What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-15 compared with 2022-03-14 · 82 added, 80 removed, 150 unchanged (52% of the section changed)

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Factors that could cause or contribute to those differences include, but are not limited to, those set forth in Part I, Item 1A, “Risk Factors” in this 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 eVTOL aircraft for use in future 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 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.

We are designing and developing eVTOL aircraft for use in UAM networks.

Our mission is to unlock the skies, freeing everyone to reimagine how they move and spend time.

O ur eVTOL aircraft are designed to be safe, sustainable, and quiet.

Our production aircraft, Midnight, which we unveiled in November of 2022, is designed around our proprietary 12-tilt-6 aircraft configuration.

This means that it has 12 propellers attached to 6 booms on a fixed wing with all 12 propellers providing vertical lift during take-off and landing and the forward 6 propellers tilting forward to cruise position to provide propulsion during forward flight with the wing providing aerodynamic lift like a conventional airplane.

Midnight is designed to carry 4 passengers plus a pilot up to 100 miles at speeds up to 150 miles per hour, but is optimized for back-to-back short distance trips of around 20-miles, with a charging time of approximately 10 minutes between trips.

We are working to certify Midnight with the FAA in late 2024 so that we can then enter into commercial service in 2025.

Midnight is the evolution of our demonstrator eVTOL aircraft, Maker, which through its flight test program has helped validate our proprietary 12-tilt-6 aircraft configuration and certain key enabling technologies.

The design of Midnight marries what we believe to be cutting-edge electric propulsion technology with state-of-the-art aircraft systems to deliver the key attributes of our eVTOL aircraft:

High redundancy and simplified propulsion systems make for a significantly safer aircraft compared to a helicopter.

Midnight has no single critical point of failure, meaning that should any single component fail, the aircraft can still safely complete its flight.

With its intended cruising altitude at approximately 2,000 feet, the design of Midnight is such that the noise that reaches the ground is expected to measure around 45 A-weighted decibels, approximately 100 times quieter than that of a helicopter.

During forward flight, the aircraft’s tilt propellers spin on axes that are aligned with the oncoming air flow, rather than edge-wise to the flow, as is the case with traditional helicopters - further decreasing noise levels.

Since Archer’s aircraft is spinning 12 small propellers rather than one large rotor, it can also spin them at significantly lower tip speeds, resulting in much lower noise levels.

• Sustainable.

Midnight is all electric, resulting in zero operating emissions.

Archer is committed to sourcing renewable energy wherever possible to power its aircraft.

Archer’s design and engineering teams have worked to integrate materials into this aircraft that have their own unique sustainability stories.

For example, Midnight’s seats are constructed out of “flax” fiber, a natural plant which requires very little irrigation and is highly absorbent of CO2.

In addition, Archer’s design uses fabric made from recycled contents like plastic bottles.

We continue to work to optimize our eVTOL aircraft design for both manufacturing and certification.

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 FAA in an efficient manner, thus allowing us to achieve our end goal of bringing to market our eVTOL aircraft.

We believe that by bringing together a mix of talent with eVTOL, traditional commercial aerospace, as well as electric propulsion backgrounds, we have built a team that enables us to move through the design, development, and certification of our eVTOL aircraft with the FAA in an efficient manner, thus allowing us to achieve our end goal of bringing to market our eVTOL aircraft as efficiently as possible.

Our Planned Lines of Business

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We plan to operate our own UAM ecosystem 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.

We will continue to evaluate our go-to-market strategy based on, among other things, estimated demand, readiness of the required infrastructure, and our ability to scale of our aircraft fleet.

Archer Direct

We also plan to selectively sell a certain amount of our eVTOL aircraft to third parties.

We have entered into a Purchase Agreement with United for the conditional purchase of up to $1 billion worth of aircraft, with an option for another $500.0 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.

We have entered into the United Purchase Agreement for the conditional purchase of up to $1 billion worth of aircraft, with an option for another $500.0 million worth of aircraft.

As we get closer to commercialization, 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 for our eVTOL aircraft to enter into service.

We will use our cash and cash equivalents 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.

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Business Combination

On the Closing Date, Legacy Archer, Atlas, and Merger Sub, consummated the closing of the Business Combination Agreement, following approval at the Special Meeting.

On September 16, 2021, (the “Closing Date”), Legacy Archer, Atlas, and Merger Sub, consummated the closing of the Business Combination Agreement, following approval at 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.

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New Archer Class A common stock and public warrants are currently listed on the NYSE under the symbols “ACHR” and “ACHR WS,” respectively.

Additionally, in connection with the PIPE Financing, certain investors had agreed to subscribe for and purchase an aggregate of up to $600.0 million of Class A common stock of the combined company.

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 common stock.

The Merger was accounted for as a reverse recapitalization in accordance with U.S.

Under this method of accounting, Atlas was treated as the “acquired” company for financial reporting purposes.

Accordingly, the financial statements of Archer represent the continuation of the financial statements of Legacy Archer, with the Merger reflected as the equivalent of Archer issuing common stock for the net assets of Atlas, accompanied by a recapitalization.

The net assets of Atlas were recognized as of the Closing at historical cost, with no goodwill or other intangible assets recorded.

Operations prior to the Merger are those of Legacy Archer and Legacy Archer’s operations are the only ongoing operations of Archer.

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 I, Item 1A, “Risk Factors” in this Annual Report for more information.

Components of Results of Operations

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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.

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.

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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 Agreement and Warrant Agreement with United (the “United Warrant Agreement”).

Other Income (Expense)

Other income (expense) consists of miscellaneous income and expense items, including the change in fair value of our warrant liabilities .

Interest expense primarily consists of interest on notes payable net of interest income from money market accounts.

Other warrant expense consists entirely of non-cash expense related to the warrants issued in conjunction with the execution of the United Purchase Agreement and that certain warrant agreement, dated January 29, 2021, between the Company and United (as amended, the “United Warrant Agreement”).

Other Income, Net

Other income, net consists of miscellaneous income and expense items, including the change in fair value of our warrant liabilities.

Interest Income (Expense), Net

Interest income (expense), net primarily consists of interest income from our cash and cash equivalents and short-term investments in marketable securities, net of interest on notes payable.

Results of Operations

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Year Ended December 31,

2021 2020 Change $

2022 2021 Change $ Change %

(In millions)

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Gain on forgiveness of PPP Loan — 0.9 (0.9) (100) %

Other income 10.6 — 10.6

Interest expense (1.0) (0.2) (0.8)

Other income, net 27.8 10.6 17.2 162 %

Interest income (expense), net 2.3 (1.0) 3.3 (330) %

Loss before income taxes (317.3) (347.8) 30.5 (9) %

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Research and Development

Research and development expenses increased by $43.2 million for the year ended December 31, 2021, compared to the year ended December 31, 2020.

The increase was primarily due to an increase of $25.8 million in personnel-related expenses due to significantly increasing our workforce during 2021.

Warrant expense increased $7.0 million due to a manufacturing consulting agreement we entered into in July 2021 with FCA Italy S.p.A.

In addition, there was an increase of $6.7 million pertaining to tools and materials to support our increased research and development activities.

Research and development expenses increased by $107.2 million, or 167%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, as we invested in people and materials to advance our technology development.

The increase was primarily due to an increase of $39.4 million in costs related to professional services and tools and materials to support our increased research and development activities, an increase of $37.8 million in personnel-related expenses due to a significant increase in our workforce from the prior year period, and an increase of $22.4 million in stock-based compensation expense primarily related to new restricted stock units (“RSUs”) granted since the closing of the Business Combination and 2022 quarterly bonus equity awards.

See Note 10 - 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 $173.2 million for the year ended December 31, 2021, compared to the year ended December 31, 2020.

This increase was primarily due to an increase of $118.1 million in stock compensation expense related to the vesting of a certain portion of 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”).

Legal fees and expenses and professional service expenses increased $33.4 million due to the Business Combination and company readiness for going public, as well as legal fees and expenses related to the Wisk litigation.

Personnel-related expenses increased $14.3 million due to significantly increasing our workforce during 2021.

In addition, there was an increase of $5.9 million pertaining primarily to marketing costs related to the Maker unveiling event.

General and administrative expenses decreased by $11.6 million, or 7%, for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The decrease was primarily due to a decrease of $53.2 million in stock-based compensation expense related to the Founder Grants.

The decrease was partially offset by an increase of $14.4 million in personnel-related expenses due to a significant increase in our workforce from the prior year period, as we invested in people and infrastructure to support our growth and maturity as a public company, an increase of $10.0 million in stock-based compensation expense primarily related to new RSUs granted since the closing of the Business Combination and 2022 quarterly bonus equity awards, an increase of $9.9 million in professional service expenses mainly due to legal fees and expenses, and an increase of $6.3 million in general and administrative expenses primarily related to the directors and officers (“D&O”) insurance.

See Note 10 - Stock-Based Compensation for further details on our stock-based compensation.

The remainder of the decrease was made up of other immaterial items.

Other Warrant Expense

Other warrant expense increased by $117.3 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase was 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 Agreement and United Warrant Agreements, in satisfaction of specific milestones.

Other warrant expense decreased by $106.5 million, or 91%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The decrease was due to the vesting of warrants pursuant to the United Warrant Agreement in association with the achievement of specific milestones.

See Note 10 - Stock-Based Compensation for further details.

Gain on Forgiveness of PPP Loan

In June 2021, we received notification that our Paycheck Protection Program Loan (“PPP Loan”) and accrued interest were forgiven in full, resulting in a $0.9 million gain on extinguishment of the loan and interest for the year ended December 31, 2021, compared to the year ended December 31, 2020.

Gain on Forgiveness of PPP Loan decreased by $0.9 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The decrease was due to the one-time gain recognized on the extinguishment of a Paycheck Protection Program loan and accrued interest during the year ended December 31, 2021.

There was no comparable activity for the year ended December 31, 2022.

Other income increased by $17.2 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily due to a gain of $10.4 million recorded from a change in fair value of our warrant liabilities (see Note 3 - Summary of Significant Accounting Policies).

Interest Expense

Interest expense increased by $0.8 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily related to interest expense recognized for the Silicon Valley Bank term loans, which we entered into in July 2021.

The increase was primarily due to the change in fair value of our warrant liabilities.

See Note 3 - Summary of Significant Accounting Policies for further details.

In addition, there was a $4.9 million accretion and amortization income related to our short-term investments recognized during the year ended December 31, 2022.

Interest Income (Expense), Net

Interest income (expense), net increased by $3.3 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to interest income from our cash and cash equivalents and short-term investments, net of interest expense recognized for the Silicon Valley Bank term loans, which we entered into in July 2021.

Liquidity and Capital Resources

As of December 31, 2021, our principal sources of liquidity were cash and cash equivalents of $746.9 million.

As of December 31, 2022, our principal sources of liquidity were cash and cash equivalents of $69.4 million and short-term investments in marketable securities of $461.8 million.

We have incurred net losses since our inception and to date have not generated any revenues.

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• 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;

• general and administrative expenses as we scale our operations and;

• general and administrative expenses as we scale our operations;

• 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, pre-delivery payments, equity financing and debt financing.

The following includes our short-term and long-term material cash requirements from known contractual obligations as of December 31, 2022:

We have short-term and long-term debt obligations of $10.0 million each.

We have short-term debt obligations of $10.0 million due within the next 12 months.

See Note 7 - Notes Payable to the consolidated financial statements for further detail on our debt.

The Company leases office, lab, hangar, and storage facilities in the normal course of business.

Under our operating leases as noted in Note 9 - Commitments and Contingencies to the consolidated financial statements, we have current obligations of $4.3 million and long-term obligations of $12.0 million, which include our obligations under the new sublease we entered into on January 14, 2022.

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.

We lease office, lab, hangar, and storage facilities in the normal course of business.

Under our operating leases as noted in Note 8 - Commitments and Contingencies to the consolidated financial statements, we have current obligations of $4.9 million due within the next 12 months and long-term obligations of $23.5 million.

The following table summarizes our cash flows for the periods indicated:

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Net cash used in investing activities (464.3) (3.5)

Net cash provided by financing activities 822.2 51.2

Net cash (used in) provided by financing activities (9.9) 822.2

Cash Flows Used in Operating Activities

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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 year ended December 31, 2021 was $108.4 million, resulting from a net loss of $347.8 million, adjusted for non-cash items consisting primarily of $117.3 million in other warrant expense related to the vesting of United warrants and $123.6 million in stock-based compensation primarily related to expense recognized for the Founder Grants.

The net cash provided by changes in our net operating assets and liabilities of $0.4 million was primarily related to an increase in accrued professional fees and other miscellaneous expenses offset by an increase in prepaid expenses related to the ramp up in our research and development activities and expenses related to becoming a publicly traded company.

Net cash used in operating activities during the year ended December 31, 2020 was $22.8 million, resulting from a net loss of $24.8 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 $1.3 million was primarily related to a $1.6 million increase in accounts payable.

The increase is related to parts and materials and outside contractors from the ramp up in our research and development activities.

Net cash used in operating activities during the year ended December 31, 2022 was $200.4 million, resulting from a net loss of $317.3 million, adjusted for non-cash items consisting primarily of $102.8 million in stock-based compensation primarily related to the Founder Grants and $10.8 million in other warrant expense related to the United warrants (see Note 10 - Stock-Based Compensation), partially offset by a gain of $22.9 million primarily due to the change in fair value of our warrant liabilities.

The net cash related to changes in our net operating assets and liabilities of $19.2 million was primarily related to a $15.6 million increase in accrued expenses and other current liabilities mainly due to legal fees and expenses and a $10.1 million increase in other long-term liabilities mainly due to the $10.0 million pre-delivery payment from United (see Note 10 - Stock-Based Compensation), partially offset by a $3.4 million increase in operating lease right-of-use assets and lease liabilities, net driven by lease payments and a $2.2 million increase in prepaid expenses primarily due to prepaid research and development-related expenses.

Net cash used in operating activities during the year ended December 31, 2021was $108.4 million, resulting from a net loss of $347.8 million, adjusted for non-cash items consisting primarily of $123.6 million in stock-based compensation primarily related to the Founder Grants and $117.3 million in other warrant expense related to the United warrants.

The net cash related to changes in our net operating assets and liabilities of $0.4 million was primarily related to an increase in accrued professional fees and other miscellaneous expenses offset by an increase in prepaid expenses related to the ramp up in our research and development activities and expenses related to becoming a publicly traded company.

Cash Flows Used in Investing Activities

Net cash used in investing activities during the year ended December 31, 2022 was $464.3 million, driven by purchases of short-term investments of $487.4 million and purchases of property and equipment of $6.9 million, offset by proceeds from maturities of short-term investments of $30.0 million.

Net cash used in investing activities during the year ended December 31, 2021 was $3.5 million, driven by purchases of property and equipment.

Net cash used in investing activities during the year ended December 31, 2020 was $1.9 million, driven by purchases of property and equipment and domain names.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities during the year ended December 31, 2021 was $822.2 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 year ended December 31, 2020 was $51.2 million, consisting primarily of proceeds received from the issuance of preferred stock, net of issuance costs.

Cash Flows (Used in) Provided by Financing Activities

Net cash used in financing activities during the year ended December 31, 2022 was $9.9 million, consisting of the repayment of debt for $10.0 million, offset by $0.1 million proceeds from the exercise of stock options.

Net cash provided by financing activities during the year ended December 31, 2021was $822.2 million, consisting primarily of $600.0 million in proceeds from the PIPE Financing, $201.8 million net proceeds from the Business Combination, and $20.0 million in proceeds from the issuance of debt.

Critical Accounting Policies and Estimates

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We evaluate our estimates and assumptions on an ongoing basis.

Actual results may differ from these

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.

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Application of these approaches and methods involves the use of estimates, judgments, and assumptions, such as future revenue, expenses and cash flows, selections of comparable companies, probabilities and timing of exit events, and other factors.

The fair value of our common stock, utilizing the above methodology prior to the closing of the Business Combination, was used to determine the fair value of the United warrants, and was a key input in in the estimation of the fair value of our stock options (as discussed below).

The fair value of our common stock, utilizing the above methodology prior to the closing of the Business Combination, was used to determine the fair value of the United warrants, and was a key input in the estimation of the fair value of our stock options (as discussed below).

Since the closing of the Business Combination in September 2021, the fair value of our common stock is based on the closing price of our Class A common stock, as quoted on the NYSE, on the date of grant.

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We account for stock-based compensation awards granted to employees and non-employees by recording compensation expense based on each award’s grant date estimated fair value over the vesting period, in accordance with ASC 718, Compensation — Stock Compensation .

We estimate the fair value of restricted stock units (“RSUs”) based on the fair value of our common stock on the date of grant.

We estimate the fair value of RSUs based on the fair value of our common stock on the date of grant.

We estimate the fair value of stock options using the Black-Scholes option-pricing model.

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For the market condition award, we estimated the fair value using a Monte Carlo simulation model.

The Company recognizes compensation expense for the market award on a straight-line basis over the derived service period.

We recognize compensation expense for the market award on a straight-line basis over the derived service period.

Determining the fair value for the market condition award under this model requires subjective assumptions, including the expected volatility of the price of our common stock.

If the applicable performance condition is not probable of being achieved, compensation cost for the value of the award incorporating the market condition is recognized, so long as the

requisite service is provided.

If the applicable performance condition is not probable of being achieved, compensation cost for the value of the award incorporating the market condition is recognized, so long as the requisite service is provided.

If the performance milestone becomes probable of being achieved, the full fair value of the award will be recognized, and any remaining expense for the market award will be cancelled.

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See Note 3 - Summary of Significant Accounting Policies to the consolidated financial statements included elsewhere in this Annual Report for a discussion about accounting pronouncements recently adopted and recently issued and not yet adopted.

Financial instruments, which subjects us to concentrations of credit risk, consist primarily of cash, cash equivalents, and deposits.

Financial instruments, which subjects us to concentrations of credit risk, consist primarily of cash, cash equivalents, and short-term investments.

Our cash and cash equivalents are held at major financial institutions located in the United States of America.

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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.

Our short-term investments consist of high quality, investment grade marketable securities and are held at a major financial institution located in the United States.

We have established guidelines regarding diversification of our investments and their maturities that are designed to preserve principal and achieve liquidity requirements.

We review these guidelines and modify them as necessary based on updated liquidity needs and changes in our operations and financial position.

Emerging Growth Company and Smaller Reporting Company Status

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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 million as of the end of that year’s second fiscal quarter, and (2) our annual revenues equaled or exceeded $100 million during such completed fiscal year or the market value of our shares of common stock held by non-affiliates equals or exceeds $700 million as of the end of that year’s second fiscal quarter.

Quantitative and Qualitative Disclosures about Market Risk

As a “smaller reporting company,” we are not required to provide disclosure under this item.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis