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On Tuesday, Mullen Automotive (NASDAQ:MULN) released its long-anticipated 10-Q report.

It was much like watching a campy horror movie:

You know things will be bad, but it’s hard to look away.

In three months, the electric vehicle startup produced zero revenue, burned through $67.5 million of operating cash, and diluted shareholders by another 60%. Shares would fall 5%.

As Mullen continues to exhaust its financial options, its latest 10-Q report hints at how close to bankruptcy the electric vehicle startup has gotten.

MULN Stock: Rocky Horror Picture Show

In December 2022, Mullen’s auditor gave its client a “going concern” opinion, a label reserved for firms that could soon fail. Studies show that roughly 17% of first-time going concern receivers go bankrupt within a year, making it one of the best predictors of corporate failure.

Mullen’s second-quarter results confirm these suspicions. Despite having $60.3 million in available cash and another $45 million due by July, Mullen’s cash position is surprisingly weak.

Cash Burn. Mullen consumed $71.8 million in free cash flow in the last six months, driven by $47.4 million of overheads and $20.5 million in research and development costs. The firm also spent $92.9 million on its Electric Last Mile Solutions purchase, adding strain to its cash position.

No Preorder Cashflow. Mullen’s 10-Q revealed that the firm generated no pre-sale revenues or deposits on new orders in the quarter. That suggests that no customers have yet signed up to reserve its Mullen FIVE crossover, which requires a refundable $100 deposit. Tesla’s 2010 annual report illustrates how these figures are ordinarily accounted, if they exist.

Most EV startups show significant deferred revenue and reservation payments. Tesla recorded $35.3 million of these payments in the years leading up to its Model S launch.

Source: SEC Filings

Reliance on Debt Funding. Mullen’s filing highlighted the impact of the $150 million notes it issued in November 2022 in place of Series D preferred stock. Because the EV firm had insufficient authorized shares to allow the complete conversion, it was forced to recognize a derivative liability of $244 million and issue 8.8 million shares as compensation. Future fundraising through notes issuances now comes with far worse terms.

Significant Debt-to-Equity Conversion. Finally, the filings revealed the extent of creditor cash-out. In Q2, total stockholder equity rose from $20.7 million to $263.1 million as Mullen’s lenders began exercising warrants and selling stock. This is a sign that even Mullen’s top backers are starting to worry about its longer-term solvency.

This suggests that Mullen could run out of cash sooner than most investors believe.

Consider the cash requirements to fulfill Mullen’s recent 1,000-vehicle order from Randy Marion. Rival Workhorse (NASDAQ:WKHS) consumed $5.3 million in cost of goods sold on 28 vehicles delivered in the first quarter, or $189,280 per unit. Even if Mullen only required half that figure per truck, a 1,000-vehicle order will still cost $94.6 million to produce — an amount the firm cannot afford with its current liquidity.

How Close Is Mullen to Bankruptcy?

This means Mullen is closer to bankruptcy than its cash position suggests.

To understand how close, consider the company’s current funding method.

First, Mullen typically issues preferred shares and warrants to creditors in exchange for cash. These special-class shares include as much as an 85% stock bonus. For every $100 a creditor deposits with Mullen, they can expect to cash out for $185 when the warrants become exercisable.

Next, Mullen’s institutional shareholders convert their shares into common stock and sell in the open market. These entities are exempt from Form 4 filings with the SEC since they own less than 10% of outstanding shares. Furthermore, outstanding share increases are often timed with major news announcements, allowing the converted stock to be more easily offloaded on heavier trading volumes.

Selected news events from Mullen Automotive. Source: Koyfin.

Finally, Mullen repeats the process by issuing more preferred shares, and so on. The company’s outstanding share count has risen 161X since 2022, and more dilution is expected as Series D preferred stock is converted.

It’s a strategy that works in the short run, much like friends sticking together in the aforementioned campy horror movie. Mullen receives the cash while helping creditors with a dilutive at-the-market offering.

But the strategy can quickly fall apart in a single jump-scare. Buyers of Series D preferred stock know their holdings can become worthless if market liquidity dries up, so they have the incentive to exercise these holdings at the first sign of trouble. No lender would risk getting stuck with penny stock shares they can’t sell. Indeed, Mullen’s recent report has continued to show an exit of key stakeholders. Between November 2022 and March 2023, over 92% of all outstanding convertible notes were exchanged into sellable stock.

In the worst-case scenario, Mullen could run out of cash by August. Producing 1,000 vehicles for Randy Marion by the fall will strain corporate finances, especially given the deal’s cash-on-delivery terms. And even if Mullen manages to convince more institutional lenders to buy its Series D preferred stock, it’s still a long road ahead to profitability.

What’s Mullen Stock Worth?

Optimistic investors still have hope for the struggling EV startup. On Wednesday, speculators sent shares up 20% in a brief flurry of trading. And perhaps Mullen will eventually focus on fewer electric vehicle models and becomes a PACCAR (NASDAQ:PCAR) equivalent in commercial EVs. It’s a lucrative business with far fewer competitors.

But few campy horror movies have such a happy ending. Not only did Mullen’s latest report reveal an acceleration of its cash burn rate. The firm also announced a further delay of its FIVE SUV production to December 2025 and pushed delivery of its first significant order from Q1 2023 to Q3 2023.

Buyers should beware. Mullen’s latest quarterly filing is more of the same scary story.

As of this writing, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Tom Yeung is a market analyst and portfolio manager of the Omnia Portfolio, the highest-tier subscription at InvestorPlace. He is the former editor of Tom Yeung’s Profit & Protection, a free e-letter about investing to profit in good times and protecting gains during the bad.

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