ARCHER AVIATION INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
This Quarterly Report includes forward-looking statements. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. See the section titled "Special Note Regarding Forward-Looking Statements" in this Quarterly Report. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those set forth in Part II, Item 1A, "Risk Factors" in this Quarterly Report and Part I, Item 1A, "Risk Factors" in the Company's Annual Report. The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Quarterly Report and the audited financial statements as of and for the year ended
December 31, 2021set forth in our Annual Report.
Our mission is to advance the benefits of sustainable air mobility. Our goal is to move people throughout the world's cities in a quick, safe, sustainable, and cost-effective manner. To accomplish this goal, we are designing and developing an electric vertical takeoff and landing ("eVTOL") aircraft for use in future urban air mobility ("UAM") networks. Our eVTOL aircraft will be fully electric and will emit zero carbon emissions during operations. The goal of our eVTOL aircraft design is to maximize safety while minimizing operating costs and noise. We look to accomplish that goal through the use of a distributed electric propulsion system with inherent redundancy and far fewer parts than a typical internal combustion propulsion system found in similarly sized aircraft or rotorcraft today. The reduced number of parts not only translates into fewer critical parts on the aircraft from a safety perspective, but will also significantly reduce the maintenance requirements versus internal combustion propulsion systems found in similarly sized aircraft and rotorcraft today. We continue to work to optimize our eVTOL aircraft design for both manufacturing and certification by using advancements in key enabling technologies such as high-energy batteries, high-performance electric motors, an advanced fly-by-wire flight control system, and a lightweight and efficient aircraft structure. The development of an eVTOL aircraft that meets our business requirements demands significant design and development efforts on all facets of the aircraft. We believe that by bringing together a mix of talent with eVTOL, traditional aerospace and automotive backgrounds we are building a team that will allow us to move through the design, development, and certification of our eVTOL aircraft with the
AVIATION-INC-114338426/news/ARCHER-AVIATION-INC-Management-s-Discussion-and-Analysis-of-Financial-Condition-and-Results-of-Ope-40420718/xmltag.org">Federal Aviation Administration("FAA") in an efficient manner, thus allowing us to achieve our end goal of getting to commercialization as soon as possible.
Our planned business lines
Upon receipt of all necessary elements
We plan to operate our own UAM ecosystem initially in select major
U.S.cities, such as Los Angelesand Miami. Our UAM ecosystem will operate using our eVTOL aircraft, which is currently in development. We project that the cost to manufacture and operate our eVTOL aircraft will be such that it will be able to enter the UAM ride-sharing market at a price point that is competitive with ground-based ride sharing services today. We will continue to evaluate our go-to-market strategy based on, among other things, estimated demand, readiness of the required infrastructure, and the scale of our UAM aircraft fleet.
We also plan to selectively sell a certain amount of our eVTOL aircraft to third parties. We have entered into a purchase agreement ("Purchase Agreement") with
United Airlines, Inc.("United") for the conditional purchase of up to $1 billionworth of aircraft, with an option for another $500 millionworth of aircraft. We will look to determine the right mix of selling our eVTOL aircraft versus using them as part of our UAM ecosystem based on, among other factors, our capital needs, our volume of manufacturing, our ability to ramp Archer UAM operations, and the purchase demand from our Archer Direct customers. 22 -------------------------------------------------------------------------------- Table of Contents To date, we have not generated any revenue from either of these planned categories, as we continue to design, develop, and seek the governmental approvals necessary to operate our eVTOL aircraft and Archer UAM. We will use the net proceeds from the Business Combination for the foreseeable future to continue to fund our efforts to bring our eVTOL aircraft to market. The amount and timing of any future capital requirements will depend on many factors, including the pace and results of the design and development of our aircraft and manufacturing operations, as well as our progress in obtaining necessary FAAcertifications and other government approvals. For example, any significant delays in obtaining such FAAcertifications and other government approvals will likely require us to raise additional capital above our existing cash on hand and delay our generation of revenues.
September 16, 2021(the "Closing Date"), Archer Aviation Inc., a Delawarecorporation (prior to the closing of the Business Combination (as defined below), "Legacy Archer"), Atlas Crest Investment Corp., a Delawarecorporation ("Atlas"), and Artemis Acquisition Sub Inc., a Delawarecorporation and a direct, wholly-owned subsidiary of Atlas ("Merger Sub"), consummated the closing of the transactions contemplated by the Business Combination Agreement, dated February 10, 2021, as amended and restated on July 29, 2021, by and among Atlas, Legacy Archer and Merger Sub (the "Business Combination Agreement"), following approval at a special meeting of the stockholders of Atlas held on September 14, 2021(the "Special Meeting"). Unless otherwise specified or unless the context otherwise requires, references herein to Legacy Archer refer to Archer prior to the Business Combination and references herein to "New Archer" refer to Archer following the Business Combination. Pursuant to the terms of the Business Combination Agreement, a business combination of Legacy Archer and Atlas was effected by the merger of Merger Sub with and into Legacy Archer, with Legacy Archer surviving the merger (the "Surviving Entity") as a wholly-owned subsidiary of Atlas (the "Merger," and, collectively with the other transactions described in the Business Combination Agreement, the "Business Combination"). Following the consummation of the Merger on the Closing Date, the Surviving Entity changed its name from Archer Aviation Inc.to Archer Aviation Operating Corp., and Atlas changed its name from Atlas Crest Investment Corp.to Archer Aviation Inc.and it became the successor registrant with the Securities and Exchange Commission(the "SEC"). Prior to the closing of the Business Combination, Atlas' Class A common stock and public warrants of Atlas were listed on the New York Stock Exchange("NYSE") under the symbols "ACIC" and "ACIC WS," respectively. Our Class A common stock and public warrants are currently listed on the NYSE under the symbols "ACHR" and "ACHR WS," respectively. Impact of COVID-19 In March 2020, the World Health Organizationdeclared the outbreak of COVID-19 a global pandemic. The rapid spread of COVID-19 caused volatility and disruption in financial markets and prompted governments and businesses to take unprecedented measures such as travel restrictions, quarantines, shelter-in-place orders, and business shutdowns. The impact of the COVID-19 pandemic continues to evolve due to, among other reasons, the emergence of additional variants or strains of COVID-19. As such, the full magnitude of the pandemic's effect on our financial condition, liquidity, and future results of operations is uncertain. Management continues to actively monitor our financial condition, liquidity, operations, suppliers, industry, and workforce, but currently does not anticipate any material impairments as a result of COVID-19 and will continue to evaluate the impact of COVID-19 on an ongoing basis. See Part II, Item 1A, "Risk Factors" in this Quarterly Report and Part I, Item 1A, "Risk Factors" in our Annual Report for more information.
Components of operating results
We are still working to design, develop, certify, and bring up manufacturing of our eVTOL aircraft and thus have not generated any revenues from either of our planned lines of business. We do not expect to begin generating significant revenues until we are able to complete the design, development, certification, and bring up of manufacturing of our eVTOL aircraft.
Research and development
Research and development activities represent a significant part of our business. Our research and development efforts focus on the design and development of our eVTOL aircraft, including certain of the systems that are used in it. As part of those activities, we continue to work closely with the
FAAtowards our goal of achieving certification of our eVTOL aircraft on an 23 -------------------------------------------------------------------------------- Table of Contents efficient timeline. Research and development expenses consist primarily of personnel-related costs (including salaries, bonuses, benefits, and stock-based compensation) for employees focused on research and development activities, costs associated with developing and building prototype aircraft, associated facilities costs, and depreciation. We expect research and development expenses to increase significantly as we progress towards the certification and manufacturing of our eVTOL aircraft. We cannot determine with certainty the timing, duration or the costs necessary to complete the design, development, certification, and manufacturing bring up of our eVTOL aircraft due to the inherently unpredictable nature of our research and development activities. Development timelines, the probability of success, and development costs may differ materially from expectations.
General and administrative
General and administrative expenses consist primarily of personnel-related costs (including salaries, bonuses, benefits, and stock-based compensation) for employees associated with administrative services such as finance, legal, human resources, information technology, associated facilities costs, and depreciation. We expect our general and administrative expenses to increase in absolute dollars, primarily as a result of operating as a publicly-traded company, including expenses to comply with the rules and regulations applicable to publicly-traded companies, as well as additional expenses customary for a publicly-traded company, such as directors' and officers' liability insurance, director fees, and additional internal and external accounting and legal fees and expenses. At this time, we are unable to estimate the costs of defending the ongoing
Wisk Aero LLC("Wisk") litigation or any potential settlement or award of damages related thereto and thus, we have not established any related reserves. For a description of our material pending legal proceedings, see Note 7 - Commitments and Contingencies of the notes to the consolidated condensed financial statements included in Part I, Item 1 of this Quarterly Report.
Other Warrant Fees
Other Warrant Expenses consist entirely of non-cash expenses related to the acquisition of Warrants issued pursuant to the Purchase Agreement and Warrant Agreement with United (“Warrant Agreement”). United Underwriting”).
Other income, net
Other income, net, includes various income and expense items, including the change in fair value of our warrant liabilities.
Interest expense, net
Interest expense, net, primarily includes interest on notes payable less interest income from our money market accounts.
The following table sets forth our condensed consolidated statements of earnings for the periods indicated:
Three Months Ended March 31, 2022 2021 Change $ Change % (In millions) Operating expenses: Research and development (1) $ 27.5
$ 10.1 $ 17.4172 % General and administrative (1) 37.8 6.6 31.2 473 % Other warrant expense - 78.2 (78.2) (100) % Total operating expenses 65.3 94.9 (29.6) (31) % Loss from operations (65.3) (94.9) 29.6 (31) % Other income, net 6.5 - 6.5 100 % Interest expense, net (0.4) - (0.4) 100 % Loss before income taxes (59.2) (94.9) 35.7 (38) % Net loss $ (59.2) $ (94.9) $ 35.7(38) %
(1) Includes stock-based compensation expense as follows:
Three Months Ended March 31, 2022 2021 (In millions) Research and development $ 5.4
$ 0.7General and administrative 19.1 0.2 Total stock-based compensation expense $ 24.5
Comparison of the three months ended
Research and development
Research and development expenses increased by
$17.4 million, or 172%, for the three months ended March 31, 2022, compared to the same period ended March 31, 2021, as we invested in people and materials to advance our technology development. Specifically, the increase was primarily due to an increase of $9.7 millionin personnel-related expenses due to a significant increase in our workforce from the prior year period and an increase of $4.7 millionin stock-based compensation expense primarily related to new restricted stock units granted since the prior year period and 2022 quarterly bonus equity awards to be granted in the subsequent fiscal quarter. In addition, warrant expense increased by $1.2 millionrelated to compensation cost recognized for the warrants issued to FCA Italy S.p.A. under a manufacturing consulting agreement. See Note 9 - Stock-Based Compensation for further details on our stock-based compensation. The remainder of the increase was made up of other immaterial items.
General and administrative
General and administrative expenses increased by
$31.2 million, or 473%, for the three months ended March 31, 2022, compared to the same period ended March 31, 2021, as we invested in people and infrastructure to support our growth and maturity as a public company. Specifically, the increase was primarily due to an increase of $16.0 millionin stock-based compensation expense related to the restricted stock units granted to our founders immediately prior to closing of the Business Combination pursuant to the terms and conditions of the Business Combination Agreement (the "Founder Grants"). In addition, professional service expenses increased by $6.1 million, mainly due to legal fees and expenses, and personnel-related expenses increased by $3.9 milliondue to a significant increase in our workforce from the prior year period. Furthermore, there was an increase of $2.9 millionin stock-based compensation expense primarily related to new restricted stock units granted since the prior year period and 2022 quarterly bonus equity awards to be granted in the subsequent fiscal quarter. See Note 9 - Stock-Based Compensation for further details on our stock-based compensation. The remainder of the increase was made up of other immaterial items. 25 -------------------------------------------------------------------------------- Table of Contents Other Warrant Expense During the three months ended March 31, 2021, we recognized $78.2 millionof non-cash expense related to the vesting of warrants associated with the execution of the Purchase Agreement and United Warrant Agreement, in satisfaction of the first milestone. There was no comparable activity during the three months ended March 31, 2022.
Other income, net
We recognized other income, net of
$6.5 millionfor the three months ended March 31, 2022, primarily due to a gain of $6.6 millionrecorded from a change in fair value of our warrant liabilities (see Note 3 - Summary of Significant Accounting Policies). There was no comparable activity during the three months ended March 31, 2021. Interest Expense, Net Interest expense, net increased by $0.4 millionduring the three months ended March 31, 2022, compared to the same period ended March 31, 2021, primarily due to interest expense recognized for the Silicon Valley Bankterm loans we entered into in July 2021.
Cash and capital resources
March 31, 2022, our principal sources of liquidity were cash and cash equivalents of $704.2 million. We have incurred net losses since our inception and to date have not generated any revenues. We expect to incur additional losses and higher operating expenses for the foreseeable future. We believe that our existing cash and cash equivalents will be sufficient for at least the next 12 months to meet our requirements and plans for cash, including meeting our working capital requirements and capital expenditure requirements.
Over the long term, our ability to meet our working capital and capital expenditure requirements will depend on many factors, including:
•the level of research and development expenses that we incur in the development of our eVTOL aircraft;
•capital expenditures necessary to increase our aircraft manufacturing capabilities, including for the construction of our manufacturing facilities and the purchases of components necessary to build our aircraft;
•general and administrative expenses as we expand our operations; and
•sales, marketing and distribution expenses related to the construction, branding and marketing of our eVTOL aircraft and our UAM network.
The following items include our significant short-term and long-term cash requirements arising from contractual obligations known to
We have short and long term debt securities of
We rent offices, laboratories, hangars and storage facilities in the normal course of our business. Under our operating leases, as disclosed in Note 7 – Commitments and contingencies to the condensed consolidated financial statements, we have present obligations to
Until we can generate significant revenues from our business activities, we expect to fund our cash requirements primarily with existing cash.
The following table summarizes our cash flows for the periods indicated:
Three Months Ended March 31, 2022 2021 (In millions) Net cash used in operating activities
$ (36.8) $ (12.0)Net cash used in investing activities $ (0.6) $ (1.1)Net cash used in financing activities $ (2.4)
Cash flows used in operating activities
We continue to experience negative cash flows from operations as we are still working to design, develop, certify, and bring up manufacturing of our eVTOL aircraft and thus have not generated any revenues from either of our planned lines of business. Our cash flows from operating activities are significantly affected by our cash investments to support the growth of our research and development activities related to our eVTOL aircraft, as well as the general and administrative functions necessary to support those activities and operations as a publicly traded company. Our operating cash flows are also impacted by the working capital requirements to support growth and fluctuations in personnel-related expenditures, accounts payable, accrued interest and other current liabilities, and other current assets. Net cash used in operating activities during the three months ended
March 31, 2022was $36.8 million, resulting from a net loss of $59.2 million, adjusted for non-cash items consisting primarily of $24.5 millionin stock-based compensation primarily related to the Founder Grants, partially offset by a gain of $6.6 milliondue to a change in fair value of our warrant liabilities. The net cash provided by changes in our net operating assets and liabilities of $1.6 millionwas primarily related to a $5.3 millionincrease in accrued expenses and other current liabilities mainly due to legal fees and expenses, partially offset by a $1.7 millionincrease in prepaid expenses, primarily due to prepaid research and development-related expenses and a $1.6 milliondecrease in accounts payable due to timing of payments. Net cash used in operating activities during the three months ended March 31, 2021was $12.0 million, resulting from a net loss of $94.9 million, adjusted for non-cash items consisting primarily of $78.2 millionin other warrant expense related to the vesting of United warrants. The net cash provided by changes in our net operating assets and liabilities of $3.3 millionwas primarily related to a $3.7 millionincrease in accounts payable mainly due to the ramp up in our research and development activities.
Cash flows used in investing activities
Net cash used in investing activities during the three months ended
Cash flows used in financing activities
Net cash used in financing activities during the three months ended
March 31, 2022was $2.4 million, consisting of the repayment of the Silicon Valley Bankterm loans for $2.5 million, offset by $0.1 millionproceeds from the exercise of stock options. There was no cash provided by or used in financing activities during the three months ended March 31, 2021.
Significant Accounting Policies and Estimates
Our consolidated condensed financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in
the United States of America(" U.S.GAAP"). The preparation of these consolidated condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. 27
For a discussion of our critical accounting policies and estimates, see "Critical Accounting Policies and Estimates" included under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report. There have been no material changes in our policies from those previously discussed in our Annual Report.
Recent accounting pronouncements
See Note 3 - Summary of Significant Accounting Policies to the consolidated condensed financial statements included elsewhere in this Quarterly Report for a discussion about accounting pronouncements recently adopted and recently issued not yet adopted. Credit Risk Financial instruments, which subjects us to concentrations of credit risk, consist primarily of cash, cash equivalents, and deposits. Our cash and cash equivalents are held at major financial institutions located in
the United States of America. At times, cash account balances with any one financial institution may exceed Federal Deposit Insurance Corporationinsurance limits ( $250 thousandper depositor per institution). Management believes the financial institutions that hold our cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to cash and cash equivalents.
Emerging Growth Company and Small Company Reporting Status
Section 107(b) of the Jumpstart Our Business Startups Act of 2012 ("JOBS Act") provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Atlas initially elected, and now we have elected, to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we are not subject to the same implementation timeline for new or revised accounting standards as other public companies that are not emerging growth companies which may make comparison of our financials to those of other public companies more difficult. We have also elected to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments. Additionally, we are a "smaller reporting company" as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our shares of common stock held by non-affiliates equals or exceeds
$250 millionas of the end of that year's second fiscal quarter, and (2) our annual revenues equaled or exceeded $100 millionduring such completed fiscal year or the market value of our shares of common stock held by non-affiliates equals or exceeds $700 millionas of the end of that year's second fiscal quarter.
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