Item 1A. Risk Factors
In the course of conducting its business operations, Embark is exposed to a variety of risks. These risks are generally inherent to the technology industry or otherwise generally impact companies like Embark. Any of the risk factors described below have affected or could materially adversely affect Embark’s business, financial condition and results of operations. The market price of shares of Embark’s common stock could decline, possibly significantly or permanently, if one or more of these risks and uncertainties occur. Certain statements in “Risk Factors” are forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.”
Summary of Risk Factors
The following is a summary of principal risks to which Embark’s business, operations and financial performance are subject. Each of these risks is more fully described in the individual risk factors immediately following this summary.
• On March 3, 2023, Embark significantly reduced its employee base and operations and is exploring strategic alternatives, and there is substantial doubt about Embark’s ability to continue as a going concern.
• Autonomous driving is an emerging technology and involves significant risks and uncertainties.
• Embark has a limited operating history and an unproven business model in a new market and faces significant challenges as its industry is rapidly evolving.
• Embark’s technology may raise safety or other automation-related concerns causing it to fail to gain acceptance from users and other stakeholders in the freight transportation industry.
• Embark’s autonomous driving technology and related hardware and software could have undetected defects, errors or bugs in hardware or software.
• The operation of autonomous semi-trucks may be unfamiliar to Embark’s users and other road users.
• Embark operates in a highly competitive market and some market participants have substantially greater resources. Embark competes against a large number of both established competitors and new market entrants.
• Disruptions to the trucking industry, including changes in transportation and shipping infrastructure, could adversely impact Embark’s business and operating results.
• Embark’s business model depends on acceptance of its technology by third-party carriers and shippers and Embark’s existing relationships with key business partners.
• Embark relies on third-party suppliers and because some of the key components in Embark’s systems come from limited or sole sources of supply, Embark is susceptible to supply shortages, long lead times for components, and supply changes, or system unavailability, any of which could disrupt its supply chain and could delay deliveries of Embark’s products to users.
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• Embark’s approach of creating a manufacturer-agnostic product exposes it to the risk of exclusive competitor partnerships and other challenges that limit integration of its technology to products of multiple OEMs.
• Embark is an early stage company with a history of losses, and expects to incur significant expenses and continuing losses for the foreseeable future.
• To the extent that Embark expects to continue to engage in resource-intensive R&D activities for the foreseeable future, Embark will be required to raise additional funds and these funds may not be available to Embark on attractive terms when it needs them, or at all.
• Embark may be subject to risks associated with potential future strategic alliances, partnerships, investments or acquisitions, all of which could divert management’s attention, result in Embark incurring significant costs or operating difficulties and dilution to its stockholders, disrupt its operations and adversely affect its business, results of operations or financial condition.
• The forecast of Embark’s operating and financial results relies in large part upon assumptions and analyses developed by its management team. If these assumptions or analyses prove to be incorrect, Embark’s actual operating results may be materially different from its forecasted results.
• Embark depends on the experience and expertise of its senior management team, technical engineers, and certain key employees.
• If Embark fails to manage its remaining team effectively, it may be unable to execute its business plan, maintain high levels of service, or adequately address competitive challenges.
• Embark’s management team has limited experience managing a public company.
• Embark may be subject to breach of contract, product liability or warranty claims and other legal proceedings in the ordinary course of business that could result in significant direct or indirect costs, including reputational harm, increased insurance premiums or the need to self-insure.
• OEMs and their suppliers may experience significant delays in the manufacture and launch of Embark- enabled autonomous semi-trucks, which could harm Embark’s business and prospects.
• If Embark’s autonomous vehicle technologies fail to perform as expected, are inferior to those of its competitors, or are perceived as less safe or more expensive than those of its competitors or non-autonomous vehicles, Embark’s financial performance and prospects would be adversely impacted.
• The Embark Founders have control over all stockholder decisions because they control a substantial majority of Embark’s voting power through “high vote” voting stock.
• Pandemics and epidemics, including the ongoing COVID-19 pandemic, natural disasters, terrorist activities, political unrest, and other outbreaks could have a material adverse impact on Embark’s business.
• Embark has identified deficiencies that together constitute a material weakness in its internal control over financial reporting and in general IT controls as of December 31, 2021 and 2022. If Embark fails to develop and maintain an effective system of internal control over financial reporting and internal control over IT, it may not be able to accurately report its financial results in a timely manner, which may adversely affect investor confidence in Embark.
• As a public company, Embark is required to maintain adequate internal over financial reporting.
• Embark holds four patents on its products. Embark employs proprietary technology (know-how) and information that may be difficult to protect.
• Embark may become subject to litigation brought by third parties claiming infringement, misappropriation or other violation by Embark of their intellectual property rights.
• Embark utilizes open source software, which may pose particular risks to its proprietary software, technologies, products, and services in a manner that could harm its business.
• Embark is exposed to, and may be adversely affected by, interruptions to its information technology systems and networks and sophisticated cyber-attacks.
• Embark collects, processes, transmits, and stores personal information in connection with the operation of its business and is subject to various data privacy and consumer protection laws.
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• Embark operates in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future regulations could have a materially adverse effect on Embark’s business.
• The trucking industry is subject to economic, business and regulatory factors that are largely beyond Embark’s and its partners’ control, any of which could have a material adverse effect on the operations of its partners and ultimately on Embark.
Risks Related to Embark’s Technology, Business Model, and Industry
Embark has significantly reduced its employee base and operations and is exploring strategic alternatives, and there is substantial doubt about Embark’s ability to continue as a going concern.
On March 3, 2023, Embark announced a reduction in its workforce by approximately 230 employees, estimated to result in charges of approximately $7 million to $11 million. The decision was based on cost-reduction initiatives intended to reduce operating expenses. Concurrently, with the reduction in force, Embark also announced that its Board approved a process to explore, review and evaluate a range of potential strategic alternatives available to it, 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. No assurance can be given that the Company’s exploration of strategic alternatives will result in any change in strategy and there is substantial doubt about Embark’s ability to continue as a going concern. To the extent the Board elects to pursue a strategic alternative, there would be no guarantee of success and such pursuit could disrupt the Company’s workforce, partnerships and other commercial relationships or prospects. In addition, if the Board were to decide to , wind up or dissolve Embark, the process will be subject to uncertainties and it is possible that there will be no distribution made to stockholders. Additionally, extraordinary corporate actions by a company, such as a strategic transaction, nontraditional financing, , winding up or dissolving, may lead to lawsuits being filed that company. If such a lawsuit is filed Embark, the could be expensive and management’s attention from implementing strategic alternative planning.
Autonomous driving is an emerging technology and involves significant risks and uncertainties.
Embark’s autonomous vehicle technology is highly dependent on internally-developed technology as well as on partnerships with third parties that could include semi-truck OEMs, carriers and other suppliers. Embark develops and integrates its autonomous driving technology and works with OEMs and other suppliers to develop autonomous driving technology hardware.
While Embark’s autonomous driving technology, including the Embark Universal Interface, Embark Driver and Embark Guardian is designed to be compatible with all major OEM platforms, Embark does not control many aspects of semi-truck production. The timely development and performance of its autonomous driving programs is dependent on the materials, cooperation, and quality delivered by OEMs and other production stakeholders. Embark’s technology is designed to interface with systems and components outside of its design and production control, including those related to braking, steering and gear shifting. There can be no assurance that those applications can be developed and validated at the high reliability standard required for L4 autonomous driving in a cost-effective and timely manner. Embark’s dependence on OEMs exposes it to the risk that components manufactured by OEMs or other suppliers could contain defects that would cause Embark’s autonomous driving technology to not operate as intended.
In addition, Embark’s autonomous driving technology may be implemented to complement the infrastructure used by its shipper and/or carrier partners, and an appropriate implementation will require the cooperation of these partners. A failure of a shipper or carrier partner to provide required information, resources or other support may slow or compromise aspects of its technology either in the implementation phase or operationally.
Although Embark believes that its algorithms, data analysis and processing, and artificial intelligence technology are promising, it cannot assure you that its technology will achieve the necessary reliability for L4 autonomy at commercial scale. For example, Embark is always improving its technology in terms of handling non-compliant driving behavior by other cars on the road as well as other real world conditions. There can be no assurance that Embark’s data analytics and artificial intelligence could predict every single potential issue that may arise during the operation of its technology.
Embark currently controls a small R&D fleet of trucks to further develop its autonomous driving technology and demonstrate its technology. To date, all of Embark’s autonomous miles driven have been “driver in.” There can be no assurance that Embark will successfully transition to “driver out” operations on its expected schedule or that its R&D fleet will successfully develop and/or prove out its autonomous driving technology.
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Embark has a limited operating history and an unproven business model in a new market and faces significant challenges as its industry is rapidly evolving. Its prospects may be considered speculative and any failure to commercialize its strategic plans would have an adverse effect on its operating results and business, harm its reputation and could result in substantial liabilities that exceed its resources.
Embark commenced operations in 2016 and launched its Partner Development Program in April 2021, a program to bring together leading shippers and carriers to work on autonomous trucking technology. Embark’s business model relies on the adoption of its autonomous vehicle technology by its partner carriers and the continued cooperation of OEMs with its universal interface. While Embark believes this model is an efficient way to develop and implement its technology, its business model is unproven and there can be no assurance that an alternative model adopted by its competitors in the autonomous vehicle space will not prove superior. In addition, the market for autonomous vehicle technology is rapidly evolving.
You should consider Embark’s business and prospects in light of the risks and challenges it faces as a new entrant into a novel industry, including, among other things, with respect to its ability to:
• navigate an evolving and complex regulatory environment and product liability regime;
• design, outfit, and produce safe, reliable, and quality L4 autonomous semi-trucks equipment with its OEM partners on an ongoing basis;
• improve and enhance its software and autonomous technology;
• design, and develop software and technology in a timely manner;
• establish and expand its user base among shippers and carrier partners;
• successfully market its other products and services;
• properly price its products and services;
• improve and maintain operational efficiency;
• maintain a reliable, secure, high-performance, and scalable technology infrastructure;
• attract, retain, and motivate talented employees;
• enter into successful strategic relationships with carriers, OEMs and shippers;
• protect its intellectual property;
• keep its technology secure and compliance with data privacy and cybersecurity requirements;
• anticipate and adapt to changing market conditions, including technological developments and changes in competitive landscape; and
• build a well-recognized and respected brand.
If Embark fails to address any of these risks and challenges, its business may be materially and adversely affected and Embark may be forced to alter its business model in ways that are difficult to predict, or may ultimately determine that the business should be wound down. There are also a number of additional challenges to L4 autonomous driving, many of which are not within Embark’s control, including market acceptance of autonomous driving, governmental licensing requirements, concerns regarding data security and privacy, actual and threatened litigation (whether or not a judgment is rendered against Embark), and any general negative perceptions regarding autonomous vehicle technology due to safety, security, job displacement or other reasons. There can be no assurance that the market will accept Embark’s technology, in which case its future business, results of operations and financial condition could be affected.
To implement Embark’s business plan, additional capital will be required beyond the amount raised to date. Furthermore, the implementation of a new business model (or an alternative business model) in an evolving industry poses a number of challenges, many of which are beyond Embark’s control, including unknown future challenges and opportunities, substantial risks and expenses in the course of entering new markets and undertaking marketing activities. The likelihood of Embark’s success must be considered in light of these risks, expenses, complications, delays, and the competitive environment in which it operates. There is, therefore, substantial uncertainty as to whether Embark’s business plan will prove successful, and it may not be able to generate significant revenue, raise additional capital, or operate profitably. Embark will continue to encounter risks and difficulties frequently experienced by early stage commercial companies, including scaling up infrastructure and headcount, and may encounter expenses, , or
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delays in connection with its growth. While Embark’s business model is designed to be minimally capital intensive, there can be no assurance that its expectation regarding future capital requirements will be correct.
The extent of Embark’s future losses and the timing of any possible profitability, if ever achieved, are highly uncertain. Further, Embark cannot predict the rate of adoption or acceptance of its technology by potential customers to the extent that it continues its commercialization plan.
Embark’s technology may raise safety or other automation-related concerns causing it to fail to gain acceptance from users and other stakeholders in the freight transportation industry.
Demand for autonomous driving technology depends to a large extent on general, economic, political, and social conditions in a given market. The market opportunities Embark is pursuing are at an early stage of development, and it is difficult to predict user demand or adoption rates for its solutions, or the future growth of the markets in which Embark operates. Despite the fact that the automotive industry has engaged in considerable effort to research and test L2 and L3 autonomous cars, Embark technology targeting L4 autonomous semi-trucks requires significant investment and may never be commercially successful on a large scale, or at all. Embark relies on its existing partnerships with carriers and shippers, as well as its ability to develop new partnerships, to implement its autonomous vehicle technology. If carriers fail to embrace Embark’s technology or cost pressure and current labor markets change in the future, its technology may not become adopted by enough carriers to make Embark’s business model commercially viable. In addition, Embark may rely on OEM manufacturer adoption of certain software and/or hardware requirements to operate profitably which may not occur, or occur in part or on a longer time frame than Embark anticipates.
Further, even if Embark succeeds in operating at commercial scale, because of the disruptive nature of its business to the freight transportation industry, key industry participants may not accept its technology, may develop competing services or may otherwise seek to subvert its efforts. For example, autonomous semi-trucks might displace individual semi-truck drivers and small fleet owners. Labor unions, workforce activists, regulators or political leaders may also raise concerns about autonomous semi-trucks displacing drivers or otherwise negatively affecting employment opportunities, as has been the case in other industries that have been subject to automation. This has in the past resulted, and could in the future result, in negative publicity, lobbying efforts to U.S. local, state, and federal, lawmaking authorities, or equivalent authorities in the foreign jurisdictions in which Embark seeks to do business, to implement legislation or regulations that make it more difficult to operate its business or boycotts of it or its users. While Embark is primarily focused on the domestic U.S. market, any future operations in foreign jurisdictions would require Embark to address complex, evolving and unique regulatory regimes and political regarding the national interest of such countries in their domestic shipping industry. Any such occurrences could materially Embark’s future business.
Additionally, regulatory, safety, and reliability issues, or the perception thereof, many of which are outside of Embark’s control, could also cause the public or its potential partners and users to lose confidence in autonomous solutions in general. The safety of such technology depends in part on user interaction and users, as well as other drivers, pedestrians, other obstacles on the roadways or other unforeseen events. For example, there have been several crashes involving automobiles using other autonomous driving technology resulting in death or personal injury, including both fully autonomous vehicles and vehicles where autopilot features are engaged. Even though these incidents were unrelated to Embark’s technology, such cases resulted in significant negative publicity and, in the future, could result in suspension or prohibition of self-driving vehicles. If safety and reliability issues for autonomous driving technology cannot be addressed properly, Embark’s business, prospects, operating results, and financial condition could be materially harmed.
Embark’s autonomous driving technology and related hardware and software could have undetected defects, errors or bugs in hardware or software which could create safety issues, reduce market adoption, damage its reputation with current or prospective users, result in product recalls or other actions, or expose it to product liability and other claims that could materially and adversely affect its business.
Embark’s autonomous driving technology is highly technical and very complex, and has in the past and may in the future experience defects, errors or bugs at various stages of development. Embark may be unable to timely correct problems to its partners’ and users’ satisfaction. Additionally, there may be undetected errors or defects especially as it introduces new systems or as new versions are released. These risks are particularly significant in the freight transport market given the high potential value of each load, as any such errors or defects could result in costly delays or losses, leading to the delay or of the adoption of autonomous driving technology in trucks.
There can be no assurance that Embark will be able to detect and fix any defects in its products prior to their sale to or installation for customers. Errors or defects in Embark’s products may only be discovered after they have been tested,
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commercialized, and deployed. If that is the case, Embark may incur significant additional development costs and product recall, repair or replacement costs, or liability for personal injury or property damage caused by such errors or defects, as these issues could result in claims against it. Embark’s reputation or brand may be damaged as a result of these problems and users may be reluctant to use its services, which could adversely affect its ability to retain existing users and attract new users, and could materially and adversely affect its financial results.
In addition, Embark could face material legal claims for breach of contract (e.g. with one or more of its partners), product liability, tort or breach of warranty, or be required to indemnify others, as a result of these problems. Any such lawsuit may cause irreparable damage to Embark’s brand and reputation. In addition, defending a lawsuit, regardless of its merit, could be costly and may divert management’s attention and adversely affect the market’s perception of Embark and its services. Additionally, Embark is operating in an emerging market with an undefined insurance liability framework and evolving expectations regarding indemnifications obligations. As the market terms for indemnification and insurance are established, they may develop in ways that are adverse to Embark. Embark’s business liability insurance coverage could prove inadequate with respect to a claim and future coverage may be on acceptable terms or at all. These product-related issues could result in Embark and its business could be materially and affected.
The operation of autonomous semi-trucks may be unfamiliar to Embark’s users and other road users.
Embark has developed Embark Driver and Embark Guardian to automate Embark’s carrier partners’ semi-trucks, but there can be no assurance that its technology will be perceived to be comparable to non-autonomous semi-trucks by carriers, other drivers or regulators. Embark’s proprietary artificial intelligence (“AI”) and machine vision capabilities are specifically engineered to interface with all major semi-truck OEMs and meet the demands of commercial trucks. In certain instances, these protections may cause the vehicle to behave in ways that are unfamiliar to drivers of non-autonomous driving trucks. For example, semi-trucks equipped with Embark’s L4 technology may adhere to safety rules in a stricter manner than some human drivers may be accustomed to.
Furthermore, there can be no assurance that Embark’s carrier partners will be able to properly adapt to the different operation processes for Embark’s L4 autonomous semi-trucks or that its Embark Universal Interface will continue to be compatible with semi-truck OEMs. For example, carriers may not be able to adapt their business processes to address activities such as the dispatching of trucks, pre-trip inspections, remote monitoring, and rescuing of trucks. Any accidents resulting from such failure to inspect, operate or maintain Embark’s L4 autonomous semi-trucks properly could harm its brand and reputation, result in adverse publicity, and product liability claims, and have a material adverse effect on its business, prospects, financial condition, and operating results.
Embark operates in a highly competitive market and some market participants have substantially greater resources. Embark competes against a large number of both established competitors and new market entrants.
The market for autonomous trucking and freight transport solutions is highly competitive. Many companies are seeking to develop autonomous trucking and delivery solutions. Competition in these markets is based primarily on technology, innovation, quality, safety, service, strategy, reputation, and price. Embark’s future success will depend on its ability to further develop and protect its technology in a timely manner and to stay ahead of existing and new competitors. Embark’s competitors in this market are working toward commercializing autonomous driving technology and may have substantial financial, marketing, research and development, and other resources. Some examples of Embark’s competitors include TuSimple, Waymo, Aurora, and Kodiak.
In addition, the carriers Embark serves operate in a competitive environment and face competition from other trucking companies that use autonomous or non-autonomous trucks, railroads, and air carriers. Traditional shipping fleets and other carriers operating with human drivers are still the predominant operators in the market. Because of the long history of such traditional freight transport companies serving the freight market, there may be many constituencies in the market that would resist a shift toward autonomous freight transport, which could include lobbying and marketing campaigns on a scale that Embark may not be able to successfully oppose, particularly because Embark’s technology will replace human-driven long haul semi-truck miles. In addition, the market leaders in the automotive industry (including the OEMs Embark has designed its technology to interface with) may start, or have already started, pursuing large scale deployment of autonomous vehicle technology on their own. These companies may have more operational and financial resources than Embark. Embark cannot guarantee that it will be able to effectively compete with them. Embark does not know how close these competitors are to commercializing autonomous driving systems.
Furthermore, although Embark believes that its technology is on the leading edge of autonomous vehicle development, many established and new market participants have entered or have announced plans to enter the autonomous vehicle
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market. Most of the existing participants have significantly greater financial, manufacturing, marketing, and other resources than Embark does and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale, and support of their products. New entrants may develop or leverage disruptive technology to commercialize their offerings more quickly than Embark. If existing competitors or new entrants are able to commercialize earlier than expected, Embark’s competitive advantage could be adversely affected.
Disruptions to the trucking industry, including changes in transportation and shipping infrastructure, could adversely impact Embark’s business and operating results.
Embark’s business and financial performance are affected by the health of the U.S. truck freight industry, which is reliant on infrastructure maintained by third parties and is affected by risks that are largely out of the control of industry participants.
Embark’s partners may experience capacity constraints due to increased demand for transportation services and decaying highway infrastructure. In 2021, the Infrastructure Investment and Jobs Act (“IIJA”, PL 117-58) was signed into law and will provide significant federal funding to improve and maintain the nation’s deteriorating infrastructure. While the bill included significant investments in the nation’s roadway infrastructure, the benefits of the legislation will likely take years to realize. In the meantime, poor infrastructure conditions and roadway congestion could slow service times, reduce operating efficiency and increase maintenance expense for truck operators. Some states have explored or instituted road-usage programs, truck-only tolling, congestion pricing, and fuel tax increases in order to make more immediate infrastructure investments. In addition, while climate resilience also received sizable investments in the IIJA, risks including harsh weather or natural disasters, such as hurricanes, tornadoes, fires and floods, global pandemics and acts of terrorism could further damage existing infrastructure. Damage or further of highway infrastructure could impact Embark’s partners and ultimately Embark’s business and operating results by increasing costs associated with truck freight. While the bill does not directly earmark money for freight rail programs, it does increase funding to numerous discretionary grant programs of which freight rail entities are eligible recipients. Sizeable investments through these or other programs into the freight rail industry, as well as IIJA’s investments in port and waterways infrastructure could impact the truck freight industry, and ultimately Embark.
Risks Related to Embark’s Dependence on Third Parties
Embark’s business model depends on acceptance of its technology by third-party carriers and shippers, including through attracting new customers and retaining existing customers, and Embark’s existing relationships with key business partners are subject to non-binding agreements which may be cancelled in the future. Business collaboration with partners is subject to risks, and these relationships may not lead to significant revenue. Any adverse change in Embark’s cooperation partners, including the cancellation of existing agreements, or failure to attract and retain customers, could harm its business.
Embark does not intend to operate its own freight shipping network and Embark does not produce or sell complete semi-trucks. Accordingly, Embark’s business model depends on carriers and shippers integrating and deploying its technology into their new semi-trucks and OEMs willing to allow Embark’s technology to be incorporated to their vehicles. The strategic business relationships are and will continue to be an important factor in the growth and success of Embark’s business. Embark has alliances and partnerships with certain such companies in the trucking and automotive industry to help Embark in its efforts to continue to enhance its technology, commercialize its solutions, and drive market acceptance. Embark has growing partnerships with leading carriers, such as Werner Enterprises, Bison Transport and certain shippers such as AB Inbev, and will continue to cultivate these partnerships while establishing new ones in the future. There can be no assurance that these relationships will continue or that Embark’s efforts to develop new partnership will be successful. In addition, Embark will also need to identify and negotiate additional relationships with other third parties, such as those who can provide service centers, maintenance, refueling, roadside service, towing, sensor support, and financing services in connection with the build out of Embark’s Transfer Hub network or other aspects of its business. While Embark is pursuing partnerships with truck facility operators and expects to partner with other facility owners and real estate developers to build out its Transfer Hub network, there can be no assurance that these partnerships will continue or prove . Embark may not be to identify and negotiate definitive agreements with these third parties to provide the services Embark would require on terms that are or at all, which would cause Embark to incur increased costs to develop and provide these capabilities.
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Collaboration with these third parties is subject to risks, some of which are outside Embark’s control. Third parties may be unwilling to deepen a contractual partnership beyond the exploratory stage, may include onerous provisions or demand exclusivity or pricing concessions that would negatively impact Embark’s business model or growth. Embark could experience delays to the extent its partners do not meet agreed upon timelines or experience capacity constraints. Embark could also experience disagreement in budget or funding for any joint development project, including its Transfer Hubs. There is also a risk of other potential disputes with partners in the future, including with respect to intellectual property rights. Embark’s ability to successfully commercialize could also be adversely affected by perceptions about the quality of its partners’ trucks.
If Embark’s existing partner agreements were to be terminated, Embark may be unable to enter into new agreements on terms and conditions acceptable to Embark. Failure to obtain replacement partners or agreements could delay adoption of Embark’s technology or build out of its Transfer Hub network. Any of the foregoing could adversely affect Embark’s business, results of operations, and financial condition.
Embark relies on third-party suppliers and because some of the key components in Embark’s systems come from limited or sole sources of supply, Embark is susceptible to supply shortages, long lead times for components, and supply changes, or system unavailability, any of which could disrupt its supply chain and could delay deliveries of Embark’s products to users. In addition, any inability of Embark to adequately forecast supply and demand for its products or the manufacturing capacity of its suppliers and partners could result in a variety of inefficiencies in its business and hinder its ability to generate revenue.
Many of the components that are used to outfit semi-trucks with Embark’s autonomous technology are sourced from third-party suppliers. Component parts sourced from third parties include cameras, radars, LiDARs and GPS systems. Embark does not have any experience in managing a large supply chain to manufacture and deliver products at scale. In addition, some of the components come from limited or sole sources of supply. Embark is also dependent on its suppliers’ production timeline for supplying automotive-grade LiDAR at scale. Embark is therefore subject to the risk of shortages and long lead times in the supply of these components and the risk that its suppliers discontinue or modify components used in its technology. In addition, Embark’s agreements with its third party suppliers are non-exclusive and it is reasonably foreseeable that OEM relationships with such suppliers will be non-exclusive in the future. Embark’s suppliers may dedicate more resources to other companies, including Embark’s competitors. Embark may in the future experience component shortages and price fluctuations of certain key components and materials, and the predictability of the availability and pricing of these components may be limited. Component shortages or pricing fluctuations could be material in the future. In the event of a component , supply , product or material pricing change from suppliers of these components, Embark may not be to develop alternate sources in a timely manner or at all in the case of sole or limited sources.
In addition, Embark uses the services of certain software suppliers in its technology, such as cloud hosting providers, that Embark relies upon to meet its uptime, data security and other commercial commitments. Developing alternate sources of supply for these components or systems may be time-consuming, difficult, and costly and Embark may not be able to source these services on terms that are acceptable to it, or at all, which may undermine Embark’s ability to meet its requirements or to fill user orders in an appropriate manner.
Any interruption or delay in the supply of any of these parts, components or services, or the inability to obtain these parts, components or services from alternate sources at acceptable prices and within a reasonable amount of time, would adversely affect Embark’s ability to meet scheduled technology deliveries to users. This could adversely affect Embark’s relationships with its users and could cause delays in its ability to expand its operations. If Embark is unable to source necessary components for its Embark Universal Interface in quantities sufficient to meet its requirements on a timely basis, or is unable to ensure that OEMs are able to source Embark Universal Interface components, Embark will not be able to have sufficient ability to ensure user demand is met, which may result in users using competitive services instead of Embark’s.
Embark’s approach of creating a manufacturer-agnostic product exposes it to the risk of exclusive competitor partnerships and other challenges that limit integration of its technology to products of multiple OEMs.
While Embark designed its platform, the Embark Universal Interface, with the aim to access the broadest market by allowing carriers and shippers to utilize Embark’s services while still maintaining their OEM of choice, this aim of universality means that Embark’s relationships with OEMs are neither binding nor exclusive. If a competitor chooses to sign an exclusivity agreement with an OEM that prevents Embark from outfitting those manufacturer’s semi-trucks,
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Embark’s ability to reach production commitments at the intended breadth will be materially and adversely affected. Embark’s potential inability to ensure a particular OEM’s trucks are outfitted with Embark technology may materially and adversely impact its value proposition to shippers’ and carriers’ that utilize or may wish to utilize that OEM’s semi-trucks.
If a competitor comes to a preferential agreement with an OEM that requires the OEM preferentially manufacture semi-trucks for the competitor over Embark-equipped customers, this will put Embark at a competitive disadvantage in terms of its ability to fulfill orders in a timely manner. This will expose Embark to additional risks from manufacturer bottlenecks and component shortages. Any potential delay or interruption in Embark’s ability to ensure demand is met may lead its customers to seek a competitor instead. If changing market conditions dictate Embark to pursue exclusivity or preferential agreements with an OEM manufacturer, there can be no assurance that Embark will be successful in doing so.
OEMs operate in a highly competitive industry that pushes OEMs to constantly make changes to their products. Although, Embark believes that its product can be successfully integrated to semi-trucks of multiple OEMs, changes made by OEMs to their products and other unforeseen technological developments might limit integration of Embark’s platform to products of multiple OEMs or make such integration more difficult. Furthermore, Embark’s model exposes it to differing requirements among OEMs which may require it to expend more resources than competitors that work with a single OEM. Such technological developments may have material and adverse effects of Embark’s business, results of operations, and financial condition.
Embark depends on an international supply chain that is subject to risk of foreign regulatory requirements and trade policy.
Many of the components that Embark requires for outfitting its trucks are sourced from international third-party suppliers. Changes in global political, regulatory and economic conditions, or changes in laws and policies governing foreign trade, manufacturing, development, and investment in the territories or countries where Embark currently purchases components, could adversely affect its business. The U.S. has recently instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the U.S., and other countries. A number of other nations have proposed or instituted similar measures directed at trade with the U.S., in response. As a result of these developments, there may be greater restrictions and economic disincentives on international trade that could adversely affect Embark’s business. For example, such changes could adversely affect the automotive market, and Embark’s ability to access key components. It may be time-consuming and expensive for Embark to alter its business operations to adapt to or comply with any such changes, and any to do so could have a material effect on its business, financial condition and results of operations.
Risks Related to Embark’s Financial Position and Need for Additional Capital
Embark is an early stage company with a history of losses, and expects to incur significant expenses and continuing losses for the foreseeable future.
Embark incurred net losses of $103.2 million and $124.2 million for the years ended December 31, 2022 and 2021, respectively and has not recognized revenue to date. Embark has successfully shipped freight for shippers and carriers to utilizing its technology and Transfer Hub network but there is no guarantee that Embark’s partnership model will get traction, grow or otherwise be successful or achieve sufficient scale for commercial viability. Embark’s potential profitability is dependent upon a number of factors, many of which are beyond its control.
Embark expects the rate at which it will incur losses to be significantly higher in future periods as Embark:
• designs, develops, manufactures and implements its Embark Universal Interface;
• seeks to achieve and commercialize full L4 autonomy for its Embark-equipped semi-trucks;
• expands its design, development, maintenance, and repair capabilities;
• expands or shifts its operation to new or adjacent markets and/or jurisdictions;
• responds to competition in the autonomous driving market and from traditional freight transportation providers;
• responds to evolving regulatory developments in the nascent autonomous vehicle market;
• increases its sales and marketing activities; and
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• increases its general and administrative functions to support its growing operations following the Transactions.
Because Embark will incur the costs and expenses from these efforts before it receives any incremental revenue, its losses in future periods will be significant. In addition, Embark may find that these efforts are more expensive than it currently anticipates or that these efforts may not result in revenue, which would further increase its losses. In particular, Embark expects to incur substantial and potentially increasing research and development (“R&D”) costs. Embark’s R&D costs were $79.2 million and $55.3 million during the years ended December 31, 2022 and 2021, respectively, and are likely to grow in the future. While Embark expects to operate a small fleet of semi-trucks for purposes of R&D and does not intend to maintain a large scale freight network of Embark-owned semi-trucks, the acquisition and maintenance of semi-trucks is expensive, and changing market conditions may force Embark to alter its business model in the future necessitating a larger fleet. Because Embark accounts for R&D as an operating expense, these expenditures will adversely affect its results to operations in the future. Further, Embark’s R&D program may not produce successful results, and Embark’s new products may not achieve market acceptance, create additional revenue, or become .
To the extent that Embark expects to continue to engage in resource-intensive R&D activities for the foreseeable future, Embark will be required it to raise additional funds and these funds may not be available to Embark on attractive terms when it needs them, or at all. If Embark cannot raise additional funds on attractive terms when it needs them, its operations and prospects would be negatively affected and/or Embark may not be able to continue as a going concern.
To date, Embark has not generated any revenue, and prior to the consummation of the Business Combination, Embark financed its operations primarily through the issuance of equity securities in private placements. As of December 31, 2022, and December 31, 2021 Embark had cash and cash equivalents of $157.6 million and $264.6 million respectively. Embark will need to raise additional capital to continue to fund its research and development activities and to improve its liquidity position. Embark’s ability to obtain the necessary financing to carry out its business plan is subject to a number of factors, including general market volatility, investor acceptance of its business plan, regulatory requirements, including foreign investment reviews, and the successful development of its autonomous technology. These factors may make the timing, amount, terms, and conditions of such financing unattractive or unavailable to Embark.
Embark may raise these additional funds through the issuance of equity, equity related, or debt securities. To the extent that Embark raises additional financing by issuing equity securities or convertible debt securities, stockholders of the combined business may experience substantial dilution, and to the extent Embark engages in debt financing, it may become subject to restrictive covenants that could limit its flexibility in conducting future business activities. Financial institutions may request credit enhancement such as third-party guarantee and pledge of equity interest in order to extend loans to Embark. Embark cannot be certain that additional funds will be available to it on attractive terms when required, or at all. If Embark cannot raise additional funds when it needs them, its financial condition, results of operations, business, and prospects would be materially adversely affected and/or Embark may not be able to continue as a going concern.
Embark’s resource-intensive R&D and commercialization activities may require Embark to raise additional funds and these funds may not be available to Embark terms when they are needed. If Embark cannot raise additional funds on attractive terms when it needs them, its strategy, operations and prospects could be negatively affected, including the possibility that a lack of funds could cause Embark’s business to fail and liquidate with little or no return to investors.
The continued R&D, marketing and commercialization of Embark’s technology is expected to require significant capital expenditures to reach commercial scale. To date, Embark has not generated any revenue, and as of December 31, 2022, Embark had cash and cash equivalents of $157.6 million. Embark may need to raise additional capital to continue to fund its R&D and commercialization activities and to improve its overall liquidity position. Given the current interest rates and capital markets environment, raising additional capital will be challenging, may require acceptance of highly onerous terms or may not be possible at all and as a result, Embark may not be able to achieve the level of commercialization it had previously anticipated by 2024. Embark anticipates that if it is not able to raise additional capital, then it may have to adjust its commercialization plans to explore more limited uses of its technology, alternative services or adjacent markets. If adequate funds are not available on a timely or reasonable basis, Embark may be required to delay, limit, reduce or terminate its research and development, operations or commercialization efforts. Embark could be to sell or of certain of its rights or assets. As a result of any such strategic adjustment or an to raise adequate funds on commercially reasonable terms, Embark’s financial condition, results of operations, business, and prospects are expected to be materially affected, including the possibility that a of funds could cause Embark’s business to and with little or no return to investors.
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General worldwide economic conditions could adversely affect Embark’s operating results, financial condition and/or ability to commercialize its technology.
The U.S. and global economy are facing growing inflation, higher interest rates and potential recession. Adverse changes in economic conditions, high inflation and increasing geopolitical risks, such as the ongoing conflict in the Ukraine, could harm Embark’s operating results and financial conditions. Regional or global economic downturns could adversely affect demand for Embark’s technology through an impact on demand for freight shipping, impairment of the profit margins of Embark customers or through other impacts which could adversely affect its operating results. Inflation could also drive increases in Embark’s costs of operations, commodities, labor, materials and services, which Embark may not be able to successfully pass along to its customers. If Embark elects to incur indebtedness, higher interest rates could result in significant cash usage to service such indebtedness.
These conditions, should they occur for an extended period of time, could adversely affect Embark and its customers and partners, which ultimately could affect Embark’s operating results and financial condition. As a result, Embark is continuing to evaluate key factors such as its commercialization timeline, scope of commercialization, anticipated headcount and operating expenses. In order to best position Embark for success against current and future anticipated commercialization objectives, Embark is considering and may develop new or adjacent business models and markets ancillary to its current commercialization roadmap but there is no assurance that Embark will be able to successfully implement those business models and/or enter into ancillary or adjacent markets.
Embark may be subject to risks associated with potential future strategic alliances, partnerships, investments or acquisitions, all of which could divert management’s attention, result in Embark incurring significant costs or operating difficulties and dilution to its stockholders, disrupt its operations and adversely affect its business, results of operations or financial condition.
Although Embark has no current acquisition plans, if appropriate opportunities arise, it may acquire additional assets, products, technology or businesses that are complementary to its existing business. Any future acquisitions and the subsequent integration of new assets and businesses would require significant attention from Embark’s management and could result in a diversion of resources from its existing business, which in turn could have an adverse effect on its operations, and consequently its results of operations and financial condition. Acquired assets or businesses may not generate the financial results Embark expects. Acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions may be significant.
The forecast of Embark’s operating and financial results relies in large part upon assumptions and analyses developed by its management team. If these assumptions or analyses prove to be incorrect, Embark’s actual operating results may be materially different from its forecasted results.
Whether actual operating and financial results and business developments will be consistent with Embark’s expectations and assumptions depends on a number of factors, some of which are outside Embark’s control, including, but not limited to:
• its ability to develop and commercialize its technology in a timely manner;
• its ability to obtain sufficient capital and successfully execute its growth strategy;
• its ability to manage its team;
• its ability to partner with carriers;
• its ability to secure and maintain required strategic supply arrangements;
• projected improvements in technology;
• its ability to maintain relationships with major OEMs;
• positive developments in the regulatory environment for autonomous vehicles;
• competition, including from established and future competitors;
• its ability to attract and retain management or other employees who possess specialized market knowledge and technical skills; and
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• the overall strength and stability of the U.S. economy.
Unfavorable changes in any of these or other factors, some of which are beyond Embark’s control, could cause actual results to differ materially from Embark’s forward-looking information included in this Annual Report on Form 10-K, and could materially and adversely affect Embark’s business, results of operations or financial condition.
Embark’s cash and cash equivalents could be adversely affected if the financial institutions in which it holds its cash and cash equivalents fail.
Embark regularly maintains cash balances at third-party financial institutions, including Silicon Valley Bank, in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. Market conditions can impact the viability of these institutions. On March 10, 2023, the California Department of Financial Protection and Innovation closed Silicon Valley Bank and appointed the FDIC as receiver, and as a result, Embark did not have access to its invested cash or cash equivalents. Although Embark has transferred its funds from Silicon Valley Bank to other financial institutions, it is possible that another failure of a depository or other financial institution could further impact Embark’s access to its cash and cash equivalents. Embark could suffer losses with respect to any uninsured depository accounts, if a depository institution used by Embark failed and the institution’s assets were insufficient to cover its holdings and/or the United States government did not take actions to support deposits in excess of existing FDIC insured limits. Any such losses could have a material effect on Embark’s liquidity, financial condition and results of operations. Similarly, government action with respect to a financial institution Embark relies upon could impact Embark.
Risks Related to Embark’s Employees and Business Operations
Embark depends on the experience and expertise of its senior management team, technical engineers, and certain key employees, and the loss of any executive officer or key employee, or the inability to identify and recruit executive officers, technical engineers, and key employees in a timely manner, could harm its business, operating results, and financial condition.
Embark’s success depends largely upon the continued services of its key executive officers and certain key employees. Embark relies on its executive officers and key employees in the areas of business strategy, research and development, marketing, sales, services, and general and administrative functions. From time to time, there may be changes in Embark’s executive management team or key employees resulting from the hiring or departure of executives or key employees, which could disrupt Embark’s business. Embark does not maintain key-man insurance for any member of its senior management team or any other employee. Embark does not have employment agreements with its executive officers or other key personnel that require them to continue to work for it for any specified period and, therefore, they could terminate their employment with Embark at any time. The loss of one or more of Embark’s executive officers or key employees could have a serious adverse effect on its business.
To execute Embark’s growth plan, it must attract and retain highly qualified personnel. Competition for these personnel is intense in the technology industry, especially for engineers with high levels of experience in artificial intelligence and designing and developing autonomous driving related algorithms. Furthermore, it can be difficult to recruit personnel from other geographies to relocate to Embark’s San Francisco-based headquarters. Embark may also need to recruit highly qualified technical engineers internationally and therefore subject it to the compliance of relevant immigration laws and regulations. Embark has, from time to time, experienced, and expects to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which Embark competes for experienced personnel have greater resources and can offer more attractive compensation packages for new employees. If Embark hires employees from competitors or other companies, their former employers may attempt to assert that these employees or Embark has breached their legal obligations, resulting in a diversion of Embark’s time and resources and potentially in litigation. Conversely, if competitors are to attract key Embark employees to leave, Embark may face the risk of intellectual property and key talent. In addition, job candidates and existing employees often consider the value of the share incentive awards they receive in connection with their employment. If the perceived value of Embark’s share awards , it may affect its ability to recruit and retain highly skilled employees. If Embark to attract new personnel on a timely basis or to retain and motivate its current personnel, it may not be to commercialize and then expand its technology offering in a timely manner and its business and future growth prospects could be affected.
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Embark’s business plan, particularly Embark Guardian, also relies on hiring qualified personnel tasked with providing support and monitoring of trucks equipped with its technology. As a new type of job in an emerging field, Embark might have difficulty hiring, training and retaining enough qualified personnel with success. Embark’s potential inability to hire and train enough personnel for those tasks might inhibit or delay its growth, which might have a materially adverse effect on its business, financial condition and results of operations.
Embark relies on equity-based compensation to attract, retain and motivate its executives and key employees, which may result in excessive price pressures on Embark’s Class A common stock and/or stockholder dilution during periods in which Embark’s share price is depressed.
Embark relies upon equity awards including stock option awards, RSUs and PSUs to attract and retain the key talent it relies upon. During periods in which Embark’s share price declines, Embark may be required to issue equity awards covering a larger number of shares than anticipated to meet the current market level of compensation required to retain key executives and employees given the strong demand for talent in the technology industry. As a result, Embark’s share price may face incremental downward pressure as employees sell more shares into the market than anticipated. In addition, stockholders may experience additional dilution to the extent Embark is required to seek, and obtains, stockholder approval to expand the size of its employee equity incentive pool in order to maintain a competitive compensation position.
If Embark fails to manage its remaining team effectively, it may be unable to execute its business plan, maintain high levels of service, or adequately address competitive challenges.
Embark must continue to manage its remaining employees, operations, finances, research and development, and capital investments efficiently. Embark’s productivity and the quality of its solutions may be adversely affected if Embark does not appropriately coordinate across its various teams. If Embark does not adapt to its new level of staffing and adjust accordingly, it may be unable to execute its business plan, maintain high levels of service, or adequately address competitive challenges.
Embark’s management team has limited experience managing a public company.
Most of the members of Embark’s management team have limited, if any, experience managing a publicly-traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies. Embark’s management team may not successfully or efficiently manage its transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents require significant attention from Embark’s senior management and could divert their attention away from the day-to-day management of its business, which could adversely affect its business, financial condition, and operating results.
Embark may be subject to breach of contract, product liability or warranty claims and other legal proceedings in the ordinary course of business that could result in significant direct or indirect costs, including reputational harm, increased insurance premiums or the need to self-insure, which could adversely affect its business and operating results.
Embark’s technology is used for autonomous driving, which presents the risk of significant injury, including fatalities. Embark may be subject to claims if one of its or a carrier partners’ semi-truck is involved in an accident and persons are injured or purport to be injured or if property is damaged either directly through a product liability claim, or indirectly via an indemnification demand or breach of partnership contract claim or otherwise. Embark may face claims arising from or related to misuse or claimed failures of its software. Any liability claim may subject Embark to lawsuits and substantial monetary damages, product recalls or redesign efforts, and even a meritless claim may require Embark to it, all of which may generate publicity and be expensive and time-consuming. Any insurance that Embark carries may not be sufficient or it may not apply to all situations. The risk of , death, and substantial to property is much higher with a substantially heavier fast-moving autonomous semi-truck, as compared to a with a moving autonomous passenger car in an urban environment. Additionally, semi-trucks may carry cargo that could increase the cost of in the event of an . In involving semi-trucks, most of the resulting are outside of the semi-truck. If Embark experiences such an event or multiple events, Embark’s insurance premiums could increase significantly or insurance may not be available to it at all. Further, if insurance is not available on commercially reasonable terms, or at all, Embark might need to self-insure. In addition, lawmakers or governmental agencies could pass laws or adopt regulations that limit the use of autonomous trucking technology or increase liability
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associated with its use. Any of these events could adversely affect Embark’s brand, relationships with its carrier partners, operating results, or financial condition.
OEMs and their suppliers may experience significant delays in the manufacture and launch of Embark-enabled autonomous semi-trucks, which could harm Embark’s business and prospects. Similarly Embark’s shipper and carrier partners may find it difficult to finance the acquisition of Embark-enabled autonomous semi-trucks.
Any delay in the broad commercial acceptance and viability of Embark’s autonomous vehicle technology could materially damage its brand, business, prospects, financial condition, and operating results. Even if OEM manufacturers adopt Embark’s technology in their semi-trucks as intended, these manufacturers often experience delays in the manufacture and commercial release of new products, meaning that implementation after adoption may be delayed. To the extent Embark delays the launch of its technology on a “driver-out” basis, its growth prospects could be adversely affected. Furthermore, Embark relies on third party suppliers for the provision and development of many of the key components and materials that are incorporated into its Embark Universal Interface, Embark Driver and Embark Guardian technology. To the extent its suppliers experience any delays in providing Embark with or developing necessary components, Embark could experience delays in delivering on its timelines.
If Embark’s autonomous vehicle technologies fail to perform as expected, are inferior to those of its competitors, or are perceived as less safe or more expensive than those of its competitors or non-autonomous vehicles, Embark’s financial performance and prospects would be adversely impacted.
Several companies other than Embark, including TuSimple, Waymo, Aurora and Kodiak, are developing autonomous vehicle technologies, either alone or through collaborations with car and/or truck manufacturers, with a focus on the truck freight market and/or other transportation industries. Embark expects that one or more these competitors will compete directly with Embark. In the event that Embark’s competitors bring to market autonomous vehicles capable of serving the freight and trucking industries before Embark does, or their technology is or is perceived to be superior to Embark’s, the competitors may be able to leverage such technology to compete more effectively with Embark, which would adversely impact its financial performance and prospects.
If Embark is unable to establish and maintain confidence in its long-term business prospects among users, securities and industry analysts, and within its industries, or is subject to negative publicity, then its financial condition, operating results, business prospects, and access to capital may suffer materially.
Users may be less likely to utilize Embark’s autonomous technology if they are not convinced that Embark’s business will succeed or that its service and support and other operations will continue in the long term. Similarly, suppliers and other third parties will be less likely to invest time and resources in developing business relationships with Embark if they are not convinced that its business will succeed. Accordingly, in order to build and maintain its business, Embark must maintain confidence among users, suppliers, securities and industry analysts, and other parties in its long-term financial viability and business prospects. Maintaining such confidence may be particularly complicated by certain factors including those that are largely outside of Embark’s control, such as its limited operating history at scale, user unfamiliarity with its solutions, any delays in scaling manufacturing, delivery, and service operations to meet demand, competition and uncertainty regarding the future of autonomous vehicles, and its performance compared with market expectations.
The Embark Founders have control over all stockholder decisions because they control a substantial majority of Embark’s voting power through “high vote” voting stock.
The dual-class structure of Embark’s common stock has the effect of concentrating voting control with the Embark Founders who hold in the aggregate 70% of the voting power of Embark’s capital stock with respect to most issues of corporate governance aside from amendment of the Amended and Restated Bylaws of Embark Technology, Inc., which will require a majority vote of both classes until a Trigger Date of up to two years from closing. This will limit or preclude your ability to influence corporate matters, including the election of directors, amendments to Embark’s organizational documents and any merger, consolidation, sale of all or substantially all of Embark’s assets, or other major corporate transaction requiring stockholder approval.
Class A common stock has one vote per share, and Class B common stock has ten votes per share. All the Class B common stock is held by the Embark Founders. Because of the ten-to-one voting ratio between Class B and Class A common stock, the holders of Class B common stock collectively control a majority of the combined voting power of common stock and therefore are able to control all matters submitted to Embark Technology stockholders for approval.
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This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments to Embark’s organizational documents, and any merger, consolidation, acquisition, sale of all or substantially all of Embark’s assets, dissolution or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for Embark’s capital stock that you may feel are in your best interest as one of Embark’s stockholders.
Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock means that no third party stockholders can leverage the high vote to offset the voting power held by the Embark Founders.
Pandemics and epidemics, including the COVID-19 pandemic, natural disasters, terrorist activities, political unrest, and other outbreaks could have a material adverse impact on Embark’s business, results of operations, financial condition, cash flows or liquidity, and the extent to which Embark will be impacted will depend on future developments, which cannot be predicted.
The COVID-19 pandemic has resulted in global supply chain disruptions, which Embark began to experience starting from 2020. Embark has and may continue to encounter supply chain distributions, which in some instances have affected purchase order lead times for trucks and hardware components. In the future, Embark may experience supply chain disruptions from third party suppliers and any such supply chain disruptions could cause delays in its development timelines. These supply chain trends that originated during the pandemic could continue to persist and have long-lasting adverse impact on Embark independently of the progress of the pandemic. Any prolonged and significant supply chain disruptions could have a material adverse impact on Embark’s business, results of operations and financial condition.
The extent to which COVID-19 impacts the business, results of operations, and financial condition of Embark and its partners and users will depend on future developments, which are uncertain and cannot be predicted, including, but not limited to, the occurrence of future outbreaks from new variants, including the ongoing outbreak of the Omicron variant, duration and spread of such outbreaks, their severity, the actions to contain the virus or treat its impact, including the widespread acceptance and efficacy of vaccines, and how quickly and to what extent normal economic and operating conditions can resume. Even if the COVID-19 outbreaks subside, Embark may continue to experience materially adverse impacts to its business as a result of its global economic impact, including any recession that has occurred or may occur in the future.
The occurrence of one or more major natural disasters, unusual weather conditions, epidemic or pandemic outbreaks, including the COVID-19 pandemic, terrorist attacks or disruptive political events and other calamities, each of which is out of Embark’s control, may result in materially adverse impacts to Embark’s business. Embark cannot assure you that any backup systems will be adequate to protect it from the effects of fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events. Any of the foregoing events may give rise to interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or of data or of software or hardware as well as affect Embark’s ability to provide services.
Embark has identified deficiencies that together constitute a material weakness in its internal control over financial reporting as of December 31, 2022 and 2021. If Embark fails to develop and maintain an effective system of internal control over financial reporting, it may not be able to accurately report its financial results in a timely manner, which may adversely affect investor confidence in Embark.
In connection with Embark’s financial statement close process for the year ended December 31, 2022, Embark identified the following deficiencies that, in combination, constitute a material weakness in the control environment contributing to a potential for there to have been accounting errors that are material to its financial statements. The deficiencies Embark identified resulted from inadequate general information technology controls in the areas of user access and program change-management over certain information technology systems that support the Company’s financial reporting processes.
A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of its consolidated financial statements would not be prevented or detected on a timely basis. These deficiencies could result in additional material misstatements to its consolidated financial statements that could not be prevented or detected on a timely basis.
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If not remediated, the material weakness could result in material misstatements in Embark’s annual or interim consolidated financial statements that might not be prevented or detected on a timely basis, or in delayed filing of required periodic reports. If Embark is unable to assert that its internal control over financial reporting is effective, or when required in the future, if Embark’s independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of the internal control over financial reporting, investors may lose confidence in the accuracy and completeness of Embark’s financial reports, the market price of Embark’s Class A common stock could be adversely affected and Embark could become subject to litigation or investigations by the stock exchanges, the SEC, or other regulatory authorities, which could require additional financial, compliance, and management resources.
With the oversight of senior management, Embark developed a remediation plan and has engaged external advisors and consultants to assist with the implementation of the plan. The Company's remediation efforts are focused on implementation of information technology (IT) controls to improve the completeness, timeliness and accuracy of the Company's financial reporting.
Embark continues to make progress on the remediation by implementing a strong set of business process and IT general internal controls. Embark believes that while significant progress has been made in implementing controls and remediating known issues in Q4 2022, management determined there is not sufficient time to complete testing of operating effectiveness before the end of December and demonstrate that the business process and IT controls are consistently operating effectively.
Embark believes progress on the measures outlined in the Remediation Plan should remediate the material weakness identified and strengthen its internal control over financial reporting. The remediation plan is estimated to take place over the next 6 to 12 months. Embark’s management will monitor the effectiveness of Embark’s remediation plans and will make changes management determines to be appropriate. Embark can give no assurance that this implementation will remediate these deficiencies in internal control or that additional material weaknesses or significant deficiencies in its internal control over financial reporting will not be identified in the future.
As a public company, Embark is required to maintain adequate internal control over financial reporting. If Embark fails to establish and maintain proper and effective internal control over financial reporting as a public company, its ability to produce accurate and timely consolidated financial statements could be impaired, investors may lose confidence in its financial reporting and the trading price of its shares may decline.
As a public company, Embark is required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act requires that Embark evaluate and determine the effectiveness of Embark's internal control over financial reporting. Additionally, once Embark no longer qualifies as an “emerging growth company,” the independent public accounting firm will be required to deliver an attestation report on the effectiveness of Embark’s internal control over financial reporting. An adverse report may be issued in the event the independent public accounting firm is not satisfied with the level at which Embark’s controls are documented, designed or operating.
When evaluating its internal control over financial reporting, Embark may identify material weaknesses that Embark may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If Embark identifies any additional material weaknesses in its internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that Embark’s internal control over financial reporting is ineffective, or if the independent public accounting firm is unable to express an opinion as to the effectiveness of Embark’s internal control over financial reporting, Embark could fail to meet its reporting obligations or be required to restate its consolidated financial statements for prior periods.
In addition, Embark’s internal control over financial reporting will not prevent or detect all errors and fraud. Because of the inherent limitations in all control systems, no evaluation can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
If there are material weaknesses or failures in Embark’s ability to meet any of the requirements related to the maintenance and reporting of its internal control, investors may lose confidence in the accuracy and completeness of Embark’s financial reports and that could cause the price of Embark’s Class A common stock to decline. In addition, Embark could become subject to investigations by the applicable stock exchange, the SEC or other regulatory authorities, which could require additional management attention and which could adversely affect its business.
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Embark has incurred and will continue to incur increased costs as a result of operating as a public company, and Embark’s management will devote substantial time to new compliance initiatives. As a public company, Embark is subjected to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules adopted, and to be adopted, by the SEC and the applicable stock exchange. Embark’s management and other personnel will need to devote a substantial amount of time to these compliance initiatives and may not effectively or efficiently manage Embark’s transition into a public company. Moreover, Embark expects these rules and regulations to substantially increase Embark’s legal and financial compliance costs and to make some activities more time-consuming and costly, compared to expenses Embark incurred as a private company. These increased costs will increase Embark’s net loss. For example, Embark expects these rules and regulations to make it more difficult and more expensive for Embark to obtain director and officer liability insurance and Embark may be forced to accept reduced policy limits or incur substantially higher costs to maintain the same or similar coverage. Embark cannot predict or estimate the amount or timing of additional costs Embark may incur to respond to the requirements it is subject to as a public company. The impact of these requirements could also make it more for Embark to attract and retain qualified persons to serve on its board of directors, its board committees or as executive officers.
Risks Related to Embark’s Intellectual Property, Information Technology and Data Privacy
Embark holds four patents and employs proprietary technology (know-how) and information that may be difficult to protect.
Embark currently relies heavily on trade secrets, proprietary know-how, and technology methods that it seeks to protect, in part, by confidentiality agreements. Embark cannot assure you that these agreements will not be breached, that it will discover any such breach, that it will have adequate remedies for any breach, or that its trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others. Similarly, Embark cannot assure you that it has entered into such agreements with each party that has or may have had access to its trade secrets or proprietary information. Embark has limited control over the protection of trade secrets used by its third-party partners or suppliers and could lose future trade secret protection if any unauthorized disclosure of such information occurs.
Embark currently holds four patents from the U.S. Patent and Trademark Office (“USPTO”). Therefore, Embark’s success depends, in part, on its ability to keep competitors from reverse engineering its products, methods, know-how and to maintain trade secrecy and operate without infringing on the proprietary rights of third parties. If Embark’s trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, Embark could have no right to prevent them from using that trade secret to compete with it. If any of Embark’s trade secrets were to be disclosed (whether lawfully or otherwise) to or independently developed by a competitor or other third party, it could have a material adverse effect on its business, operating results and financial condition.
Embark cannot assure you that the patents of others will not have an adverse effect on its ability to conduct its business, that any of Embark’s trade secrets and applications will be protected, that it will develop additional proprietary technology (know-how) or methods that are defensible against theft or will provide Embark with competitive advantages or will not be challenged by third parties.
Embark plans in the future to apply for and obtain patents on its software and hardware products. To the extent Embark does so, Embark may need to engage in costly and time consuming activities to enforce such patents. Furthermore, there can be no assurance that any such patent applications will be granted or even that patents Embark does obtain will be sufficient to protect its intellectual property or will be issued in a timely fashion to deter infringement.
Embark may become subject to litigation brought by third parties claiming infringement, misappropriation or other violation by Embark of their intellectual property rights.
The industry in which Embark operates is characterized by a large number of patents, some of which may be of questionable scope, validity or enforceability, and some of which may appear to overlap with other issued patents. As a result, there is a significant amount of uncertainty in the industry regarding patent protection and infringement. In recent years, there has been significant litigation globally involving patents and other intellectual property rights. Third parties may in the future assert that Embark has directly or indirectly infringed, misappropriated or otherwise violated their intellectual property rights. Embark may in the future receive letters from third parties that identify patents owned by third parties and invite Embark to obtain licenses to such patents. In any such case Embark may decide to engage in licensing discussions. Embark may not be able to obtain a commercially reasonable license or any license may not entirely resolve the potential risks of intellectual property infringement. As Embark faces increasing competition and as a public company,
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the possibility of intellectual property rights claims against Embark or its technology grows. Such claims and litigation may involve one or more of Embark’s competitors focused on using their patents and other intellectual property to obtain competitive advantage, technology companies with large patent portfolios in adjacent spaces or patent holding companies or other adverse intellectual property rights holders who have no relevant product revenue, and therefore Embark’s own pending patents and other intellectual property rights may provide little or no deterrence to these rights holders in bringing intellectual property rights claims against Embark. There may be intellectual property rights held by others, including issued or pending patents and trademarks, that cover significant aspects of Embark’s technologies or business methods, and Embark cannot assure you that it is not infringing or violating, and have not or , any third-party intellectual property rights or that Embark will not be held to have done so or be of doing so in the future. In addition, because patent applications can take many years until the patents issue, there may be applications now pending of which Embark is , which may later result in issued patents that Embark’s products may . Embark expects that in the future it may receive notices that claim Embark or its have or other parties’ intellectual property rights, particularly as the number of competitors in its market grows.
To defend itself against any intellectual property claims brought by third parties can be time-consuming for Embark and could result in substantial costs and a diversion of its resources. These claims and any resulting lawsuits, if resolved adversely to Embark, could subject it to significant liability for damages, impose temporary or permanent injunctions against its products, technologies or business operations, or invalidate or render unenforceable its intellectual property.
If Embark’s technology is determined to infringe a valid and enforceable intellectual property right, or if Embark wishes to avoid potential intellectual property litigation on any alleged infringement, misappropriation or other violation of third party intellectual property rights, Embark may be required to do one or more of the following: (i) cease development, sales, or use of its products that incorporate or use the asserted intellectual property right; (ii) obtain a license from the owner of the asserted intellectual property right, which may be unavailable on commercially reasonable terms, or at all, or which may be non-exclusive, thereby giving its competitors and other third parties access to the same technologies licensed to Embark; (iii) pay substantial royalties or other damages; or (iv) redesign Embark’s technology or one or more aspects or systems of its software or hardware to avoid any infringement or thereof. The aforementioned options sometimes may not be commercially feasible and may materially affect Embark’s business and/or impact its reputation. Additionally, in Embark’s ordinary course of business, Embark may be called upon to indemnify its users, partners, and other commercial counterparties for any arising out of their use of its technology, along with providing standard indemnification provisions, so Embark may face liability to its users, business partners or third parties for indemnification or other remedies in the event that they are for arising from the use of its technology.
Embark may also in the future license third party technology or other intellectual property, and Embark may face claims that its use of such in-licensed technology or other intellectual property infringes, misappropriates or otherwise violates the intellectual property rights of others. In such cases, Embark will seek indemnification from its licensors. However, Embark’s rights to indemnification may be unavailable or insufficient to cover its costs and losses.
Embark utilizes open source software, which may pose particular risks to its proprietary software, technologies, products, and services in a manner that could harm its business.
Embark uses open source software in its products and services and anticipates using open source software in the future. Some open source software licenses require those who distribute open source software as part of their own software products to publicly disclose all or part of the source code to such software product or to make available any modifications or derivative works of the open source code on open source terms or at no cost. This could result in Embark’s proprietary software being made available in the source code form and/or licensed to others under open source licenses, which could allow Embark’s competitors or other third parties to Embark’s proprietary software freely without spending the development effort, and which could lead to a loss of the competitive advantage of its proprietary technologies and, as a result, sales of its products and services. The terms of many open source licenses to which Embark is subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on Embark’s ability to provide or distribute its products or services or retain ownership of its proprietary intellectual property. Additionally, Embark could face claims from third parties ownership of, or demanding release of, the open source software or derivative works that Embark developed using such software, which could include Embark’s proprietary source code, or otherwise seeking to enforce the terms of, or of, the applicable open source license. These could result in and could require Embark to make its proprietary software source code freely available, purchase a license, or offering the products or services unless and until Embark can re-engineer them to avoid of the applicable open source software licenses or
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potential infringement. This re-engineering process could require Embark to expend significant additional research and development resources, and Embark cannot guarantee that it will be successful.
Additionally, the use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. There is typically no support available for open source software, and Embark cannot ensure that the authors of such open source software will implement or push updates to address security risks or will not abandon further development and maintenance. Many of the risks associated with the use of open source software, such as the lack of warranties or assurances of title, non-infringement, or performance, cannot be eliminated, and could, if not properly addressed, negatively affect Embark’s business. Embark has processes to help alleviate these risks, including a review process for screening requests from Embark’s developers for the use of open source software, but Embark cannot be sure that all open source software is identified or submitted for approval prior to use in its products and services. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could adversely affect Embark’s ownership of proprietary intellectual property, the security of Embark’s vehicles, or its business, results of operations, and financial condition.
If Embark’s software contains serious errors or defects, Embark may lose revenue and market acceptance and may incur costs to defend or settle claims with its licensees, franchisees or other parties.
Software often contains errors, defects, security vulnerabilities or software bugs, some of which are difficult to detect and correct, particularly when first introduced or when new versions or enhancements are released. Despite internal testing, Embark’s software may contain serious errors or defects, security vulnerabilities or software bugs that Embark may be unable to successfully detect or correct in a timely manner or at all, which could result in security incidents, data breaches, vehicle safety issues, product liability claims, lost revenue, significant expenditures of capital, a or in market acceptance, and to Embark’s reputation and brand, any of which could affect Embark’s business, results of operations, and financial condition.
Embark is exposed to, and may be adversely affected by, interruptions to its information technology systems and networks and sophisticated cyber-attacks.
Embark collects and maintains information in digital form that is necessary to conduct its business, and it relies on information technology systems and networks (“IT systems”) in connection with many of its business activities. Some of these networks and systems are managed by third-party service providers and are not under Embark’s direct control, and as a result, a number of third-party service providers may or could have access to its confidential information. Embark’s operations routinely involve receiving, storing, processing, and transmitting confidential or sensitive information pertaining to its business, users, dealers, suppliers, employees, and other sensitive matters, including intellectual property, proprietary business information, and personal information. It is critical that Embark does so in a secure manner to maintain the confidentiality and integrity of such confidential or sensitive information. Embark has established physical, electronic, and organizational measures designed to safeguard and secure its systems to prevent a data compromise, and relies on commercially available systems, software, tools, and monitoring to provide security for its IT systems and the processing, transmission, and storage of digital information. Despite the implementation of preventative and detective security controls, such IT systems are vulnerable to damage or interruption from a variety of sources, including telecommunications or network or , system , natural , human acts, terrorism, and war. Such IT systems, including Embark’s servers, are additionally to physical or electronic -ins, security from or actions by Embark’s employees, third-party service providers, contractors, consultants, business partners, and/or other third parties, or from cyber-attacks by third parties (including the deployment of malware, ransomware, -of-service attacks, social engineering, and other means to affect service reliability and the confidentiality, , and availability of information).
Any future cyber incidents could materially disrupt operational systems, result in the loss of trade secrets or other proprietary or competitively sensitive information, compromise personally identifiable information regarding users or employees and jeopardize the security of Embark’s facilities. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. Embark can provide no assurance that its current IT systems, or those of the third parties upon which Embark relies, are fully protected against cybersecurity threats. It is possible that Embark or its third-party service providers may experience cybersecurity and other breach incidents that remain undetected for an extended period. Even when a security is detected, the full extent of the may not be determined immediately. Because techniques used to obtain access or to systems change frequently and generally are not recognized until they are
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launched against a target, Embark may be unable to anticipate these techniques or to implement adequate preventative measures. Information technology security threats, including security breaches, computer malware, and other cyber-attacks are increasing in both frequency and sophistication and could cause Embark to incur financial liability, subject Embark to legal or regulatory sanctions or damage its reputation with users, dealers, suppliers, and other stakeholders. Embark continuously seeks to maintain information security and controls, however its efforts to mitigate and address network security problems, bugs, viruses, worms, malicious software programs, and security vulnerabilities may not be successful and the impact of a material cybersecurity event could have a material adverse effect on its competitive position, reputation, results of operations, financial condition, and cash flows.
Any unauthorized control or manipulation of Embark’s systems could result in loss of confidence in Embark and its products.
Embark’s products contain complex information technology systems and are used to operate large physical machines carrying valuable cargo on roads that will include human drivers. Thus, the potential adverse effect to a successful hacking attack that permits an intruder to control some or all aspects of an AV-operated truck are particularly acute in Embark’s industry. While Embark has implemented security measures intended to prevent unauthorized access to its information technology networks, its products and their systems, malicious entities have reportedly attempted, and may attempt in the future, to gain unauthorized access to modify, alter and use such networks, products and systems to gain control of, or to change, Embark’s products’ functionality, user interface and performance characteristics or to gain access to data stored in or generated by its products. Embark encourages reporting of potential vulnerabilities in the security of its products and aims to remedy any reported and verified . However, there can be no assurance that any will not be before they can be identified, or that Embark’s remediation efforts are or will be .
Any unauthorized access to or control of Embark’s software or the semi-trucks that are controlled by its software or their systems or any loss of data could result in legal claims or government investigations. In addition, regardless of their veracity, reports of unauthorized access to Embark’s products, their systems or data, as well as other factors that may result in significant adverse impact on Embark’s reputation, creating the perception that its products, their systems or data are capable of being hacked, may harm its business, results of operations and financial condition.
Embark collects, processes, transmits, and stores personal information in connection with the operation of its business and is subject to various data privacy and consumer protection laws. The costs to comply with, or Embark’s actual or perceived failure to comply with, changing U.S. and foreign laws related to data privacy, security, and protection, such as the California Consumer Privacy Act, or contractual obligations related to data privacy, security, and protection, could adversely affect its financial condition, operating results, and reputation.
In operating its business and providing services and solutions to clients, Embark collects, uses, stores, transmits, and otherwise processes employee, partner, and client data, including personal data, in and across multiple jurisdictions. Embark uses the electronic systems of its Embark Driver and Embark Guardian Systems to log information about each equipped semi-truck’s use in order to aid Embark in vehicle diagnostics, repair, and maintenance, as well as to help it collect data regarding use patterns and preference in order to help it customize and optimize the driving and riding experiences. When Embark-equipped semi-trucks are in operation, the camera, LiDAR, and other sensing components of Embark’s semi-trucks will collect street view, mapping data, landscape images, and other sensor information, which may include personal information such as license plate numbers of other vehicles, GPS data, geolocation data, in order to train the data analytics and artificial intelligence technology equipped in its semi-trucks for the purpose of identifying different objects, and predicting potential issues that may arise during the operation of Embark’s semi-trucks. To the extent that Embark inadvertently collects additional personal data, it may become subject to additional regulatory requirements.
The regulatory framework for data privacy, protection, and security worldwide is continuously evolving and developing and, as a result, interpretation and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. In particular, some of these laws and regulations may require Embark to store certain categories of data collected from individuals residing in a jurisdiction only on servers physically located in such jurisdiction, and may further require Embark to conduct security assessments and/or adopt other cross-border data transfer mechanisms in order to transfer such data outside of such jurisdiction. With the continuously evolving and rapidly changing privacy regulatory regime, Embark’s ability to freely transfer data among its affiliates and with its partners in different jurisdictions may be impeded, or Embark may need to incur significant costs in order to comply with such requirements. In addition, the number of high-profile data breaches at major companies continues to accelerate, which will likely lead to even greater regulatory scrutiny.
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The U.S. federal government and various states and governmental agencies also have adopted or are considering adopting various laws, regulations, and standards regarding the collection, use, retention, security, disclosure, transfer, and other processing of sensitive and personal information. In addition, many states in which Embark operates have laws that protect the privacy and security of sensitive and personal information. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to sensitive and personal information than federal, international, or other state laws, and such laws may differ from each other, which may complicate compliance efforts. For example, California enacted the California Consumer Privacy Act of 2018 (the “CCPA”) on June 28, 2018, which came into effect on January 1, 2020. The CCPA creates individual privacy rights for California residents and increases the privacy and security obligations of entities handling personal data of California consumers and meeting certain thresholds. Failure to comply with the CCPA may result in attorney general enforcement action and damage to Embark’s reputation. The CCPA provides for civil penalties for violations, as well as a private right of action for data that result in the of certain types of personal information. This private right of action may increase the likelihood of, and risks associated with, class action data . In addition, the CCPA’s restrictions on “sales” of personal information may restrict Embark’s use of cookies and similar tracking technologies for advertising purposes. To the extent the CCPA applies to Embark, CCPA will increase its compliance costs and potential liability. In addition, many similar laws have been proposed at the federal level and in other states. For instance, the state of Nevada recently enacted a law that went into on October 1, 2019 and requires companies to consumers’ requests to no longer sell their data. may be subject to and civil of up to $5,000 per . New legislation proposed or enacted in Illinois, Massachusetts, New Jersey, New York, Rhode Island, Washington, and other states, and a proposed right to privacy amendment to the Vermont Constitution, imposes, or has the potential to impose, additional obligations on companies that collect, store, use, retain, , transfer, and otherwise process confidential, sensitive, and personal information, and will continue to shape the data privacy environment throughout the U.S. State laws are changing rapidly and there is discussion in Congress of a new federal data protection and privacy law to which Embark could become subject if it is enacted. All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time, may require Embark to modify its data processing practices and policies, and may resources from other initiatives and projects. Furthermore, non-compliance with data privacy laws and regulations, or a major of Embark’s network security and systems, could have consequences for its businesses and future prospects, including possible , , and , reduced customer demand for autonomous vehicle technology, and to its reputation and brand, all of which may have a material and impact on its business, financial condition, and operating results.
Embark outsources important aspects of the storage, processing, and transmission of personal information, and thus relies on third parties to manage functions that have material cybersecurity risks. In an attempt to address these risks, Embark may require third-party service providers who handle personal information to sign confidentiality agreements or data processing agreements (if required by applicable data privacy laws), which would contractually require them to safeguard personal information to the same extent that applies to Embark, and in some cases Embark requires such service providers to complete information security questionnaires, quality verification questionnaires, or undergo third-party security examinations or provide data security certifications or security audit results. However, Embark cannot assure that these contractual measures and other safeguards will adequately protect it from the risks associated with the storage and transmission of the personal information of its users, employees, drivers, and passengers.
Many statutory requirements include obligations for companies to notify individuals of security breaches involving certain personal information, which could result from breaches experienced by Embark or its third-party service providers. For example, laws in all 50 U.S. states and the District of Columbia require businesses to provide notice to consumers whose personal information has been disclosed as a result of a data breach. These laws are not consistent, and compliance in the event of a widespread data breach is difficult and may be costly. Moreover, states have been frequently amending existing laws, requiring attention to changing regulatory requirements. Embark also may be contractually required to notify users or other counterparties of a security breach. Although Embark may have contractual protections with its third-party service providers, contractors, and consultants, any actual or perceived security breach could harm its reputation and brand, expose it to potential liability or require it to expend significant resources on data security and in responding to any such actual or perceived . Any contractual protections Embark may have from its third-party service providers, contractors or consultants may not be sufficient to protect it from any such liabilities and , and Embark may be to enforce any such contractual protections.
In addition to government regulation, privacy advocates and industry groups have and may in the future propose self-regulatory standards from time to time. In addition, Embark’s operations, partners, OEMs or suppliers may, or may in the future, be located in other jurisdictions, such as the European Union, that have more stringent privacy regulations that they seek to impose upon Embark through data protection agreements, flowdown provisions or other contractual mechanisms.
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These and other industry or extraterritorial standards may legally or contractually apply to Embark, or Embark may elect to comply with such standards. Embark expects that there will continue to be new proposed laws and regulations concerning data privacy and security, and Embark cannot yet determine the impact such future laws, regulations, and standards may have on its business. New laws, amendments to or re-interpretations of existing laws, regulations, standards, and other obligations may require Embark to incur additional costs and restrict its business operations. Because the interpretation and application of laws, regulations, standards, and other obligations relating to data privacy and security are still uncertain, it is possible that these laws, regulations, standards, and other obligations may be interpreted and applied in a manner that is inconsistent with Embark’s data processing practices and policies or the features of its products and services. If so, in addition to the possibility of fines, lawsuits, regulatory investigations, public censure, other claims and penalties and significant costs for remediation and damage to its reputation, Embark could be required to fundamentally change its business activities and practices, which could affect its business. Embark may be to make such changes and modifications in a commercially reasonable manner, or at all. Any to address data privacy or security-related , even if , or to comply with applicable laws, regulations, standards, and other obligations relating to data privacy and security, could result in additional cost and liability to Embark, its reputation and brand, its relationship with important clients, and affect its financial condition, operating results, and its reputation.
Also, Embark enters into contracts with third parties (such as its partners and clients) that contain provisions regarding the collection, sharing, and processing of personal information. Although Embark endeavors to comply with its contractual and other privacy-related obligations, it may at times fail to do so or be alleged to have failed to do so. In addition, from time to time, concerns may be expressed about whether Embark’s products and services compromise the privacy of clients and others. Any concerns about Embark’s data privacy and security practices (even if unfounded), or any failure, real or perceived, by Embark to comply with its privacy policies, contractual obligations, or any legal or regulatory requirements, standards, certifications, or orders, or other privacy or consumer protection-related laws and regulations applicable to it, could cause its clients to reduce the use of its technology and could affect its financial condition, operating results, and its reputation, and may result in governmental or regulatory investigations, enforcement actions, regulatory fines, compliance orders, , of contract , or public statements Embark by government regulatory authorities, its partners and/or clients, data subjects, consumer advocacy groups, or others, all of which could be and have an effect on its business.
Furthermore, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase. Non-compliance could result in proceedings against Embark by data protection authorities, governmental entities or others, including class action privacy litigation in certain jurisdictions, which would subject it to significant fines, penalties, judgments, and negative publicity, and may otherwise affect its financial condition, operating results, and its reputation. Given the complexity of operationalizing data privacy and security laws and regulations to which Embark is subject, the maturity level of proposed compliance frameworks and the relative lack of guidance in the interpretation of the numerous requirements of data privacy and security laws and regulations to which Embark is subject, Embark may not be able to respond quickly or effectively to regulatory, legislative, and other developments, and these changes may in turn impair its ability to offer its existing or planned products and services and/or increase its cost of doing business. In addition, if Embark’s practices are not consistent or viewed as not consistent with legal and regulatory requirements, including changes in laws, regulations, and standards or new interpretations or applications of existing laws, regulations and standards, Embark may become subject to audits, inquiries, whistleblower , media coverage, , of export privileges, or or civil sanctions, all of which may affect its financial condition, operating results, and its reputation. access or disclosure of personal or other sensitive or confidential data (including data about third parties), whether through systems , employee , , or , by Embark, its service providers or other parties with whom Embark does business (if they to meet the standards Embark imposes, or if their systems on which its data is stored experience any data or security ) could also subject Embark to significant , monetary , regulatory enforcement actions, , and in one or more jurisdictions.
Risks Related to Regulations
Embark operates in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future regulations could have a materially adverse effect on Embark’s business.
The USDOT and various state and local agencies exercise broad powers over Embark’s business, generally governing such activities as authorization to engage in motor carrier operations, safety and insurance requirements. Given the evolving nature of autonomous vehicle technology, Embark may become subject to new or more restrictive regulations
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relating to its technology, or other matters affecting safety or operating methods. Other agencies, such as the EPA and the U.S. Department of Homeland Security, also may regulate Embark’s operations and technology or the shipping industry generally. Future laws and regulations may be more stringent and require changes to Embark’s operating practices, influence the demand for transportation services, or require Embark to incur significant additional costs.
The costs of complying with safety regulations could increase as regulators impose more stringent compliance and reporting requirements in response to product recalls and safety issues in the automotive industry. As the semi-trucks that carry Embark’s systems go into production, Embark or vehicles equipped with its equipment could be subject to existing stringent requirements under the National Traffic and Motor Vehicle Safety Act of 1966 (the “Vehicle Safety Act”), including a duty to report, subject to strict timing requirements, safety defects, and to undertake remedial actions under certain circumstances. The Vehicle Safety Act imposes potentially significant civil penalties for violations including the failure to comply with such reporting actions. Embark or vehicles equipped with its equipment could also be subject to the existing U.S. Transportation Recall Enhancement, Accountability and Documentation Act (the “TREAD Act”), which requires motor vehicle equipment manufacturers, such as Embark, to comply with “Early Warning” requirements by reporting certain information to NHTSA such as information related to or reports of . The TREAD Act imposes liability for such requirements if a subsequently causes death or bodily . If Embark cannot rapidly address any safety or with its products, its business, results of operations, and financial condition will be affected.
A federal regulatory regime for vehicle automation safety does not exist, but the USDOT issued guidance in 2016 suggesting, but not requiring, that manufacturers of Automated Driving Systems voluntarily provide public documentation covering topics such as how automated systems detect objects on the road, how information is displayed to drivers, what cybersecurity measures are in place, and the methods used to test the design and validation of autonomous driving systems. In 2020, the National Highway Traffic Safety Administration (“NHTSA”) published an advanced notice of proposed rulemaking (“ANPRM”) requesting public input on a new regulatory initiative known as the Framework for Automated Driving System Safety. NHTSA has been analyzing comments on this ANPRM since 2021. Similarly, in 2019, FMCSA published an ANPRM on the Safe Integration of Automated Driving System (ADS)-Equipped Commercial Motor Vehicles (CMVs) to identify whether and how the agency should update Federal Motor Carrier Safety Regulations (“FMCSRs”) to incorporate and oversee autonomous trucks. FMCSA released a supplemental ANPRM (“SANPRM”) in February 2023, requesting public comment on additional issues related to regulation of autonomous trucking. In the future, NHTSA and FMCSA may move forward on these or other similar rulemaking processes and promulgate new rules affecting ADS development and deployment. If the obligations associated with complying with these or other new regulations prescribe specific features or engineering approaches that differ from Embark’s development plans, or impose costly, burdensome, or infeasible operational requirements or compliance procedures, this may require increased resources, management’s attention, and affect Embark’s business.
From time to time, various federal, state, or local taxes are increased, including taxes on fuels. Embark cannot predict whether, when, or in what form, any such increase may be applied to Embark’s partners, but such an increase could adversely affect Embark’s revenues or profitability, if such taxes result in overall decrease in miles driven by Embark’s partners.
Embark is subject to substantial regulations, including regulations governing autonomous and commercial vehicles, and unfavorable changes to, or failure by Embark to comply with, these regulations, as well as industry standards more generally, could substantially harm its business and operating results.
Commercial vehicles are subject to substantial regulation under international, federal, state, and local laws. Regulations designed to govern autonomous vehicle operation, testing and/or manufacture are still developing and may change significantly. These regulations could include requirements that significantly delay or narrowly limit the commercialization of autonomous vehicles, limit the number of autonomous vehicles that Embark can host on its platform, impose restrictions on the number of vehicles in operation and the locations where they may be operated or impose significant liabilities on manufacturers or operators of autonomous vehicles or developers of autonomous vehicle technology. If regulations of this nature are implemented, Embark may not be able to commercialize its autonomous vehicle technology in the manner Embark expects, or at all. The costs of complying with such regulations could be prohibitive and prevent Embark from operating its business in the manner Embark intends, or its potential inability to comply with such regulations may expose it or its partners to the risk of substantial fines or penalties. Conversely, existing regulations may be tailored for human-operated motor vehicles and may not permit the use of fully autonomous vehicle technology for certain classes of vehicles or may otherwise restrict the use of such vehicles. For example, 49 CFR §392.22
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is a federal regulation that would require a human operator to place hazard signals in specified locations away from a vehicle in the event of a breakdown.
In addition, industry groups involving competitors and other technology stakeholders may promulgate certifications and standards as the autonomous vehicle industry matures and the standards for use of the technology become more standard. Such industry regulation may create the standard for liability in civil claims or may create self-certification requirements Embark needs to meet in order to market or operate its technology. There is no guarantee that Embark will be included in such industry activities or that Embark will be able to comply with industry standards that may develop over time.
Further, Embark is subject to international, federal, state, and local laws and regulations, governing pollution, protection of the environment, and occupational health and safety, including those related to the use, generation, storage, management, discharge, transportation, disposal, and release of, and human exposure to, hazardous and toxic materials. Such laws and regulations have tended to become more stringent over time.
Fines, penalties, costs, liabilities or the negative perception of failing to meet industry standards associated with such regulations, industry standards or laws, including as a result of Embark’s failure to comply, could be substantial, and could adversely impact its business, prospects, financial condition, and operating results.
The trucking industry is subject to economic, business and regulatory factors that are largely beyond Embark’s and its partners’ control, any of which could have a material adverse effect on the operations of its partners and ultimately on Embark.
The trucking industry is highly cyclical, and the business of Embark’s partners is dependent on a number of factors that may have a negative impact on Embark’s results of operations, many of which are beyond Embark’s and its partners’ control. Any conditions that negatively impact the trucking industry could ultimately impact demand for Embark’s technology. Embark believes that some of the most significant of these factors are economic changes that affect supply and demand in transportation markets such as:
• recessionary economic cycles;
• changes in the inventory levels and practices of Embark’s partners’ customers, including shrinking product/package sizes, and in the availability of funding for their working capital;
• excess truck capacity in comparison with shipping demand;
• increases in fuel or equipment prices, which may impact Embark’s partners’ ability to invest in its technology, including costs associated with complying with state and/or federal zero-emission trucking fleet and sales regulations;
• industry compliance with new and ongoing regulatory requirements; and
• downturns in business cycles of Embark’s partners’ customers, including as a result of declines in consumer spending.
Additionally, economic conditions that decrease shipping demand or increase the supply of available tractors and trailers can exert downward pressure on rates and equipment utilization, thereby decreasing asset productivity. The risks associated with these factors are heightened when the U.S. economy is weakened. Some of the principal risks during such times are as follows:
• trucking industry may experience low overall freight levels, which may impair demand for Embark’s technology;
• certain of Embark’s partners’ customers may face credit issues and cash flow problems that may lead to payment delays, increased credit risk, bankruptcies and other financial hardships that could result in even lower freight demand;
• freight patterns may change as supply chains are redesigned, resulting in an imbalance between the geographies Embark’s technology is optimized to cover and its customers’ freight demand; and
• Embark’s partners’ customers may solicit bids for freight from multiple trucking companies or select competitors that do not use its technology in an attempt to lower their costs or due to concerns about AV technology.
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Embark’s partners may be subject to cost increases outside its control that could materially reduce demand for its technology. Such cost increases include, but are not limited to, increases in fuel prices, driver and office employee wages, zero-emission vehicle requirements, purchased transportation costs, interest rates, taxes, tolls, license and registration fees, insurance, revenue equipment and related maintenance, tires and other components and healthcare and other benefits for Embark’s employees.
In addition, events outside Embark’s control, such as deterioration of U.S. transportation infrastructure and reduced investment in such infrastructure, strikes or other work stoppages at customer, port, border or other shipping locations, armed conflicts or terrorist attacks, efforts to combat terrorism, military action against a foreign state or group located in a foreign state or heightened security requirements could lead to wear, tear, and damage to Embark’s or its customers’ equipment, reduced economic demand and freight volumes, reduced availability of credit, increased prices for fuel or temporary closing of the shipping locations or U.S. borders. Such events or enhanced security measures in connection with such events could negatively impact Embark’s partners and ultimately Embark.
Seasonality and the impact of weather can affect Embark’s revenues and/or profitability.
Truck transportation productivity generally decreases during the winter season because inclement weather impedes operations and some shippers reduce their shipments. At the same time, operating expenses generally increase, with harsh weather creating higher accident frequency, increased claims and more equipment repairs. The trucking industry can also suffer short-term impacts from weather-related events such as hurricanes, blizzards, ice-storms, and floods that could harm Embark’s results or make its results more volatile. As Embark’s anticipated pricing model is based in part on the number of miles driven using its technology, reduced mileage due to seasonality may negatively impact Embark’s top and/or bottom line.
Embark’s partners may incur additional operating expenses or liabilities as a result of potential future requirements to address climate change issues.
As concerns about climate change become more prevalent, U.S. federal, state and local governments and foreign governments, as well as some of Embark’s customers, have made efforts to respond to these issues. This increased focus on sustainability may result in new legislation or regulations and customer requirements that could negatively affect Embark’s partners and ultimately Embark as additional costs may be required to make changes to comply with any new regulations or customer requirements. New laws or regulations that potentially impose restrictions, caps, taxes, or other controls on emissions of greenhouse gases such as carbon dioxide, a by-product of burning fossil fuels such as those used by semi-trucks, could adversely affect the competitiveness of truck freight relative to other freight transport options. Any increases to the cost structure of Embark’s carrier partners could have a negative impact on the adoption of its technology and ultimately its revenues. More specifically, legislative or regulatory actions relating to climate change could adversely impact Embark by increasing its partners fuel costs and by demanding increased fuel efficiency and could result in the creation of substantial additional capital expenditures and operating costs in the form of taxes, emissions allowances, or required equipment upgrades. Any of these factors could Embark’s partners’ operating and productivity and result in higher operating costs. These additional costs, changes in operations, or of revenues could have a material effect on Embark’s business, financial condition and results of operations. In addition, Embark may become subject to such climate change regulations itself to the extent market forces require Embark to serve as a shipper using its R&D fleet.
The operations of Embark’s partners are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.
Embark’s partners are subject to various environmental laws and regulations dealing with the handling of hazardous materials, underground fuel storage tanks, and discharge and retention of storm-water. In addition, Embark’s partners operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination could occur and Embark may grow its own facilities in similar areas to the extent market forces call on Embark to grow its R&D semi-truck fleet or to acquire real estate associated with its Transfer Hub Network. The use of Embark’s technology in these environments may involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. If Embark’s technology is involved in a spill or other accident involving hazardous substances, it could have a materially adverse effect on its reputation and ultimately business and operating results.
Risks Related to the Committed Equity Financing
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It is not possible to predict the actual number of shares of Class A common stock, if any, Embark will sell under the Purchase Agreement to Cantor, or the actual gross proceeds resulting from those sales.
On May 31, 2022, Embark entered into a common stock purchase agreement (the “Purchase Agreement”) with CF Principal Investments LLC (“Cantor”), pursuant to which Cantor committed to purchase up to 30,000,000 shares (which is 1,500,000 shares after giving effect to the Reverse Stock Split (as defined below)), of Embark’s Class A common stock (the “Total Commitment”), subject to certain limitations and conditions set forth in the Purchase Agreement. The Class A common stock that may be issued under the Purchase Agreement may be sold by Embark to Cantor at Embark’s discretion from time to time until the earliest to occur of (i) the first day of the month next following the 36-month anniversary of the effectiveness of the Registration Statement on Form S-1, filed with the SEC on June 1, 2022, (ii) the date on which Cantor has purchased the Total Commitment pursuant to the Purchase Agreement, (iii) the date on which Embark’s Class A common stock fails to be listed or quoted on Nasdaq or any alternative market, and (iv) the date on which, pursuant to or within the meaning of any bankruptcy law, Embark commences a voluntary case or any Person commences a proceeding against Embark, a custodian is appointed for us or for all or substantially all of Embark’s property, or Embark makes a general assignment for the benefit of its creditors.
Embark generally has the right to control the timing and amount of any sales of its Class A common stock to Cantor under the Purchase Agreement. Sales of Embark’s Class A common stock, if any, to Cantor under the Purchase Agreement will depend upon market conditions and other factors to be determined by Embark. Embark may ultimately decide to sell to Cantor all, some or none of the Class A common stock that may be available for Embark to sell to Cantor pursuant to the Purchase Agreement.
Because the purchase price per share of Class A common stock to be paid by Cantor for the Class A common stock that Embark may elect to sell to Cantor under the Purchase Agreement, if any, will fluctuate based on the market prices of Embark’s Class A common stock at the time it elects to sell shares to Cantor pursuant to the Purchase Agreement, if any, it is not possible for Embark to predict, as of the date of the prospectus and prior to any such sales, the number of shares of Class A common stock that Embark will sell to Cantor under the Purchase Agreement, the purchase price per share that Cantor will pay for shares of Class A common stock purchased from Embark under the Purchase Agreement, or the aggregate gross proceeds that Embark will receive from those purchases by Cantor under the Purchase Agreement.
The Purchase Agreement provides that Embark may, in its discretion, from time to time after the date of this prospectus and during the term of the Purchase Agreement, direct Cantor to purchase shares of Embark’s Class A common stock from Embark in one or more purchases under the Purchase Agreement, as the purchase price per share of Embark’s Class A common stock will depend on the market price, which may fluctuate significantly. Assuming a price per share of Class A common stock of $2.50, the closing price of Embark’s common stock on March 17, 2023, Embark may receive up to $3.64 million in aggregate gross proceeds from the Shareholder under the Purchase Agreement in connection with sales of its Class A common stock to the Stockholder pursuant to the Purchase Agreement after the date of the prospectus. However, the actual proceeds may be less than this amount depending on the number of shares of Embark’s Class A common stock sold and the price at which the shares of Class A common stock are sold.
The number of Class A common stock ultimately offered for sale by Cantor is dependent upon the number of shares of Class A common stock, if any, Embark ultimately elects to sell to Cantor under the Purchase Agreement. However, even if Embark elects to sell Class A common stock to Cantor pursuant to the Purchase Agreement, Cantor may resell all, some or none of such shares at any time or from time to time in its sole discretion and at different prices.
Investors who buy Class A common stock from the Shareholder at different times will likely pay different prices.
Pursuant to the Purchase Agreement, Embark will have discretion to vary the timing, price and number of shares sold to Cantor. If and when Embark elects to sell Class A common stock to Cantor pursuant to the Purchase Agreement, after Cantor has acquired such Class A common stock, Cantor may resell all, some or none of such shares at any time or from time to time in its sole discretion and at different prices. As a result, investors who purchase shares from Cantor in this offering at different times will likely pay different prices for those shares, and so may experience different levels of dilution and in some cases substantial dilution and different outcomes in their investment results. Investors may experience a decline in the value of the shares they purchase from Cantor in this offering as a result of future sales made by Embark to Cantor at prices lower than the prices such investors paid for their shares in the offering. In addition, if Embark sells a substantial number of shares to Cantor under the Purchase Agreement, or if investors expect that Embark will do so, the actual sales of shares or the mere existence of Embark’s arrangement with Cantor may make it more difficult for Embark to sell equity or equity-related securities in the future at a time and at a price that Embark might otherwise wish to effect such sales.
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Embark may use proceeds from sales of its Class A common stock made pursuant to the Purchase Agreement in ways with which you may not agree or in ways which may not yield a significant return.
Embark will have broad discretion over the use of proceeds from sales of its Class A common stock made pursuant to the Purchase Agreement, including for any of the purposes described in the section entitled “Use of Proceeds” in the Registration Statement on Form S-1 filed with the SEC on June 1, 2023, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. However, Embark has not determined the specific allocation of any net proceeds among these potential uses, and the ultimate use of the net proceeds may vary from the currently intended uses. The net proceeds may be used for corporate purposes that do not increase Embark’s operating results or enhance the value of its Class A common stock.
Additional Risks Related to Ownership of Embark’s Common Stock
The price of Embark’s Class A common stock and warrants may be volatile.
The price of Embark’s Class A common stock, as well as Embark’s warrants, may fluctuate due to a variety of factors, including:
• announcements regarding any strategic alternatives that Embark selects for execution;
• changes in the industries and markets in which Embark and its customers operate;
• changes in Embark’s business operations that result in operating in new industries, markets or jurisdictions;
• developments involving Embark’s competitors;
• changes in laws and regulations affecting Embark’s business;
• variations in Embark’s operating performance and the performance of its competitors in general;
• actual or anticipated fluctuations in Embark’s quarterly or annual operating results;
• publication of research reports by securities analysts about Embark or its competitors or its industry;
• the public’s reaction to Embark’s press releases, its other public announcements and its filings with the SEC;
• actions by stockholders, including the sale by the PIPE Investors of any of their shares of Embark’s common stock;
• additions and departures of key personnel;
• commencement of, or involvement in, litigation involving Embark’s;
• changes in Embark’s capital structure, such as future issuances of securities or the incurrence of additional debt;
• the volume of shares of Embark’s common stock available for public sale; and
• general economic and political conditions, such as the effects of the COVID‑19 outbreak, recessions, interest rates, local and national elections, fuel prices, international currency fluctuations, corruption, political instability and acts of war or terrorism.
These market and industry factors may materially reduce the market price of Embark’s common stock and warrants regardless of its operating performance.
Embark does not intend to pay cash dividends for the foreseeable future.
Embark currently intends to retain its future earnings, if any, to finance the further development and expansion of its business and do not intend to pay cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of the board of directors and will depend on a number of factors that the board of directors deems relevant.
If analysts do not publish research about Embark’s business or if they publish inaccurate or unfavorable research, Embark’s stock price and trading volume could decline.
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The trading market for Embark’s Class A common stock depends in part on the research and reports that analysts publish about its business. Embark does not have any control over these analysts or reports. If one or more of the analysts who cover Embark downgrade its common stock or publish inaccurate or unfavorable research about its business, the price of its common stock would likely decline. If few analysts cover Embark, demand for Embark’s Class A common stock could decrease and its common stock price and trading volume may decline. Similar results may occur if one or more of these analysts stop covering Embark in the future or fail to publish reports on it regularly.
Embark may be subject to securities litigation, which is expensive and could divert management attention.
The market price of Embark’s Class A common stock may be volatile and, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. Embark may be the target of this type of litigation in the future. Securities litigation against Embark could result in substantial costs and divert management’s attention from other business concerns, which could seriously harm its business.
Future resales of common stock may cause the market price of securities to drop significantly even if Embark’s business is doing well.
In connection with the Business Combination, certain of the shares of the Company were subject to lock-ups of between 180 days and one year. As these lock-ups have now expired, the parties subject to such lock-up are not restricted from selling shares of Embark’s Class A or Class B common stock held by them, other than by applicable securities laws. Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. As such, sales of a substantial number of shares of Embark’s Class A common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could have the effect of increasing the volatility in Embark’s share price or could reduce the market price of its common stock.
In addition, as of December 31, 2022 and December 31, 2021 there were warrants to purchase 1,157,663 shares of Embark’s Class A common stock at an exercise price of $11.50 per share, which became exercisable on December 10, 2021. To the extent such warrants are exercised, additional shares of Embark’s Class A common stock will be issued, which will result in dilution to the holders of its Class A common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that such warrants may be exercised could adversely affect the market price of Embark’s Class A common stock.
