EMBK - Embark Technology: Does This Tech Stub Cigar Butt Have One Last Puff?

2023-05-03 18:44:53 ET

Summary

• Embark is a pre-revenue de-SPAC that has thrown in the towel and is seeking strategic alternatives.
• Fortunately, its balance sheet holds a substantial cash position.
• A liquidation, company sale, reverse merger, or CVR could prove to be lucrative at the stock's currently depressed share price.
• A deal may be right around the corner.

Company Overview

Embark Technology ( EMBK ) came to the public market via a SPAC created by Northern Genesis Acquisition Corp II in November of 2021. At the time, the stock market valued Embark at ~$5 billion. The firm was creating software that allows long-haul truckers to operate hands-free over long stretches on highways. The drivers navigate each truck through city streets.

Over the company's history, it has accomplished some impressive 'firsts.' Embark executed the first coast-to-coast autonomous haul. It was also the first to notch 10,000 autonomous truck miles and adapt OEM-agnostic trucks. The list goes on from there. The company also initiated a Partner Development Program involving Anheuser-Busch InBev ( BUD ), Bison Transport, Ryder System ( R ), Cummins ( CMI ), DHL, and more.

Like virtually all SPAC-generated public companies, Embark's shares have crumbled since then. Losses have mounted at the pre-revenue firm, and capital markets have soured with rising interest rates and global economic concerns. In early March, CEO Alex Rodrigues (not to be confused with baseball legend Alex Rodrigues) disseminated an email to his employees spelling out the company's existential crisis.

In the email, Rodrigues apologetically told 70% of Embarks workforce that they would be let go. Additionally, the company will evaluate options, including selling assets, restructuring, or shutting down completely. In a separate SEC filing, Embark announced that following an evaluation with a financial advisor, the company is exploring options, including alternative uses of the company's assets and liquidation.

With no operating business, stock's valuation becomes less of an art and more of a science.

Valuation

As of the date of Embark's most recent balance sheet on December 31, 2022, the company had cash and restricted cash of $158.5 million. After assigning zero value for the remaining assets and subtracting cash due for accounts payable, current notes payable, and long-term notes payable, the company's liquidation value is roughly $156 million or about $6.35 (24.5 million shares).

Currently, shares are ~$2.70. That may sound enticing, but Embark will pay wages and severance through June 2. Considering wages and salaries are the company's largest expense, and it will not likely have time to adjust or terminate its several leases by June 2, we can expect 2022 cash expenses to be a reasonable proxy for cash burn from December 31, 2023 balance sheet, until June 2, when headcount reduction payments are complete. After adjusting for non-cash expenses, we expect the company to burn about $40 million from its year-end 2022 balance sheet to June 2, 2023.

After deducting cash burn through June 2, when Embark will have paid the severance promised to laid-off employees, it will be left with a liquidation value of ~$166 million or ~$4.73 per share.

If Embark management can strike a deal or decide to liquidate the company quickly, the $4.73 estimated liquidation value represents a 75% premium to the ~$2.70 current share price.

There is the risk, of course, that a strategic alternative isn't reached as promptly as that. Since time is an important function of our rate of return, let's see what might happen if Embark's search for strategic alternatives drags on for a year to June 2024.

Once Embark pays severance, its cash burn profile changes dramatically. Rodriques' email noted that 70% of the company's employees ( or 230 ) would be let go. That implies that about 100 will remain. If, on average, the remaining employees make $150,000 per year, Embark will burn ~$15 million from June 2023 to June 2024.

Embark's lease portfolio consists of eight leased locations used as transfer points for its autonomous truck fleet testing and one lease for its headquarters. The company doesn't spell out the lease payments for each location, but it averages about ~$19 per square foot per year based on its minimum lease payments disclosed on its 2022 10-K .

Notably, six of the eight transfer point leases will fall off in 2023. For the sake of conservatism, I'll assume they expire at the end of the year, and the remaining leases will be paid without concession or sublease.

Additionally, Embark paid about $2 million in auditor fees in 2022, which I'll replicate for another year. It will likely incur professional fees of an estimated $10 million to execute its strategic alternative.

Subtracting cash burn from June 2, 2023 liquidation value, through June 2, 2024, Embark could liquidate the company's balance sheet cash for roughly $84.6 million or $3.45 per share.

If that estimation holds up, shareholders could see a 28% bump in just over a year. I think this gives today's shareholders an adequate margin of safety in terms of value and time to execution of a deal.

But other considerations could add to the upside of Embark stock.

Further Potential Upside

• Lease terminations - Given the company's current situation, early lease terminations are inevitable. On the other hand, its lease payments are a minor percentage of its cash burn. So, though lease concessions would benefit shareholders, they'll likely be modest.
• NOLs - As of the year-end, Embark held $132 million in US Federal net loss carryforwards and another $216 million at the state level (Delaware). The carryforwards will only come into play if it is acquired by a company that generates taxable earnings. Assuming a 25% federal income tax rate, an acquirer could save $33 million. Delaware charges an 8.7% income tax, which translates into a tax savings of $19 million. An acquirer could save $52 million with the carryforwards. If it is willing to pay $26 million (half of the total tax savings) for the carryforwards, shareholders will receive another ~$1 per share.
• Asset sales - Though the company has failed to sell the company despite help from an advisor, it's not out of the question that Embark is paid for its software platform as part of a deal. Especially considering how far the platform has advanced and the cost savings to trucking companies. An online article interviewing Rodrigues noted the following:

The software-based approach gives Embark the advantage of not needing to build its own trucks from scratch. The company says its tech can improve fuel efficiency by up to 10%, reduce delivery times by up to 40% and increase revenue per truck by up to 300%.

A modest $10 million for the platform could fetch $0.40 per share. At $25 million, shareholders could get another ~$1.

Possible Outcomes

• Liquidation - A liquidation sounds like a scary story to buy into, but that's likely why the market is pricing Embark's shares at a compelling discount to the company's cash position. If the company chooses to liquidate, we'd like to see it happen as soon as possible to mitigate cash burn and conserve the value of its shares.
• Contingent Value Rights (CVRs) - To expedite a liquidation, Embark could also choose to pay its obligations, distribute retained cash to shareholders, and issue CVRs that would pay out if the company can sell its software platform in the future. CVRs are a great way to wind up operations quickly and add optionality to sell assets later.
• Company sale - According to an SEC filing , Embark's decision to discontinue operations came after an 'exploration' of a potential sale of the company with the assistance of a financial advisor. The vague language could mean the exploration resulted in zero interested buyers. It could also be construed as meaning a sale of the company was a feasible strategic alternative. If the 'exploration' resulted in interest from acquirers, it could indicate that a company sale process is already underway.
• Reverse merger - In a reverse merger, a private company would merge with Embark and survive the merger. Embark shareholders would receive a pro-rata percentage of the outstanding shares of the surviving public company based on Embark's cash position and the valuation of the merger partner's company. There are likely many startups starved for capital like Embark was. As evidenced by Embark's inability to draw investor capital, the well for startup capital may have dried up. If that is the case, Embark's cash position could garner the attention of cash-starved startups willing to supply equity to the merged corporation.

It should be noted that the outcome of its strategic alternatives process will likely be decided by Mr. Rodrigues and his Co-founder Benjamin Moak. The company has two share classes. Each A share comes with one shareholder vote. Its B shares have ten votes. Rodrigues (57.5%) and Moak (42.5%) hold all of the B shares. Together, the co-founders account for about 65% of shareholder votes.

In April, Moak terminated without cause and took a lump sum buyout of six months' base salary and 50% of his annual target bonus. He has seemingly moved on to something else, but his votes still count. Rodrigues has a remarkable resume. From Embark's 2022 10-K:

Mr. Rodrigues has an extensive background in robotics, beginning with a world robotics championship win as a middle school student in 2009. Mr. Rodrigues studied at the University of Waterloo, where he built Canada's first self-driving vehicle, a golf cart that was used to take guests on tours of the campus. Mr. Rodrigues is a 2016 Thiel Fellowship recipient and was accepted into Silicon Valley startup incubator Y-Combinator, where he launched Embark.

He may want to stay in the industry, but it appears he'll be helming the company until the bitter end. I believe a few things would motivate the two to make a shareholder-friendly deal as quickly as possible.

First, the tandem founded Embark in 2016 in their mid-twenties. So, it's probably safe to assume that most of their net worth is tied up in Embark shares. As Embark burns cash, so does their collective financial well-being. The company's advisors will also generate fees from a transaction and are likewise motivated. They assuredly reminded the two of the advantages of a quick turnaround.

Rodrigues could be motivated by an opportunity to move on or continue his work. As an engineer at heart, navigating his company through its strategic alternatives process is not likely his cup of tea.

Risks

• If the company engages in a reverse merger, Embark shares will become shares of an unknown company. If those shares become shares of another startup or an undesirable company, the market may frown on the transaction. This is a legitimate concern, but the opposite may also happen.
• There is also a risk that the company's decision-making process drags on well past our year-plus timeline estimate. If that is the case, shareholders risk losing money on the trade. On the other side of the token, an acquirer or reverse merger partner could drag their feet. I could also be wrong about Rodrigues, and he could be content collecting a paycheck until the cash runs out. Then again, so will his life savings. I don't think this is a likely scenario for the reasons cited above.
• I'm not too proud to acknowledge modeling risk. My forecast could be less conservative than intended, or I could've missed something entirely. But a swift strategic alternative resolution could sweep forecasting errors under the rug.

Conclusion

There is a good chance the company will reach a deal within the next year, and shareholders could benefit handsomely. In other words, your downside could be an upside with further upside if Rodrigues pushes the right buttons.

In our best-case scenario, Embark's liquidation value is currently worth ~$4.73. If the company can strike a deal that includes a dollar for its NOLs and another dollar for its autonomous truck driving platform, shareholders could reap ~$6.73 or 148% very quickly.

In contrast, the strategic alternatives process could drag on for another year, and Embark liquidates without retaining any value for its NOLs or software platform assets. In that case, shareholders would get an estimated $3.45 per share or 28% in a year or so.

I think shares offer an attractive margin of safety. To further its case, the company could potentially burn cash for another year beyond June 2024 before its liquidation value falls to the current stock price of ~$2.70.

Together, Rodrigues and Moak own all 4,353,948 B shares. Based on our valuation range ($2.70 to $6.73 per share), the share class is worth $11.8 million to $29.3 million. In addition to Rodrigues' desire to continue his work elsewhere, I believe the co-founder's potential loss of net worth will likely be a significant motivating factor to get a deal done as expeditiously as possible.

I think the stock's margins of safety and upside provide an appealing proposition right now.

For further details see: