SPACs Are Warning They May Go Bust

The SPAC boom brought a flood of companies to the public markets, promising investors years of rapid growth and profits. Many of these companies are already warning that they may fail two years after the boom began.

Source: WSJ | Published on May 27, 2022

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According to Audit Analytics, at least 25 companies that merged with special-purpose acquisition companies between 2020 and 2021 have issued so-called going-concern warnings in recent months.

A company planning to build an air-taxi network, numerous upstart electric-vehicle companies, and a scooter-rental business are among those to issue the warnings, which come when a company's auditor determines there is "substantial doubt" about its ability to stay afloat for the next 12 months.

According to Audit Analytics, the companies with warnings account for more than 10% of the 232 companies that listed through SPACs during that time period. According to Audit Analytics, this percentage is roughly double that of companies that listed through more traditional initial public offerings. The figure excludes hundreds of IPOs by blank-check companies—SPACs before they merge with a private company—which frequently carry their own going-concern notices.

The relatively large number of dire warnings is the latest example of the SPAC sector's rough state, in which scores of companies raised hundreds of millions of dollars as part of public listings. Many businesses, particularly startups with little revenue, quickly discovered that their projections were more difficult to meet than they had anticipated. Many young companies in the sector have underperformed their projections.

"We're going to see more of this," said Michael Dambra, a professor at the University of Buffalo who studies SPACs. "Cash flows aren't coming in," he said.

Starting in mid-2020, SPACs—blank check companies with no operations that allow private companies to list on public markets by merging with them—will be widely used. One draw was that SPACs have fewer regulations than IPOs, allowing startups to entice investors with revenue and profit projections. Since early 2020, more than 300 companies have gone public through SPACs.

Regulators have since stated that they hope to change the rules for SPAC projections to make them more like IPOs. According to an analysis by University of Florida researchers Minmo Gahng and Jay Ritter, shares of companies that listed through SPACs in 2021 were down an average of 59.5 percent as of Tuesday.

View Inc. makes glass windows that change tint automatically in response to sunlight. SoftBank Group Corp., a deep-pocketed startup funder, committed about $1 billion to the Silicon Valley-based company. It compared itself to and Tesla in an investor presentation.

In 2021, View merged with a SPAC, raising $815 million. The company told investors that it did not expect to require additional funding before becoming profitable.

View's funds have run out. It had $281 million at the end of the fiscal year, down from $518 million just nine months earlier.

It hasn't reported any quarterly financial results since May 2021, and the Nasdaq has warned that the stock, which is down more than 90% from its peak, may be delisted. View has stated that it is currently restating its earnings.

In a recent filing, the company stated that it expects to include a going-concern warning when it reports its results on May 31, adding that it lacks "adequate financial resources" to fund its operations over the next 12 months. A spokesman for the company declined to comment.

Companies that issue such warnings are more likely to survive. Furthermore, auditors note that a large percentage of companies that fail never issued such warnings.

Electric-vehicle manufacturers, which were popular among SPAC investors looking for the next Tesla, frequently forecast rapid growth before even having a factory. Since early 2021, the Securities and Exchange Commission has revealed at least six investigations. Three car or battery manufacturers have issued going-concern alerts.

Other types of vehicles are also facing difficulties. The recent financial statements of scooter rental company Helbiz Inc. included a going-concern warning. In a SPAC presentation in early 2021, the company stated that it had a "clear path to profitability" for the year, but ended up with a $72 million loss. A request for comment was not returned by the company.

Some companies raised less than they anticipated, and now face the prospect of a cooling funding market amid the tech stock rout. Last summer, Lilium NV raised $584 million in a SPAC transaction. It intends to build electric air taxis that can rise and land like helicopters—a vehicle type that has yet to be approved by regulators.

The company initially stated that it expected to have enough cash to begin production in 2024. However, it raised approximately $250 million less than it had hoped in its SPAC merger last summer. Its annual report for 2021 included a going-concern warning. It also stated that the company's operations "will be dependent on additional financing."