Mullen Automotive (MULN): What to Do About Serial Reverse Splitters

At noon on September 13, 2024—Friday the 13th—Mullen Automotive (MULN) announced a 1:100 reverse stock split to become effective on September 17 at 12:01 a.m. The news did not come as a surprise to shareholders. MULN had held a Special [Stockholder] Meeting on September 9, 2024. The meeting, which was originally scheduled for September 13, was virtual. Its chief order of business was to vote on several issues. Votes from those not present had to be submitted electronically by 11:59 p.m. Pacific Standard Time on September 8. The company reports in its press release about the split that voting stockholders approved the split. And they did, by better than two to one. Of course, ballots not returned were presumably counted as votes in favor of the board’s proposals.

The press release also informs observers that “The Reverse Stock Split will not change the par value of the Common Stock nor the authorized number of shares of Common Stock, preferred stock or any series of preferred stock.” The company has 5 billion shares of common stock authorized. There are also three classes of preferred stock, warrants, and other convertible securities. 

Reverse and forward splits are neutral in theory. They only change the number of shares outstanding, not the value of shareholders’ positions in those shares. If you own 1,000 shares of ABCD, which is trading at $1 a share, and it does a 1:2 reverse split, the size of your holding will be cut in half: for every 2 shares you owned, you will now own 1 share. But that single share will be worth as much as your former 2 shares. Your 1,000 shares worth $1,000 are now 500 shares worth $1,000 because each share will be worth $2. Were ABCD to do a 2:1 forward split, you’d receive 2 shares for each share you own. Your new position will consist of 2,000 shares worth $1,000. Each share will be priced at $0.50.

But not, alas, for long. Forward splits are nearly always perceived by investors as positive; reverse splits are seen as negative. That’s because stocks carrying a lot of debt—especially startups and biotechs—are likely to end up doing more reverse splits. MULN is one of those companies. In the past 18 months, it’s done three reverse splits; the one that will become effective on Tuesday will be its fourth since May 2023.

Mullen Automotive

Mullen is one of a not very exclusive group of companies that trade on the Nasdaq’s Capital Market. The Capital Market, or CM, is the lowest of the exchange’s three tiers. The highest, the Global Select Market, trades large-cap issuers; the Global Market trades mid-caps. MULN is based in southern California but incorporated in Delaware. It was founded in 2010 as a developer and manufacturer of electric vehicle technology, an industry that was just beginning to find its feet. It operated as a private company until 2021, when it effected a reverse triangular merger with Net Element, Inc., a company trading on the Nasdaq as NETE. NETE described itself as “a global technology and value-added solutions group that supports electronic payments acceptance in a multi-channel environment including point-of-sale (POS), e-commerce and mobile devices” in its Form 10-K for fiscal year 2020.

Net Element was still doing business during 2020, but on August 4, it entered into an agreement and plan of merger with Mullen Technologies and Mullen Acquisition, Inc., a newly-created merger subsidiary. The merger took time and went through several amendments over the course of more than a year. The transaction finally closed on November 5, 2021, leaving Mullen Automotive-California as the surviving entity. The Net Element officers and directors resigned and were replaced by Mullen’s own management. The company’s CEO was David Michery.

The company immediately began to offer stock. On December 27, 2021, it had 23,383,202 shares outstanding. By May 13, 2022, that number had increased to 332,443,385 shares; by August 10, 2022 – 509,294,481 shares; and by January 6, 2023 – 1,696,543,863 shares. (The public company’s fiscal year-end had changed with the merger to September 30.)

It didn’t take long for MULN to attract the wrong kind of interest. It was already dealing with two shareholder class actions that had been filed in the Delaware Court of Chancery. The plaintiffs alleged “that the number of shares of Common Stock issued and outstanding as of the record date (the “Annual Meeting Record Date”) for the Annual Meeting of stockholders held on July 26, 2022… was 477,510,822 and that, based on this eligible share total, a majority of shares of Common Stock, when considered separately as a class, did not vote in favor of the increase in authorized shares at the 2022 Annual Meeting, and therefore the amendment to the Company’s Second Amended and Restated Certificate of Incorporation, which was then filed with the Office of the Secretary of State of the State of Delaware on July 26, 2022 (the “2022 Amendment”), was invalid.” MULN was able to resolve the issue, and the suits were voluntarily dismissed, but they were a harbinger of things to come. 

The offerings continued. The company had scheduled a Special Stockholder Meeting in late 2022; the record date for the votes to be cast was November 21, 2022. At that time, there were 1,659,097,754 shares of common stock issued and outstanding. MULN asked its stockholders to approve a reverse split. The stock issuances had been so large and so constant that MULN had lost compliance with the Nasdaq’s listing standard, and so it proposed:

An amendment to the Company’s Second Amended and Restated Certificate of Incorporation, which amendment will not be filed prior to the later of March 6, 2023 and 180 days after such date (which later date depends on whether Nasdaq Stock Market LLC grants the Company an additional 180-day extension to regain compliance with Nasdaq listing rules), to effect a reverse stock split of our outstanding shares of common stock in an amount not less than 1-for-2 shares and not to exceed 1-for-25 shares, with the exact ratio to be set within that range at the discretion of our Board of Directors…; provided, however, that the Company will not file such amendment before May 1, 2023 to effect the Reverse Stock Split unless needed in order to maintain continued inclusion in the Russell 2000, which requires a minimum stock price of $1.00; notwithstanding the foregoing, if Proposal No. 2 [for an increase in the number of authorized shares) is not approved at the Special Meeting, then the Board of Directors may effectuate the Reverse Stock Split at any time, and at such time and date, if at all, as determined by the Board of Directors in its sole discretion, but no later than December 1, 2023, when the authority granted in this proposal to implement the Reverse Stock Split would terminate.

The company reported the vote as 848,328,114 in favor, 249,157,027 against, and 15,207,541 abstentions.

By May of 2023, the time had come. On the third of the month, it announced a 1:25 reverse split effective the following day, May 4. Shareholders posting on social media didn’t hesitate to register their displeasure. Trading did not go well that day. On the third, the stock had closed at $0.0639, far below the $1 needed to maintain compliance with the Nasdaq listing standard. Had the split become effective at that moment, its price would have been $1.5975. In early pre-market trading the next day, it dropped to $1.39, down $0.20 split-adjusted. It rallied a little in the late afternoon and closed at $1.4705. But that didn’t last for long.

Even before the reverse splits began, Mullen had its critics. One of the sharpest was activist short seller Hindenburg Research, headed up by Nate Anderson. On April 6, 2022, Hindenburg served up a scathing report on MULN, describing it as “yet another fast-talking EV hustle.” We’ll leave it to you to read Anderson’s work; there’s no point in repeating or attempting to add to his research. Our purpose here is to discuss the company’s multiple reverse splits, none of which had occurred when the Hindenburg report was published.

Nor do we intend to discuss the company’s activity and progress, or lack thereof. We’ll say only that although it issues an enormous number of press releases, it isn’t churning out thousands of EVs. In the quarter ended June 30, 2024, it reported only $65,235 in vehicle sales. Would that be one truck or van? (Trucks and vans seem now to be its area of concentration.) Its loss per share is $7.91. Once, it at least flaunted a market cap in the hundreds of millions; now, it’s a mere $5.11 million. 

MULN’s Reverse Splits and Nasdaq Policy

Mullen did three reverse splits in 2023. The first, as we’ve seen, was on May 4, at a ratio of 1:25. The second was on August 11, at a ratio of 1:9, and the third on December 21, at a ratio of 1:100. Now it is about to do another, at a ratio of 1:100. MULN notes in its most recent 10-Q that:

During the calendar year ended December 31, 2023, we completed 3 reverse stock splits in order to regain compliance with NASDAQ Listing Rule 5550(a)(2). In May 2023, we completed a 1-for-25 reverse split of our outstanding shares of common stock. In August 2023, we completed a 1-for-9 reverse split of our outstanding shares of common stock. In December 2023, we completed a 1-for-100 reverse split of our outstanding shares of common stock.

On January 24, 2024, the Company received formal notice from The Nasdaq Stock Market LLC confirming the Company had regained compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2). On March 6, 2024, the Company received formal notice from Nasdaq confirming that it had regained compliance with the annual shareholder meeting requirement set forth in Nasdaq Listing Rule 5620(a).

Nasdaq Rule 5550(a)(2) provides that a Capital Market issuer must maintain a “minimum bid price of at least $1 per share.” 

Those issuers have additional requirements as well:

• At least two registered and active Market Makers, one of which may be a Market Maker entering a stabilizing bid;
• Minimum bid price of at least $1 per share;
• At least 300 public holders;
• At least 500,000 publicly held shares; and
• Market value of Publicly Held shares of at least $1 million.

That doesn’t sound particularly daunting, but for many CE companies, it is, and the situation is becoming worse.

Companies whose stock has traded below $1 for more than 30 consecutive trading days will be sent a delisting notice. They will then have 180 days to regain compliance by maintaining a minimum $1 closing bid price for a minimum of 10 consecutive days during the 180-day period. If the company is a Nasdaq CM issuer, it may apply for another 180 days in which to achieve compliance. Writing for Bloomberg, securities attorney Spencer Feldman notes that:

As of Dec. 8, [2023] 557 companies listed on these exchanges were trading below $1 per share, up from fewer than a dozen in early 2021, according to Dow Jones market data. Of these companies, 464 were listed on the Nasdaq Stock Market and subject to possible delisting.

Feldman does not examine why this has only begun to happen on the Nasdaq in the relatively recent past and in the middle of a strong bull market. He says only that many of the companies in difficulty are tech issuers “with some well-known names that would normally be considered promising emerging growth companies.”

We can explain at least in part: At the end of September 2021, compliance with the SEC’s amendments to Rule 15c2-11 was required. Rule 15c2-11 applies only to over-the-counter issuers, but the result of required compliance affected the entire marketplace. Thousands of stocks were tossed to the Grey (or Expert) market; those that remained lost volume. Penny players looked elsewhere for the volatility they craved and found the so-called meme stocks, risky crypto plays, options, and more. Many of the weaker meme stocks were listed on the Nasdaq CE. When the penny crowd moved in, some were pumped and dumped. The result was compliance problems.

In its proxy statement proposing the upcoming split to shareholders, the company says:

The primary purpose for the proposed Reverse Stock Split is to increase the per share market price of our Common Stock to meet the Nasdaq Bid Price Rule (as defined below) for continued listing on The Nasdaq Capital Market. The Reverse Stock Split will only be implemented if necessary to regain and maintain compliance with the Nasdaq Bid Price Rule. Our Board has recommended that this proposed amendment be presented to our stockholders for approval. Our stockholders are being asked to approve the proposed amendment pursuant to Proposal 1 to effect a Reverse Stock Split of the issued and outstanding shares of Common Stock. Accordingly, effecting a Reverse Stock Split would reduce the number of outstanding shares of Common Stock.

Has MULN lost compliance with the Nasdaq listing standard? Yes, its bid price, currently $0.1206, is well below $1. It’s been below $1 for more than 30 consecutive days: during the past month, its high was $0.575, and its low was $0.108. It is not among the 531 issuers on the Nasdaq’s list of Noncompliant Companies. 

Each trading day, Nasdaq publishes a list of companies that are noncompliant with the continued listing standards. In most cases, a company is added to the list five business days after Nasdaq notifies the company about its noncompliance and is removed from the list one business day after Nasdaq determines that the company has regained compliance or no longer trades on Nasdaq.

Every item is clickable; it’s easy to see why each issuer is noncompliant. In some cases, there’s more than one reason, and many go back for quite a while. Failure to maintain a bid price above $1 seems to be the most common. 

Interestingly, the Nasdaq can use its own judgment when removing companies from the list. Feldman rightly says that reverse splits “rarely achieve a lasting solution to the bid price deficiency for struggling companies, ultimately resulting in other deficiencies based on the company’s market value when the company’s stock price sinks to near pre-split levels. Therefore, Nasdaq will wait for the reverse split price to settle in the market before lifting the bid price deficiency.”

In any case, Michery will not be receiving another delisting letter; for the moment, he’s solved his problem. That was made easier for him by a change in Delaware corporate law. As of August 2023, “Reverse stock splits and increases or decreases in the number of authorized shares will now require approval by a majority of votes cast, rather than a majority of shares outstanding; provided that the class of stock in question is listed on a national securities exchange and the company would continue to meet listing requirements as to the minimum number of holders following the reverse split.”

But how long will the fix last? MULN is known for its relentless dilution; how long before the shares outstanding will once again be high enough to drive the stock price below a buck?

Thanks to a new Nasdaq rule approved by the SEC in 2020, the exchange can get tougher with issuers that appear to be seriously troubled. If an issuer is already having difficulty and is trying to get its stock price over $1 but falls below $0.10 for ten consecutive trading days, the exchange may cancel the 180-day grace period and delist the stock immediately. Further, if it loses compliance after regaining it thanks to one or more reverse splits resulting in a “cumulative ratio of 250 shares or more to one over the two-year period immediately prior to such non-compliance,” it could be delisted. 

The emphasis is on “could.” As with everything Nasdaq, there are exceptions. The ones that apply in these cases seem to make the new rule pointless:

The Exchange stated that a company that is not eligible for a compliance period under the proposed rule change would receive a Staff Delisting Determination, which it could appeal to a Hearings Panel. The Hearings Panel could grant the company an exception to remain listed for a period not to exceed 180 days from the date of the Staff Delisting Determination if, according to the Exchange, it believes the company will be able to achieve and maintain compliance with the bid price requirement. However, the Exchange also proposed to modify its listing rules so that following such a Hearings Panel exception the company would be subject to the procedures applicable to a company with recurring deficiencies as described in Rule 5815(d)(4)(B). As a result, if within one year of the date a company regained compliance (i.e., in those cases where the company was not granted a compliance period under proposed Rule 5810(c)(3)(A)(iii) and (iv) but the Hearings Panel had granted an exception during which time the company came into compliance) the company again fails to maintain compliance with the bid price requirement, the company would not be eligible for a compliance period and instead the Listing Qualifications Department will issue a Staff Delisting Determination, which can be appealed to the Hearings Panel.

So. The stock could be delisted—in which case it’d end up on the OTC—but it could appeal that, which no doubt would take months, or perhaps even a year or more? Or would it stay on the exchange during that time? By contrast, FINRA, which deals with compliance issues that arise among OTC stocks, is far stricter. There is, of course, no minimum bid price for penny stocks. But if FINRA feels a company is doing too many reverse splits, it may delay processing requests or, in some cases, may simply refuse to allow the split.

Can a reverse split result in a positive outcome? Only occasionally. Sometimes, a split will be factored into a merger agreement. But if the merger leads to a private company becoming a public company, then with luck, it may be considered a good thing. As far as the investing public is concerned, it doesn’t matter because retail is unlikely to own any stock in the original private issuer. Once the company is public, on the OTC or with an exchange listing, it will start afresh.

Some say that another benefit of reverse splits is that they force short sellers to cover their positions. That is not true. Those short positions will split along with the stock.

Virtu’s Petition and the Nasdaq’s Response

All this has been bothering some market professionals. In recent years, Nasdaq has made several rule changes that, to some extent, address the problem. It filed another proposed rule at the end of June 2024. The change is simple and, in our opinion, won’t make much difference. Its purpose is, the exchange says, “to modify the application of the bid price compliance periods where a company takes action that causes non-compliance with another listing requirement.”

The rulemakers begin by explaining how issuers may use reverse splits to regain compliance with continuing listing standards. They evidently understand that those splits can lead to other problems:

The share reduction caused by the reverse stock split results in a proportional reduction in the number of Publicly Held Shares4 and, depending on how fractional shares are treated, may also reduce the number of holders of the company’s securities. As such, implementation of a reverse stock split could trigger non-compliance with other listing rules and start a new deficiency process.

That is true. If the number of shareholders is fewer than 300, the issuer will once again lose compliance. But that doesn’t happen. Why not? Because just about all issuers have the sense to round up fractional shares when they do a reverse split. If the company is a serial splitter, it’ll probably end up with large numbers of investors who own one share and will never bother to sell it. The number of publicly held shares could also dip below 500,000, as noted above, but that can easily be fixed. All that’s needed is a quick Reg D offering. After all, the first thing most of these issuers do after a reverse split is sell stock.

Not to worry: as things stand now, even if the issuer facing one or both of these problems has difficulty planning ahead, it will be given 45 calendar days to submit a plan to regain compliance and might even get a grace period lasting up to 180 days! The exchange’s new idea is to require issuers to remain compliant with all the rules they may have neglected to consider, or… we’re not sure what.

And that is it. We think Nasdaq could do better. So does at least one other market participant.

On July 15, 2024, Virtu Financial submitted a petition for rulemaking to the SEC—yes, anyone can do that—because it was unhappy with what it saw as too much junk listed on the Nasdaq. Its object was to “initiate rulemaking proceedings that would prohibit National Securities Exchanges from listing high risk ‘penny stocks’ and mandate additional disclosures from issuers that would facilitate investors’ ability to assess the risks typically inherent in such stocks.”

Virtu begins by reminding the Commission that the Penny Stock Reform Act of 1990 was intended to require the SEC to address the sleazy tactics used to sell penny stocks to naive investors and to require broker-dealers to provide information about the risks they presented. One feature of the Reform Act that’s fallen by the wayside is that broker-dealers were required “to provide heightened disclosures about their risks, and instituting a cooling off period of two days from the date the disclosure was provided before allowing penny stock transactions to occur.” With the advent of online brokers and electronic trade execution, the idea seems quaint.

Virtu echoes what Spencer Feldman said: That in early 2021, there were very few Nasdaq stocks that traded below a dollar, but as of December 2023, there were 557 of them. The problem, Virtu believes, is the laxity of the exchange’s listing standards. The firm is specific about what’s wrong with these companies, finding fault with toxic lenders and their destructive tactics:

A primary attribute of these issuers is that they feature capital structures that result in serial dilution of the ownership interests of public purchasers of their securities. Ownership of their shares is opaque, with much of their equity owned by insiders and parties who purchased significant amounts of the issuers’ outstanding common shares and derivative securities that convert into common shares in unregistered private offerings, although in some instances also registered offerings. Often, their derivative securities convert to common shares at a discount to current market prices, which incentivizes short sales by the holders of these securities as both the short positions and the conversions of their derivative securities benefit from the activity. As a result of the dilutive effect of these capital structures and the serialized dilutive practices, these issuers often cannot maintain a price above $1 and inevitably fail to meet the continuing listing standards of the exchanges.

It goes on to note that reverse splits are in greater use than at any time in the past: according to the Wall Street Journal, “there were 495 reverse splits of exchange-listed stocks in 2023, up from 288 in 2022 and the largest annual number in the past two decades.” Virtu could be describing MULN when it notes that such issuers “often have multiple public and private offerings.” There’s hardly a time when Michery isn’t selling stock or convertible securities. Virtu also hasn’t missed the increased promotional activity involving those stocks in social media.

As we’ve, Nasdaq has proposed a new rule that would make it harder for issuers to achieve compliance with minimum bid requirements through reverse stock splits. However, the proposal isn’t strong enough to have the effect desired by Virtu. What does the broker-dealer suggest? It’s made a list of five recommendations.

First, it would like to see the exchanges adopt more rigorous initial listing standards, standards tough enough to “prevent the listing of risky issuers.” The exchange should avoid dealing with companies that are big diluters and accomplish that dilution through the issuance of convertible securities. Second, the exchanges should strengthen continuing listing standards. Virtu recommends that a stock that trades below $1 for 15 consecutive days should be considered to have lost compliance with the minimum bid requirement and that the period for curing the deficiency should be reduced from 180 days to 60 days. Finally, they’d like to see the possibility of requesting a second grace period eliminated. 

The third recommendation is for the exchanges to limit excessive reverse splits. Nasdaq seems to understand it’s a problem, but as we’ve seen with MULN, though it has a rule supposedly holding reverse splits within a two-year period to a 1:250 ratio, it evidently offers no meaningful punishment for those that violate the limit. Yes, Nasdaq says that if an issuer exceeds the limit and falls out of compliance with another listing standard, it’ll be shown no mercy. But as we’ve seen, that’s unlikely to happen. Further, Virtu suggests that the Nasdaq “eliminate the grace period for curing a deficiency for any issuer that has engaged in one or more reverse stock splits over the prior three-year period with a cumulative ratio of 10-for-1 or greater.”

Fourth, Virtu would like to see exchanges required to keep an eye out for misleading and manipulative promotional activity. Finally, the Commission should adopt amendments to Regulation S-K that will help investors assess the risks they’ll run if they invest in penny stocks trading on the national exchanges:

Specifically, the Commission should require disclosure of the hypothetical impact on the issuer’s share price if, within 180 days following the issuer’s initial listing on an exchange, all restricted shares become unrestricted, all insider options are exercised, and all convertible securities are converted into common stock. Relatedly, the Commission should require issuers to disclose, based on foreseeable needs, how much additional common stock, or securities convertible into common stock the issuer projects it will need to issue within 180 days of initial listing.

We are concerned that retail shareholders may not be aware of how dilutive corporate actions can negatively impact a company’s share price. Requiring issuers to affirmatively disclose their projected share issuances and conversions, and to include a hypothetical analysis that demonstrates the dilutionary effect of the conversion of restricted and/or convertible shares and insider options, would better inform investors about the potential risks of investing.

We believe Virtu’s recommendations are very good ones. Brief as the petition is, it touches on the most important ways companies like Mullen are able to game the system. The firm clearly understands that toxic lenders and the horrific dilution they bring with them are among the most pernicious market participants active today. The SEC has had some success in limiting their activity by suing them as unregistered dealers, but when they move to the Nasdaq, they seem able to call what they’re selling PIPEs and go on their merry way. 

We’d like to see the Virtu petition adopted, but fear its chances of making the cut are slim. The Commission is rarely open to this kind of advice from “outsiders.” Mullen is just one of a great many issuers that have taken advantage of the Nasdaq’s misplaced generosity, and of its own shareholders as well. They all need to be stopped.

To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
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