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.