Mullen: A Force In The Making

Summary:

• We learned the Fortune 500 customer is a telecommunications provider in the Southeastern part of the US. We also learned the customer requested certain modifications, including an 80-kWh battery pack.
• As of yesterday, it has been confirmed that the modifications have been successfully made. As such, we are one step closer to closing the deal.
• Additionally, Mullen signed a new deal to supply up to 600 Class 2 EV cargo vans to an Amazon Delivery Services Partner. It seems more deals are in the making.
• The stockholder meeting is next week (26 July). Investors are concerned about dilution. Right now, Mullen is unable to raise additional capital; it has maxed out its authorized share count. The only way to raise additional capital is by increasing its authorized shares.
• Mullen has received commitments of $275M from certain investors (this is positive). Mullen needs to increase the share count to accommodate this investment, by issuing shares accordingly, but could then commit to issue additional shares at much higher prices.

A lot has happened since my previous article on Mullen Automotive, Inc. (NASDAQ:MULN) dated 14 June 2022. The good news is that the positive catalysts keep on piling up. The bad news is that things are moving slower than investors want.

Please note that all dates in this article are for 2022 unless otherwise stated.

In my previous article, I outlined a number of positive catalysts regarding Mullen including the Fortune 500 order, impressive battery test results, deals with OEMs (Original Equipment Manufacturers), progress on fundraising efforts, and inclusion in the Russell 2000/3000 Indexes. Let’s see where we stand regarding the aforementioned catalysts and also go over some new ones.

Fortune 500 Order

In a March interview on Benzinga, David Michery (Mullen’s CEO) announced that he struck a significant deal with a “major, major Fortune 500 customer” regarding its electric vans. We were told that we would learn more about the order within Q2 (i.e., by the end of June).

Subsequently, during a June interview, again on Benzinga, Mr. Michery doubled down on the Fortune 500 deal. He announced that Mullen officially initiated a “pilot program” by making “the delivery on May 12.” Mr. Michery added that they have been working for more than a year on this deal, that the customer has reported “they are pleased with the performance to date,” and that “everything is moving along exactly as planned.”

Lastly, Mr. Michery reiterated, once again, the Q2 timeframe by stating the following: “we made a statement that we would announce this within the completion of the second quarter and we fully intend on doing that.” Mr. Michery also mentioned that “we are actually working on the PR [press release] with them [Fortune 500 customer] as we speak,” and that investors will learn “all details in the PR.”

Q2 is now over. Did Mr. Michery deliver? Yes, but not all the way. Why? We did learn more about the deal (as promised), but not details that investors wanted such as customer name, order size, etc. (as hinted). Specifically, on June 23, via a press release, Mullen updated us with the following. They gave us a decent hint about the customer, namely a:

telecommunications provider in the Southeastern part of the U.S.

By following this lead, many investors inferred that the customer in question is Lumen Technologies (LUMN). Reflecting this confidence, an article was written about this concluding:

The company that fulfills every aspect mentioned by Mullen is Lumen Technologies: an American telecommunications company headquartered in the Southeastern (Monroe, Louisiana) and a member of the Fortune 500 company.

In addition to hints about the customer’s identity, Mullen reiterated that it delivered its first electric vehicle (“EV”) van under a pilot program to the customer on May 12, which confirms what Mr. Michery told us during the June Benzinga interview, as outlined above. That’s positive.

Lastly, Mullen provided an explanation of why the deal has been delayed. In particular, the customer has:

requested certain van modifications in support of their anticipated use. The van has been picked up and is currently being modified to fit the specs required by the customer in anticipation of a vehicle purchase order, including an upgrade to an 80-kWh battery pack.

Reading between the lines, this is a good sign. It is healthy for a business relationship to have some back-and-forth, especially before a sizeable deal is reached. The fact that the customer requested specific modifications shows that there is a serious intent to engage.

What’s more, Mullen’s annual meeting of stockholders will take place next week, on 26 July. Mullen representatives are reaching out to investors to explain the importance of voting in favor of certain matters including to increase the authorized number of shares of common stock to 1,750,000,000, the authorized number of shares of preferred stock to 500,000,000 (more on this below). In one of the calls, published yesterday, it was revealed that Mullen has successfully made the modifications requested by the Fortune 500 customer. This is positive and it suggests that the annual meeting next week will not be just a routine meeting. My guess is that we will get another update about the Fortune 500 order.

New Order with Amazon Delivery Services Partner

In addition to the Fortune 500 order, just a few days ago we became aware of a new deal. Mullen signed a binding agreement with DelPack Logistics, an Amazon Delivery Services Partner, to purchase up to 600 Mullen Class 2 EV cargo vans over the next 18 months. Interestingly, the first 300 vans can be delivered by 30 November, at the request of DelPack Logistics. This suggests that Mullen is ramping up production. Perhaps this, along with the Fortune 500 order and progress on the Mullen Five, provides a good explanation why Mullen is on a hiring spree right now. What’s more, the DelPack deal is relatively small, but I wouldn’t be surprised to see a lot more of those in the coming weeks. They add up. In any event, it is a nice little revenue boost for Mullen which is still in its very early stages.

Battery Technology, OEMs & Patents

On 31 May, Mullen announced impressive results of its solid-state polymer battery testing with Battery Innovation Center in Indiana. When scaled to the vehicle pack level, a 150-kilowatt hour solid-state battery can deliver more than 600 miles of range, on a full charge, for the Mullen FIVE EV Crossover. As a side note, talking about the Mullen FIVE EV Crossover, it is important to highlight that Mullen has filed over 130 patents in 24 countries in support of the Mullen FIVE EV Crossover. This implies that Mullen has global ambitions.

Back to the battery, having a solid-state battery that can deliver more than 600 miles of range on a full charge is game-changing news. This is exactly why Mullen has already started negotiations with several major OEMs. In fact, the major OEMs were so impressed with the battery results that Mr. Michery is “talking to them at the CEO level.” Mr. Michery portrayed his excitement by saying “stay tuned, it’s going to be pretty good.” Positive developments on this front will open up a brand new revenue stream, something that the market has failed to realize. Taking this one step further, Mullen’s vision is to share this technology with everybody, for all types of devices/equipment (e.g., cell phones and power tools); “to be like Bluetooth.”

Stockholder Meeting on 26 July & Major Concerns

What investors are most concerned about right now is destructive dilution by issuing shares at rock-bottom prices. Before we analyze the issue of dilution further, it is important to understand the context.

Right now, Mullen has maxed out the number of shares it is allowed to issue. In other words, it has reached the authorized share limit, meaning that Mullen is prohibited from raising additional equity, unless the authorized share count increases. To achieve an increase in the authorized share count requires shareholder approval. However, many shareholders fear that this will mean irreparable dilution.

In the June Benzinga interview, Mr. Michery mentioned that he is working “tirelessly” on a “significant transaction.” He also added that “something very impressive is coming down the pipe.” On 10 June, Mullen filed a Form 8-K with the SEC revealing that on 7 June, Mullen entered into a securities purchase agreement with certain investors (subject to stockholder approval) amounting to $275 million. Mullen plans to use the proceeds to support the development of The Mullen class one, class two, class three, and Mullen five and Mullen five RS vehicle lineups.

On the one hand, this is positive news. This group of investors is committing a substantial amount of capital. Logic dictates that they must see something really exciting in the horizon. On the flip side, for this investment to be concluded, new shares must be issued. However, as mentioned above, there are no more authorized shares available to issue. In my view, this is the biggest risk for Mullen, in addition to the usual risks of intense competition from established players like Toyota who are in a race for the solid-state battery. If Mullen fails to raise the $275 million, it will be a setback for the company as it will struggle to pursue various strategic priorities, including funding the Fortune 500 order. Add into the equation that Mullen only has enough cash to make it through 2022, then 2023 could prove to be difficult if Mullen doesn’t manage to raise additional capital.

One could argue that there are other financing mechanisms such as the ATVM loan application. The application was submitted on 29 April for the Mullen ONE EV Cargo van program. But this is a time consuming process that can take up to 18 months, if not longer. Mullen expects to receive an update from the U.S. Department of Energy in August, but there are no guarantees that the application will be successful. In other words, Mullen cannot rely on this.

Therefore, timing is somewhat of the essence. But it’s not all that gloomy. It is very important to emphasize that, in the event investors vote in favor of increasing the authorized share count, they are not automatically voting for full blast dilution. I believe this is a major misconception amongst many investors right now. The vote is to increase the share count from 500 million common shares currently to 1.75 billion. Even though this is more than 3 times higher, this does not mean automatic dilution. It depends when the company actually issues these shares.

Let’s take an example. For the aforementioned $275 million deal to close, I expect something around 250 million new shares to be issued (based on today’s current share price). This will lead to a 50% dilution and increase the company’s cash balance by $275 million, all else constant. But then, the company can refrain from issuing new shares and only do so at much, much higher prices, e.g., via opportunistic ATM (at-the-market) offerings. It goes without saying that if Mullen increased its share count to 1.75 billion common shares, and issued all of the shares close to $1 in a reckless manner, then it would more than triple the actual share count calculated in the float, albeit it the company would be sitting on more than $1 billion in cash. Then one could argue that with $1 billion in cash on hand, this might be the last time the company every raises equity, meaning the chances for this becoming the next NIO (NIO) have increased.

However, if Mullen raises capital in a reckless manner, e.g., via ATM offerings at any price well below $1 (e.g., at 50 cents) this will cause massive dilution, without raising as much capital, and this will put a permanent lid on the upside.

Therefore, a balanced scenario is for Mullen to raise the $275M today, meaning an approximate 50% increase in the share count, and commit to raise additional capital only when its share price is trading much, much higher. In other words, it’s all based in trust. Even if there is a Fortune 500 deal, eventually the authorized share count will need to increase in order to finance production.

The ideal scenario is to vote against the increase in authorized shares, and tie any increases in the share count to various events that benefit shareholders. However, if management plans to be shareholder friendly, and this is the directions they are working towards, then even if the vote turns in favor of increasing the authorized shares it is up to management to use this weapon wisely.

Looking into the future, it is no secret that Mullen has a core plan which requires raising at least $1.2 billion to start production. Therefore, Mullen will ultimately be required to raise more capital for 2023 and beyond. And Mullen’s greatest tool to raise capital is its share price. But to be able to use this tool effectively, the stock price must eventually go up. Even Mr. Michery himself acknowledges this; he wants to be in a position to “make better deals” as Mullen’s “stock strengthens.” Instead of having 2 sides on the annual meeting on 26 July (retail investors versus management) its best for shareholders and management to find common ground, and be on the same page. All this requires is effective communication and transparency. For instance, Mr. Michery can commit that the $275 million earmarked will be raised at share price not below $X per share, and then commit that future capital will be raised at much higher prices, and looking at things on a per-share basis.

This is something that AMC-backed Hycroft Mining (HYMC) seems to be doing. As Hycroft’s CEO stated at the time:

We also disclosed we would be authorizing an additional 1.0 billion shares of common stock under our charter. The Company’s authorized share capital did not provide us with the necessary flexibility to improve our capital structure and it was prudent to increase the authorized share capital for a variety of corporate purposes. These purposes may include financing transactions as well as adopting additional stock plans or reserving additional shares for issuance under existing plans. While the Company has sufficient cash on hand to conduct our planned activities at the Hycroft Mine thanks to our successful recent financings, we need to have the flexibility to move promptly should opportunities arise as we develop Hycroft for the long term.

I view Mullen being in a similar situation. It is of vital importance for David Michery to play the game of financial engineering in a smart way, to raise capital in an accretive manner. Only then will Mullen investors feel very comfortable. But for this to happen, good communication is required right now, since the stockholder meeting is just around the corner.

In any event, July will be another eventful month for Mullen. One thing is for sure, there are many things happening at Mullen, most of them good. To this end, it is very difficult to value Mullen right now as it is a company in transition mode, that will rely on financial engineering as a means to raising capital. That said, looking at the evolution of peers like Rivian Automotive (RIVN) and NIO, which currently command multibillion market cap valuations, one could argue that there is tremendous potential for Mullen.

As things stand, Mullen has enough cash to get through 2022. As announced in a press release dated 30 June, Mullen is set to report the strongest balance sheet in its history, expecting to end Q2 with more than $61M in cash and cash equivalents. A few days later, on 5 July, Mullen announced that it has eliminated $17.5 million in company debt and reduced its overall indebtedness from more than $30 million last year to an estimated $11 million currently. In other words, Mullen is on the verge of becoming debt free.

Lastly, many investors are still skeptical since they have not seen Mullen cars in action. As of this fall, starting in Southern California and working its way throughout the U.S., covering 19 cities, interested parties can place a reservation and experience first hand driving the Mullen FIVE EV Crossover. I think this will be a great moment to build momentum, as a lot of exciting and valuable content involving Mullen cars will emerge. We are at an inflection point.

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Disclosure: I/we have a beneficial long position in the shares of MULN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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