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

The following discussion and analysis is intended to help the reader understand Mullen’s results of operations and financial condition. You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and related notes included elsewhere in this Report.

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 changed from December 31 to September 30, effective for our fiscal year ended September 30, 2022. As a result, and unless otherwise indicated, references to our fiscal year 2023 and prior years mean the fiscal year ended on September 30 of such year.

Cautionary Note Regarding Forward-Looking Statements

This Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continue,” or “should,” or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations. The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control), and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the section titled “Risk Factors” in Item 1A above. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation (and expressly disclaim any obligation) to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. These risks and others described under the section titled “Risk Factors” in Item 1A above may not be exhaustive. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In addition, even if our results or operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods.

Basis of Presentation

The consolidated condensed financial statements include the accounts of the Company and its wholly owned subsidiaries Mullen Investment Properties LLC, a Mississippi corporation, Ottava Automotive, Inc., a California corporation, Mullen Real Estate, LLC, a Delaware corporation, as well as a 60%-owned subsidiary Bollinger Motors Inc., a Delaware corporation. Intercompany accounts and transactions have been eliminated, if any. The financial statements reflect the consolidated condensed financial position and results of operations of Mullen, which have been prepared in accordance with Generally Accepted Accounting Principles in the United States. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

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.

Results of Operations

Comparison of the Three Months Ended December 31, 2023 to the Three Months Ended December 31, 2022

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

(dollar amounts, except percentages)

Revenues

We are a development stage company and have only recently started to generate notable revenues. As we expand production and commercialization of vehicles, we expect the majority of our revenue to be derived from sales of commercial vehicles. 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 expect additional revenue streams in the future, also from the sales of Sport Utility Vehicles ("SUVs") and the flexible leasing of our electric vehicles ("EVs").

In accordance with accounting standards, we recognize revenue from the sale of electric vehicles upon transfer of control to a customer. In general, the control is transferred at the point of delivery to the customer but certain contracts with our dealers contain a return provision, stating that they may return unsold vehicles after 1 year. Since the Company does not have sufficient relevant statistics of returns yet, we defer revenue recognition until the vehicles have been sold by such dealer or until there is sufficient evidence to justify a reasonable estimate for consideration to which the Company expects to be entitled. Payments from customers are generally expected to be received within 30-60 days after delivery.

The tables below disclose information on deliveries of vehicles, revenue recognized, and payments received from our customers over the recent periods.

Cost of Goods Sold

Costs of goods sold primarily includes vehicle components and parts, labor costs, amortized tooling costs, provisions for estimated warranty expenses, and other relevant costs associated with the production of our vehicles.

Research and Development

Research and development expenses increased by approximately $7.5 million or 88% from approximately $8.6 million through the three months ended December 31, 2022, to approximately $16.2 million through the three months ended December 31, 2023. Research and development expenses are primarily comprised of external fees and internal costs for engineering, homologation, prototyping costs and other expenses related to preparation to mass-production of electric vehicles such as Mullen Five EV, Mullen One EV cargo van, etc.

General and Administrative

General and administrative 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. General and administrative expenses decreased by approximately $21.8 million or 33% from approximately $65.0 million in the three months ended December 31, 2022, to approximately $43.2 million in the three months ended December 31, 2023, primarily due to decreases in compensation to employees, depreciation expense, and lease expense offset by increases in professional fees, utilities, office expense, advertising and promotions expenses.

Other losses

The line item “Other financing costs - initial recognition of derivative liabilities” in the three months ended December 31, 2023 is zero versus the three months ended December 31, 2022 when it amounted to approximately $256 million. Similarly, the derivative liability revaluation loss has decreased by 84% from $40.8 million to $6.7 million. These changes are due to the fact that no additional warrants or convertible notes were issued during the three months ended December 31, 2023 and the monetary value of relevant obligations has significantly decreased in comparison to the three months ended December 31, 2022 (see Notes 7 and 8 to the financial statements).

Interest Expense

Interest expense decreased by approximately $2.6 million, or 91%, from approximately $2.8 million through the three months ended December 31, 2022, to approximately $0.3 million through the three months ended December 31, 2023, primarily due to a decrease in convertible debt that has was fully converted in March, 2023.

Net Loss

The net loss attributable to common stockholders (after preferred dividends) was approximately $61.4 million, or $15.32 net loss per share, for the three months ended December 31, 2023, as compared to a net loss attributable to common stockholders after preferred dividends of approximately $376.9 million, or $6,233.08 loss per share, for the three months ended December 31, 2022 (giving effect to reverse stock splits, see below).

Operating segments

The Company is currently comprised of 2 major operating segments:

• Bollinger Motors. The Company acquired the controlling interest of Bollinger Motors Inc. (60%) on September 7, 2022. This acquisition positions Mullen into the medium duty truck classes 4-6, along with the Sport Utility and Pick Up Trucks EV segments.
• Mullen/ELMS. By November 30, 2022, Mullen acquired ELMS’ manufacturing plant in Mishawaka Indiana and all the intellectual property needed to engineer and build Class 1 and Class 3 electric vehicles.

Reverse Stock Splits and NASDAQ listing rules compliance

During the calendar year ended December 31, 2023 we have completed 3 reverse stock splits in order to regain compliance with NASDAQ Listing Rule 5550(a)(2). 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. The last 1-for-100 reverse stock split was effectuated in December 2023.

On January 24, 2024, the Company received formal notice from The Nasdaq Stock Market LLC confirming the Company has regained compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2).

Mullen has scheduled its Annual Meeting of Stockholders to be held on February 29, 2024 to regain compliance with the annual shareholder meeting requirement set forth in Nasdaq Listing Rule 5620(a).

Liquidity and Capital Resources

To date, we have yet to generate any significant revenue from our business operations. We have funded our capital expenditure and working capital requirements through the sale of equity securities, as further discussed below. Our ability to successfully 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.

The Company's principal source of liquidity consists of existing cash and restricted cash of approximately $88.9 million as of December 31, 2023. During the three months ended December 31, 2023, the Company used approximately $59.9 million of cash for operating activities. The net working capital on December 31, 2023 amounted to approximately $47.1 million, or approximately $79.3 million after excluding derivative liabilities and liabilities to issue stock that are supposed to be settled by issuing common stock without using cash. For the three months ended December 31, 2023, the Company has incurred a net loss of $64 million and, as of December 31, 2023, our accumulated deficit was $1,923.6 million.

The Company is evaluating strategies to obtain the required additional funding for future operations. These strategies may include, but are not limited to, obtaining equity financing, issuing debt, or entering other financing arrangements, and restructuring of operations to grow revenues and decrease expenses. However, given the impact of the economic downturn on the U.S. and global financial markets, the Company may be unable to access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.

Despite these efforts, there can be no assurance that our plans will be successful in alleviating the substantial doubt about our ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty, such as the potential need to liquidate assets, restructure operations, or make other significant changes to the business model.

COVID-19

During the three months ended December 31, 2023, the COVID-19 pandemic did not have a material impact on our operating results. The Company has not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or results of operations, financial condition, or liquidity.

Debt

To date, our current working capital and development needs have been primarily funded through the issuance of convertible indebtedness, convertible preferred stock and common stock. Debt comprises an insignificant component of our funding needs.

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 following is a summary of our debt as of December 31, 2023:

The Promissory Note issued to NuBridge Commercial Lending LLC for a principal amount of $5 million (with carrying amount, net of debt discount, of approximately $4.9 million as of December 31, 2023) was repaid by the Company on January 31, 2024, further reducing the overall debt of the Company to approximately $2.7 million.

Cash Flows

The following table provides a summary of our cash flow data for the three months ended December 31, 2023 and 2022:

49

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 before we start to generate any material cash flow from our business.

Net cash used in operating activities was $59.9 million in the three months ended December 31, 2023, an 80% increase from $33.2 million net cash used during the three months ended December 31, 2022.

Cash Flows used in Investing Activities

Our cash flows used in investing activities, to date, have been comprised mainly of purchases of equipment.

Net cash used in investing activities was $6.9 million in the three months ended December 31, 2023, a 93% decrease from $93.7 million used in investing activities the three months ended December 31, 2022. The primary factor of the change was the ELMS assets acquisition during the three months ended December 31, 2022.

Cash Flows provided by Financing Activities

Through December 31, 2023, we have financed our operations primarily through the issuance of convertible notes and equity securities.

Net cash provided by financing activities was $0.0 for the three months ended December 31, 2023, as compared to $150 million for the three months ended December 31, 2022, when we issued convertible notes in lieu of preferred shares.

Contractual Obligations and Commitments

The following tables summarizes our contractual obligations and other commitments for cash expenditures as of December 31, 2023, and the years in which these obligations are due:

Operating Lease Commitments

Non-convertible secured promissory note

On December 18, 2023, Mullen entered into a Debt Agreement to issue a non-convertible secured promissory note (the “Note”) with a principal amount of $50 million, purchased for $32 million, reflecting an $18 million original issue discount. The Note, which does not include conversion rights, stock, warrants, or other securities, aims to raise capital for the Company's manufacturing operations. The issuance of this non-convertible Note is scheduled for the first trading day when all closing conditions are met. By February 12, 2024, the loan has not been received. The $18 million original issue discount was considered a settlement cost related to a dispute over financings that occurred during the fiscal year ended September 30, 2023. The $18 million settlement cost has been accrued as of September 30, 2023 and is included as accrued expenses and other liabilities at December 31, 2023 and September 30, 2023. When the debt is issued the $18 million will be reclassified to note payable.

The Note will incur 10% annual interest, escalating to 18% post-Event of Default. It matures three months post-issuance. The Note's terms allow for accelerated repayment upon default, requiring the Company to pay the principal, accrued interest, and other due amounts. The Note is secured by the Company’s assets and imposes restrictions on the Company, limiting additional debt, asset liens, stock repurchases, outstanding debt repayment, and affiliate transactions, except for specified exceptions. It mandates prepayment of the principal from net proceeds of any subsequent financing.

Scheduled Debt Maturities

The following are scheduled debt maturities as of December 31, 2023:

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 condensed financial statements. Our significant accounting policies are described in Note 3 to the consolidated condensed financial statements. Management believes none of the accounting policies and estimates are considered critical for the preparation of these consolidated condensed financial statements.

Recent Accounting Pronouncements

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

Evaluation of Disclosure Controls and Procedures

We are responsible for establishing and maintaining disclosure controls and procedures (“DCP”) that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (b) accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosures.

We conducted an evaluation pursuant to Rule 13a-15 of the Exchange Act of the effectiveness of the design and operation of our DCP as of December 31, 2023, under the supervision and with the participation of our management, including our

Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our DCP were not effective at the reasonable assurance level as of December 31, 2023 because of material weaknesses in the Company’s internal control over financial reporting described below.

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 a company’s annual or interim financial statements will not be prevented or detected on a timely basis. In conducting our annual review of our internal control over financial reporting for the year ended September 30, 2023, we identified the following material weaknesses described below.

• Based on management’s review of key accounting and information technology policies and procedures, we have determined that although such policies and procedures exist, they are not all formalized in a written procedure format that is up to date.
• As a result of absence of formalized review of key controls across several business processes and/or insufficiently formalized documentation evidencing such review, management’s ability to evaluate the design and monitor the effective operation of these preventative and detective internal controls is limited. Accordingly, management’s ability to timely detect, prevent and remediate deficiencies and potential risks has been assessed as inadequate.
• The Company identified certain design deficiencies in its management and analytical review controls associated with the financial close process. These deficiencies, individually or in the aggregate, combined with inadequate compensating controls, created a reasonable possibility that a material misstatement to the consolidated condensed financial statements might not be prevented or detected on a timely basis.
• The Company lacks in-house accounting expertise to identify rights and obligations reflected in non-standard agreements, requiring specialized accounting for complex transactions.
• The Company’s internal control system as well as disclosure controls and procedures failed to ensure the Company properly presents certain related party disclosures in the financial statements for the year ended September 30, 2022, as discussed in the Note 20 to the financial statements for the year ended September 30, 2023.

During the three months ended December 31, 2023, these control deficiencies did not result in identified material misstatements in our consolidated condensed financial statements; however, the control deficiencies described above created a more than remote possibility that a material misstatement in the consolidated condensed financial statements would not be prevented or detected on a timely basis. Therefore, our management concluded that the deficiencies represent material weaknesses.

Based on the performance of additional procedures by management designed to ensure reliability of financial reporting, the Company’s management has concluded that, notwithstanding the material weaknesses described above, the consolidated condensed financial statements, included in this Form 10-Q, fairly present, in all material respects, the Company’s financial position, results of operations, and cash flows as of the dates, and for the periods presented, in conformity with U.S. GAAP.

Remediation Efforts to Address the Material Weaknesses

While the Company has significantly improved its internal control over financial reporting, the material weaknesses remain un-remediated as of December 31, 2023, and the Company’s remediation efforts will continue to take place in 2024.

During the three months ended December 31, 2023, the management continued implementing actions in accordance with the remediation plan, including:

• Improvement of accounting policies and procedures.
• Development of systems and IT tools to enable the effectiveness and consistent execution of controls over timely and accurate accounting for certain transactions.
• Consulting with independent accounting firm on accounting and valuation matters.

Changes in Internal Control Over Financial Reporting

The following changes in internal control took place during the three months ended December 31, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:

• In the fourth quarter of the year ended September 30, 2022, the Company acquired a controlling interest (60%) in a substantial subsidiary, Bollinger Motors, Inc. During the three months ended December 31, 2023, as part of our ongoing integration activities, management has been considering the controls design to be incorporated into this business concurrent with the augmentation of our Company-wide controls.
• During the three months ended December 31, 2023, the Company started considerable production and sales activities and is implementing internal control procedures related to ASC 606.
• Management of the Company has launched a substantial upgrade of information systems to implement a new enterprise resource planning system (SAP) that is expected to go live in April, 2024.

In addition to the remedial actions taken to date, the Company is considering the full extent of the procedures to implement in order to remediate the material weaknesses described above. Currently, the remediation plan includes:

• Revising and enhancing effectiveness of the controls put in place during previous periods, including those mentioned above.
• Continuing to implement processes and controls to better manage and monitor our financial reporting risks, including enhancing the usage of technology and tools.
• Continuing professional training and education on accounting subjects for accounting staff.
• Enhancing management review controls related to our financial statement close and financial reporting involving estimates, judgments, and assumptions.
• Augmenting the design of the financial statement closing and financial reporting process including documentation of accounting treatment of significant and unusual transactions.

The actions that we are taking are subject to ongoing management review and audit committee oversight. We believe these measures will aid to remediate the control deficiencies that gave rise to the material weaknesses, but the material weaknesses will not be considered fully remediated until controls have been designed and implemented for a sufficient period of time, and properly tested for our management to conclude that the control environment is operating effectively.

We are committed to continuing to improve our internal control processes, and, as we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify certain of the remediation measures described above.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and processes as well as internal control over financial reporting, we recognize that any controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Because of its inherent limitations, any internal control system, no matter how well designed and operated, is based upon certain judgments and assumptions, and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the 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, as amended, for the year ended September 30, 2023 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.