Strategic Review – 50% Upside
A pretty interesting situation with a strategic review and potential liquidation of a failed SPAC. Embark Technology is a software developer for autonomous truck driving that currently trades at a 50% discount to net cash. The company has recently laid off 70% of its workforce, closed Houston and South California’s offices, and announced a strategic review. Several aspects suggest that liquidation might be in the cards.
- EMBK’s CEO letter detailed that the company had already tried looking for a buyer and had also explored financing options, however, all of these alternatives have failed.
- The ongoing organizational restructuring seems like the first step in liquidation – the CEO’s letter also outlined that the remaining 30% of employees will be focusing on an orderly wind-down of the operations. Several days after the announcement, EMBK’s COO resigned.
- Following the announcement, special-situations-focused fund BML Investment Partners filed 13G indicating a 5.2% stake in EMBK. The fund’s involvement here is a strong positive. BML is mostly a passive investor but also has a track record as an activist. BML’s recent campaign in MTCR (covered here) gives confidence that the fund can fight for the interests of minority shareholders if needed – BML has successfully derailed the sale of the company and turned it into a profitable liquidation instead. The fund was also involved in lucrative Imara’s case, which was covered multiple times on SSI (here, here, and here).
- Two co-founders of EMBK own around 18.6% of EMBK. Several prominent institutional investors (Embark’s SPAC PIPE sponsors) own another 30% stake – Sequoia Capital (11.5%), affiliates of Mavern Ventures (just short of 5%), Data Collective (13.7%). The incentives should be well aligned to preserve cash and maximize shareholder returns.
EMBK may be one of the nastiest examples of just how dangerous the 2021 SPAC bubble was. The company went public through a $5bn SPAC in Nov’21. Adjusting for the reverse split (1 for 20 in Aug’22), EBMK shares are now worth $0.13/share for a market cap of around $60m. While half of SPAC investors redeemed their funds, EMBK received substantial $200m backing from credible PIPE investors such as Sequoia Capital, Knight-Swift Transportation, and several prominent VC firms. EMBK was/is developing a self-driving system that can be retrofitted to almost all US trucks. In 2021 the company was projecting almost $1bn in revenues and $0.6bn gross profit by 2024, however, the development of the autonomous vehicle system turned out to be much more expensive and difficult than expected. The product is still in the proof-of-concept stage with revenues nowhere in sight.
Management launched the strategic review as, according to the CEO, ‘the capital markets have turned their backs on pre-revenue companies, just as slipping manufacturer timelines have delayed the prospect of scaled commercial deployment’. The technology that EMBK has been developing might still be worth something even if the revenue stage has not been reached. The company is partnering with Knight-Swift, the 5th largest trucking company in the US, and in December’22 has provided the first Embark-powered truck to the trucking firm. Any value that management would be able to get for the company’s tech/IP would be a bonus on top of the net cash valuation. However, I’m not very optimistic about it given how EMBK has failed to find a buyer so far.
My calculations below indicate the potential value that shareholders could expect in a liquidation scenario:
- $158m cash as of Q4’22.
- Less $2m – debt as of Q4’22.
- Less $12m – cash burn in Q1’23. Average cash burn (adjusted for stock-based comp) stood at $14.5m/quarter in 2022. Q1’23 should be lower given the restructuring that was announced at the beginning of March.
- Less $11m – restructuring costs. This is the upper limit of the $7-$11m range indicated by management.
- This results in the $133m net cash as of the end of March.
- Less $5m for account payables and accrued expenses.
- Less $6m for lease termination expense (1-year cost of rent).
- Less $10m of cash burn for the next two quarters (the company is already in a wind-down mode and has only 30% of the workforce remaining).
- Less $5m in additional liquidation costs.
- This would leave potential liquidating distributions at $107m.
Obviously, that is a rough (but hopefully conservative) guess estimate only and it is not even clear if liquidation is being seriously considered by management. Still the $107m potential liquidation value after two more quarters of cash burn compares very favorably relative to the fully diluted market cap of $66m. The market cap is calculated using diluted share count of 25.3m (current shares of 23.4m + 0.725m outstanding stock options + 1.15m RSUs). By the time the strategic review is concluded, any additional stock compensation might further increase the share count, however, the dilution shouldn’t be material. Although the stock-comp appears to be very large in the cash flow statement, most of it is just a recognition of previous expenses. The actual amount of RSUs issued in 2022 was 1.3m and is likely to be lower this year due to the restructuring and reduced headcount.
Altogether that is more than 50% upside from the current prices.
The key thing that keeps me cautious about this setup is that EMBK is a failed SPAC that has already almost fully destroyed shareholder value.
how much dilution will there be from class B shares?
Class B shares are already included in my 25.3m diluted share count. 19.1m class A shares + 4.3m class B shares + from options and RSUs. Class B shares have 10 votes, but that does not make any difference in the current situation.
Thanks for the idea. Curious why you don’t think this makes any difference in the current situation?
From the 10-K:
“Because of the ten-to-one voting ratio between Class B and Class A common stock, the holders of Class B common stock collectively control a majority of the combined voting power of common stock and therefore are able to control all matters submitted to Embark Technology stockholders for approval. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments to Embark’s organizational documents, and any merger, consolidation, acquisition, sale of all or substantially all of Embark’s assets, dissolution or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for Embark’s capital stock that you may feel are in your best interest as one of Embark’s stockholders.”
In my head this weakens/nullifies the involvement of other minority shareholder oriented holders, e.g. BML ?
I meant to say that BML’s involvement (even a passive one) is positive from the signaling perspective – it’s a fund with a known track record of investing in special situations, so gives a bit of confidence in the setup.
The company is controlled by founders who have almost 20% economic interest, so in that sense, incentives with minority shareholders are well aligned. Besides, the same founders/management has already laid off 70% of the workforce, another sign of shareholder value preservation.
So kind of there are some signs that the setup is moving in a positive direction, but I agree that the case is risky.
Isn’t the key risk here the class actions? Do you have a view on the potential liabilities from the lawsuits and how that may affect potential liquidation proceeds? It seems if EMBK is tied up in litigation it might also hold back cash from initial liquidation distributions.
That might be a risk and I should have mentioned it in the write-up. However, the class action lawsuit (Hardy v. Embark Technology) seems rather weak with allegations centered on insufficient/inaccurate information in the proxy and other documents. It remains to be seen if this gets dismissed by the court. Whereas the derivative lawsuits are against former and current directors rather than Embark directly – the company is the only nominal defendant in these lawsuits.
Having said that, failed SPACs now face litigation across the board. The cases that so far are proceeding to the trial seem to be more substantial than EMBK. But I am not a lawyer, so it is my superficial opinion only.
In their 10K on 3/28 they disclosed: Company had a total cash balance of approximately $133 million held in the deposit accounts at SVB. The cash balance with SVB at the time of closing represents all of the Company’s cash and cash equivalents.
So I believe you will need to adjust for this cash burn, which reduces potential liqudiation value by $25m.
Potential liquidation value becomes $82m
Good find, but I think you are overestimating the cashburn. The $158m cash balance I have indicated was as of Dec’22, and I have noted that after Q1 cash burn and restructuring costs, net cash balance would be $133m at the end of March. Thus this ties in roughly. There might also have been some working capital pay down and etc.
Probably the March-end cash balance will turn out slightly lower than my estimate but doubt this will materially be different.
Fair enough, makes sense. Thank you.
I am flattered that the ideas I cover on Quick Pitches appear on VIC a couple of weeks later.
Yesterday’s post on EMBK: https://www.valueinvestorsclub.com/idea/EMBARK_TECHNOLOGY_INC/3338734331
Monday’s post on NLTX: https://www.valueinvestorsclub.com/idea/NEOLEUKIN_THERAPEUTICS_INC/5326421343
No new info to add for SSI subs – the pitches are very similar to the ones on SSI.
$2.88/sh
We was robbed
Still comes down to shareholder vote. Though given cofounders and SPAC PIPE’s combined just under 50%, is there even a remote chance for rejection and higher bid?
I think this is a done deal. Disappointing. The two founders have voting control through Class B shares and Sequoia also signed a voting agreement:
“In total, the stockholders that signed the Voting Agreements represent approximately seventy-three percent (73%) of Embark’s outstanding voting power based on the number of shares of Common Stock outstanding as of May 23, 2023. Under the Voting Agreements, the stockholders party thereto have agreed to vote their shares of Common Stock in favor of the adoption of the Merger Agreement, not transfer their shares of Common Stock, subject to certain exceptions, and certain other matters.”
https://www.bamsec.com/filing/110465923064697/1?cik=1827980
Anyone have view on warrant payout amount?