MULN - Mullen: Bankruptcy Is A Serious Risk

2023-08-18 15:15:00 ET

Summary

• As of Q2 2023, Mullen still hasn’t realized any revenue from its vehicle sales.
• Mullen has around $235 million in cash, which is only enough to keep it operating for FY ‘2023.
• Despite its cash position, Mullen announced a $25 million stock buyback program in July.
• Mullen has previously announced two separate deals regarding its class 3 EV trucks that combine to be worth around $80 million.

Thesis

Mullen Automotive, Inc. ( MULN ) is at serious risk of going bankrupt. As of March 31, it had around $235 million in liquidity, and with its current cash burn rate and realizing no revenue, it means that it would run out of cash in Q1 2024, according to my estimates. Furthermore, the company will likely have problems raising capital in the future since it is trading just below the $1 mark, and if it continues diluting its shares, it will be at risk of getting delisted since it already effected two reverse splits this year. In addition, the company announced a $25 million stock buyback program, which is not an ideal use of cash given its current financial state. Although the company announced deals worth around $80 million, its operating costs will definitely have to increase due to the ramp-up in production. All of that has led me to give Mullen a sell rating.

Mullen’s Financials

Mullen ended Q2 FY23 with no revenues, a loss from operations of around $70 million, and a net loss of $117 million. Additionally, it currently only has around $7 million in debt that will mature over the next twelve months, which it should have no problem paying with its current liquidity. What may be a problem for the emerging EV maker is its cash burn rate, since it burned $34 million in Q2 and almost $70 million in the first half of the fiscal year. Despite increasing its liquidity to $235 million, according to its press release in late June, it may still face liquidity problems in the future due to its cash burn rate.

That said, Mullen is set to realize around $300,000 in revenue in Q3 since it has delivered 22 cargo vans to Randy Marion Automotive Group.

The New Deals May Not Be Enough

While in the press release, Mullen says that $235 million is approximately two years of operating capital, I think it may be overestimating its financial position. The production ramp is probably the hardest challenge for automobile makers, and Mullen now needs to increase its production to fulfill its deals with both Randy Marion Automotive Group and MGT Lease Company, which add up to 1250 trucks.

Transitioning from producing almost no vehicles to 1250 vehicles will require the company to increase its cash burn rate since it will probably start with negative margins as it scales its production. The reason this may be the case is that another class 3 EV truckmaker, REE (REE) - that is also starting to ramp up its production, expects its margins to be in the negatives as it scales its production. This is why I find it hard to believe that $235 million would be enough for Mullen to continue operating for 2 years, since at its current cash burn rate of $34 million per quarter, its cash would be enough to operate for 6 quarters without including the $25 million stock buyback program.

Although the delivery orders should add to its revenues, Mullen still needs to show that there is demand for its vehicles by acquiring new customers, which hasn't been the case so far. Based on all of this, the company will have to raise capital soon in order to scale production to meet its delivery orders.

Raising Future Capital

If Mullen decides to raise capital in the next two years, which I believe it will do, it will face the problem of staying compliant with Nasdaq’s listing requirements. This is due to its stock currently trading just below the $1 mark, and any dilution will surely add pressure on its stock price to the downside.

In that case, Mullen faces the risk of being delisted since if it can’t maintain a bid price of at least $1, it can’t effect a third reverse split since its cumulative reverse split ratio is 225 to 1, and according to NASDAQ listing requirements, its cumulative ratio mustn’t exceed 250 to 1. So, if its cumulative ratio exceeded 250 to 1 and the bid price fell below $1, the company would receive a delisting determination and would be at risk of being delisted. This means that the company’s future will depend on whether it can maintain its bid price above $1 without resorting to a reverse split for the next 2 years, which may not be realistic given its need to raise capital.

Even if Mullen is able to raise capital through debt in order not to impact its share price, it will suffer from the current high interest rates, where the interest payments would add pressure to the company’s bottom line and its cash balance. All of this leads me to believe that there are only two outcomes for the company in the future, which are either dilute shares to raise capital and delist from Nasdaq or seek relief under Chapter 11.

Upside Risk

While I do think Mullen running out of cash is the most likely scenario, I don’t believe my thesis is without risks. If the company shows strong deliveries and production numbers, it can maintain its trading price well above $1, which means it can raise capital in the future without the risk of being delisted. Also, if management’s forecast was accurate and the $235 million was enough to cover its operating expenses for two years until it can regain its ability to perform reverse splits and be able to raise capital through dilution again.

Conclusion

Despite increasing its liquidity to $235 million, Mullen is still at risk of running out of cash earlier than management expects, which may lead it to go bankrupt. This is mainly due to its ability to raise capital being limited, since it would risk being delisted for not meeting Nasdaq’s $1 minimum bid price requirement. Not only that, but Mullen is yet to show enough demand for its vehicles to convince me that it is a serious contender in the EV space. For these reasons, I’m giving Mullen a Sell rating.

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