Archer Aviation Inc. Q1 FY2022 Earnings Call

Hello everyone, and thank you for joining the Archer Aviation Inc. Q1 2022 financial results. My name is indiscernible and I will be moderating your call today. Before I hand you over to your host, Andy Missan, I would like to remind you of the operator instructions. I now have the pleasure of handing you over to Andy Missan. Please go ahead, Andy.

Good morning, everyone and thank you for joining us today to review Archer's first-quarter 2022 operating and financial results. My name is Andy Missan, the Chief Legal Officer of Archer. On the call today are Adam Goldstein, our CEO. Mark Mesler, our CFO, and Tom Muniz, our COO. We posted a shareholder letter detailing our Q1 2022 operating and financial results to 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 be making forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause the 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 annual report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 14th, 2022 and our quarterly report on Form-10-Q for the three months ended March 31, 2022, which is expected to be filed with the SEC later today, 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 as a result of new information or future events. Also, please note that on this call, certain financial measures are presented on a non-GAAP basis. Reconciliations of these non-GAAP financial measures in the most directly comparable GAAP measures are included in our shareholder letter posted on our Investor Relations website. We will begin with commentary and then we'll open up the call to questions. And with that, I'd like to turn the call over to Adam.

Thank you for joining us today and for your continued interest in Archer. Our operating and financial performance were consistent with our expectations and we are on track to achieve all of our 2022 milestones. We remain well capitalized and well-positioned as a leader in the eVTOL sector, with key strategic relationships, a growing team of dedicated, experienced, and committed designers, engineers, and operators, and with a business plan and strategy that is unique, compelling, and clearly differentiated. Since we just spoke on our fourth quarter and year-end earnings call, we've continued to advance on many key initiatives, which I will discuss later. But first, I'd like to start by reiterating our vision and strategy for commercialization. Archer is enabling a new form of transportation and our commitment to our goal is unwavering, bringing sustainable, safe, quiet, and accessible Urban Air mobility to the masses. We are building a transportation solution that will enable people to move freely, whether it is commuting to work or taking time to explore places previously inaccessible because of traffic limitations. From day one, we've anchored our business plan on driving to commercialization, and with the support of our key strategic partners, United and Stellantis. The aim of our production aircraft is to balance the performance necessary to be economically viable against the complexity that allows us to achieve certification and scale operations. That's why we chose to build a piloted plus four-passenger vehicle that is designed to perform continuous rapid 25-to-50-mile missions throughout the day with minimal charging time required on the ground in between trips. This vision has never changed. To make this vision a reality, our strategic development program uses our full-scale demonstrator aircraft, Maker to prove out our 12-tilt-6 configuration, advance our key enabling technologies, and set the roadmap for our production aircraft certification program. Maker has proven that our configuration was the right choice. Our flight test program began in December and we have and will continue to use the data for Maker to inform the design of our production aircraft. In parallel, we are rapidly advancing our production aircraft through the preliminary design phase, while working with the FAA to finalize our G2 means of compliance to the G1 certification basis we agreed to last year. Our executive team and board are fully aligned behind this approach, which is about efficiency, effectiveness, and safety as we drive to commercialization. Since the beginning of the year, we have made significant progress on our production aircraft design. We have finalized key system architectures, advanced the development of our critical propulsion and flight control technologies, and matured our supply base, including the selection of several key suppliers. A major technical achievement this quarter was defining our aircraft Oil, Mel or outer mold line. This was a critical milestone that involved extensive aerodynamic design optimization using computational fluid dynamics to verify that our performance targets will be met with some margin. Having the Oil, Mel defined unlocked detailed structural part design, and the release of long lead tooling to build our certification test aircraft. We also made significant progress on meeting our aircraft structural and system weight targets. This is extremely important as weight is the most critical factor in meeting our performance requirements. It's the only parameter that shows up in every performance equation. And eVTOL aircraft are especially unforgiving when it comes to weight creep. Our weight status shows our design closing with sufficient weight margin. This means that we're hitting our payload weight target for a pilot plus four-passenger vehicle. We can also carry enough battery energy to meet our range requirements and maintain sufficient weight margin to absorb the inevitable weight growth that occurs as the program reaches maturity. Since the success of our first hover, Dr. Jeff Bauer, our Chief Engineer, who is the Chief Engineer for Airbus Vanhana and the engineering team have been analyzing the valuable data from that flight and have been making a number of updates to the aircraft, as well as conducting numerous ground tests. This has included installing and testing the tilt rotor system to ready Maker for our first transition flight this year. We plan to fly routinely through the remainder of the second quarter and the rest of the year. We will share the results of those flights with the Air Force as part of our deliverables under the agility prime agreement. With respect to overall plan and timing, we remain on track for completing our first transition flight before the end of the year, as we previously announced, which will result in the full flight envelope expansion in less than 12 months. This will be a significant accomplishment for the industry, demonstrating our technical leadership in our team's ability to deliver on our development roadmap. Tom Muniz, our COO, who has experience taking six different aircraft from design concept all the way through the transition flight is here today to discuss more in the Q&A section. As we mentioned in our shareholder letter, we have established a joint eVTOL Advisory Committee with United Airlines. This committee is focused on advising on maintenance and operational concepts to recommend to Archer for all-electric aircraft aimed at driving towards best-in-class operational standards. We believe United's outstanding track record in airline operations and their existing collaboration with Archer make them an ideal stakeholder to advise the company about the scope and build-out of maintenance and operational plans. Finally, I'd like to close by sharing just a little bit about my philosophy as CEO. As we grow, my goal is to ensure we continue to operate as an engineering-led company with a unified goal of commercialization. Critically important to commercialization is that we all work together for progress as an industry. Certainly, we compete, but we are really pioneers, breaking new ground and blazing new trails in the air together. So industry success also depends on collaboration. As our peers make progress, look for us to congratulate them and champion them. We remain on track to meet our 2022 goals. We are a well-capitalized growing company with a singular mission to advance the benefits of sustainable air mobility for all. With that, let me turn it over to Mark for an update on our financials and then we'll take questions.

Thanks, Adam. And thanks to everyone participating on the call. As Adam just discussed, and as we have outlined in our shareholder letter, Archer is making significant progress in a number of critical areas that are advancing our efforts to achieve our commercialization goals. While clearly we are focused on our aircraft technology and certification, we are also maturing the capabilities that we will need to engage in commercial operations, such as with our supply chain manufacturing, as well as operating an urban air mobility network. We're making excellent progress. Externally, it's very compelling to see that the overall eVTOL industry is starting to be recognized as more than just an interesting technology experiment, in fact, as a significant business sector. Since we last convened, there have been a number of events and publications specific to the industry. For example, there have been eVTOL-specific financial conferences that have brought many of the eVTOL companies together with other industry players and investors to share ideas and discuss issues common to all companies and we are scheduled to participate in additional ones later this year. Research analyst coverage is expanding for the industry, with a couple of new industry reports recently initiated. And finally, there was a piece on the eVTOL industry, highlighting several of our peer companies in the FAA regulatory environment. All of these developments continue to educate stakeholders and investors on the critical drivers for the industry. And that definitely helps each of us as industry participants to tell our individual stories better. Our market is projected to be very large in the future. And that market will be supported by a number of companies. So we need to continue to support and do more on the education front to expand investor and consumer understanding and interest in our space. As we think about what it will take to support a fast-growing company taxing a large market opportunity, we are also making strides to further build operating infrastructure and financial discipline that will help the company establish an operating rhythm that is married with financial rigor around planning, budgeting, and capital allocation. Since our last call, we've made several key leadership hires across our accounting and finance functions. And our accounting team has onboarded leaders to support our financial close process, procurement process, and SEC reporting. Additionally, we have hired key financial planning and analysis leaders to drive our five-step planning process to continue to build out our financial and operating model, and to help drive the execution of the business to achieve our target business model. We're very pleased with the progress that we're making to build a world-class accounting and finance team. And the critical financial processes, to enable the business with the build-out of our finance team. We have worked with our engineering and operating teams to continue to align on how to allocate investment across our critical differentiating technology development areas, such as power train, batteries, software, and our technical and production aircraft. The certification process, and our data science capabilities. As we focus on the execution of our 2022 goals, these remain critical areas that we are clearly continuing to invest in throughout the year. Pivoting to our financial performance for Q1 '22, non-GAAP total operating expenses were $39.6 million, which was slightly above the upper end of our outlook range of $39 million primarily due to accelerating some engineering program spending from Q2 '22 and the Q1 '22. Non-GAAP operating expenses increased sequentially by $6.5 million as expected, as we hired more people to staff our engineering programs and build out the requisite infrastructure to support the growth of the business, as well as invested in engineering development materials for both our technical demonstrator and production aircraft programs. We incurred a loss on adjusted EBITDA of $39.1 million. And the sequential expansion of that loss relative to Q4 '21 of $6.7 million was primarily driven by our increase in non-GAAP operating expenses. On a GAAP basis, total operating expenses for Q1 '22 were $65.3 million, which included $24.5 million of stock-based compensation and $1.2 million of warrant expenses for our warrants issued to Stellantis. These results were $1.3 million above the high end of our Q1 '22 outlook of $64 million, primarily because of the acceleration of some engineering program spending and stock-based compensation. We ended the quarter with $704 million of cash and cash equivalents on our balance sheet. We used $39.8 million of cash in the quarter in addition to moving $2.6 million to restricted cash to support various letters of credit for commercial leases. Annualizing our Q1 '22 burn rate and comparing that to our cash balance, our cash to burn ratio is 4.4 times. We continue to lead the sector based on this metric. Clearly, we remain well capitalized. Finally, let's look at our Q1 '22 outlook estimates. We anticipate total GAAP operating expenses of $80 million to $86 million and total non-GAAP operating expenses of $47 million to $53 million. This reflects expected stock-based compensation, one-time expenses, and other one-time expenses of approximately $33 million. To close out, the business is focused on delivering on our 2022 goals, on our path to commercialization. And we are investing in the key areas of Engineering certification, and product development to support those goals. Beyond that, we've financial and operating team with the experience, financial discipline, and processes to efficiently and appropriately allocate capital. Archer continues to be well-positioned to execute on our business plan and achieve the kind of growth that will further solidify our position as a leader in the eVTOL sector.

With that Operator, let's open it up for questions.

Our first question comes from Peter Peterson from JP Morgan. Please go ahead, Bill.

Yes. Hi, it's Peter Symptom, Jason, JP Morgan. Thanks for taking my questions. First on certification, I was hoping you can comment on NERC or published sort of this week by Air current and it talks about potential shift in certification from small aircraft to powered lift. And the article made it appear that the eVTOL companies were caught off guard. I'm wondering if you've had any discussions with the FAA on the shift, if there is a shift. What are the next steps? And how we should think about the potential ramifications if there's a shift in the certification requirements.

Thanks for the question, Bill. This is Adam Goldstein. We actually support the FAA's effort to put a more comprehensive certification framework in place for the industry. We don't actually believe the rule transition, which what you're referring to is the transition from 2117A to 2117B. We don't believe that this will have a material impact on our certification timeline. But this is a complex process. So maybe what I can do is just level-set here on exactly what happened and try to explain it in a digestible way. Part 21 contains the overarching procedures for how aircraft are certified. 2117 talks about which regulations are applicable for the vehicle being certified. 2117A handles traditional aircraft and 2117B handles special aircraft, for which there are no standard airworthiness regulations; therefore, the applicable regulations can just be efficiently pooled together from other rule parts. The change from 2117A to 2117B was really done in order to more easily tie the vehicle airworthiness regulations, so like the things you need to do for airplanes to be safe, to the operational regulations, so things like pilot training. So our vehicle and other eVTOLs will now be classified as powered lift aircraft under 2117B and the FAA is going to publish operating rules for powered lift aircraft to the operating regulations. The rationale for doing this was really to streamline the policy framework to support the commercialization of these vehicles. Hopefully that gives you a sense for what's happening. So our strategy has always been to design an aircraft in parallel with establishing and agreeing to our G1 CRT basis and our G2 means of compliance. Really ensuring that the regulations that we're designing to are comprehensive and have been pulled from the applicable rule parts for our particular aircraft design. So based on this change, we actually don't see any material impact on our airworthiness rules or regulations, or on our timeline. So we're still working with the FAA to understand the full extent of the change, but in our view today, this is largely just an administrative change. And in fact, we think this could streamline important aspects of the efforts to bring these vehicles into commercial service.

Thank you for that information. I appreciate it. For my second question, it's something we haven't discussed in a while, but it's related to the ecosystem and infrastructure, such as charging infrastructure. I'm hoping you can provide insight on which parts of cities, like airports to downtown areas, will likely see the first developments in infrastructure. Based on the discussions I've had, it seems that infrastructure could gain more focus as we progress further into the decade.

It's a good question. There has been considerable interest from cities around the world in bringing eVTOLs to the market. There is a strong push for sustainable transportation options that can help reduce traffic and congestion. We’ve seen various local municipalities and groups reach out with inquiries. I believe the industry will initially have a significant presence with airport routes, similar to what we've observed in traditional rideshare services in ground transportation. Currently, trips to the airport account for about 20% to 30% of rideshare companies' total business. Thus, it seems logical that airports will serve as a good starting point and contribute significantly to the business as the industry develops. The advantage is that airports already have some infrastructure in place to support these vehicles, though additional charging infrastructure will be necessary. While infrastructure development for Urban Air Mobility is still in its early stages, existing helipads, land parcels, and retrofitted rooftops are suitable locations for establishing real estate and infrastructure. We are actively engaging with various large infrastructure providers and exploring opportunities on our own.

Thank you, I will share this information, and I will connect you if there are additional questions that remain unanswered.

Thanks, Bill.

Our next question comes from Edison Yu from Deutsche Bank, please go ahead. Go ahead, Edison.

Thank you for taking our questions. First, it seems like there's a lot going on in the second half of the year. Was wondering if you could go into a little bit more detail on timeline for flight testing and sort of how you define a successful campaign.

Yes, absolutely. Hey Edison, this is Tom. Thanks for the question. So as you know, we had a really successful first hover flight back in December. And at that flight, we got a lot of really valuable data. We used to validate the aero model and other performance of the aircraft. Since then, we have not been flying because we made that strategic decision to upgrade the aircraft in preparation for transition flights later this year. Specifically have been focused on installing our tilt rotor system, which is used to control the vehicle through that transition flight. For the past couple of months, we've been focused on getting through ground tests and we've gotten lots of data and are now in the final preparation to return to flight later this quarter into the second half of the year. So right now we plan to be back in the air late this month into early June. And then in the second half of the year, we'll be working into much more relocating to flying up to multiple times per week. Just to give you a sense for what to expect. As Adam mentioned earlier, this is actually the sixth aircraft that I'll have taken from concept through the transition flight over the past decade. So I've been super happy with the progress of the team and just want to reiterate that we're on track for our first full transition this year. And I'm super confident we'll get it done.

Understood. And then on the more production side, could you maybe update us on the progress of the pilot line and also how you're thinking about components, subsystems, procured, and assembly.

One of our goals this year was to finalize the site selection for our manufacturing facility. We have been in detailed discussions and progressing through that process. Our collaboration with Stellantis has encompassed everything from selecting the manufacturing site to establishing the factory itself, with an emphasis on efficiency. We started with numerous potential locations nationwide and have narrowed it down to a select few. We are still on track to announce our decision, finalizing our choices among the last couple of sites under consideration. Regarding our pilot line, we are constructing a new lab space in North San Jose, where we will set up our low-rate initial production facility to manufacture 10 vehicles for certification testing. The lab will be completed this year, and we anticipate beginning vehicle production next year. In terms of our supply chain, we are at a development stage where we are not yet heavily relying on parts. Currently, we are focused on building technical demonstrators and designing production aircraft while negotiating long-term agreements with our suppliers. Consequently, we are not experiencing significant impacts from supply chain delays that are prevalent in other industries. We are proactively addressing long lead-time items to mitigate risk. Our aim is to secure quantities and pricing through our RFx process as we assess our manufacturing operations, and currently, we do not see any major delays from our foundational suppliers.

Appreciate the insights.

That next question comes from Andres Sheppard, from Cantor Fitzgerald. Please go ahead, Andres.

Good morning, everyone, and congratulations on another strong quarter. I wanted to clarify the timeline for the test flights mentioned earlier. Previously, you indicated they would begin in the second half of the year, but now it seems the first cruise flight is anticipated next month. I want to confirm that I understood this correctly. Additionally, Tom, you hinted at how often you plan to conduct test flights for the rest of this year and into early next year. Could you provide a bit more detail on that, please?

Yeah. Sure, happy to clarify, Andres. So we are planning to continue our flight test campaign, resuming in hover, but then going into flights where we translate and fly around, working up towards a complete transition flight, meaning taking off vertically, accelerating forward, then flying with lift only generated by the wing, that's what we consider full transition flight before the end of this year as we've previously said. So in the coming weeks here, we'll get back to our flight test campaign and then it will be a progressive ramp up where we do expect to be flying very regularly with flight frequencies of several flights per week. Again, working towards that first full transition flight at the end of the year. So a little context, our flight test is a very step-by-step rigorous approach. We take the envelope expansion, is what it's called into various small increments, increasing speed and other capabilities. We're working towards that, the full transition flight.

And hey, Andres. This is Adam just adding in here. If you took a step back and looked at the industry over the past 10 years, we've seen several groups transition vehicles. And from my understanding from far from some of those groups, it's taken between 18 and 24 months for most groups to be able to transition an aircraft. And some groups have been at it for years and still are trying to transition aircraft. Our stated goal to transition the aircraft this year would put us at a transition timeline of 12 months. And so I think that will be probably the fastest anyone has done it in the eVTOL industry. And so it's quite a technical feat. So sort of the downstream version of what we're stating here is actually a very aggressive flight test campaign that we feel really confident in really being on track this year that we will show our technical capabilities off what we're very excited to do.

Got it. Thanks, guys. That's very helpful and thorough. Quick follow-up. Can you just remind us, what are some of the key KPI from the advisory committee that you announced with United last month, like, what are some maybe things that we can look for or what are some of the things that you kind of expect from that joint committee?

Yes. Sure. So United has been a really great partner to Archer and it really goes beyond just being an investor and buying planes. They're helping us with all the operational side too. So the most important area of focus for Archer will always be safety. But we also want to consider cost of maintainability. So we set up this committee really to leverage the expertise of United's really deep history and maintenance and operating strategies. So I believe our direct operating cost is going to be a major factor in an eVTOL and maintenance will be basically the driver of direct operating costs. So one aspect of the committee will be focusing on reviewing the production aircraft design for maintainability. So we're going to look at things like anything from access panels, chart port locations, or commonly placed components, things like that. And United is participating in our design reviews to help us focus on improving these areas. So if we think about just stepping back, we have a big direct operating cost that we're going to be heavily focused on. Direct maintenance costs will be a large component of our direct operating costs. So that's really kind of one of the areas of focus for us is to make sure that we can drive the long-term profitable business. And this committee is really set up to help guide us through best practices.

Wonderful. Thanks, Adam. Maybe one last one if I may. You guided OpEx for next quarter of $86 million on a GAAP basis. And most of that is due to the stock-based compensation, it looks like, but there are some one-time expenses. So I'm just wondering if maybe you can elaborate on what those are.

I believe it's mainly a one-time expense related to Brett's separation from the company. This is reflected in the 8-K that was issued.

Got it. Understood. Great. Thanks so much, guys. Congrats again. I'll pass it on.

Thanks, Andres.

Our next question comes from David Zazula from Barclays. Please go ahead, David.

Thank you for taking my question. I wanted to follow up on the recent resignation of a board member who mentioned that his vision differed from that of the board. Adam, could you provide some insight into the current vision of the board and how it has evolved?

Hey, David, this is Adam. The vision of the company has remained consistent and strong since we started. I tried to emphasize that in my opening remarks today. Our aim has always been to create a vehicle that is safe, quiet, and affordable for everyone. We are on track to realize that vision and hope to have a vehicle certified and in service by the end of 2024. The Board and the executive team are fully behind this, and there have been no changes to that vision. I hope that clarifies things.

Thanks. Tom. You've worked really hard towards having the first flight in December, and it seems like it can be probably about six months between the next flight. Can you help us out with what data you were trying to achieve, that's helped you to follow-on tests in between such a gap in between the first and the follow-on flight, like why was it important to get that flight then and then not fly again until now.

Yes. Sure. Happy to add more context there. The flight we did in December was a hover and basically gave us enough information to validate that the aircraft was performing as expected in that flight condition of an at that point, we did not have the aircraft in a physical state and with the software where it was capable of flying the full mission envelope through transition. So when we looked at the data from that first flight, we could have chosen to keep doing more hover flights in that configuration. But we were confident enough that we just decided to move to the next phase of the program, which was installing the tilt rotor system as I mentioned earlier, along with some software upgrades that make the vehicle capable of the full transition envelope. So there was a process getting all of that hardware and software completed and installed. And then the last couple of months have been all about testing and preparation for more flying. So like I mentioned earlier, we're really close to continuing the flight test campaign ended this month. Early June, that's what's looking like today. And then based on where we stand and the maturity of the vehicle, we are in great shape to get through the first transition by the end of the year.

Great. Thanks, Tom.

Our next question comes from Josh Sullivan from Benchmark Company. Please go ahead, Josh.

Hey, good morning.

Good morning, Josh.

Regarding the selection of the manufacturing site, I’d like to know your perspective on the requirements. You mentioned Airbus is planning to engage in contract manufacturing with Spirit, which aligns with traditional aerospace partnerships. While the volume demands are expected to resemble those in the automotive sector, I am interested in what your team is suggesting or advising. Specifically, what aspects need to align more closely with automotive practices, and which should adhere to conventional aerospace manufacturing? Additionally, I would appreciate your insights on contract manufacturing overall.

It's a good question. A significant aspect of our site selection aligns with our broader strategy regarding volumes. This includes considerations on when, where, and how much we need to transport these vehicles, especially since their range is under 100 miles. We won't be flying them to their final destinations; instead, we will use other transportation methods. Many factors influence our manufacturing site selection, but our primary focus has been on the volumes we aim to produce. We anticipate starting with volumes in the low hundreds and scaling up to several thousand by the end of the decade. Therefore, we're looking for a factory that can be built and designed around these projected volumes, while also evaluating which components we will manufacture in-house versus those we will outsource. We have been collaborating with Stellantis to utilize some automotive capabilities that are not commonly found in aerospace. For instance, painting a general aviation aircraft of a similar size takes about five to seven days, while the automotive industry can complete the same task in approximately seven hours. We've visited Stellantis factories to understand their processes and the types of automation they use, aiming to identify where automation investments will be beneficial and where they may not be necessary. This has been a significant area of focus for us. Additionally, we've noticed that high-scale composite manufacturing is another strength of the auto industry, and we plan to assemble vehicles in-house while concentrating on manufacturing key components, particularly parts of our powertrain and other essential in-house elements.

Got it. And then just on a real transition from 2117A to B, what are your broader thoughts on the readiness of the FAA for passenger eVTOLs transport? Maybe if you could put it in the baseball innings context, just where you think the regulatory environment is at this point.

Yeah. Part of Archer's strategy really since the beginning was to design a vehicle that could be certified in a timeframe that made sense. And we really tied our capital strategy to that as well. So we've raised enough capital that could get us through the timeline that we thought was estimated that it would take. So I don't think anybody thought it would be a clear straight line and that this would be an easy process. But at the same time, we are certifying the vehicle that I don't think is so outrageous that there's going to be gigantic twists and turns. For us, this change from 2117A to 2117B is one of those I would say not necessarily expected, because you don't know what you don't know, but in a sense, a minor change like this in our view, there's going to be a bunch of them. So the whole goal in Archer's strategy from the very beginning was making sure that we designed an aircraft in parallel with establishing our G1 basis and G2 and really making sure that we could design around the existing regulations and not do things that would make the FAA uncomfortable. And so to date, that strategy I think has been very effective and changes like this we don't think impact us, and there likely could be more changes down the road. I think that would be probably expected, but given our strategy, I think we'll be able to continue to navigate those changes and stay within our timeline.

Got it. Thank you for the time.

And a follow-up question from Bill Peterson from JP Morgan. Please go ahead, Bill.

Yes. Thanks for taking the follow-up question. I think you spoke to it a bit and it will certainly come from the shareholder letter, but in terms of the preliminary design review, you mentioned OML being a major achievement one of the longer lead time things. But what other milestones were accomplished? And then I guess, can you share any more specifics on what must be done in the second half?

Yeah, absolutely. So just to give a little context. We're following a very traditional aerospace development process that involves these phase gates, right? Conceptual design review, CPMC, RDR, preliminary design review, PDR. Next one after that will be critical design review, CDR. At each of these milestones, the vehicle maturity, maturity of the design, and the production system around it is continuing to increase. So they're just really good markers and time to assess holistically how the program is developing. So the all in all that is a really great accomplishment. Yes, as you mentioned earlier that unlocks our ability to kick off tooling in support of manufacturing our first aircraft for our production aircraft next year. But in addition to that, like Adam mentioned in his opener, we've also just made a lot of progress maturing the design to the point where we're now shifting, after PDR which is coming up in a couple of months, we're now shifting into the detailed design phase, actually producing the drawing in detailed engineering definition that we'll build off of. So the great news at this point is the design has come together really well and we're on track actually in a better spot than we hoped, even for key performance metrics like vehicle weight, payload, and range. So overall, the design is coming here, the great with sufficient margin and just really happy with all the work the team has done.

Thank you for the additional information. I have a housekeeping question regarding operational and capital expenditures. I'm curious about how to consider the trajectory beyond this quarter. I understand you provide guidance one quarter at a time, but I would like clarity on how to think about the trajectory. Specifically, could you break down operational expenses, highlighting what is related to personnel versus tooling or materials? Given the current market environment, understanding investments is crucial, and while you shared a snapshot based on the first quarter, any further insights would be appreciated. Thank you.

Hey Bill. This is Mark. So regarding your first question about the trajectory of OpEx for the rest of the year, is that correct?

Well, I mean, OpEx and CapEx, I mean, as it relates to cash burn, but then the OpEx, how to think about more one-off, onetime in nature versus, let's call it fixed OpEx and personnel and personal growth and things like that.

Sure. While we may experience some fluctuations in operating expenses, we have completed a thorough budget review for the year and do not anticipate any significant one-off costs. However, some quarters may be uneven depending on larger purchases for engineering components or similar needs. I suggest continuing to model payroll and operating expenses in a steady manner. Regarding capital expenditures, our spending in the first quarter was modest, under a million dollars, but you should expect a more substantial investment in the second half of the year, particularly as we plan to begin construction on a factory. I'm happy to provide more details on this, but that's my perspective on the matter.

Thanks for the additional color, and we'll look forward to following the progress.

Our final question comes from Andres Sheppard from Cantor. Please go ahead, Andres.

Hey guys, thanks again for taking my follow-up as well. Adam, I'm just wondering if you can maybe comment on what are some of the best practices that you guys are putting in place to try to help mitigate some of the increasing cost of batteries as a result of supply chain disruption. I know we've addressed it in the past, but maybe just remind us your thoughts on the macro there.

Our goal is to have most of the suppliers we need for the aircraft under contract this year. We began the RFx process early in the year and received feedback from suppliers. Many suppliers are interested as they see urban air mobility as a significant market opportunity. However, we are noticing that costs are rising higher than expected in several areas. Fortunately, we have a strong market and capital position, allowing us to negotiate favorable terms for both potential upsides and downsides. For instance, in many current negotiations, we can establish Not to Exceed Prices while also linking raw material prices to certain indexes. This strategy allows us to benefit when prices decrease. Regarding batteries, we have a partnership with Stellantis, which is quite active in battery cell production. Their buying power as a leading auto OEM provides us with a significant advantage in price negotiations, helping us to mitigate costs effectively.

Got it. That's super helpful. Thanks again, guys congrats on the quarter.

Thank you.

Today's Q&A session has concluded I will hand over to Adam Goldstein, CEO for any final remarks.

Okay, we'll thanks again for joining us today, and I really want to just reiterate the principles of Archer delivering on our 2022 goals. I look forward to speaking with everybody again on our next quarterly update.

This concludes today's call. Thank you for joining. You may now disconnect your lines.