EMBK TECHPAR The following discussion and analysis of Embark's financial condition and results of operations should be read in conjunction with Embark's consolidated financial statements and related notes and other information included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Embark's actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this Annual Report on Form 10-K. Additionally, Embark's historical results are not necessarily indicative of the results that may be expected in any future period. Overview Headquartered inSan Francisco, California , Embark's history as the industry's longest running autonomous truck driving program in theU.S. is replete with technological firsts that include, but are not limited to:
•First coast-to-coast autonomous truck drive;
•First to reach 100,000 autonomous miles driven on public roads;
•First operational transfer point network for self-driving trucks;
•First autonomous trucking company to adopt an OEM-agnostic approach;
•First autonomous vehicle trucking software to handle work zone lane closures;
•First autonomous vehicle trucking software to self-park;
•First to complete on-road autonomous testing in winter conditions;
•First to complete a public demonstration of an autonomous truck being pulled over by law enforcement and participating in a routine traffic stop on a public highway; and
•First autonomous developer to handover trucks to a carrier, through the TTP, for operation within the carrier's fleet with the carrier's drivers.
Embark currently targets and evaluates all sub-segments of the growing truck freight market, which is segmented by, criteria such as type of goods transported, geographies covered and trailer type. Embark will continue to evaluate a variety of different segments within the truck freight industry.
OnMarch 1, 2023 , the Board of Directors of the Company (the "Board") approved a process to explore, review and evaluate a range of potential strategic alternatives, including, without limitation, exploring alternative uses of the Company's assets to commercialize its technology, additional sources of financing, as well as potential dissolution or winding up of the Company and liquidation of its assets. To the extent Embark is unable to execute or identify strategic alternatives, its liquidity will be negatively impacted and may not be sufficient to fund its operations. These conditions and events raise substantial doubt about the Company's ability to continue as a going concern. In response to these conditions, onMarch 3, 2023 , the Company announced a restructuring plan after an extensive review of its organization and programs and in response to current ongoing market headwinds. In connection with this restructuring plan, the Company will reduce its workforce by approximately 230 employees, which represents 70% of its headcount. No assurance can be given that the Company's exploration of strategic alternatives will result in any change in 43
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strategy. To the extent Embark is unable to execute or identify strategic alternatives, the Board may explore potential alternatives including, without limitation, the potential dissolution or winding up of the Company and liquidation of its assets. As a result, management's plan cannot be considered probable and thus does not alleviate the substantial doubt about the Company's ability to continue as a going concern.
Recent Developments Affecting Comparability
COVID-19 Impact
InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. In theU.S. as part of government-imposed restrictions, Embark was forced to temporarily pause fleet testing and operations in 2020. Embark also implemented a work-from-home policy for most of its non-operations team. Since then, Embark has resumed its fleet testing and operations and has increased headcount to address its R&D requirements. The future impact of the COVID-19 pandemic on Embark's operational and financial performance will depend on certain developments, including the duration and end of the pandemic and the occurrence of future outbreaks from new variants, impact on Embark's research and development efforts, and effect on Embark's suppliers, all of which are uncertain and cannot be predicted. Public and private sector policies and initiatives to reduce the transmission of COVID-19 and disruptions to Embark's operations and the operations of Embark's third-party suppliers, along with the related global slowdown in economic activity, may result in increased costs. It is possible that the COVID-19 pandemic, the measures that have been taken or that may be taken by the federal, state, local authorities and businesses affected by government-mandated business closures, vaccination mandates and the resulting economic impact may materially and adversely affect Embark's business, results of operations, cash flows and financial positions.
Conflict in
Although Embark does not have direct business exposure inRussia ,Belarus andUkraine , the Russian military actions and the resulting sanctions could adversely affect the global economy, as well as further disrupt the supply chain. A major disruption in the global economy and supply chain could have a material adverse effect on our business, partners, prospects, financial condition, results of operations, and cash flows. The extent and duration of the military action, sanctions, and resulting market and/or supply disruptions are impossible to predict, but could be substantial.
Key Factors Affecting Embark's Operating Performance
Embark's financial condition, results of operations, and future success depend on several factors that present significant opportunities for Embark but also pose risks and challenges, including those set forth in the section entitled "Risk Factors" in this Annual Report on Form 10-K, and as set forth below:
Embark's Ability to Achieve Key Technical Milestones and Deliver a Commercial Product
Embark's growth will depend on the introduction of Embark Driver and Embark Guardian products which will drive demand from potential customers. Embark has developed a platform agnostic interface, Embark Universal Interface, which will serve as the foundation to utilize Embark Driver and Guardian products in trucks manufactured by a broad range of OEMs. Embark's ability to introduce its products will be driven by a variety of factors including strategic use of the testing capacity of Embark's R&D fleet capacity, the number of autonomous miles driven (measured as the number of miles driven by Embark's R&D fleet as well as partner fleet autonomous miles), simulated miles and encounters, and the ability to effectively collect and act upon information gathered from the operation of Embark's R&D fleet to develop a safe and sustainable solution. Embark develops most key technologies in-house to achieve a rapid pace of innovation and tests it extensively through R&D fleet operations. To date, Embark has not generated any revenue and until its products reach commercialization, autonomous miles driven will be comprised of autonomous miles driven by its R&D fleet and the fleet of its partners. Embark believes that data taken from autonomous miles driven during testing will continually feed improvements to the platform, allowing it to innovate and introduce new products to the market and increase adoption of its products in the future.
Embark's Ability to Expand its Coverage Map Across the United States
Embark's long-term growth potential will benefit from strategic network
expansion across
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which Embark plans to support. Embark expects to achieve significant network growth by partnering with key real-estate partners which will enable it to quickly bring their properties into its coverage map. Additionally, Embark is partnering with carriers and shipperswho currently move, or have in the past moved, a significant amount of freight on Embark's network to add their properties to the network. Embark believes that expanding its network over the long run will enable it to create a significant and sustainable competitive advantage.
Embark's Ability to Expand its Partner Network
An aspect of Embark's business growth strategy is seeking to drive the adoption of its technical products by deploying them in Embark's partners' operations in a collaborative process. This is achieved by working closely with carrier management teams to prepare them to deploy and scale autonomous trucks. InApril 2021 , Embark formally announced the Embark PDP, which serves as the basis of its partnership network. The PDP is comprised of carriers and shippers from across the freight ecosystem working with Embark to refine and scale Embark's offerings. InDecember 2022 , Embark and Knight-Swift announced that Embark initiated handover of the first Embark-powered truck as part of the TTP. The TTP marks the first public initiative in which a carrier will directly own and operate a truck with select features of Embark's automated driving software, allowing Embark to gain valuable insight from having its system components operating in a carrier customer's duty cycle. Embark will continue to look for partnership opportunities across all sub-segments of the truck-freight market.
Adoption and Support of Autonomous Technology in the Freight Industry
Embark's business model is supported by a large addressable market that Embark believes will benefit from the introduction of autonomous trucking technology. The freight industry is currently facing significant challenges, notably driver shortages and utilization limitations, which it believes it will address through its product offerings. Embark has identified participants from across the freight ecosystemwho have expressed support for Embark's offerings and the potential solutions they provide to the challenges they are facing.
Key Components of Embark's Results of Operations
The following discussion describes certain line items in Embark's consolidated statements of operations.
Operating Expenses Operating expenses consist of research and development expenses and general and administrative expenses. Personnel-related costs are the most significant component of Embark's operating expenses and include salaries, benefits, and stock-based compensation expenses.
Research and Development Expenses
Research and development expenses consist primarily of salaries, employee benefits, stock-based compensation expenses and travel expenses related to Embark's engineers performing research and development activities to originate, develop and enhance Embark's products. Additional expenses include consulting charges, component purchases and other costs for performing research and development on Embark's software products.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, employee benefits, stock-based compensation expenses, and travel expenses related to Embark's executives, finance team, and the administrative employees. It also consists of legal, accounting, consulting, and professional fees, rent and lease expenses pertaining to Embark's offices, business insurance costs and other costs.
Non-Operating Expenses and Other Items
Other Income (expense), net
Other income (expense) consists of income generated from transporting freight on
behalf of counterparties using Embark's own research and development truck fleet
equipped with its self-driving systems through various Transportation Service
Agreements ("TSAs"), sublease income, the change in fair value of derivative
liabilities and the change in fair
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value of Public, Private, Working Capital and Forward Purchase Agreement ("FPA")
Warrants. The primary purpose of TSAs is to support Embark's research and
development and proof of concept efforts. Accordingly, income generated from
such TSA arrangements is not expected to be the primary revenue generating
activity of Embark. Change in fair value of derivative liabilities represents
the increase or decrease in the fair value of the embedded conversion and
redemption features, which are presented as a derivative liability, related to
the convertible note payable, which was converted to Embark Class A common stock
upon consummation of the Business Combination. Change in fair value of warrants
represents the increase or decrease in the estimated fair value of such warrant.
For each reporting period, Embark will determine the fair value of the
derivative liability and warrants, and record a corresponding non-cash benefit
or non-cash charge, due to a decrease or increase, respectively, in the
calculated derivative liability or warrants.
Interest Income
Interest income consists of interest earned on Embark's cash and cash equivalents. Embark invests in highly liquid securities such as money market funds, as well as treasury bills.
Interest Expense
Interest expense in 2021 primarily consists of non-cash interest incurred on Embark's convertible note. The interest expense is related to the accretion of the debt discount offered upon the issuance of the convertible note. Interest expense in 2022 primarily consists of interest on Embark's truck financing arrangements.
Results of Operations
The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K. The following table sets forth Embark's results of operations data for the periods presented (in thousands):
Comparisons for the years ended
The following table sets forth Embark's statement of operations for the years endedDecember 31, 2022 and 2021 and the dollar and percentage change between the two periods: Years Ended December 31, $ % 2022 2021 Change Change (in thousands) (in thousands) Operating expenses: Research and development$ 79,214 $ 55,276 $ 23,938 43 % General and administrative 74,449 48,387 26,062 54 % Total operating expenses 153,663 103,663 50,000 48 % Loss from operations (153,663) (103,663) (50,000) 48 % Other income (expense): 50,500 (20,550) 71,050 (346) % Change in fair value of derivative liability - (4,323) 4,323 (100) % Change in fair value of warrant liability 48,957 (8,206) 57,163 (697) % Other Income (expense), net (318) 44 (362) (823) % Interest income 2,221 98 2,123 2166 % Interest expense (360) (8,163) 7,803 (96) % Loss before provision for income taxes (103,163) (124,213) 21,050 (17) % Provision for income taxes - - - N.M. Net loss$ (103,163) $ (124,213) $ 21,050 (17) % _____________________
N.M. - Percentage change not meaningful
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Research and Development Expenses
Research and development expenses increased by$23.9 million in the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase was primarily due to a$17.6 million increase in headcount expense, including stock-based compensation, salaries and employee benefits, related to the continued expansion of Embark's R&D team, a$1.3 million increase in prototype truck hardware expenses, a$2.0 million increase in R&D expenses, a$1.5 million increase in technical infrastructure costs, and a$0.8 million increase in property, plant and equipment acquisition expenses.
General and Administrative Expenses
General and administrative expenses increased by$26.1 million in the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase was primarily due to a$18.6 million increase in headcount expense, including stock-based compensation, salaries and employee benefits, related to growth in the business, a$1.3 million increase in occupancy costs related to the expansion of Embark's lease portfolio, a$0.7 million increase in fleet operation expenses, a$1.4 million increase in insurance expenses and a$2.7 million increase in administrative expenses due to the growth of the business.
Other Income (Expense)
Other income (expense) decreased$71.1 million in the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The decrease was primarily due to the decrease in the estimated fair value of Public, Private, Working Capital and FPA Warrants of$57.2 million , the conversion of Embark's derivative liability into Class A common stock upon the consummation of the Business Combination of$4.3 million , a$2.1 million increase in interest income, and a$7.8 million decrease in interest expense.
Liquidity and Capital Resources and Ability of the Company to Continue as a Going Concern
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses from operations since inception and, as a result, as ofDecember 31, 2022 and 2021 had an accumulated deficit of$286.1 million and$182.9 million , respectively. Net cash used in operating activities was$97.4 million and$64.9 million for the years endedDecember 31, 2022 and 2021, respectively. As Embark has not earned any revenue to date, it has financed its operations primarily through the sale of shares of common stock and preferred stock to fund operations, invest in R&D and repay borrowings. Embark has explored and exhausted avenues following an extended evaluation by Embark of alternative markets in which to commercialize its technology, and with the lack of success in bringing Embark's product to those markets, it will not generate revenues in the near future, and may not be able to raise additional financing on terms that are favorable, or at all. As such, Embark believes that its operating losses and negative operating cash flows will continue into the foreseeable future requiring Embark to explore strategic alternatives. These conditions and events raise substantial doubt about Embark's ability to continue as a going concern. In response to these conditions, as part of management's plans, onMarch 1, 2023 , the Board approved a process to explore, review and evaluate a range of potential strategic alternatives, including, without limitation, exploring alternative uses of Embark's assets to commercialize its technology, additional sources of financing, as well as potential dissolution or winding up of Embark and liquidation of its assets. In addition, onMarch 3, 2023 , Embark announced a workforce restructuring plan. Management's plan cannot be considered probable and thus does not alleviate the substantial doubt about Embark's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
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The following table shows Embark's cash flows from operating activities, investing activities and financing activities for the stated periods:
Years Ended
December 31,
2022 2021
Net cash provided by (used in) operating activities$ (97,408) $ (64,909) Net cash provided by (used in) investing activities$ (10,015) $ 49,533 Net cash provided by financing activities$ 902 $ 268,936 Operating Activities Net cash used in operating activities for the year endedDecember 31, 2022 was$97.4 million , an increase of$32.5 million from the$64.9 million used in operating activities for the year endedDecember 31, 2021 . The increase was primarily due to$63.1 million of non-cash adjustments to net loss, comprised of changes in the fair value of the warrant liabilities of$57.2 million , amortization of debt discount of$8.2 million , change in the fair value of the derivative liability of$4.3 million , accretion on investment discounts of$0.3 million and a loss on the sale of trucks of$0.1 million , offset by increases in depreciation and amortization of$4.0 million , increases in stock-based compensation of$2.3 million and$0.7 million in common stock issued for services. The increase was offset further by a$9.6 million net cash increase by changes in Embark's operating assets and liabilities, which were primarily attributable to accounts payable, accrued expenses and other current liabilities and a$21.1 million decrease in net loss.
Investing Activities
Net cash used in investing activities for the year endedDecember 31, 2022 was$10.0 million , an decrease of$59.5 million from the$49.5 million net cash provided by investing activities for the year endedDecember 31, 2021 . The decrease was primarily due to a$53.2 million decrease in proceeds received from maturities of investments, an increase in purchase of property, equipment, and software of$7.1 million , and a decrease of$0.1 million in refunds received for deposits for trucks. The decrease was offset by$0.4 million in proceeds received from the sale of fixed assets and a$0.4 million decrease in deposits paid for trucks. Financing Activities Net cash provided by financing activities for the year endedDecember 31, 2022 was$0.9 million , a decrease of$268.0 million from the$268.9 million for the year endedDecember 31, 2021 . The decrease was primarily due to a$314.1 million decrease in proceeds received from the business combination, a$25.0 million decrease in cash proceeds received from the convertible note, and a$0.3 million increase in payments towards notes payable. The decrease was offset by a$70.2 million decrease in transaction costs associated with the business combination and an increase of$1.2 million in proceeds received from the exercise of stock options.
Financing Arrangements
Notes Payable for Equipment Purchases
Since inception Embark has entered into multiple financing agreements to finance the purchase trucks that Embark utilizes for R&D (collectively, the "Notes Payable"). The Notes Payable is comprised of multiple loans between$0.1 million and$0.5 million that incur interest at rates between 6.01% and 8.39% per annum, with terms of 60 months. Embark makes equal monthly installment payments over the terms of the Notes Payable, which are allocated between interest and the principal balance.
Off-Balance Sheet Arrangements
Embark did not have any off-balance sheet arrangements as of
Critical Accounting Policies and Significant Management Estimates
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Embark prepares its consolidated financial statements in accordance withU.S. GAAP. The preparation of consolidated financial statements also requires Embark to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. Embark bases Embark's estimates on historical experience and on various other assumptions that Embark believes to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by Embark's management. To the extent that there are differences between Embark's estimates and actual results, Embark's future financial statement presentation, financial condition, results of operations and cash flows will be affected. Embark believes that the accounting policies discussed below are critical to understanding Embark's historical and future performance, as these policies relate to the more significant areas involving Embark management's judgments and estimates. Critical accounting policies and estimates are those that Embark considers the most important to the portrayal of Embark's financial condition and results of operations because they require Embark's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Embark believes that the accounting policies described below involve a significant degree of judgment and complexity. Accordingly, Embark believes these are the most critical to aid in fully understanding and evaluating Embark's financial condition and results of operations. For further information, see Note 2 to Embark's consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Stock-Based Compensation Expense
Stock Options
Embark estimates the fair value of stock options granted to employees and directors using the Black-Scholes option-pricing model. The grant date fair value of stock options is recognized as compensation expense on a straight-line basis over the requisite service period. Forfeitures are accounted for when they occur.
The Black-Scholes model considers several variables and assumptions in estimating the fair value of stock-based awards. These variables include:
•Fair value of common stock: Because Embark's common stock was not publicly traded prior to the closing of the Business Combination, Embark estimated the fair value of Embark's common stock in 2021. Embark's board of directors considers numerous objective and subjective factors to determine the fair value of Embark's common stock as discussed in "- Common Stock Valuations" below.
•Expected Term: The expected term represents the period that Embark's stock-based awards are expected to be outstanding and was calculated as the average of the option vesting and contractual terms, based on the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options.
•Expected Volatility: Because Embark does not have a trading history of its common stock, the expected volatility was derived from the average historical stock volatilities of several public companies within Embark's industry that Embark considers to be comparable to its business over a period equivalent to the expected term of the stock option grants. •Risk-Free Interest Rate: The risk-free interest rate is based on the implied yield available onU.S. Treasury zero-coupon issues, with the remaining term equivalent to the expected term. •Expected Dividend: Embark has not issued any dividends in its history and does not expect to issue dividends over the life of the options and, therefore, has estimated the dividend yield to be zero.
Restricted Stock Units
We grant Restricted Stock Units ("RSUs") that vest based on a service and
performance condition. Restricted stock awards issued with these conditions vest
based on the occurrence of a defined liquidity event and an explicit service
period. We recognize compensation expense for RSU awards based on the fair value
of the award and on a graded vesting basis over the requisite service period.
Our board of directors determines the fair value of RSUs based on the price of
our common stock on the date of grant.
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Performance Stock Units
We grant performance-based RSUs ("PSUs") that vest upon satisfaction of certain
market and performance-based conditions. The PSUs market conditions are based on
Embark achieving six different valuation tranches, as derived from Embark's
stock price, that can be achieved over ten years in relation to the pre-money
valuation prior to the Business Combination. The vesting of the PSUs performance
condition can be achieved on the occurrence of a defined liquidity event. For
PSU awards, Embark uses the graded vesting to allocate compensation expense, as
the PSU awards are associated with market conditions, over the holder's derived
service period, and estimates the fair value of the PSU awards using the Monte
Carlo simulation. Embark accounts for the effect of forfeitures as they occur.
Common Stock Valuations
Prior to the closing of the Business Combination, given the absence of a public trading market for Embark's common stock and in accordance with theAmerican Institute of Certified Public Accountants Accounting and Valuation Guide , Valuation of Privately Held Company Equity Securities Issued as Compensation, Embark's board of directors determined the best estimate of fair value of Embark's common stock, exercising reasonable judgment and considering numerous objective and subjective factors. These factors include:
•contemporaneous third-party valuations of Embark's common stock;
•the prices at which Embark or other holders sold Embark's common stock to outside investors in arms-length transactions;
•Embark's financial condition, results of operations, and capital resources;
•the industry outlook;
•the fact that option awards involve rights in illiquid securities in a private company;
•the valuation of comparable companies;
•the lack of marketability of Embark's common stock;
•the likelihood of achieving a liquidity event, such as an initial public offering or a sale of Embark given prevailing market conditions;
•the history and nature of Embark's business, industry trends, and competitive environment; and
•general economic outlook including economic growth, inflation, unemployment, interest rate environment and global economic trends.
Embark's board of directors determined the fair value of Embark's common stock by first determining enterprise value of Embark's business, and then using that to derive a per share value of Embark's common stock. The enterprise value of Embark's business was estimated by considering several factors, including estimates using the cost approach, market approach, and the income approach. The cost approach estimates the fair market value of an organization by utilizing the consolidated balance sheet to take the total fair market value of assets minus the fair market value of liabilities. The market approach was estimated based on the projected value of comparable public companies in a similar line of business that are publicly traded. The income approach estimates the enterprise value of the business based on the cash flows that it expects to generate over its remaining life. These future cash flows are discounted to their present values using a rate of return appropriate for the risk of achieving the business' projected cash flows. The present value of the estimated cash flows is then added to the present value equivalent of the residual value of the business at the end of the projected period to calculate the business enterprise value. In addition to the three approaches described above, Embark factors in recent arms-length transactions such as the closest round of equity financing preceding the date of valuation. After determining Embark's enterprise value, an allocation of enterprise value is made to Embark's various classes of equity to determine the value of common stock. In allocating the enterprise value of Embark's business to common stock throughOctober 2020 , Embark used the option pricing method ("OPM"), whereas afterOctober 2020 , Embark used a combination of OPM and probability weighted expected return method ("PWERM"). PWERM involves a forward-looking analysis of the possible future outcomes of the enterprise. This method is particularly useful when discrete future outcomes can be predicted at a relatively high level of confidence with a probability distribution. Discrete future outcomes considered 50
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under PWERM include an acquisition by aSpecial Purpose Acquisition Company of Embark's common stock, as well as other market-based outcomes. Determining the fair value of the enterprise using PWERM requires Embark to develop assumptions and estimates for both the probability of a liquidity event and stay private outcomes, as well as the values Embark expects those outcomes could yield. A discount for lack of marketability ("DLOM") is applied to arrive at a fair value of Embark's common stock. A DLOM is meant to account for the lack of marketability of a stock that is not traded on public exchanges. In making the final determination of common stock value, consideration is also given to recent sales of common stock. Application of these approaches involves the use of estimates, judgments and assumptions that are highly complex and subjective, such as those regarding Embark's expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions, or the relationships between those assumptions, impact Embark's valuations as of each valuation date and may have a material impact on the valuation of Embark's common stock. For valuations after the completion of the Business Combination, Embark's board of directors the fair value of each share of underlying common stock based on the closing price of Embark's common stock as reported on the date of grant.
Warrants
The PDP warrants were classified as equity on Embark's consolidated balance
sheet as the underlying shares of common stock are not considered to be
mandatorily redeemable, do not include an obligation of Embark to repurchase its
equity shares or to issue a variable number of equity shares. The warrants are
measured at fair value on the issuance date. The fair value of the underlying
common stock was measured using a Black-Scholes ("BSM") option-pricing model.
The following assumptions and inputs were utilized within the BSM option-pricing
model: exercise price, fair value of the underlying common stock, risk-free
interest rate, expected term, expected dividend yield and expected volatility,
which are all determined in the same manner with Embark's stock options as
detailed in the above "Stock-Based Compensation Expense" section. Pursuant to
the original terms of the warrant agreement, upon the completion of the Merger,
all outstanding Partner Development Program warrants were extinguished and
exercised in exchange for restricted common stock. The common stock is subject
to the same vesting conditions existing under the warrant agreement such that
unvested common stock is subject to forfeiture if the holder terminates its
services to Embark prior to vesting.
The Public, Private, FPA and Working Capital warrants are recognized as
liabilities on Embark's consolidated balance sheets. Accordingly, we recognize
the warrant instruments as liabilities at fair value and adjust the instruments
to fair value at each reporting period. The liabilities are subject to
re-measurement at each balance sheet date until exercised, and any change in
fair value is recognized in our statement of operations. The initial fair value
of the Public, Private, FPA and Working Capital warrants have been measured at
fair value based on observable listed prices for such public warrants. The fair
value of the Public and FPA warrants as of December 31, 2022 and December 31,
2021 are based on observable listed prices for such public warrants. The fair
value of the Private and Working Capital warrants as of December 31, 2022 and
December 31, 2021 are determined using the Black-Scholes option valuation model.
Capitalization of
Embark capitalizes certain internal use software development costs associated with creating and enhancing internal use software related to Embark's product suite and technology infrastructure. These costs include personnel and related employee benefits expenses for employeeswho are directly associated with andwho devote time to software projects. Embark expenses software development costs that do not meet the criteria for capitalization as incurred and records them in research and development expenses in Embark's statements of operations. Software development activities generally consist of three stages: (i) the planning stage; (ii) the application and infrastructure development stage; and (iii) the post implementation stage. Costs incurred in the planning and post implementation stages of software development, including costs associated with the post configuration training and repairs and maintenance of the developed technologies, are expensed as incurred. Embark capitalizes costs associated with software developed for internal use when both the preliminary project stage is completed and management has authorized further funding for the completion of the project. Embark capitalizes costs incurred in the application and infrastructure development stages, including significant enhancements and upgrades. Capitalization ends once a project is substantially complete and the software and technologies are ready for their intended purpose. Embark will amortize internal use software development costs using a straight-line method over their estimated useful life commencing when the software is 51
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ready for its intended use. Embark estimates a useful life of three years for technology infrastructure related software. As Embark's product suite is not yet ready for its intended use, amortization has not yet begun.
All capitalized software requires the ongoing assessment for recoverability which requires judgment by management with respect to certain external factors including, but not limited to, anticipated future gross revenues, estimated economic useful life, and changes in competing software technologies.
New Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, in the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
JOBS Act Accounting Election
Embark is an emerging growth company, as defined in the JOBS Act. Under the JOBS
Act, emerging growth companies can delay adopting new or revised accounting
standards until such time as those standards apply to private companies. Embark
intends to elect to adopt new or revised accounting standards under private
company adoption timelines. Accordingly, the timing of Embark's adoption of new
or revised accounting standards will not be the same as other public companies
that are not emerging growth companies or that have opted out of using such
extended transition period. See Note 1 to the consolidated financial statements
for further discussion.
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