Problems at Embark Technology (EMBK)

Problems at Embark Technology (EMBK)

Embark Technology (NASDAQ: EMBK — $3.68 billion) describes itself as “an autonomous vehicle company building the software powering autonomous trucks” and merged with a SPAC in November. The company’s 26-year-old CEO projects no revenue in 2022 and 2023, but $867 million in revenue in 2024 and $2.7 billion in 2025. Embark’s current valuation appears to be based on puffery rather than actual substance. The company holds no patents, has only a dozen or so test trucks, and may be more bark than bite.

Founded in 2016 by Canadian college students, Embark Technology competes with Waymo, TuSimple (NASDAQ: TSP), Aurora Innovation (NASDAQ: AUR), Plus, and Tesla in the red-hot market for autonomous trucking. Embark does not make trucks but instead is developing software to help trucks drive autonomously between waypoints on highways. By 2024, Embark hopes to license its software to trucking companies and bill on a per-mile basis. Once a truck using Embark software reaches the outer edge of a city, a human will generally be needed to complete the more difficult task of driving the last mile in non-highway environments.

Embark is led by Alex Rodrigues, a 26-year-old dropout of the University of Waterloo with a background in robotics. The company’s Chief Technology Officer is Brandon Moak, a 25-year-old graduate from the University of Waterloo. They are joined by the company’s Chief Business Officer, Michael Reid, a 27-year-old graduate of the University of Waterloo. According to LinkedIn, around 15 Embark employees are graduates or dropouts of the University of Waterloo, including the company’s ~26-year-old Head of Product and its ~26-year-old Deep Learning Lead. Some former employees have complained that the founders “promote their close friends and roommates.”

One notable Embark hire that got media attention was Zeljko Popovic, who previously ran Tesla’s Perception Team for Autopilot. He left Embark in December 2020 after less than two years with the company and now works for Waymo.

More troubling is that Embark appears to lack true economic substance. For example, a July 2021 article titled, “Who's set to win Big Tech's 'insanely hot' race to self-driving trucks?” by the Commercial Carrier Journal didn’t even mention Embark. One reason may be that the company “holds no patents on its products” and instead “relies heavily on trade secrets [and] proprietary know-how” according to Embark’s SEC filings.

For comparison, Embark competitor TuSimple has 357 issued patents and Aurora Innovation has over 1,100 awarded and pending patents. In its risk factors, Embark discloses it “may become subject to litigation brought by third parties claiming infringement, misappropriation or other violation by Embark of their intellectual property rights.”

Embark reassures investors about its plans by promoting its industry partnerships and 14,200+ “reservations” through its Partner Development Program. Those may be less than meet the eye.

For example, Embark launched its Partner Development Program in April 2021 with large trucking companies Werner Enterprises and DHL among its initial members. Those partnerships may not be that valuable because Werner Enterprises is an investor in competitor TuSimple and DHL went on to order autonomous trucks built by TuSimple and Navistar. In podcasts, media appearances, and investor presentations Embark also touts over 14,200+ “reservations” from its partners, but rarely mentions those reservations are fully-refundable $500 deposits for software to be delivered in 2024-2028, and Embark’s equity partners have the $500 deposit waived. Embark does not break down reservations by customer or disclose the percent that have paid $500 refundable deposits.

The SEC Division of Corporate Finance sent Embark a comment letter asking the company to “clarify the extent to which your estimates for miles driven for 2024 and 2025 are based on your existing agreements with your existing transportation partners.” In response the company said it would revise its filings to “clarify that Embark’s estimates for miles driven for 2024 and 2025 are not based on either Embark’s existing agreements with its existing transportation partners or acquiring new customers for which Embark currently does not have a relationship.” Instead, the company’s estimates are “a penetration target of 1.1% in 2024 and 3.3% by 2025” for its trucking market.

Some of the company’s hype may seem harmless. For example, Embark’s June 2021 investor presentation claims that its CEO “built the first self-driving vehicle in Canada.” That vehicle was a golf cart.

Other promotion is more troubling.

On June 22 and June 23 nine employees posted five-star reviews of the Embark on Glassdoor, representing nearly half of total reviews. On June 23, the company and the Northern Genesis Acquisition Corp. II SPAC also announced the proposed SPAC merger.

In addition, Embark hired a public relations associate to help the CEO book podcasts, according to conversation screenshots shared on Twitter. The host for the retail-focused “Pounding the Table” podcast publicly denied being compensated for their episode calling Mr. Rodrigues “the next Elon Musk.”

In a September 2021 podcast interview with SPAC Insider, Mr. Rodrigues told the host, “We run full driverless operations…so, there is a safety driver in the truck, but we are moving freight, real freight, today, for money.” That statement seems to contradict the company’s communication with the SEC.

In its August 2021 letter, the SEC wrote Embark:

“We note that you have not generated revenue from principal operations through March 31, 2021; however, some of your disclosures do not appear to clearly convey this fact… Please revise throughout, including the summary, to ensure your disclosures are clear that the company is still in the process of developing and testing your technology, you have not earned revenue to date, and all products, route models, and partners are related to operations you expect to begin in the future but have not yet begun.”

Lawyers from Husch Blackwell LLP representing Embark responded,

“The Company respectfully acknowledges the comment from the Staff and advises the Staff that the Company has revised its disclosure… the Company advises the Staff that all payments received to date for movement of goods, including Embark’s daily shipments between Los Angeles and Phoenix, are classified as ‘Other Income’ and not as ‘Revenue’… Specifically, Embark uses its own research and development truck fleet equipped with its self-driving systems through various Transportation Service Agreements (‘TSAs’). The primary purpose of TSAs is to support Embark’s research and development and proof of concept efforts.”

Despite not having any revenue, Embark has had some accounting issues. In November 2021, the company announced that its audited balance sheet for January 2021 and its financial statements ending March 2021 “should no longer be relied upon” due to a reclassification of some share types. Embark’s prospectus also discloses: “Embark has identified deficiencies that together constitute a material weakness in its internal control over financial reporting as of December 31, 2019 and 2020.”

None of these issues have deterred retail investors from Embark. The company has gained some favorable coverage on WallStreetBets due to its “extreme meme potential” because the CEO’s “name is literally A-Rod.”

Embark’s largest outside investor is DCVC, which owns 17% of the company. On its website, DCVC’s featured portfolio company is Zymergen (NASDAQ: ZY), a synthetic biology company that has fallen over 80% since its April 2021 IPO after the company acknowledged its timeline to start reaching revenue “encountered technical issues.” Other public DCVC portfolio companies include AbCellera Biologics (NASDAQ: ABCL), which has fallen over 75% since its December 2020 IPO, Desktop Metal (NYSE: DM), which has fallen nearly 50% since its December 2020 SPAC merger, Recursion Pharmaceuticals (NASDAQ: RXRX), which has fallen over 40% since its April 2021 IPO, Rocket Lab USA (NASDAQ: RKLB), which is up around 20% since its August 2021 SPAC merger, and SentinelOne (NYSE: S), which is flat since its July 2021 IPO.

After recording their interview with Embark’s CEO, the hosts of “Pounding the Table” discussed the company and why they were bullish. One host said, “This is a company that is not making tons of revenue obviously… Are they making money today? In short, probably no.” The other host responded,

“I do like that its software. This is not another EV startup situation. This is more of a picks and shovels business for the EV business.”

“This is not a Nikola yah.”

“Right yeah.”

Caveat emptor.

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This article is not investment advice and represents the opinions of its author, Edwin Dorsey. You can reach the author by email at edwin@585research.com or on Twitter @StockJabber. This article is for paid subscribers of The Bear Cave newsletter. If this article was forwarded to you please consider becoming a paid subscriber to receive articles like this twice every month. Learn more here.