Archer Aviation Inc. Q4 FY2021 Earnings Call

Good afternoon. My name is Hannah and I will be your conference operator today. At this time, I would like to welcome everyone to Archer Aviation Inc. Fourth Quarter and Full Year 2021 Earnings Conference Call. Thank you. You may now begin your conference.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today to review Archer’s fourth quarter and full year 2021 financial results. My name is Andy Missan, the Chief Legal Officer of Archer Aviation Inc. With us on the call today are Brett Adcock and Adam Goldstein, our Co-Founders and Co-CEOs; Mark Mesler, our CFO; and Tom Muniz, our COO. We posted a shareholder letter detailing our Q4 and full year 2021 financial results and business overview on our IR website. This call is being recorded and an archive will be available on our IR website. Before we begin, I would like to remind everyone that during today’s call, we will make forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual events or actual future results to differ materially from those expressed or implied in the forward-looking statements. These risks and uncertainties are described in the Risk Factors section of our filings with the Securities and Exchange Commission available on the SEC’s website and on our Investor Relations website. Except as required by law, Archer disclaims any obligation to update or make revisions to such forward-looking statements. We will begin with commentary and then we will open up the call to questions. And with that, I’d like to turn the call over to Brett Adcock. Brett?

Thank you, Andy. We are pleased to be speaking with you today for our Q4 and full year 2021 earnings call. As we did in Q3, we have published a shareholder letter to our Investor Relations website, which provides a comprehensive update on the company and our Q4 accomplishments. We strongly encourage everyone to review this letter. We want to summarize some of the key highlights. Before we jump into our Q4 update, I want to clarify the key elements of our roadmap. Bringing a new product in a new industry to market is complicated and challenging, to say the least. This is why we have simplified our business roadmap into four key business areas. These four areas will define success in our industry and dictate the milestones to which Archer holds itself most accountable. These four areas are: one, aircraft technology. The focus here is advancing the key enabling technologies and design of aircraft capable of moving people in and around urban areas. Two, FAA aircraft certification, certify our eVTOL aircraft with the FAA to begin operations in the U.S. Three, manufacturing, manufacture our eVTOL aircraft at scale and in a cost-effective manner. Four, airline operations, establish commercial eVTOL airline operations. In the outlook to commercialization section of our Q4 shareholder letter, we have laid out our roadmap in these four key business areas and what we will achieve in these areas in each of the next three years. Importantly, Archer achieved all of its stated 2021 goals and our summary business roadmap. We are currently on track to achieve all of our stated 2022 goals. To recap, in 2021, we accomplished receiving a signed G-1 Certification Basis from the FAA; unveiling Maker, which is our full-scale eVTOL demonstrator; completing our conceptual design review for our production aircraft, a piloted four-passenger vehicle; and completing Maker’s first hover flight. In 2022, we are on track to achieve our G-2 means of compliance with the FAA. Notably, no other company in the world has achieved this yet, completing Maker’s first full transition cruise flight, and finally, to select our manufacturing site and begin the construction process. Current production aircraft progress is promising. Maker is our full-scale demonstrator aircraft, which we are using to help inform the design and engineering of our production aircraft. After completing our conceptual design review process for our production aircraft in October 2021, we are progressing towards our preliminary design review milestone. During this process, engineering is determining final design requirements, completing system and subsystem architectures, integrating those systems through a digital 3D aircraft layout, and finalizing predictive performance models for the aircraft. We continue to conduct various tests and analyses to optimize the various elements of our production aircraft. Key areas of testing include the technology of the battery cells, aerodynamics, and acoustics. We are currently conducting informative wind tunnel tests to help optimize our electric motor and propeller interactions. Additionally, we're conducting critical acoustic testing with our partners at Stellantis. Ultimately, our production aircraft is progressing very well and remains on track for an initial unveiling in 2023. Lastly, I would emphasize the importance of safety at Archer. Safety is a core value of the company and it’s in our DNA to conduct all operations at the highest level of care and diligence. This commitment extends to design, testing, manufacturing, and everything in between, with safety always being our top priority. I will now pass it over to Adam for a more comprehensive update on our Q4 and full year 2021 results.

Thanks, Brett. In addition to the advancements we made on our production aircraft, there are several other major updates for the fourth quarter. The two most notable are our updates on our Maker aircraft and on certification. In terms of our Maker aircraft, over two years ago, Archer’s goal was set to begin flying in 2021, and we are proud to have achieved this ambitious goal. In December of 2021, our Maker aircraft conducted its first hover flight. Critically, the flight results were consistent with our expectations, providing validation for our systems, instruments, and acoustics. This was a historic milestone for Archer. As Brett mentioned earlier, we remain on track to conduct Maker’s first full transition cruise flight in 2022. Regarding FAA certification, we continue to move efficiently through the process. We are focused on agreeing upon our means of compliance with our already established certification basis via a G-2 issue paper with the FAA. This process remains on track and we continue to anticipate achieving our G-2 issue paper in 2022. Some other notable achievements in the quarter include ongoing progress on the selection of our manufacturing facility. We are in the final stages of the selection and negotiation process and hope to make an announcement soon. To accommodate Archer’s growth, we have recently signed a new lease for our headquarters in North San Jose, California, just a few minutes away from our current headquarters in Palo Alto. This will help all of our employees come together and work under one roof. We have continued to hire incredible, world-renowned talent, including what we believe is a best-in-class powertrain team led by Dr. Michael Schwekutsch, former VP of Engineering at Tesla and Senior Director at Apple’s Special Projects Group. We also welcomed Mark Mesler as our new CFO. Mark’s background is extremely well-suited to Archer’s needs. He helped lead his former employer, Bloom Energy, through its IPO process, including the expansion of their financial infrastructure to support their transition from a private to a public company. He also has excellent experience across hardware, sustainability, and aerospace. We are thrilled to have Mark on our team. Additionally, we welcomed Barb Pilarski to our Board of Directors. Barb is the Global Head of Business Development at Stellantis and she is a seasoned leader with over 35 years of experience in the automotive sector across business development, finance, and human resources. She is an incredible addition to Archer. In conclusion, we continue to be very proud of our achievements in the fourth quarter and throughout the entire year of 2021. I will now pass it over to Mark Mesler for additional details on Archer’s financial position.

Thanks, Adam. It’s certainly exciting for me to have completed my first five weeks with the Archer team. As I have transitioned into this role, I have had the opportunity to meet some of the best eVTOL aviation, propulsion, battery, and design talents in the world. They have all come together to develop a solution for a transformational problem, transitioning how we as a society manage our short-distance terrestrial transportation into the air, safely, reliably, and sustainably. This is a significant opportunity that Archer affords investors and it’s exciting for me to be part of that team. My experience at KLA-Tencor, Bloom Energy, and most recently, Volansi, a private company in the eVTOL logistics space, has given me perspective on strategic financial planning and the challenges of taking emerging growth companies that are disrupting well-established business sectors to the public markets, along with the critical elements of business and financial strategy in the eVTOL space. I also appreciate the importance of clear, consistent, and transparent communication with the financial community that enables our investors and the analysts covering the company to understand our business strategy, our financial disclosures, and the best ways to evaluate our success and value our business. With that perspective and after my short time here, I know that we have the right strategy, the right team, and a strong balance sheet to deliver on our business outlook, getting us to our goal of achieving certification and commencing commercialization in 2024. I want to share my initial observations and some key data points on these three key areas with you. From a strategy perspective, Archer is laser-focused on getting our eVTOL aircraft certified and into commercial operations. To achieve this, we are executing capital-efficient strategies that include focusing on designing and manufacturing an eVTOL aircraft optimized for servicing short-distance urban routes, approximately 20 to 30 miles on average. To expedite commercial operations, our engineering development efforts are concentrated on key technology differentiators, such as propulsion, powertrain, batteries, software, and aircraft design, while leveraging existing best-in-class subsystem technologies from our world-class vendors that have already been used in aircraft certified under Part 23. Our approach ensures that we are not vertically integrating our supply chain, which we believe will allow us to speed our time to certification and commercialization and mitigate the need for larger engineering teams. This strategy allows us to deploy our capital efficiently. You can see our capital efficiency manifesting itself in our recent cash burn relative to our peers in this space. Our annualized cash burn for Q4 '21, defined as adjusted EBITDA less CapEx multiplied by four, was $132 million. Based on publicly available information, we believe we have the lowest annualized cash burn of any publicly traded company in the sector. Pivoting to our team, we continue to assemble a world-class team to deliver on our business outlook. I know it’s easy for a company to say this, but here at Archer, we have real proof points to validate this position. Just look at the recent new Archer team members, board members, and Technical Advisory Board additions this past quarter, as outlined earlier by Adam and in our shareholder letter and announcements, and you can see the critical experience and technical knowledge we are bringing together to help achieve our certification and commercialization goals. This team’s ability to go from the design of Maker to its first hover in just two years this past December is an extraordinary accomplishment within the sector. As we develop our production aircraft and transition into manufacturing and airline operations, we will continue to add exemplary talent to our team to help us achieve our goals. From a capitalization standpoint, we have one of the strongest balance sheets in the sector, with $747 million of cash and cash equivalents on the balance sheet entering fiscal year 2022, equating to $3.14 of cash per outstanding share as of the end of Q4 '21. Moreover, our Q4 '21 cash balance is 5.7 times our Q4 '21 annualized cash burn rate as I defined earlier. There is no doubt we are one of the best-capitalized companies in the sector. These are key reasons that when I was deciding whether to join the team at Archer, I had real confidence and why I look forward to working with the team to execute our business outlook. Switching gears to our financial performance for Q4 '21 and FY '21. Our Q4 '21 non-GAAP total operating expenses were $33.1 million, which was below the lower end of our outlook range of $35 million, primarily due to the timing of hiring and spending on engineering development materials. This led to an adjusted EBITDA loss of $32.4 million. For the full year FY '21, our non-GAAP total operating expenses were $110.4 million. Operating expenses continue to be characterized by investments in personnel and materials needed to develop and mature the technology for our eVTOL aircraft. Our focus is now transitioning from work on our Maker demonstrator aircraft to our production aircraft. We are making investments across multiple functions to strengthen our capability as we transition to being a public company. On a GAAP basis, total operating expenses for Q4 '21 were $53.3 million, which included $18.9 million of stock-based compensation and $123 million of warrant expenses for our warrants issued to Stellantis. These results were $11.7 million below the lower end of our Q4 '21 outlook of $65 million, primarily due to $9.8 million less stock-based compensation and warrant expense, driven by lower share prices in the quarter. For the full year FY '21, GAAP total operating expenses were $358.3 million, which included $123.6 million of stock-based compensation related to the deSPAC transaction and the vesting of certain brands to our Founders upon achieving specific milestones, as well as $117.3 million in non-cash warrant expenses for achieving two milestones associated with our warrants issued to United and $7 million of Stellantis warrant expense. We exited FY '21 with $747 million of cash and cash equivalents on our balance sheet. Although we used $49.3 million in cash for the quarter, approximately $22 million was attributed to non-recurring items as we settled expenses related to the deSPAC transaction, including legal, accounting, and insurance fees. There was another $0.5 million of capital expenses, leaving our normalized cash usage for the quarter at approximately $26.8 million. Again, we are well-capitalized as we enter 2022. With FY '21 behind us, our efforts now focus on delivering our 2022 business milestones. We are pleased to begin 2022 with the recent news that the U.S. Attorney’s Office decided not to continue its investigation and not to bring charges against our team member, Dr. Xue, as part of the Boeing joint venture Wisk allegations against Archer. This claim was central to its allegations. It is not unusual for technology companies to make trade secret claims against others in attempts to stifle competition or slow new product introductions. That said, we believe this outcome supports our assertions from the very beginning that Wisk’s claims lack any factual evidence. We hope to put this issue behind us as we look forward to trial in January 2023. As I look at 2022, I’ve established overarching goals for our current and potential investors in Archer to consider. While our shares are currently well-capitalized, my focus is to ensure that we continue to remain well-capitalized as we mature our business model and execute our business outlook. As we transition from our R&D-centric business focus to manufacturing and commercialization, we will create an operational rhythm at Archer. Establishing a successful operating rhythm will ensure that our internal cadence and infrastructure for product development, supply chain procurement, manufacturing operations, and airline service levels meet market demand as we transition to commercialization. We recognize that the urban air mobility sector is challenging for investors to understand what success means. We believe that this ambiguity is keeping many interested investors on the sidelines from not only Archer but the urban air mobility space in general. The wide range in valuation for these sectors supports this thesis. For example, as of March 9, the 2026 revenue multiples for publicly traded companies in this sector ranged from 0.4x to 1.5x. We are at the lower end of that valuation range. Over the course of the next year, I aim to provide transparency to investors on how we are creating value and tracking toward our business outlook through education and defining success across critical elements such as the FAA certification process. We’ll begin providing information to help investors better understand the space and how we believe Archer will excel in it. Finally, regarding our Q1 '22 outlook estimates, we anticipate total GAAP operating expense of $58 million to $64 million and total non-GAAP operating expense of $33 million to $39 million. This reflects expected stock-based compensation and warrant expense of approximately $25 million. In summary, my observations from my first month at Archer are that we have the right strategy, the right team, and the right capitalization to deliver on our business outlook and achieve certification and commence commercialization of our technology. I’m excited to be a part of this mission, and I look forward to helping continue to build this great company.

The first question is from Andres Sheppard with Cantor Fitzgerald. You may proceed.

Hey, good afternoon, guys, and congrats on the quarter. Can you hear me okay?

Yes.

Great. Thanks, guys. A quick question. I’m just wondering if you can maybe provide a little more color on the timeframe and the ramp-up regarding the first cruise test flight? So, you’ve mentioned you expect to conduct it in the second half of the year; any chance of maybe doing it beforehand? And separately, once the first cruise flight is complete, can you talk about the next steps? Can you give us a sense of maybe how many test flights you expect to conduct shortly after or in the year?

Yes. Sure. Hi, Andres, nice to meet you, it’s Brett. So, the first flight, as you mentioned, in December, we had Maker’s first hover flight, and we were really pleased with the results. We gathered a lot of information and data that we’re using to advance the development of our production aircraft and accelerate that timeline to market. Overall, we’re taking a very measured, strategic, and disciplined approach to our flight testing to ensure we go through the proper steps from hover all the way through the transition flight envelope. Tom Muniz, Archer’s Chief Operating Officer, is on the call. Tom has over a decade of eVTOL experience. I figure he could talk a little bit more about our timing as it relates to the transition envelope expansion and then further flights from here.

Yes. Thanks, Brett. Andres, this is Tom. Brett hit a lot of the high points, but just to reiterate, we had a very successful first flight in December. First flights are never easy, but the team did a great job—the flight went off as planned. I think it speaks to what Brett mentioned earlier, which is the approach we’re taking, just very methodical and step-by-step; flight testing is a very incremental process, right? You expand the flight envelope in small steps, and you make sure everything is good before you progress. So to answer your question, we are on track to get through our first transition flight on Maker this year, but we are going to take the data as it comes, right and react to it. Everything that we have seen so far looks really good, validating our aero models and validating our flight control laws. We are really happy with what we have seen so far. So, looking forward to continuing to progress through that envelope extension.

Got it. No, that’s great and very helpful. Thanks, guys. Maybe one last one if I may. Any sense of the timing regarding the selection of the manufacturing facility? I am just wondering if we can maybe quantify that a bit further or is it safe to say now that it’s expected later this year?

Andres, it’s Brett. Yes, I will detail a little bit more here. We put some information in our Q4 shareholder letter. We began our manufacturing site selection process several months ago, and we have down-selected from over 200 possible sites. We are currently in late-stage negotiations with a few locations to make our final selection. We remain on track to formally announce both the manufacturing site and the beginning construction this year. It’s not something we can disclose here on the call, but we are getting very close, and we are on plan as of today.

Got it. I appreciate that. That’s awesome. Thanks guys. Congrats again on the quarter. I will pass it on.

Thank you, Mr. Sheppard. The next question is from the line of David Zazula with Barclays. You may proceed.

Hey guys. Congrats on the first flight, and thanks for taking the question. Just to clarify on the prior question, I guess you have not made any successive flights, but it sounds like you are really able to leverage the data you gained from that flight and incorporate it into models and plans for future flights. Is that what I am understanding?

Yes. Hey David, it’s Brett. So, our process for flight testing is really going to follow the same concept of operations that we are going to do in real life operations when we get to market. So, from a flight planning perspective, we do a lot of integration and ground testing work. We then move into hover flights. From there, we work to expand the flight envelope from hover to full cruise flight or full wing-borne flight. Our real focus today is getting to full wing-borne flight, and all our energy around the flight testing group is focused on expanding the flight envelope. We expect to achieve this full flight envelope expansion this year. It is an important engineering milestone for us to gather more data about how the aircraft is behaving in full transition flight and full cruise flight environments. We are using all of this for Maker to help advance our timeline concerning our production aircraft and make better engineering and certification decisions. We have gathered a tremendous amount of lessons learned throughout the entire engineering design process for Maker as well as all the flight testing work that we have done and will continue to do this year.

Thanks, Brett. Just expanding – there was a report out this morning that questioned the battery capabilities of one of your competitors. You guys have put out, I think, the most battery information of anyone in the industry. Can you discuss any differences you are expecting in the production aircraft battery from what you had disclosed about Maker, including any changes made as a result of your dialogue with the FAA or during the preliminary design review?

Yes, certainly. This is Brett again, David. First, we cannot comment on our competitors' technologies in battery areas. However, Archer is serving a market for urban air mobility; we are not going for these longer-distance regional transport trips. We are really focused on urban areas, and we believe it’s a long-term multi-trillion dollar industry. We are excited about helping fix traffic problems and moving passengers around. Since day one, we have designed our aircraft using today’s technologies, with aircraft design being one of our key enabling technologies. Our flight sciences and aerodynamics team is quite large and sophisticated. It’s important to note that, as it relates to the aircraft design process, we are not making any bets on future technology advancements. We aim to design our aircraft around readily available battery technologies that exist today. We have verified our designs through thousands of cell cycles to ensure that we have adequate power and energy for our nominal mission. Additionally, we are validating this for safety from a cell reliability perspective. We believe it's essential to ensure we are designing our aircraft with batteries and technologies that exist today because we do not want to take any technology bets. Lastly, this is a capital-intensive space, and we feel well-capitalized for the journey we are on and our track for commercialization. I hope that’s helpful.

Definitely helpful. If I could just squeeze one more in, we have seen – and I know this seems a long way off, but we’ve seen commodity costs expand significantly since you guys had put out your initial estimates on what you thought it would take to get up to production. I guess – is that calling into question any of the assumptions you have put out as far as production, or is it still too far off to say?

Hi. This is Tom. I can take that one. We are still in the supplier selection process, working towards our production aircraft. The nice thing is we have time to negotiate these contracts and navigate the current supply chain challenges that we are seeing. You are right, commodity costs have been rising. However, we haven’t seen that affect the contracts we have been working on significantly. We remain optimistic and are on track to hit our overall business targets, including our operational economic model, despite the data we have on supply chains. Does that make sense?

Yes. Thanks, Tom.

Thank you, Mr. Zazula. The next question is from Josh Sullivan with The Benchmark Company. You may proceed.

Good afternoon. How should we think about cash use cadence through the year? Can you maintain your title here with the lowest burn in the sector throughout the year? Maybe where are you on engineer or total employee headcount at this point? Perhaps provide expectations for year-end and timing of any other cash needs or large cash needs through the year?

Hi Josh, this is Mark. Thanks for the question. It's great to hear from you. We have agreed to provide quarterly guidance going forward. You can expect the growth pace quarter-over-quarter to be consistent with what you saw from Q4 to Q1, just to give you a ballpark for potential modeling. There may be lumpier expenses associated with engineering materials in any given quarter, but I think that’s how you could generally think about the spending cadence throughout the year.

Got it. Yes, that’s helpful. And as far as G-2 progress with the FAA, given you plan to be one of the first eVTOLs to receive the designation, how has the G-2 structure evolved with the FAA? Is it static at this point, or have the FAA changed any expectations over the last couple of months?

Yes. Hey, it’s Brett. That’s a good question. From the outset, we have gone through a pretty structured process over the last several years with the FAA. We have completed the intake board process with FAA staff for the Archer project, and we received full G-1 certification basis approval back in September. Since then, we’ve been working through the G-2 means of compliance work, and none of that process has changed whatsoever; the status quo remains. We are working every day, every week with the FAA, providing supporting issue papers and documentation for that process. We fully expect to achieve G-2 means of compliance this year. Everything is on track, and we have had an incredible dialogue with the FAA. It is one of our core focuses—the design around certification. We listen to the FAA and design according to existing Federal guidelines wherever possible. We are not trying to take any significant risks.

Thank you, Mr. Sullivan. There are no additional questions waiting in queue at this time, so I will turn the call back over to Brett Adcock for any closing remarks.

Hey, this is Adam Goldstein. I would like to end the call today by reiterating a couple of our key points. One is that we do what we say we are going to do. We have accomplished everything we said we were going to do in 2021, including getting our G-1 certification basis and having the first flight of Maker. Two is, we are well-capitalized, and we have strong financial discipline. We have significant cash in our balance sheet, and our disciplined financial plan will help us invest in our operational roadmap. This will be key to getting us to market in 2024 and beyond. Finally, we have significant momentum in 2022. We are on track to achieve our 2022 goals and our operational roadmap. Thank you for joining us today, and we look forward to hearing from you soon.

That concludes today’s call. Thank you for your participation. You may now disconnect your lines.