Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

Equity Research Firm

Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>Negative news continues to permeate through SPAC land.&nbsp;Since the start of June, there has been an avalanche of IBC terminations, with eight cancellations announced, bringing the total for the year to 28 or more than $30 billion worth of deals. In addition, there have been two SPAC liquidation announcements, bringing the total to nine YTD. The latest SPACs to give up their mission to find an IBC are technology-focused G3 VRM Acquisition Corp. (GGGV) and travel-focused Go Acquisition Corp. (GOAC), which are scheduled to liquidate on July 6 and August 7, respectively. There has also been a second de-SPAC to declare bankruptcy just two weeks after Electric Last Mile Solutions (ELMS) became the post SPAC/de-SPAC boom era’s first financial casualty. Mobile retail store operator and inaptly named Enjoy Technology (ENJY) filed for bankruptcy under Chapter 11 on June 29.</li>
<li>2Q22 activity review.&nbsp;For 2Q22, the number of SPAC IPOs totaled 16, the lowest quarterly number recorded since 1Q20, before the surge in SPAC activity began in earnest. Deal activity was busier. The 42 new IBC deals that were announced in the quarter were up from 33 in the preceding quarter, although the average deal size did shrink from $1.08 billion in 1Q22 to $640 million in 2Q22. Twenty de-SPACings were completed in 2Q22 versus 29 in 1Q22. Redemptions rates in the quarter just ended averaged 79% versus 85% in 1Q22, courtesy of the anomalously low 20% redemption rate on GGPI’s de-SPACing of Polestar (PSNY), without which the average redemption trajectory would have continued up to 89%. Excluding the liquidations announced but not yet completed, there remain 589 live SPACs still searching for merger targets.</li>
<li>Who’s next in line for bankruptcy?&nbsp;In the wake of the two de-SPAC bankruptcies declared in June, our SPAC Talk Focus this week assesses the more likely candidates to follow using Altman’s Z-Score Model, which has a reasonable, although not flawless, track record of prediction.</li>
</ul>
<h2>SPAC STATISTICS</h2>
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<p>Source: WTR Research</p>
<h2>SPAC HAPPENINGS IN JUNE/JULY 2022</h2>
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<h2>SPAC/DE-SPAC RETURNS</h2>
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<h2>SPAC TALK FOCUS</h2>
<h2>Bankruptcy – Who’s Next After ELMS and ENJY?</h2>
<p>A few weeks ago, SPAC Talk Focus (June 17, 2022) discussed the proliferation of going concern warnings issued by de-SPACs in recent months. At that time, we had already witnessed the first post SPAC/de-SPAC boom era bankruptcy declared. On June 14, 2022, about one year after being de-SPACed in June 2021, Electric Last Mile Solutions, Inc. (ELMS), a pure-play commercial electric vehicle company, filed for bankruptcy under Chapter 7. In the context of the going concern warnings, we asked the question as to whether the ELMS bankruptcy could prove to be the tip of the iceberg?</p>
<p>Well, only about two weeks after the ELMS bankruptcy, a second de-SPAC, mobile retail store operator Enjoy Technology (ENJY) filed for bankruptcy under Chapter 11 on June 29. ENJY describes itself as an operator of a Smart Last Mile™ solution, which includes a network of mobile stores with significant inventory and trained experts that bring greater speed, convenience, and personalized experiences to customers. Essentially, ENJY sends out vans to customer homes after a device such as an iPhone has been ordered. ENJY has ~2,000 employees and ~700 mobile stores deployed in the US, Canada, and the UK, with key partners including AT&amp;T, Rogers Communications, and BT. Like ELMS, ENJY came to market with much fanfare and gung-ho financial projections, with an initial valuation to match of $1 billion plus. Only de-SPACed in October 2021, it took even less time than ELMS for ENJY to unravel and slide into the financial abyss.</p>
<p>Against the backdrop of a slowing economic environment and with funding for speculative early-stage businesses harder to come by, there is a likelihood that ELMS and ENJY will not be the only de-SPAC bankruptcies to occur. Below, we consider potential candidates for bankruptcy among companies de-SPACed since the start of 2021. Both ELMS and ENJY were trading below $1 ahead of their bankruptcy filings. As of writing, there are 18 de-SPACs from our universe that are trading below $1, which we use as a starting point to identify companies with those companies with the largest credit risks. This does not discount the possibility that de-SPACs trading above $1 could be considered candidates for bankruptcy as well. Our database indicates that more than 70% of companies de-SPACed since the start of 2021 are trading below $5, well below their SPAC redemption prices.</p>
<p>To this end, we apply Altman’s Z-Score Model, a numerical measurement used to predict the chances of a business going bankrupt in the next two years. The model was developed by NYU finance professor Edward Altman in 1968 as a measure of the financial stability of companies. Altman’s model combines five financial ratios based on information from a company’s SEC filings to predict the probability of a company becoming insolvent within the next two years. Altman devised a weighting system for these ratios that predicted the chances of a company going bankrupt. The formula for the model is as follows:</p>
<p>Z-Score = 1.2*(Working Capital/Total Assets) +1.4*(Retained Earnings/Total Assets) + 3.3*(EBIT*/Total Assets) + 0.6*(Equity Market Value/Total Liabilities) + 1*(Total Sales/Total Assets)</p>
<p>* In our calculations in Figure 10, we use last quarter’s annualized EBITDA, which puts greater emphasis on cash profits and losses.</p>
<p>According to the model, a Z-Score that is lower than 1.8 means that the company is in financial distress and with a high probability of going bankrupt, while a score of 3 and above means that the company is in a safe zone and is unlikely to file for bankruptcy and any score in between 1.8 and 3 is in the grey zone. Studies have shown that Altman’s Z-Score Model’s track record of prediction is quite impressive, with a 72% accuracy in predicting bankruptcy two years out, with a false positive of 6%. This rises to 15-20% when the model is used to predict bankruptcy one year out. The false positive percentages may skew higher for early-stage companies with little or no earnings. This caveat is pertinent to de-SPACs that typically fall into the early-stage category of companies.</p>
<p>Figure 10 highlights the Z-Scores we have calculated for the companies that have been de-SPACed since the start of 2021 and are currently trading below $1. Our list excludes financial companies due to idiosyncrasies associated with financial company balance sheets. We also exclude the bankrupt ELMS, which has not updated its financial filings since November 2021. This leaves a list of 12 out of the 18 de-SPACs that are trading below the $1 mark. The figure highlights that all of the listed de-SPACs except Embark Technology (EMBK) are trading in the model’s distress zones. While we mentioned that there may be a greater incidence of false bankruptcy signals in early-stage companies, it should be noted that five of the worst six scoring de-SPACs have issued going concern warnings in their latest financial filings, including ENJY, which filed for bankruptcy last week.</p>
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<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


Negative news continues to permeate through SPAC land.&nbsp;Since the start of June, there has been an avalanche of IBC terminations, with eight cancellations announced, bringing the total for the year to 28 or more than $30 billion worth of deals. In addition, there have been two SPAC liquidation announcements, bringing the total to nine YTD. The latest SPACs to give up their mission to find an IBC are technology-focused G3 VRM Acquisition Corp. (GGGV) and travel-focused Go Acquisition Corp. (GOAC), which are scheduled to liquidate on July 6 and August 7, respectively. There has also been a second de-SPAC to declare bankruptcy just two weeks after Electric Last Mile Solutions (ELMS) became the post SPAC/de-SPAC boom era’s first financial casualty. Mobile retail store operator and inaptly named Enjoy Technology (ENJY) filed for bankruptcy under Chapter 11 on June 29.
2Q22 activity review.&nbsp;For 2Q22, the number of SPAC IPOs totaled 16, the lowest quarterly number recorded since 1Q20, before the surge in SPAC activity began in earnest. Deal activity was busier. The 42 new IBC deals that were announced in the quarter were up from 33 in the preceding quarter, although the average deal size did shrink from $1.08 billion in 1Q22 to $640 million in 2Q22. Twenty de-SPACings were completed in 2Q22 versus 29 in 1Q22. Redemptions rates in the quarter just ended averaged 79% versus 85% in 1Q22, courtesy of the anomalously low 20% redemption rate on GGPI’s de-SPACing of Polestar (PSNY), without which the average redemption trajectory would have continued up to 89%. Excluding the liquidations announced but not yet completed, there remain 589 live SPACs still searching for merger targets.
Who’s next in line for bankruptcy?&nbsp;In the wake of the two de-SPAC bankruptcies declared in June, our SPAC Talk Focus this week assesses the more likely candidates to follow using Altman’s Z-Score Model, which has a reasonable, although not flawless, track record of prediction.

SPAC STATISTICS

Source: WTR Research
SPAC HAPPENINGS IN JUNE/JULY 2022



SPAC/DE-SPAC RETURNS






SPAC TALK FOCUS
Bankruptcy – Who’s Next After ELMS and ENJY?
A few weeks ago, SPAC Talk Focus (June 17, 2022) discussed the proliferation of going concern warnings issued by de-SPACs in recent months. At that time, we had already witnessed the first post SPAC/de-SPAC boom era bankruptcy declared. On June 14, 2022, about one year after being de-SPACed in June 2021, Electric Last Mile Solutions, Inc. (ELMS), a pure-play commercial electric vehicle company, filed for bankruptcy under Chapter 7. In the context of the going concern warnings, we asked the question as to whether the ELMS bankruptcy could prove to be the tip of the iceberg?
Well, only about two weeks after the ELMS bankruptcy, a second de-SPAC, mobile retail store operator Enjoy Technology (ENJY) filed for bankruptcy under Chapter 11 on June 29. ENJY describes itself as an operator of a Smart Last Mile™ solution, which includes a network of mobile stores with significant inventory and trained experts that bring greater speed, convenience, and personalized experiences to customers. Essentially, ENJY sends out vans to customer homes after a device such as an iPhone has been ordered. ENJY has ~2,000 employees and ~700 mobile stores deployed in the US, Canada, and the UK, with key partners including AT&amp;T, Rogers Communications, and BT. Like ELMS, ENJY came to market with much fanfare and gung-ho financial projections, with an initial valuation to match of $1 billion plus. Only de-SPACed in October 2021, it took even less time than ELMS for ENJY to unravel and slide into the financial abyss.
Against the backdrop of a slowing economic environment and with funding for speculative early-stage businesses harder to come by, there is a likelihood that ELMS and ENJY will not be the only de-SPAC bankruptcies to occur. Below, we consider potential candidates for bankruptcy among companies de-SPACed since the start of 2021. Both ELMS and ENJY were trading below $1 ahead of their bankruptcy filings. As of writing, there are 18 de-SPACs from our universe that are trading below $1, which we use as a starting point to identify companies with those companies with the largest credit risks. This does not discount the possibility that de-SPACs trading above $1 could be considered candidates for bankruptcy as well. Our database indicates that more than 70% of companies de-SPACed since the start of 2021 are trading below $5, well below their SPAC redemption prices.
To this end, we apply Altman’s Z-Score Model, a numerical measurement used to predict the chances of a business going bankrupt in the next two years. The model was developed by NYU finance professor Edward Altman in 1968 as a measure of the financial stability of companies. Altman’s model combines five financial ratios based on information from a company’s SEC filings to predict the probability of a company becoming insolvent within the next two years. Altman devised a weighting system for these ratios that predicted the chances of a company going bankrupt. The formula for the model is as follows:
Z-Score = 1.2*(Working Capital/Total Assets) +1.4*(Retained Earnings/Total Assets) + 3.3*(EBIT*/Total Assets) + 0.6*(Equity Market Value/Total Liabilities) + 1*(Total Sales/Total Assets)
* In our calculations in Figure 10, we use last quarter’s annualized EBITDA, which puts greater emphasis on cash profits and losses.
According to the model, a Z-Score that is lower than 1.8 means that the company is in financial distress and with a high probability of going bankrupt, while a score of 3 and above means that the company is in a safe zone and is unlikely to file for bankruptcy and any score in between 1.8 and 3 is in the grey zone. Studies have shown that Altman’s Z-Score Model’s track record of prediction is quite impressive, with a 72% accuracy in predicting bankruptcy two years out, with a false positive of 6%. This rises to 15-20% when the model is used to predict bankruptcy one year out. The false positive percentages may skew higher for early-stage companies with little or no earnings. This caveat is pertinent to de-SPACs that typically fall into the early-stage category of companies.
Figure 10 highlights the Z-Scores we have calculated for the companies that have been de-SPACed since the start of 2021 and are currently trading below $1. Our list excludes financial companies due to idiosyncrasies associated with financial company balance sheets. We also exclude the bankrupt ELMS, which has not updated its financial filings since November 2021. This leaves a list of 12 out of the 18 de-SPACs that are trading below the $1 mark. The figure highlights that all of the listed de-SPACs except Embark Technology (EMBK) are trading in the model’s distress zones. While we mentioned that there may be a greater incidence of false bankruptcy signals in early-stage companies, it should be noted that five of the worst six scoring de-SPACs have issued going concern warnings in their latest financial filings, including ENJY, which filed for bankruptcy last week.

DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

SPAC Talk: De-SPAC Bankruptcy Risk in Focus