MULN stock upcoming reverse split could cause a short squeeze

Mullen Automotive (NASDAQ: MULN) stock price has lost its bullish momentum even as other EV stocks like Tesla rebound. The shares were trading at $0.377 on Tuesday, about 118% above its all-time low. It nonetheless remains sharply below its all-time high of $1,225.

An uphill battle ahead

The electric vehicle industry has had mixed success in the past few years. On the one hand, we have well-known brands like Tesla and Nio that are selling large volumes of cars. In the other side of the spectrum, there are upstart EV companies like Arcimoto, Veemo, Britishvolt, and Lightyear have filed for bankruptcy. Canoo is on the brisk as well.

Are you looking for fast-news, hot-tips and market analysis?

Sign-up for the Invezz newsletter, today.

The future of electric vehicles will be made up of companies with huge balance sheets and substantial scale. Unfortunately, Mullen Automotive seems to be at risk of not succeeding as the cost of manufacturing rises and balance sheet remains stretched.

Mullen losses have been rising over the years. In its recent 10k, the company said that its losses from operations in 2022 surged to over $96 million from the previous $22.4 million. Total loss jumped to over $740 million. Most of these losses came from the revaluation of warrant liabilities and other financing costs.

For a company with no revenues to continue as a going concern, it needs to have a solid balance sheet. The 10k showed that the company had $86.3 million in current assets, including $54 million in cash and equivalents. This is important since the company closed its acquisition of Electric Last Mile Solutions (ELMS) in December, meaning that it used some of these funds.

Dilution risks remain

Therefore, Mullen Automotive faces a major liquidity challenge considering that it is burning cash at a quick rate. The most likely scenario is where the company sells more shares and dilutes existing investors. In December, shareholders voted for a provision to increase the outstanding share count from 1.75 billion to a whopping 5 billion.

Mullen will likely need less amount of money than it used in 2022 since I don’t expect it to make other big acquisitions. However, with the production of its key vehicles slated for 2024, the company could see more costs. Its 10k shows that R&D costs surged to $21 million while G&A costs rose to $74 million. Unless it makes major job cuts, these are not costs that are easy to cut. 

Therefore, Mullen Automotive faces a major liquidity risk in 2023 that could push the company into bankruptcy. This risk will likely be avoided but the cloud still hangs around. The biggest risk is that of dilution of existing shareholders.

The only benefit of the Mullen stock price is that the company is incredibly popular among traders. As such, we can’t rule out a short squeeze that pushes the price sharply higher. This short-squeeze could happen if the company decides to reverse split it stock to meet Nasdaq listing requirements. I wrote about the reverse split here. Nasdaq has given it until March 6 to ensure that the stock remains above $1. Find out how to buy Mullen Automotive.