Mullen (NASDAQ:MULN) fans were holding their collective breath last week. The EV startup had just undergone a 1-for-9 reverse split on Aug. 11, and the company needed to keep its stock price above $1 for 10 consecutive days by Sept. 5 to regain compliance with Nasdaq listing rules.

For the first several days, things seemed to go Mullen’s way. Every time shares sank below $1, buyers would jump in to keep prices aloft. One final buying spree on Aug. 15 drove prices from 98 cents to $1.02 in the last minutes of the trading day.

But on Aug. 16… DISASTER!

Mullen’s beaten-down stock closed at 98 cents, snapping its winning streak. According to Nasdaq listing rules, it now faces potential delisting when markets open on Sept. 6. That would demote the EV startup to the illiquid over-the-counter markets — making it harder for investors to buy.

But is that actually the case?

Mullen Stock: What the Nasdaq Listing Rules Say

Nasdaq listing rules require companies to maintain a minimum $1 listing price to remain on the exchange. If a firm closes down 30 days in a row, Nasdaq’s staff can start the process of delisting the stock.

There are some ways to regain compliance. Most that fall below $1 receive a 180-day grace period, which typically can be extended by another 180 days. That exception has allowed hundreds of stocks to trade under $1 for extended periods. As of Aug. 21, 329 entities find themselves in this penalty box.

During this period, companies can undergo bouts of self-help. Management can increase sales, sell off underperforming businesses, bring in new talent, or decrease costs. An entire industry of turnaround consultants exists to help these fallen stars regain their mojo. Many, like Buzzfeed (NASDAQ:BZFD), drum up short-term excitement among retail investors.

Other firms decide to sell themselves to the highest bidder, absorb another entity in a backdoor listing, or perform other acts of financial engineering to raise their market capitalization.

However, many still fail to raise their shares above $1. Turnarounds are challenging, and none of these feats have worked for Mullen so far.

For these laggards, reverse share splits become an option. For instance, if a $500 million firm has 1 billion shares outstanding (i.e., each share is worth 50 cents), management could convert 10 old shares into a single new one. All else equal, that reduces shares outstanding to 100 million, driving each share to $5. It’s a mathematical trick that pumps up share prices without changing an enterprise’s overall value, and one that Mullen used on May 4, 2023 after reverse-splitting shares in a 1-for-25 ratio.

The 250-for-1 Rule

The Nasdaq Exchange has some guardrails against excessive reverse stock splits. According to the 5800-Series rules:

If a Company’s security fails to meet the continued listing requirement for minimum bid price and the Company has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 250 shares or more to one, then the Company shall not be eligible for any compliance period specified in this Rule 5810(c)(3)(A) and the Listing Qualifications Department shall issue a Staff Delisting Determination under Rule 5810 with respect to that security.

It’s likely why Mullen split its shares a second time by only 1-for-9 on Aug. 11. The EV startup had already undergone a 1-for-25 reverse split, so the latest round was the maximum it could have done (to the nearest whole number) without exceeding the 1-for-250 ratio.

However, the rule is slightly confusing. According to a call with Nasdaq representatives, companies can reverse split by more than 1-for-250 if they want. The only penalty is that they become ineligible for the 180-day extension window mentioned above. They also become ineligible for any additional reviews since shares receive an immediate staff delisting determination.

That means Mullen could reverse split its shares in a 1-for-100 ratio, gain a $60 share price, and remain relatively confident that it will stay above a $1 price target for at least 10 days. Even the most cynical short-sellers will realize that Mullen has significant cash reserves that put a floor on stock prices. In this instance the company will lose its 180-day extension period, but it won’t need it since shares have traded above $1 for 10 consecutive days.

But the time for that is running out. The 10-consecutive-day rule means Mullen must enact a split by Aug. 22 to use this loophole.

What’s Mullen’s Plan?

Avoiding another stock split suggests two things.

First, it tells us that Mullen’s management is willing to roll the dice on a Nasdaq appeal. Shares of the EV maker traded above $1 (before its 1-for-9 split) between May 4 and May 19 this year, a 12-business-day period. The company could use that fact to argue that it has regained compliance and that remaining under a 1-for-250 share split affords them the consideration.

Second, it appears that Mullen’s management is concerned that the Nasdaq compliance team will increase the 10-day compliance period to 20 days or more — a move allowed by rule IM-5810-2. Here’s the text of the rule:

Staff may, in its discretion, require a Company to satisfy the applicable Price-based Requirement for a period in excess of ten consecutive business days, but generally no more than 20 consecutive business days, before determining that the Company has demonstrated an ability to maintain long-term compliance. 

Increasing the 10-day rule to 20 days would nullify the period in May where shares traded above a dollar. It would also void any period from now until Sept. 5 that shares trade above $1, even if shares were reverse-split again.

The EV firm should be worried. It missed its annual report deadline in December 2022 after failing to value its outstanding warrants in time. Mullen has also been sued by multiple shareholder groups, including a suit that has already cost the company $7 million in interim arbitration payments. No matter how you look at it, time for Mullen’s management is running out.

What’s Next for Mullen Stock?

I’ve long warned investors about investing in Mullen. Weak corporate governance and dilutive share offerings mean that every $100 invested in the stock during its November 2021 reverse merger is worth just 3 cents today.

In an alternate universe, Mullen could have succeeded. CEO David Michery is a proven master of raising money from retail investors, and its purchase of Electric Last Mile Solutions and Bollinger Motors gave it an enormous head start in manufacturing capabilities.

But Mullen failed to capitalize on its advantages. Today, the EV startup is fighting to keep its Nasdaq listing. And even if it holds its position on the main board, its prospects continue to diminish, just as its share price has done.

As of this writing, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.