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Meme Stock Mullen Is Drowning Its Investors in Shares

Meme stock and retail investor darling Mullen Automotive Inc. is ostensibly in the business of making electric cars. For now, its most plentiful product is its own shares. 

There are now are almost 1.7 billion Mullen shares outstanding, compared with fewer than 25 million a year ago, and soon the authorized total could increase to as many as 5 billion, according to recent financial filings. Several hundred million of these shares change hands on a typical day, making it one of the most active of all US stocks in volume terms. Mullen is case study for the dangers of creeping shareholder dilution and how as the tech bubble bursts, retail investors can find themselves taken for a ride.

Loss-making Mullen had around 120 employees at the end of September, and the Tesla Inc. wannabe doesn’t expect to start manufacturing its first proprietary SUV until next year. Nevertheless, it already has a devoted amateur investor following and is frequently among the most-mentioned companies on online forums such as Stocktwits. Last year Mullen acquired a majority stake in Bollinger Motors Inc. as well as assets from bankrupt Electric Last Mile Solutions Inc., which have enhanced its prospective vehicle lineup and manufacturing capacity, and further fueled investor excitement.(1)

However, Mullen was the subject of a critical report in April by Hindenburg Research, which previously targeted truckmaker Nikola Corp. And Mullen’s latest accounts include a warning from southern Florida auditor Daszkal Bolton LLP on its ability to remain a going concern.

Mullen held only $54 million of unrestricted cash at the end of September. While it has lined up as much as $340 million(2)in convertible debt and preferred stock financing from Esousa Holdings LLC, Acuitas Capital LLC and a handful of other key investors, this isn’t nearly sufficient to fund its vehicle programs. Rival electric vehicle maker Rivian Auomotive Inc. has more than $13 billion in cash; the collapse of UK battery startup Britishvolt Ltd this week delivered another reminder of the auto industry’s massive capital intensity.

Mullen’s shares have declined more than 90% in the past year, valuing it at around $465 million currently. The more it slumps, the more shares it will need to issue to keep the lights on. 

Regrettably, Mullen’s owners won’t be diluted equally. In September, the company signed a partnership with an Israeli company to eventually equip its vehicles with technology that produces fresh water from the air for vehicle occupants to drink. Leaving aside the questionable merits of an innovation reminiscent of the water-distilling machine aboard Captain Nemo’s Nautilus submarine, the announcement was eye catching for another reason: Mullen Chief Executive Officer David Michery, a former president of hiphop label Death Row Records, received 5% of Mullen’s then outstanding shares as a reward for signing the deal, according to the annual report. With those shares now worth around $12.5 million, that’s a mighty expensive thirst-quencher, considering Mullen has yet to generate revenue.

In total, Michery was awarded more than 100 million shares last year for meeting what I consider unambitious targets: he was handed 2% of shares then outstanding for Mullen joining the Russell 2000 and 3000 indexes and another 2% for Mullen signing a UK and Ireland vehicle-distribution agreement, for example. Prior to securing shareholder approval for these compensation arrangements in July, Mullen noted the “significant dilution” Michery suffered since Mullen went public via reverse merger the previous year. 

Another problem with issuing so many new shares is it’s easy to lose count. Much of the recent dilution has come from warrants being exercised by Mullen’s financial backers on a cashless basis for hundreds of millions of additional shares. Though vital to understanding Mullen’s growing share count, lengthy discussions about warrants in financial filings are apt to make ordinary investors fall asleep. More surprisingly, management can also lose track. The company last year erroneously issued almost 1.7 million shares to key investors in connection with the exercise of their warrants, according to the annual report. Whoops.(3)

Potentially much worse, Mullen investors filed a pair of lawsuits in December claiming the company misrepresented the number of eligible shares at a crucial investor meeting in July that would invalidate a vote authorizing the subsequent issuance of more than 1 billion shares. Mullen says the stockholder actions are without merit and is seeking confirmation of the accuracy of its capital structure from a Delaware court in a hearing scheduled for next week.In the meantime, Mullen shareholders are due to vote on Thursday on whether to authorize another 3.25 billion shares for future issuance, because the company is close to the current cap of 1.75 billion. 

Nasdaq has threatened to delist Mullen’s shares because they’re trading below one dollar and so shareholders have also been asked to approve a reverse stock split, which would artificially boost the price, significantly reduce the share count and thereby materially increase the total left remaining for issuance before hitting the cap (I wrote about how reverse splits are no panacea here). 

Shareholders must also vote on the $340 million convertible financing I mentioned, as it could result in several billion more shares being issued, according to this filing. If the vote fails and Mullen was then unsuccessful in raising additional capital, the company has warned it would be obliged to curtail its manufacturing plans and instead cut costs and dispose of assets. So ordinary investors are stuck between a rock and hard place.

Retail investor enthusiasm for the clean energy revolution is admirable, and the quality of Redditors’ research into early-stage companies like Mullen is often impressive. But the everything bubble of 2021 has popped and it’s harder now for supporters to pump loss-making penny stocks to the moon. While Mullen dreams of vehicles that produce water from thin air, its shareholders are drowning.

More From Bloomberg Opinion:

• SPACs Slap Some Lipstick on Their Penny-Stock Pigs: Chris Bryant

• Big Tech Is in Crisis. That’s Exactly What It Needed: Parmy Olson

• Sparks Will Fly in the Electric-Car Trade War: Lionel Laurent

(1) Mullen expects to start delivering electric cargo vans this year as well as the I-GO, a China-made small urban commercial delivery vehicle.

(2) Including investor option to purchase an additional $100 million of preferred stock.

(3) Elsewhere the annual report talks about “the erroneous issuance by the Company of an aggregate exercise of 1,660,988 warrants for approximately 100 million shares of common stock”, which is confusing.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.

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