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CONTINGENCIES AND CLAIMS | 12 Months Ended
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Sep. 30, 2021
CONTINGENCIES AND CLAIMS |
CONTINGENCIES AND CLAIMS | NOTE 17 – CONTINGENCIES AND CLAIMS ASC 450 governs the disclosure and recognition of loss contingencies, including potential losses from litigation, regulatory, tax and other matters. The accounting standard defines a “loss contingency” as “an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur.” ASC 450 requires accrual for a loss contingency when it is “probable that one or more future events will occur confirming the fact of loss” and “the amount of the loss can be reasonably estimated.” From time to time, we are subject to asserted and actual claims and lawsuits arising in the ordinary course of business. Company management reviews any such legal proceedings and claims on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and it discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our consolidated financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, management evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. We do not record liabilities when the likelihood is probable, but the amount cannot be reasonably estimated. Preferred Management Partners, Inc. – Consulting Agreement On September 23, 2021, MAI entered into a consulting arrangement with Preferred Management Partners, Inc. The Company hereby engages Preferred Management, Inc. to resume negotiations between MAI and Qiantu Motor Cars to enable the Company to procure the intellectual property ownership rights related to the K-50 automobile. As compensation for entering into this agreement and providing services to MAI, the consultant will receive 750,000 unrestricted publicly traded shares of the Company’s common stock registered on Form S-8 registration statement. If the consultant is successful, the Company will pay the consultant an additional 750,000 unrestricted shares of common stock registered on Form S-8 registration statement. As of this date, the Form S-8 registration statement has not been filed; however, the transaction is properly accounted for within the prepaid account and the liability for to issue future shares on the balance sheet. Debt Financing On September 3, 2021, the Company received debt financing through MTI entering into an unsecured $6.6 million convertible note agreement with TDR Capital. The initial sale and purchase was comprised of a $550,000 convertible note and detached warrants to acquire up to 2,180,750 shares in MTI stock (169,764 MAI warrants). The second sale and purchase was comprised of a $6,050,000 convertible note and detached warrants to acquire up to 23,988,500 shares in MTI stock (1,867,423 MAI warrants). The series of funding began October 5, 2021 and ended on 11/5/2021, the aggregate funds received was $5.44 million, net of OID of 10% or $0.61 million. Refer to Note 5, Debt and Note 19, Subsequent Events. Equity Financing On May 7, 2021, MTI executed a $20,000,000 equity purchase agreement with the Acuitas Group Holdings, who committed to purchase shares of the MAI Series C Preferred Stock at a price of $8.84 per share. Upon NASDAQ uplifting and trading volume of stock, this equity will commence funding. On November 4, 2021, Acuitas Group Holdings wired $20,000,000 to MTI before the merger effective date with Net Element that occurred on November 5, 2021. As part of the transaction, Acuitas Group Holdings received 5,915,639 warrants with an adjusted exercise price of $8.83 and matures in five years. Cambria – Investment Banking Services Agreement On July 16, 2021 and September 8, 2021, MTI agreed to a proposal with Cambria a placement agent services for investment offerings up to $3,000,000. As a result of the agreement, MTI is obligated to pay a financing fee of 6.0% of aggregate gross proceeds and warrants equal to 6.0% of the offering. To date, Cambria has raised $750,000 in equity financing. The equity purchases of Series C Preferred Stock have detached warrants with strike price of $8.84. The warrants have a five-year maturity. Since the Series C Preferred Stock has not been issued to the investor due to pending merger between MAI and Net Element, the transaction is being accounted for within the prepaid account and the liability for to issue shares on the balance sheet. Table below represents the post-merger shares for equity capitalization. As of September 30, 2021, there was no issuances of Series C preferred Stock and associated warrants. ​
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Date |  | Series C Preferred Stock |  | Warrants |  | Additional Warrants |  | Maturity Date |  | Exercise Price
7/23/2021 | ​ | $ | 75,000 | ​ | 1,983 | ​ | — | ​ | 7/23/2026 | ​ | $ | 8.84
7/23/2021 | ​ | ​ | 50,000 | ​ | 1,322 | ​ | — | ​ | 7/23/2026 | ​ | $ | 8.84
7/23/2021 |  | ​ | 100,000 |  | 2,644 |  | — |  | 7/23/2026 | ​ | $ | 8.84
7/23/2021 |  | ​ | 75,000 |  | 1,983 |  | — |  | 7/23/2026 | ​ | $ | 8.84
7/23/2021 |  | ​ | — |  | 1,528 | * | 3,056 | * | 7/23/2026 | ​ | $ | 8.84
9/8/2021 |  | ​ | 175,000 |  | 4,626 |  | — |  | 9/8/2026 | ​ | $ | 8.84
9/8/2021 |  | ​ | 175,000 |  | 4,626 |  | — |  | 9/8/2026 | ​ | $ | 8.84
9/8/2021 |  | ​ | 100,000 |  | 2,644 |  | — |  | 9/8/2026 | ​ | $ | 8.84
Total | ​ | $ | 750,000 |  | 21,356 |  | 3,056 |  | — | ​ |  | —
| ● | Represents placement agent fees to Cambria.
Drawbridge Acknowledgement, Waiver and Consent On July 16, 2021, MTI and Drawbridge entered into an agreement whereby Drawbridge acknowledged, waived, and consented to the contribution and spin-off of Mullen’s EV assets into a new entity. As indicated in Note 1 to the financial statements, the spin-off occurred occur immediately prior to the merger with Net Element. As part of the agreement, Drawbridge was paid $10,000,000 that was applied towards the outstanding principal balance and includes a waiver of default. The principal reduction to the indebtedness to Drawbridge occurred on November 15, 2021. International Business Machines (“IBM”) We previously recorded a $4.5 million liability associated with a lawsuit with IBM, in which IBM contended that we had not fulfilled our obligations pursuant to a contract entered into during 2017. On April 28, 2020, the Supreme Court of the State of New York granted summary judgment in favor of IBM’s claim for breach of contract. The Court, however, found that a trial (inquest) was required to determine the damages to which IBM is entitled. We proposed an offer in settlement to resolve the matter, with the parties proceeding under the Joint Development and Technology License Agreement and all rights restored to us under the Trademark License Agreement. On December 1, 2021, the Supreme Court of the State of New York entered a judgment of $5.6 million to IBM. On December 2, 2021, we filed a Notice of Appeal. As a result, we recorded an additional charge, increasing the liability to the adjudicated amount. Federal and State Tax Liabilities We have recorded a $3.8 million liability at September 30, 2021 associated with past due amounts owed to the Internal Revenue Service (“IRS”) and the Employment Development Department of California (“EDD”) for failing to remit payroll taxes associated with MTI and the Company’s employees. The IRS has filed a lien on substantially all of our assets. On April 28, 2021, MTI entered into an installment agreement with the EDD to pay $10,000 per month related to unpaid state payroll tax liabilities of $388,352 plus accrued interest. Monthly payments of $10,000 are being made and will continue until paid in full. Raymond James and Associates (“RJA”) – Investment Banking Services Agreement On May 5, 2020, MTI entered into an agreement with Raymond James & Associates for public offering and placement agent services. The agreement called for payment of a cash retainer of $50,000, which remains unpaid. Upon the closing of any public offering, regardless of whether RJA procured the agreement regarding the offering, we are obligated to pay a financing fee of equal to the greater of a) 6.0% of aggregate gross proceeds and b) $3,000,000. Linghang Boao Group, LTD In November 2019, we entered into a three-year Strategic Cooperation Agreement (“SCA”) with Linghang Boao Group LTD to co-develop a Solid- State Battery Management system with a 480 - 720-mile Driving Range. The Company’s total financial commitment under the SCA is $2,196,000. On December 3, 2019, we paid the first installment of $390,000. The remaining installments are payable upon the earlier of certain dates or the achievement of defined milestones. The contractual target dates and milestones have been severely disrupted due to the occurrence COVID-19. As a result, our management believes the COVID-19 pandemic represents a Force Majeure event (that is, the pandemic has impacted our and Linghang Boao Group LTD’s ability to meet their respective contractual obligations due to restriction in movement, stoppage of production, increase in costs due to scarcity of raw materials components, labor shortages, shortage of funds, disruption in the supply chains, U.S. governmental closures of ports/borders and travel restrictions). Based on the foregoing, we believe there is no breach of contract due to our failure of performance. Unfortunately, we have sustained a loss of $390,000 at September 30, 2020 due to contract nonperformance and force majeure. There are no accrued liabilities recorded for any remaining milestone payments at September 30, 2021. Our management has notified Linghang Boao Group of the decision to invoke the force majeure provision of the Strategic Cooperation Agreement due to the inability of the parties to perform caused by the global Pandemic. ASC GEM Equity Line Financing On January 4, 2021, MTI entered into a $350,000,000 equity line financing agreement with GEM Global Yield LLC (“Purchaser”) and GEM Yield Bahamas Limited (“GEM”). MAI plans to issue and sell common shares to GEM up to the number of common shares having an aggregate value of $350,000,000. The Purchaser will buy MAI shares based on the operational needs and/or drawdowns of the Company. If the aggregate limit has been reached, the Purchaser will increase the aggregate limit in an amount up to $150,000,000. The commitment fee, equal to 2% of the Aggregate Limit, will be charged for each draw-down. The fee may be paid in cash or freely tradeable common shares of the Company. The commitment begins when we effect the public listing of MAI common stock for trading on a U.S. national securities exchange. The agreement matures in 36 months after the public listing of MAI common shares. Pursuant to the GEM Agreement, the commitment began on the “Public Listing Date”, defined as the date that we effected (i) a “Reverse Merger Transaction” (defined in the GEM Agreement as a reverse merger of a similar transaction between MAI and a special purpose acquisition company whose securities are publicly traded) or (ii) the direct listing of the Company’s common stock on a public market. Further to the GEM Agreement, we are obligated to issue warrants providing GEM the right to purchase up to 6.6% of our common shares outstanding on the Public Listing Date. As the Company is not effecting a Reverse Merger Transaction (that is, Net Element is not a special purpose acquisition company) nor is the Company effecting a direct listing of its common shares, the Company does not believe it is obligated under the GEM Agreement to pay fees nor issue warrants to GEM. In addition, the Company has agreed with a lender of its convertible promissory notes that the Company would not initiate utilization of the GEM Agreement. [HELP ME UNDERSTAND THIS – THE REVERSE MERGER INTO NET ELEMENT DID OCCUR. SO, IS THIS AGREEMENT STILL VALID? NEED TO DISCLOSE THE PROPER RIGHTS AND OBLIGATIONS] Litigation On May 28, 2021, a Net Element shareholder filed a complaint against Net Element and Mullen Acquisition, Inc. and certain named individuals regarding the proposed merger transaction. The complaint alleges, among other things, a potential dilution of the value of Net Elements stock and a failure to act in with a fiduciary duty to its stakeholders. On September 3, 2021, a Net Element shareholder filed a lawsuit against Net Element, Mullen Technologies, Inc. and Mullen Acquisition, Inc. and certain individuals regarding the proposed merger agreement. The lawsuit alleges material omissions regarding the merger transaction and seeks to prevent the consummation of the merger agreement, as well as certain other equitable relief. Based upon information presently known to management, the Company believes that the potential liability from the May 2021 complaint and September 2021 lawsuit, if any, will not have a material adverse effect on its financial condition, cash flows or results of operations. Therefore, no liability has been reflected on the financial statements. Odyssey Group Settlement On August 13, 2021, MTI and Odyssey Group reached a settlement concerning disputes and differences that arose from collections on invoices and liens pending pursuant to Odyssey’s Client Account and the Odyssey Group Consulting Agreement. Odyssey alleged that the MTI owed $503,637 at March 31, 2021. The parties agreed that Odyssey would receive $50,000 and 500,000 shares of MTI common stock (pre-merger). Additionally, Odyssey will receive an equivalent of $10,000 in cash or common stock from Mullen. The obligation to pay Odyssey may be terminated by either party upon 30-days’ notice by either party. A release of liability for the amounts owed on the Consulting arrangement was signed and executed on the settlement date. The Company has issued Odyssey the 500,000 common shares worth $1.25 million and paid $50,000 in cash and common stock. The $10,000 in cash or common stock provision has not been terminated by either party.

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