Description

"Après moi, le déluge" said by Louis XV, referring to France after his death, and (probably) by David Michery, MULN CEO, referring to his share count after his upcoming shareholder meeting.

It’s no secret that many Electric Vehicle stocks are straight-up scams. And, thanks to some stellar work by Hindenberg Research, it’s clear that MULN is a proud member of the scam club: https://hindenburgresearch.com/mullen/ The report is very thorough, and does a great job establishing that in every aspect, MULN is a fraudulent and promotional entity, designed to raise cash for insiders, with any actual vehicle production a distant afterthought.

It’s also no secret that not every fraud is a good short. However, MULN will soon be the source of some epic stock dilution. I don’t track these things, but this is a situation reminiscent of Dryships (DRYS). Let’s get into the details here and see why MULN is a great short with 50%+ downside between now and the next 12 months. The aforementioned shareholder meeting on July 26^th is the key, and the proxy is well worth a read: https://www.sec.gov/Archives/edgar/data/1499961/000110465922070232/tm2218156-2_pre14a.htm

You’ll first notice an attempt to increase the authorized share count (currently at ~475mn outstanding) to 1.75bn common and 500mn preferred. That’s impressively ambitious. What heroic feats of capitalism will be undertaken with all those potential shares? Sadly, as we read further into the proxy, it becomes apparent that the players here are not cast in the mold of the protagonists of “Atlas Shrugged,” but are instead simple looters. David Michery, for instance, has a pay package that can only be described as egregious:

“Upon termination from the Company, other than for cause, Mr. Michery is entitled to receive from the Company the following severance: An amount equal to 10% of the Company’s market capitalization at such time (“Equity Termination Payment”)

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For example, if 2.5 years have passed the date hereof, the Company’s market capitalization rate is $500,000,000, then the Salary Termination Payment is $500,000 x 8 and an Equity Termination Payment equal to $50,000,000.

Feature Milestone:   If Mullen enters into an agreement with a manufacturer or provider of equipment, accessory, feature or other product (collectively, “Feature”) by the end of 2023 that sets Mullen or its vehicle apart from its competitors or that provides Mullen a first mover or first disclosure advantage over its competitors for the Feature, the Company will issue to Mr. Michery a number of shares of Common Stock equal to 5% of Mullen’s then-current total issued and outstanding shares of Common Stock as of date the Feature milestone is achieved.

….if Mullen is included in the Russel [sic] Index, the Company will issue to Mr. Michery a number of shares of Common Stock equal to 2% of Mullen’s then-current total issued and outstanding shares as of the date Mullen is approved to be included on the Russel Index.

There’s more, but granting the CEO 7% of the company for getting into the Russell and having a “feature that sets their vehicles apart” suffices to show the sheer audacity of the grift here. However, machinations like that don’t require an authorized share count of 1.75bn. Let’s move on to the less entertaining but much more massive dilution that makes MULN such an appealing short: the Series D Preferred and Warrants and the death spiral they contain. The shareholder meeting is not just to approve the increased authorized shares, but also to comply with Nasdaq Listing Rule 5635(d) (the 20% rule https://www.sec.gov/rules/sro/nasdaq/2018/34-84287-ex5.pdf  ) because the Series D will definitely trigger it. Here’s the Securities Purchase Agreement that contains the gory details ( https://www.sec.gov/ix?doc=/Archives/edgar/data/1499961/000110465922070216/tm2218156d1_8k.htm ):

In plain language, MULN has entered into an agreement to sell $275mn of Series D Preferred. The purchase price will be the lower of $1.27 OR the closing price of the stock on the day the agreement is executed (with a floor of $0.10). Let’s use $1/share to make the math easy, and remember that MULN currently has ~475mn shares outstanding and a market capitalization of ~$500mn. So, the Series D will add another 275mn shares, all of which have a cumulative 15% PIK dividend attached to them. Not great, but not crazy. Then you have the warrants that are attached to the Series D: “The number of Warrants that may be issued will equal 110% of the shares of Series D Preferred Stock purchased by the investors.” That gives us roughly 302.5mn warrants which nominally have an exercise price with the same terms as the Series D pricing. However (and here’s where it gets really interesting), these warrants have some nasty cashless exercise provisions:

It doesn’t take a PhD in quantology to see that the Black Scholes Value is basically a constant, and the only moving part here is the Bid Price. The lower it goes, the more shares get created. Notably, Preferred and warrant holders can even short against their positions:

 Certain Transactions. Each Buyer covenants that neither it, nor any affiliate acting on its behalf or pursuant to any understanding with it, will (i) execute any Short Sales, of any of the Company’s securities during the period commencing with the execution of this Agreement and ending at such time that the transactions contemplated by this Agreement are first publicly announced nor (ii) from the date hereof until the Purchase Date, execute any Short Sales of the Common Stock (provided that this provision shall not prohibit any sales made where a corresponding notice of conversion for the Purchased Shares is tendered to the Company and the shares received upon such conversion or exercise are used to close out such sale).

This is a classic death spiral financing, with the shares getting pressure from the short position and then the ever-increasing share count. Against this, we should take a quick look at the promotion we can expect out of MULN. The company, as you might expect, is active with PRs and on Youtube. Most of what they discuss is the standard EV song and dance of unnamed Fortune 500 companies and ‘breakthrough’ battery designs. I think Hindenburg has done a very good job debunking those issues as viable. The last arrow in the MULN quiver is a potential loan from the Department of Energy:  https://news.mullenusa.com/mullen-automotive-files-u.s.-department-of-energy-atvm-loan-application-for-mullen-one-ev-cargo-van-program

This receives an outsized share of attention from the MULN retail shareholder base, but seems like a real long-shot. The program has been in existence since 2008 and per Wikipedia, “Of the 108 requests made, 5 were approved…” Furthermore, the loan request is expected to take 12-18 months to resolve, so should be more of a 2023 issue. I expect the dilution to hit before this.  https://en.wikipedia.org/wiki/Advanced_Technology_Vehicles_Manufacturing_Loan_Program

In short, the odds that MULN management can move their share price up substantially seems low, while the deluge of dilution that is coming is a near-certainty. Shorting via equity or options around their shareholder meeting likely won't net you enough to buy your own personal Versaille, but it is quite likely to get you a bit of foie gras and caviar. Louis XV would be proud. 

Catalyst

The shareholder meeting on 7/26, and subsequent filings, that will cause significant dilution. 

Risks: lack of borrow, short squeezes, unexpected and unexpectedly early DoE loan grant, company promotion more effective than expected.