Archer Aviation Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q 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 on Form 10-Q. 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 on Form 10-Q and the section titled “Risk Factors” in the Company’s prospectus filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b)(3) under the Securities Act of 1933, as amended (the “Securities Act”), on October 26, 2021 (the “Prospectus”). The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this report and the audited financial statements as of and for the year ended December 31, 2020 set forth in the Prospectus. Overview We are a former blank check company incorporated on August 26, 2020 under the name Atlas Crest Investment Corp. (“Atlas”) as a Delaware corporation and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. Business Combination On September 16, 2021 (the “Closing Date”), Archer Aviation Inc., a Delaware corporation (prior to the closing of the Business Combination, “Legacy Archer”), Atlas, and Artemis Acquisition Sub Inc., a Delaware corporation 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 Legacy Archer refers to Archer prior to the Business Combination and references herein to “New Archer” refers 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 SEC. Prior to the closing of the Business Combination, the 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. New Archer Class A common stock and public warrants are currently listed on the NYSE under the symbols “ACHR” and “ACHR WS,” respectively. Additionally, certain investors had agreed to subscribe for and purchase an aggregate of up to $600.0 million of common stock of the combined company (“PIPE Financing”). The PIPE Financing was consummated substantially concurrent with the closing of the Merger. The Business Combination generated gross cash proceeds of $857.6 million, including $600.0 million proceeds from the PIPE Financing. Total direct and incremental transaction costs aggregated $81.8 million, of which $10.9 million were expensed as part of the Business Combination, $55.8 million were recorded to APIC as equity issuance costs, and the remaining $15.1 million was settled through the issuance of shares of New Archer Class A shares. Our Business 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 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 28 Table of Contents 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 have optimized 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 both eVTOL and traditional commercial aerospace backgrounds we are building a team that will allow us to move through the design, development, and certification of our eVTOL aircraft with the Federal Aviation Administration (“FAA”) in an efficient manner, thus allowing us to achieve our end goal of bringing to market our eVTOL aircraft. Our Planned Lines of Business Upon receipt of all necessary FAA certifications and any other government approvals necessary for us to manufacture and operate our aircraft, we intend to operate two complementary lines of business. Our core focus is direct-to-consumer (“Archer UAM”) with our secondary focus being business-to-business (“Archer Direct”). Archer UAM We plan to operate our own UAM ecosystem (“Archer UAM”) initially in select major U.S. cities, such as Los Angeles and 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. Archer Direct We also plan to selectively sell a certain amount of our eVTOL aircraft to third parties (“Archer Direct”). We have entered into a purchase agreement with United Airlines Inc. (“United”) for the conditional purchase of up to $1 billion worth of aircraft, with an option for another $500 million worth 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. 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 FAA certifications and other government approvals. For example, any significant delays in obtaining such FAA certifications and other government approvals will likely require us to raise additional capital above our existing cash on hand and delay our generation of revenues. Impact of COVID-19 In March 2020, the World Health Organization declared 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 on Form 10-Q for more information. 29 Table of Contents Components of Results of Operations Revenue 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. Operating Expenses 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 FAA towards our goal of achieving certification of our eVTOL aircraft on an efficient timeline. Research and development expenses consist of personnel-related costs (including salaries, bonuses, benefits, and stock-based compensation) for employees focused on research and development activities, costs associated with building prototype aircraft, other related costs, depreciation, and an allocation of general overhead. 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, other related costs, and depreciation and an allocation of our general overhead. We expect our general and administrative expenses to increase in absolute dollars 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 8 - Commitments and Contingencies of the notes to the consolidated condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Other Warrant Expense Other warrant expense consists entirely of non-cash expense related to the vesting of warrants issued in conjunction with the execution of the Purchase and Warrant Agreements with United. We expect to incur additional expense as these warrants vest upon satisfaction of certain milestones outlined in the applicable agreements. Other Expense, Net Other expense, net primarily consists of miscellaneous income and expense items . Interest expense primarily consists of interest on notes payable net of interest income from money market accounts. 30 Table of Contents Results of Operations The following table sets forth our consolidated condensed statements of operations for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 Change $ 2021 2020 Change $ (In millions) Operating expenses: Research and development (1) $ 23.1 $ 6.7 $ 16.4 $ 44.6 $ 13.6 $ 31.0 General and administrative (1) 114.1 0.6 113.5 143.1 2.3 140.8 Other warrant expense 39.1 — 39.1 117.3 — 117.3 Total operating expenses 176.3 7.3 169.0 305.0 15.9 289.1 Loss from operations (176.3) (7.3) (169.0) (305.0) (15.9) (289.1) Gain on forgiveness of PPP loan — — — 0.9 — 0.9 Other expense, net (0.4) — (0.4) (0.4) (0.2) (0.2) Loss before income taxes (176.7) (7.3) (169.4) (304.5) (16.1) (288.4) Net loss $ (176.7) $ (7.3) $ (169.4) $ (304.5) $ (16.1) $ (288.4) (1) Includes stock-based compensation expense as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Research and development $ 0.8 $ — $ 2.2 $ — General and administrative 102.0 — 102.5 — Total stock-based compensation expense $ 102.8 $ — $ 104.7 $ — Comparison of the Three and Nine Months Ended September 30, 2021 and 2020 Research and Development Research and development expenses increased by $16.4 million for the three months ended September 30, 2021, compared to the same period ended September 30, 2020. The increase was primarily due to an increase of $16.4 million in personnel-related expenses and allocated facilities expenses due to significantly increasing our workforce from the prior period and an increase in stock-based compensation. Research and development expenses increased by $31.0 million for the nine months ended September 30, 2021, compared to the same period ended September 30, 2020. The increase was primarily due to an increase of $23.5 million in personnel-related expenses and allocated facilities expenses due to significantly increasing our workforce in the first nine months of 2021. The increase was also due to increases of $1.7 million and $5.7 million pertaining to third-party consultant expenses and tools and materials, respectively, to support our increased research and development activities. General and Administrative General and administrative expenses increased by $113.5 million for the three months ended September 30, 2021, compared to the same period ended September 30, 2020. This increase was primarily due to an increase of $104.8 million in personnel-related expenses and allocated facilities costs due to a significant increase in stock-based compensation, which was primarily related to the vesting of one-quarter of the Founder Grants that were granted immediately prior to closing pursuant to the terms and conditions of the Business Combination Agreement. In addition, there was an increase in legal and professional service expenses of $7.7 million pertaining to the Business Combination and company readiness for going public, as well as legal fees and expenses related to the Wisk litigation, as described in detail in Note 8 - Commitments and Contingencies of our consolidated condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q. General and administrative expenses increased by $140.8 million for the nine months ended September 30, 2021, compared to the same period ended September 30, 2020. This increase was primarily due to an increase of $108.9 million in personnel-related expenses and allocated facilities costs due to a significant increase in our workforce and stock-based compensation, 31 Table of Contents which was primarily related to the vesting of one-quarter of the Founder Grants that were granted immediately prior to closing pursuant to the terms and conditions of the Business Combination Agreement. In addition, there was an increase in legal fees and expenses and professional service expenses of $26.4 million pertaining to the Business Combination and company readiness for going public, as well as legal fees and expenses related to the Wisk litigation. There was also an increase of $5.1 million pertaining to advertising and marketing expenses. Other Warrant Expense Other warrant expense increased by $39.1 million and $117.3 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods ended September 30, 2020. These increases were due to $78.2 million and $39.1 million of non-cash expense recognized in the first and third quarter of 2021, respectively, related to the vesting of warrants associated with the execution of the Purchase and Warrant Agreements with United, in satisfaction of specific milestones. Gain on Forgiveness of PPP Loan In June 2021, we received notification that our PPP Loan (as defined below) and accrued interest were forgiven in full, resulting in an increase of $0.9 million in gain on extinguishment of the loan and interest for the nine months ended September 30, 2021, compared to the same period ended September 30, 2020. Other Expense, Net Other expense, net, increased by $0.4 million and $0.2 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods ended September 30, 2020. The increase in both of these periods primarily was due to increased interest expense related to the Term Loans, which was entered into in July 2021. See Note 7 - Notes Payable of our consolidated condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information. Liquidity and Capital Resources As of September 30, 2021, our principal sources of liquidity were cash and cash equivalents of $796.2 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. The Business Combination generated net cash proceeds of $801.8 million. We expect that the net cash proceeds from the Business Combination along with our cash balances held prior to the closing date will be sufficient to fund our current operating plan for at least the next 12 months from the date the consolidated condensed financial statements are available to be issued. Our future capital requirements will depend on many factors, including: • the level of research and development expenses we incur as we continue to develop our eVTOL aircraft; • capital expenditures needed to bring up our aircraft manufacturing capabilities, including for both the build out of our manufacturing facilities and component purchases necessary to build our aircraft; • capital expenditures needed to support the infrastructure required to launch our UAM network; • general and administrative expenses as we scale our operations; • interest expense from our debt financing; and • sales, marketing and distribution expenses as we build, brand and market our eVTOL aircraft and UAM network. Until such time as we can generate significant revenue from our business operations, we expect to finance our cash needs primarily through existing cash on hand, public or private equity or debt financings or other capital sources, including potential collaborations and other similar commercial arrangements. However, we may be unable to raise additional capital or enter into such other commercial arrangements when needed, on favorable terms or at all. To the extent that we raise additional capital through equity or convertible debt financings, the ownership interest of our stockholders could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our current stockholders. 32 Table of Contents Additionally, these financings may require us to agree to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise funds through collaborations or other similar commercial arrangements with third parties, we may have to relinquish valuable rights which in turn may reduce the value of our common stock. If we are unable to raise additional capital through equity or debt financings or commercial arrangements when needed, we may be required to delay, limit, reduce or terminate certain business operations. Loan and Security Agreement On July 9, 2021, we entered into a Loan and Security Agreement, as borrower, with Silicon Valley Bank (“SVB”) and SVB Innovation Credit Fund VIII, L.P. (“SVB Innovation”) as the lenders, and SVB as the collateral agent. The total principal amount of the loans is $20.0 million (the “Term Loans”), and all obligations due under the Term Loans are collateralized by all of our rights, title and interest in and to our specified personal property in favor of the collateral agent. The interest rate on the Term Loans is a floating rate per annum equal to the greater of (1) 8.5% and (2) the Prime Rate plus the Prime Rate Margin, which increases by 2% per annum upon the occurrence of an event of default. The proceeds were required to be used solely for the working capital or to fund the Company’s general business purpose. The Term Loans are subject to a final payment fee ranging between zero and 5.5% of the original aggregate principal amount depending on the timing of repayment. Cash Flows The following table summarizes our cash flows for the periods indicated: Nine Months Ended September 30, 2021 2020 (In millions) Net cash used in operating activities $ (59.5) $ (15.2) Net cash used in investing activities (3.0) (0.4) Net cash provided by financing activities 822.1 46.6 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 nine months ended September 30, 2021 was $59.5 million , resulting from a net loss of $304.5 million , adjusted for non-cash items consisting primarily of $117.3 million in other warrant expense related to the vesting of United warrants and $104.7 million in stock-based compensation primarily related to the vesting of one-quarter of the Founder Grants that were granted immediately prior to closing pursuant to the terms and conditions of the Business Combination Agreement. The net cash provided by changes in our net operating assets and liabilities of $16.2 million was primarily related to a $16.9 million increase in accounts payabl e related to Wisk litigation costs, parts and materials used in our research and development activities, and advertising and marketing activities. Net cash used in operating activities during the nine months ended September 30, 2020 was $15.2 million, resulting from a net loss of $16.1 million, adjusted for non-cash items consisting of primarily $0.3 million in non-cash interest primarily related to our convertible notes. The net cash provided by changes in our net operating assets and liabilities of $0.5 million was primarily related to a $1.4 million increase in accounts payable offset by an increase of $0.9 million in prepaid expenses. Both increases are related to parts & materials and outside contractors from the ramp up in our research and development activities. Cash Flows Used in Investing Activities Net cash used in investing activities during the nine months ended September 30, 2021 and 2020 was $3.0 million and $0.4 million, respectively, driven by purchases of property and equipment within those respective periods. 33 Table of Contents Cash Flows Provided by Financing Activities Net cash provided by financing activities during the nine months ended September 30, 2021 was $822.1 million, consisting primarily of $20.0 million in proceeds from the issuance of debt, $600.0 million in proceeds from the PIPE Financing, and $201.8 million net proceeds from the Business Combination. Net cash provided by financing activities during the nine months ended September 30, 2020 was $46.6 million, consisting primarily of proceeds received from the issuance of preferred stock, net of issuance costs. Contractual Obligations and Commitments The following table summarizes our contractual obligations and commitments as of September 30, 2021: Payments Due by Period Total Less than 1 year 1 to 3 years 3 to 5 years After 5 years (In millions) Operating lease obligation (1) $ 5.2 $ 0.6 $ 4.6 $ — $ — Note payable (2) 20.0 — 20.0 — — Note payable accrued interest 2.4 1.6 0.8 — — $ 27.6 $ 2.2 $ 25.4 $ — $ — __________________________ (1) Operating lease obligation is primarily related to the corporate headquarters lease expiring on June 30, 2023. As of September 30, 2021, the Company has entered into six real estate lease agreements. (2) Note payable is related to the Term Loans. Refer to Note 7 - Notes Payable of our condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q. The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty. Paycheck Protection Program In April 2020, we obtained a loan of approximately $0.9 million pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act (the “PPP Loan”), with interest accruing on the PPP Loan at a rate of 0.98% per annum. The Paycheck Protection Program was established as part of the CARES Act and provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the business, subject to certain limitations. The loan and accrued interest are forgivable after 24 weeks so long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent, and utilities. We applied for loan forgiveness under the CARES Act and received forgiveness of the loan and accrued interest in full from the Small Business Administration in June 2021. Off-Balance Sheet Arrangements As of September 30, 2021, we did not have any off-balance sheet arrangements. Critical Accounting Policies and Estimates Our consolidated condensed financial statements and accompanying notes have been prepared in accordance with 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. For additional information about our critical accounting policies and estimates, see the disclosure included elsewhere in this Form 10-Q as well as Note 3 - Summary of Significant Accounting Policies in the notes to the consolidated condensed financial statements included elsewhere in this Form 10-Q. 34 Table of Contents Recent Accounting Pronouncements See Note 3 - Summary of Significant Accounting Policies to the consolidated condensed financial statements included elsewhere in this Form 10-Q 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 Corporation insurance limits ($250 thousand per 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 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.