EMBK TECHPAR You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the Annual Report. In addition to the historical financial information, this discussion contains forward-looking statements that involve risk, assumptions and uncertainties, such as statements of our plans, objectives, expectations, intentions, forecasts and projections. Our actual results and the timing of selected events could differ materially from those discussed in these forward-looking statements as a result of several factors. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the sections entitled "Forward-Looking Statements" above and "Risk Factors" below, and in the section entitled "Risk Factors" in the Annual Report. Overview Embark develops technologically advanced autonomous driving software for the truck freight industry and offers a carefully constructed business model that is expected to provide the industry with the most attractive path to adopting autonomous driving. Specifically, Embark has developed a Software as a Service platform designed to interoperate with a broad range of truck OEM platforms, forgoing complicated and logistically challenging truck building or hardware manufacturing operations in favor of focusing on a superior driving technology. At scale, domestic fleets will be able to access Embark technology via a subscription software license selected as an option at the time they specify the build of new semi-trucks. Headquartered inSan Francisco, California , Embark's history as the industry's longest running autonomous truck driving program is replete with technological firsts that include, but are not limited to:
•the first coast-to-coast autonomous truck drive,
•the first to reach 100,000 autonomous miles on public roads,
•the first to successfully open autonomous transfer points for human- autonomous vehicle ("AV") handoff,
•the first to complete on-road autonomous testing in winter conditions, and
•the 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. Embark currently targets and evaluates all sub-segments of the growing truck freight market, which is segmented by, e.g., type of goods, geography and trailer type. Embark will continue to evaluate a variety of different segments within the truck freight industry based on factors including ease of implementation and profitability in order to identify the most favorable opportunities to commercialize AV technology over time.
Embark's founding team includes roboticists and its broader team includes numerous computer scientists, many with advanced degrees and experience at other leading robotics and autonomous vehicle companies and academic programs.
The Business Combination
Embark entered into the Merger Agreement with NGA, a special purpose acquisition company, onJune 22, 2021 . OnNovember 10, 2021 , pursuant to the Merger Agreement, Embark completed the Business Combination, in which Merger Sub, a newly formed subsidiary of NGA, merged with and into Embark Trucks. In connection with the consummation of the Business Combination, the separate corporate existence of Merger Sub ceased; Embark Trucks survived and became a wholly owned subsidiary of NGA, which was renamedEmbark Technology, Inc. The Business Combination was accounted for as a reverse recapitalization, in accordance with GAAP. Under the guidance in ASC 805, Embark was treated as the "acquired" company for financial reporting purposes. Embark Trucks was deemed the accounting predecessor of the combined business, andEmbark Technology, Inc. , as the parent company of the combined business, was the successorSEC registrant, meaning that our financial statements for previous periods will be disclosed in the registrant's periodic reports filed with theSEC . The Business Combination had a significant impact on Embark's reported financial position and results as a consequence of the reverse recapitalization. The most significant changes in Embark's reported financial position and results are a net increase in cash of$243.9 million net of transaction costs for the Business Combination of$70.2 million . 35
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As a result of the Business Combination, Embark became anSEC -registered and Nasdaq-listed company, which required Embark to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. Embark incurs additional annual expenses as a public company for, among other things, directors' and officers' liability insurance, director fees, and additional internal and external accounting, legal and administrative resources.
Recent Developments Affecting Comparability
Reverse Stock Split
At a special meeting of stockholders held onAugust 15, 2022 (the "Special Meeting"), the stockholders of Embark, with 89.7% voting, approved an amendment to the Certificate of Incorporation to effect the Reverse Stock Split of the Company's outstanding Common Stock, with the final ratio to be determined by the Company's board of directors from within a range of between 1-for-15 and 1-for-30. Following the Special Meeting, onAugust 15, 2022 , the Company's board of directors approved the Reverse Stock Split at the ratio of 1-for-20. Following the close of trading on the Nasdaq Global Market, on the Effective Time, the Company filed the Amendment with the Secretary of State of theState of Delaware to effect the Reverse Stock Split. At the Effective Time, each 20 shares of Class A common stock and Class B common stock outstanding and held of record by each stockholder of the Company were automatically reclassified and combined into one validly issued, fully paid and non-assessable share of Class A common stock or Class B common stock, as applicable, subject to the treatment of fractional shares as described below. Proportional adjustments were made to the number of shares of Class A common stock reserved for issuance under the Company's equity incentive plans and the number of shares of Class A common stock subject to outstanding equity awards and warrants, as well as the applicable exercise price. No fractional shares were issued in connection with the Reverse Stock Split. Stockholderswho would otherwise be entitled to receive fractional shares as a result of the Reverse Stock Split received a cash payment in lieu thereof at a price equal to the fraction to which the stockholder would otherwise be entitled to multiplied by the closing trading price per share of the Class A common stock (on a split-adjusted basis) on the Nasdaq Global Market onAugust 16, 2022 .
COVID-19 Impact and the Conflict in
InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. Inthe United States , 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. However, a select group of workers remained on-site to continue advancing testing work for its test fleet. 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. While we have limited 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 the section entitled "Risk
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Factors" in this Quarterly Report on Form 10-Q, in the section entitled "Risk Factors" in the Annual Report, 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 research and development fleet capacity, the number of autonomous miles driven (measured as the number of miles driven by Embark's research & development 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 research and development 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 research and development fleet operations. Embark expects a continuing emphasis in research and development fleet usage in the foreseeable future to allow it to strategically focus on innovations, which it believes will help solidify its overall solution to customers and partners. 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 research and development 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 acrossthe United States . Network breadth is measured by the number of transfer points on Embark's coverage map, which are representative of the cities 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. In addition to itsUnited States coverage map expansion, Embark may explore other near-term business opportunities to commercialize its technology in order to develop further technical and operating expertise that may ultimately be applied in furtherance of itsUnited States network expansion efforts. Lastly, Embark believes that the continued growth of its partnerships will improve user experience and drive more users to its platform, which it believes will allow it to further densify its coverage map and reinforce rapid network growth. Embark will apply a highly scalable model nationally, with a tailored approach to each state, driven by the regulatory environment and local market dynamics. Embark believes that this will allow it to expand rapidly and efficiently across different geographies, while maintaining a high level of control over the specific strategy within each state.
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 Partner Development Program (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. Most recently, Embark announced the industry-first Truck Transfer Program to place Embark technology in the hands of Knight-Swift drivers. 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
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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. While Embark has confirmed general market support, the long-term success of its business model is dependent on broad scale adoption and support of autonomous trucking technology. Embark has engaged with notable partners in the freight industrywho Embark believes will lead the industry in adopting autonomous vehicle technology. As Embark onboards more partners, it will increase miles driven by partners, which Embark believes will serve to validate its product offerings and generate interest and confidence from other partners. Embark believes customers will be motivated to integrate Embark's technology to be price competitive with other freight participantswho have achieved efficiencies with it.
Key Components of Embark's Results of Operations
The following discussion describes certain line items in Embark's unaudited condensed 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. Embark's full-time employee headcount in research and development has grown from 172 as ofDecember 31, 2021 to 251 as ofSeptember 30, 2022 and employee headcount in general and administrative functions has grown from 59 as ofDecember 31, 2021 to 66 as ofSeptember 30, 2022 . Embark will continue to ensure its employee base and employee talents are aligned to achieve its objectives. Embark expects to continue to invest resources in a focused manner to support its growth and anticipates that each of the following categories of operating expenses could increase in absolute dollar amounts for the foreseeable future.
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, software licenses 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. They also consists of legal, accounting, consulting, and professional fees, rent and lease expenses pertaining to Embark's offices, business insurance costs and other costs. Embark expects its general and administrative expenses to increase as it puts in the processes and procedures as a public company, including as a result of compliance with the rules and regulations of theSEC , legal, audit, tax, and other administrative and professional services. 38
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Results of Operations
The results of operations presented below should be reviewed in conjunction with the financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q.
Comparisons for the three months ended
The following table sets forth Embark's unaudited condensed consolidated results of operations data for the periods presented (in thousands):
Three Months Ended September 30, $ %
2022 2021 Change Change
Operating expenses:
Research and development $ 21,691 $ 11,481 $ 10,210 88.9 %
General and administrative 16,050 4,593 11,457 249.4 %
Total operating expenses 37,741 16,074 21,667 134.8 %
Loss from operations (37,741) (16,074) (21,667) 134.8 %
Other income (expense), net 2,329 (3,043) 5,372 (176.5) %
Loss before provision for income taxes (35,412) (19,117) (16,295) 85.2 %
Provision for income taxes - - - N.M
Net loss $ (35,412) $ (19,117) (16,295) 85.2 %
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N.M. - Percentage change not meaningful
Research and Development Expenses
Research and development expense increased by$10.2 million in the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . The increase was primarily due to$8.8 million higher headcount expenses including stock-based compensation, salaries and employee benefits, related to the continued expansion of Embark's R&D team and$0.4 million increase in infrastructure expenditure related to increased R&D activities.
General and Administrative Expenses
General and administrative expense increased by$11.5 million in the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . The increase was primarily due to$8.9 million higher headcount expenses including stock-based compensation, salaries and employee benefits, related to growth in the business, a$0.3 million increase in insurance expenses, a$0.3 million increase in fleet operation expenses, a$0.3 million increase in legal expenses and a$0.4 million increase in professional services expenses. Other income (expense), net Other income increased by$5.4 million in the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The increase was primarily due to a$0.7 million increase in interest income, a$1.4 million change in the estimated fair value of Public, Private, Working Capital andFPA Warrants that were issued during the fourth quarter of 2021, a$2.1 million decrease in interest expense related to convertible notes, which were converted upon consummation of the Business Combination, and a$1.0 million change in the estimated fair value of derivative liabilities which were derecognized upon consummation of the Business Combination. 39
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Comparisons for the nine months ended
The following table sets forth Embark's condensed consolidated results of operations data for the periods presented (in thousands):
Nine Months Ended September 30, $ %
2022 2021 Change Change
Operating expenses:
Research and development $ 59,427 $ 26,823 $ 32,604 121.6 %
General and administrative 56,741 11,585 45,156 389.8 %
Total operating expenses 116,168 38,408 77,760 202.5 %
Loss from operations (116,168) (38,408) (77,760) 202.5 %
Other income (expense), net 47,985 (9,417) 57,402 (609.6) %
Loss before provision for income
taxes (68,183) (47,825) (20,358) 42.6 %
Provision for income taxes - - - N.M
Net loss $ (68,183) $ (47,825) (20,358) 42.6 %
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N.M. - Percentage change not meaningful
Research and Development Expenses
Research and development expense increased by$32.6 million in the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . The increase was primarily due to$26.2 million higher headcount expenses including stock-based compensation, salaries and employee benefits, related to continued expansion of Embark's R&D team and a$2.4 million increase in general R&D costs primarily driven by engineering software & subscription costs.
General and Administrative Expense
General and administrative expense increased by$45.2 million in the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30 , 2021.The increase was primarily due to$38.4 million higher headcount expenses including stock-based compensation, salaries and employee benefits, related to growth in the business, a$1.2 million increase in occupancy expenses related to additional leases and a$1.8 million increase in insurance expenses.
Other income (expense), net
Other income increased by$57.4 million in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The increase was primarily due to a$47.8 million of Public, Private, Working Capital andFPA Warrants that were issued in the fourth quarter of 2021, a$3.4 million decrease in interest expense related to convertible notes which were converted upon consummation of the Business Combination, and a$5.8 million change in the estimated fair value of derivative liabilities which were derecognized upon consummation of the Business Combination .
Liquidity and Capital Resources
Since Embark's inception, it has financed its operations primarily through the sale of shares of common stock and preferred stock.
In connection with the Business Combination, a convertible promissory note (the "Convertible Note") issued by Embark inApril 2021 was converted in exchange for 188,747 shares of Embark Class A common stock. As ofSeptember 30, 2022 , Embark had outstanding debt of$1.9 million from a financing of freight trucks that it utilizes for R&D. Embark makes monthly installment payments on its truck financing arrangements. The truck financings have varying maturities betweenMarch 2023 andJanuary 2027 . Embark's principal uses of cash in recent periods have been to fund its operations, invest in research and development, repay borrowings, and make investments in accordance with its investments policy. 40
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Embark believes existing cash and other components of working capital will be sufficient to meet its needs for at least the next 12 months. Embark's long-term capital requirements will depend on many factors including timing and extent of spending to support R&D efforts, as well as general and administrative activities for the business. If, at any time, Embark determines it requires more capital to execute upon its business plan, and /or that market conditions are favorable, Embark may seek additional equity or debt financing. Additionally, in the event Embark may in the future enter into arrangements to acquire or invest in related products, technologies, software and services, and Embark may need to seek additional equity or debt financing to support such growth. As ofSeptember 30, 2022 , there were future minimum lease payments of$32.9 million . Embark currently transports shipments using its R&D truck fleet, demonstrating proof of concept and paving the way for commercialization and revenue generating operations in the future. However, Embark has not earned any revenue to date, and had$191.0 million in cash and cash equivalents and an accumulated deficit of$251.1 million as ofSeptember 30, 2022 . To the extent Embark is unable to commercialize its technology as expected, its liquidity may be negatively impacted. Embark's ability to continue as a going concern is dependent on management's ability to control operating costs and demonstrate progress against its technical roadmap. This involves developing new capabilities for the Embark Driver software and improving the reliability and performance of the software on public roads. Embark believes demonstrating ongoing technical progress will enable Embark to obtain funds from outside sources of financing, including financing from equity interest investors and borrow funds to fund its general operations, research and development activities and capital expenditures. The following table shows Embark's cash flows from operating activities, investing activities and financing activities for the stated periods (in thousands): Nine Months Ended September 30, 2022 2021 Net cash (used in) provided by: Operating activities$ (66,270) $ (32,858) Investing activities $ (7,802)$ 45,506 Financing activities $ 969$ 24,183 Operating Activities Net cash used in operating activities for the nine months endedSeptember 30, 2022 was$66.3 million , an increase of$33.4 million from$32.9 million for the nine months endedSeptember 30, 2021 . The increase was primarily due to an increase of$20.4 million in net loss for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The increase was also due to$18.0 million of non-cash adjustments to net loss (comprised of$47.8 million of change in fair value of warrant liability,$5.8 million of change in the fair value of the derivative liability,$1.8 million of change in the fair value of warrants issued for services and$3.7 million of amortization of debt discounts, which was offset by$38.3 million of stock-based compensation, depreciation and amortization of$2.5 million and$0.7 million of issuance of common stock for services). In addition, the increase was offset further by$5.0 million net cash decrease by changes in Embark's operating assets and liabilities, which was primarily attributable to prepaid expenses and other current assets, accrued expenses and other current liabilities primarily due to overall growth and timing of payables.
Investing Activities
Net cash used in investing activities for the nine months endedSeptember 30, 2022 was$7.8 million , a decrease of$53.3 million from$45.5 million of net cash provided by investing activities for the nine months endedSeptember 30, 2021 . The decrease was primarily due to a decrease of$48.2 million in proceeds received from maturities of investments and an increase in purchase of property, equipment, and software of$5.8 million . The decrease was offset by decrease of$0.4 million in deposits paid for the purchase of trucks and$0.4 million in proceeds received from the sale of trucks. 41
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Financing Activities
Net cash provided by financing activities for the nine months endedSeptember 30, 2022 , was$1.0 million , a decrease of$23.2 million from the$24.2 million of net cash provided by financing activities for the nine months endedSeptember 30, 2021 . The decrease was primarily due to a decrease of$25.0 million in proceeds received from the Convertible Notes, and a$0.2 million increase in payments towards notes payable. The decrease was partially offset by$1.2 million of cash proceeds received from the exercise of stock options and a$0.8 million decrease in cash paid in relation to deferred offering costs.
Financing Arrangements
There have been no material changes outside the ordinary course of business in Embark's financing arrangements as previously disclosed in Embark's Annual Report.
Off-Balance Sheet Arrangements
Embark did not have any off-balance sheet arrangements as of
Critical Accounting Policies and Significant Management Estimates
The preparation financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of Embark's financial statements and accompanying notes. Actual results could differ from those estimates. There have been no material changes to Embark's critical accounting policies or estimates during the three and nine months endedSeptember 30, 2022 , from those discussed in Embark's Annual Report.
Recent Accounting Pronouncements
For information on recently issued accounting pronouncements, refer to Note 2, "Summary of Significant Accounting Policies" in Embark's unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. JOBS Act Accounting Election Embark is an EGC, as defined in the JOBS Act. Under the JOBS Act, EGCs 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.
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