

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 now commenced our commercial operations and started to generate revenue. We are planning to ramp up production and reach sufficient revenue levels in subsequent periods – primarily from sales of Commercial Delivery Vehicles (Class 1 – 6). As we continue to develop our product line, we anticipate additional revenue streams in the future, also from the sales of Sport Utility Vehicles ("SUVs") and the flexible leasing of our electric vehicles ("EVs").

Cost of Goods Sold

The costs of goods sold primarily include vehicle components and parts, direct labor costs, amortized tooling costs, and reserves for estimated warranty expenses, all associated with the production and sale of these vehicles.

General and Administrative Expense

General and administrative (“G&A”) expenses include all other 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.

Research and Development Expense

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.

Results of Operations

Comparison of the Three Months Ended June 30, 2023 to the Three Months Ended June 30, 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 $311.4 million and $4.8 million for the three months ended June 30, 2023 and 2022, respectively.

The $306.6 million or 6,325% increase in Net loss before accrued preferred dividends and noncontrolling interest was primarily due to a $292.1 million increase in non-cash financing expenses and revaluation and $35.6 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 $20.9 million or 192% to $31.8 million for the three months ended June 30, 2023, from $10.9 million in the three months ended June 30, 2022, primarily due to increases in 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 $14.8 million or 202% to $22.1 million for the three months ended June 30, 2023, compared to $7.3 million in the three months ended June 30, 2022. Research and development expenses primarily consist of engineering, consulting, homologation, and prototyping costs. The research and development costs are expected to rise with continuing development of our electric vehicle programs.

Other financing costs – initial recognition of derivative liabilities

Other financing costs for the initial recognition of derivative liabilities was $248.4 million for the three months ended June 30, 2023 as compared to zero for the three months ended June 30, 2022 (as no investments that would require recognition of derivative liabilities took place during three months ended June 30, 2022, see Note 8 for further details).

Gain on derivative liability revaluation

The revaluation of derivative liabilities losses increased $34.8 million from $34.6 million gain for the three months ended June 30, 2022 to $0.2 million loss for the three months ended June 30, 2023 due to different patterns in warrant exercises, common shares market price changes, and recognition of new investments creating additional derivative liabilities.

Interest expense

Interest expense decreased by $4.7 million or 89% to $0.6 million for the three months ended June 30, 2023 from $5.3 million for the three months ended June 30, 2022, as the main part of notes payable was converted to common stock or repaid during the second half of fiscal year ended September 30, 2022.

Loss on financing

Loss on financing increased $8.9 million for the three months ended June 30, 2023, versus zero for the three months ended June 30, 2022 due to different patterns in warrants exercise, common shares market price changes, and recognition of new investments creating additional derivative liabilities.

Deferred tax provision

Deferred tax provision was $0.5 million for the three months ended June 30, 2023 as compared to zero for the three months ended June 30, 2022 due to an adjustment in timing differences for amortization expense (relates to deferred tax liability of the Bollinger component acquired in the last quarter of the fiscal year ended September 30, 2022).

Other income (expense), net

Other income, net was $0.8 million for the three months ended June 30, 2023 as compared to $12.3 million of other expense, net for the three months ended June 30, 2022. Bollinger earned interest on a money market account opened in January 2023.

Comparison of the Nine Months Ended June 30, 2023 to the Nine Months Ended June 30, 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 $806.8 million and $485.5 million for the nine months ended June 30, 2023 and 2022, respectively.

The $321.3 million or 66% increase in Net loss before accrued preferred dividends and noncontrolling interest was primarily due to a $189.2 million increase in Other expenses plus the $132.6 million increase in operating losses to ramp up of development efforts.

General and Administrative

General and administrative expenses increased by $91.1 million or 172% to $144.2 million for the nine months ended June 30, 2023, from $53.1 million in the nine months ended June 30, 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 production.

Research and Development

Research and development expenses increased by $41.5 million, or 430%, to $51.2 million for the nine months ended June 30, 2023, versus $9.7 million in the nine months ended June 30, 2022. Research and development expenses primarily consist of engineering, consulting, homologation, and prototyping costs. Research and development costs are expected to rise with continuing development of our electric vehicle programs.

Other financing costs – initial recognition of derivative liabilities

Other financing costs for the initial recognition of derivative liabilities increased from $269.3 million for the nine months ended June 30, 2022, to $504.4 million for the nine months ended June 30, 2023, due to new significant investments received by the Company (see Note 8).

Gain / (loss) on extinguishment of debt, net

The loss on debt settlement increased $6.28 million from $0.03 million gain for the nine months ended June 30, 2022, to a loss of $6.25 million for the nine months ended June 30, 2023.

Revaluation of derivative liabilities

The loss on revaluation of derivative liabilities decreased $18 million from $107.7 million for the nine months ended June 30, 2022 to $89.5 million for the nine months ended June 30, 2023 due to different patterns in warrant exercises, common shares market price changes, and recognition of new investments creating additional derivative liabilities.

Interest expense

Interest expense decreased by $24.5 million or 82% to $5.4 million for the nine months ended June 30, 2023 from $29.9 million for the nine months ended June 30, 2022, primarily due to the decrease in the convertible debt balance as well as from the paydown of debt principal during second half of the fiscal year ended September 30, 2022.

Deferred tax benefit

Deferred tax benefit increased $0.5 million to $0.5 million for the nine months ended June 30, 2023 as compared to zero for the nine months ended June 30, 2022 due to an adjustment in timing differences for amortization expense (relates to deferred tax liability of the Bollinger component acquired in the last quarter of the fiscal year ended September 30, 2022).

Other income (expense), net

Other income, net increased $14.4 million to $2.0 million income for the nine months ended June 30, 2023, as compared to $12.3 million of other expense, net for the nine months ended June 30, 2022.

Liquidity and Capital Resources

As of the date of this Quarterly Report, we have yet to generate significant 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 June 30, 2023, our cash and cash equivalents (including restricted cash) amounted to $227.4 million. Included in the $13.4 million restricted cash balance at June 30, 2023, is $13.0 million available for development and operations of our subsidiary Bollinger, to be released in the quarter ending September 30, 2023. The total cash available for operations and development was $227.0 million at June 30, 2023.

Management believes we have sufficient liquidity and working capital from operating cash up to June 2024. We will need additional capital beyond June 2024, to sustain operations. The Company may need to seek additional equity or debt financing. While the Company expects to obtain the additional capital and/or financing that may be required, there is no assurance that the Company will be successful in obtaining the necessary funds to bring its product and service offerings to market and support future operations. If the financing is not available, or if the terms of financing are less desirable than the Company expects, the Company may be forced to decrease its planned level of investment in product development or scale back its operations, which could have an adverse impact on its business and financial prospects.

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 nine months ended June 30, 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 $113.6 million for the nine months ended June 30, 2023, a 163% increase from $43.2 million net cash used in activities in the nine months ended June 30, 2022.

Cash Flows used in Investing Activities

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

Net cash used in investing activities was $107.4 million in the nine months ended June 30, 2023, an increase from $11.3 million used in investing activities in the nine months ended June 30, 2022.

Cash Flows provided by Financing Activities

Through June 30, 2023, we have financed our operations primarily through the issuance of convertible notes, equity securities, and warrants. Net cash provided by financing activities was $364.1 million for the nine months ended June 30, 2023, an increase of $248.6 million over the nine months ended June 30, 2022.

Reverse Stock Split

In May 2023, we completed a 1-for-25 reverse split of our outstanding shares of common stock. In August 2023, we completed a 1-for-9 reverse split of our outstanding shares of common stock. As a result of these reverse splits, our issued and outstanding common stock decreased from 833,468,180 shares to 3,704,303 shares as of September 30, 2022, and from 7,048,387 shares to 31,326 shares as of September 30, 2021.

The 1-for-25 reverse stock split was reflected in our condensed consolidated financial statements for the six months ended March 31, 2023 and 2022. The 1-for-25 and 1-for-9 reverse splits were reflected in our condensed consolidated financial statements for the nine-months ended March 31, 2023 and 2022. The following table presents selected share information reflecting on a retrospective basis the reverse stock splits for the years ended September 30, 2022 and 2021:

Contractual Obligations and Commitments

The following tables summarizes our contractual obligations and other commitments for cash expenditures as of June 30, 2023, and the years in which these obligations are due:

Operating Lease Commitments

We currently lease our headquarters space in the Orange County, California 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 June 30, 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 nine months ended June 30, 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.