The Electric Last Mile (OTCMKTS:ELMSQ) bankruptcy auction on Oct. 7 is the next big event for Mullen Automotive (NASDAQ:MULN). The question is whether this event will create more positives or more negatives for MULN stock.

Mullen, a fledgling electric vehicle (or EV) maker, has placed a “stalking horse” bid for Electric Last Mile’s assets, which include Electric Last Mile’s manufacturing plant, its inventory, as well as its intellectual property.

On the surface, this deal may seem like something that could get MULN shares (down more than 95% in the past year) moving again in the right direction. After all, the company is looking to move into the production stage and out of the pre-revenue stage.

It does not appear likely that it’s good news for shareholders if Mullen wins this auction. In fact, quite the opposite. Let’s dive in, and see why this event could be a big negative for investors.

MULN Stock and the Bankruptcy Auction

Recently, I went through the details of Mullen’s bid for Electric Last Mile’s assets. The company’s bid consists of $55 million in cash, plus the assumption of $37 million in liabilities, for a total of $92 million in consideration.

So far, Mullen is the highest bidder. This could change, however, when the auction occurs in two days’ time. As Bloomberg reported Sept. 19, 39 potential buyers solicited by the bankruptcy court went to the trouble of signing non-disclosure agreements to perform due diligence.

That’s not to say a bidding war will break out at the auction, but it may suggest that Mullen Automotive could end up having to pay more for the assets. Still, even if the stalking horse bid prevails, and the company isn’t required to pay a penny more for the assets, such a “victory” could be yet another crushing blow to MULN stock investors.

Dilution risks related to this company’s poor capitalization have been a major reason why I’ve been bearish on this stock. Short on cash as it is, the fact management has aggressively pursued this deal suggests more dilutive capital raises are on the way, which is bad news for existing shareholders.

Mullen Shareholders are Likely to Keep Losing

You can blame many factors for the continued decline of MULN stock. The deflating of the “EV bubble,” for one, as well as the falling appeal of growth stocks in light of higher interest rates and recession worries.

But along with these external factors, shareholder dilution has also played a massive role in sending MULN from as much as $15.89 per share late last year, to around 35 cents per share today. During this timeframe, the company has consistently sold more stock and convertible debt to meet its financial obligations. As a result, Mullen’s share count has ballooned.

Last December, Mullen had around 23.4 million outstanding shares. Today, its share count now stands at around 509.3 million. Slicing the pie into nearly 22 times the amount of slices, it’s not surprising the stock now trades at less than five percent of its 52-week high.

Worse yet, despite this dilution, Mullen remains strapped for cash. It needs to raise more money to finance this bid, as well as to keep its existing operations running. With this, you can expect a further issuance of stock/convertible debt. Mullen’s share count will keep expanding, which will push the stock even lower.

The Best Move Now With MULN Stock

This stock may look cheap at current prices, but don’t assume there’s minimal downside from here. Between its current negative operating cash flow (around $18.3 million per quarter), its existing slate of merger deals (its deal for Bollinger Motors) and now a potential deal for Electric Last Mile, Mullen likely needs to raise cash far in excess of its current market cap (around $165 million).

Another 22-fold increase in its share count may not lie ahead, but the MULN share count could continue to multiply. This will reduce the stock’s per-share value and limit upside potential in the event this upstart defies the odds and becomes an established name in the EV space.

If this EV maker wins the Electric Last Mile auction on Oct. 7, there will be even more reason to avoid MULN stock.

MULN stock earns a D rating in my Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.