Earnings Call Transcript - ACHR Q3 2021

Operator, Operator

Hello and welcome to the Archer's Third Quarter 2021 Earnings Call. My name is Brica and I'll be today's call operator. Following the presentation today, we will have a Q&A session. I'll now turn the call over to Archer's Chief Legal Officer, Andy Missan. So, Andy, please go ahead.

Andy Missan, Chief Legal Officer

Hello everyone and welcome to Archer's third quarter 2021 financial results conference call. I'm Andy Missan, Archer's Chief Legal Officer. Joining me on today's call are Archer's Co-Founders and Co-CEOs Brett Adcock and Adam Goldstein, as well as our CFO, Ben Lu. We posted a shareholder letter detailing our Q3 financial results and business overview on our IR website. This call is being recorded and the 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 future results to differ materially from those expressed or implied. These risks and uncertainties are described in the risk factors section of our filings with the Securities and Exchange Commission, including in our proxy statement prospectus filed on October 26, 2021. Except as required by law, Archer disclaims any obligation to update or revise such forward-looking statements. Please note that certain financial measures are presented on a non-GAAP basis. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in our shareholder letter posted on our IR website. We will begin with commentary and then we'll open up the call for questions. And with that, I'd like to turn over the call to Brett Adcock.

Brett Adcock, Co-CEO

Thanks Andy. We're pleased to be speaking with you today during our first earnings call as a public company. Earlier today, we released a shareholder letter that provides a more detailed update on Archer, including our vision and market, our 2021 milestones so far, our Q3 financials, our financial outlook for Q4, and our business outlook for the coming years. We encourage everyone to review this letter. Our goal was to be highly specific with our accomplishments and future plans, and we'll use the shareholder letter as a vehicle for getting this information out to the world. We will not repeat the entirety of the shareholder letter on this call, but we will summarize some of the key highlights. When we started this company, we wanted to tackle two important problems; the first is helping the world move to a sustainable form of transportation. Over the next several decades, a majority of all transport will transition to electric, which we hope to contribute to. The second is a way to reduce traffic congestion inside cities, where today half of the world lives. Every day in the U.S., there are more than a billion trips that contribute to air pollution, and people spend approximately one hour per day behind the wheel. To help address this traffic problem, one must utilize the Z-axis, meaning one must travel either above or below the ground. We believe that a 3D aerial transportation service above ground is the answer. Archer has developed plans that demonstrate that technology is ready today to make this work, and we believe we will be one of the first eVTOL manufacturers to achieve FAA type certification. Archer's near-term focus is on designing, certifying, and manufacturing an eVTOL aircraft. That aircraft will support a diversified business model across both consumer and commercial categories. Our core focus is to design an incredible transportation service for the masses. We will operate these aircraft ourselves over an Archer network to move people quickly and safely in and around cities. On the commercial side, we have Archer Direct, where we will sell aircraft directly to large operators. Archer Direct will help accelerate our mission of advancing the benefits of sustainable air mobility and provide diversity to our revenue and timing of cash flows. With that, I will pass it over to Adam to talk about some of our major accomplishments this year.

Adam Goldstein, Co-CEO

Thanks Brett. Archer has had an exciting year so far with a lot of accomplishments. We closed our SPAC transaction raising $858 million in gross proceeds and began trading as a public company on the New York Stock Exchange. We received our signed FAA G-1 certification basis, the first major step in the FAA certification process. Our progress with the FAA is going well. We believe this positions Archer to be one of the first to market in the U.S. We assembled an outstanding Board of Directors and continue to hire some of the most talented individuals in the industry. We secured and strengthened excellent relationships with global leaders and innovators, such as United Airlines, Stellantis, Reef, and the United States Air Force. On the partnership front, earlier this year, we announced our agreement with United Airlines who placed an order for $1 billion of our aircraft with an option for an additional $500 million of aircraft. In addition, United Airlines has already begun supporting us on our design process, pilot, and maintenance crew training, helping us as we develop our go-to-market strategy for city launches. Stellantis, another major partner, has played a critical role in Archer's progress in 2021. We are working to identify key commodities in our supply chain that Archer can access through this partnership, which we believe will be critical in our process to scale manufacturing. Stellantis is also playing a crucial role in helping us select and establish our manufacturing plant. In June of 2021, we unveiled to the world, Maker, our full-scale eVTOL aircraft. We are pleased to announce that we have relocated Maker from our design and development facilities to the hangar facility from which we will conduct our Maker test flights. The aircraft is currently undergoing preparations for its hover flight, which we anticipate will take place by the end of this year. Next, we intend to unveil the first generation of our production aircraft in 2023. It will be a piloted aircraft that can carry up to four passengers. We recently completed our conceptual design review of this aircraft and are currently in the preliminary design stage of development. Throughout the program, we will continue to work closely with the FAA in an effort to achieve certification efficiently. While we are proud of our achievements to date, we recognize that challenges loom ahead on our path to commercialization. However, we believe that if we continue our journey with pace, purpose, talent, and relentlessness, we will accomplish our mission and lead the world into the age of urban air mobility. We thank our shareholders, employees, business partners, advisors, and our Board of Directors for their contributions and support thus far. In our shareholder letter, we have provided additional details on these updates and more, including forward-looking business guidance. With that, I want to pass it over to Andy Missan, our Chief Legal Officer, for an update on the Wisk litigation.

Andy Missan, Chief Legal Officer

Prior to joining Archer, I was General Counsel of Fitbit. During my tenure there, I led the litigation efforts in connection with Jawbone trade secret litigation, which has similarities to what we're seeing in the Wisk litigation. We are pleased with the progress of the Wisk litigation. Significantly, after extensive discovery as part of Wisk's motion for preliminary injunction, Wisk has provided no evidence, not a single document, not a single witness, that we ever received or utilized any of Wisk's trade secrets. Accordingly, on August 24th, 2021, the court issued an order denying Wisk's motion for a preliminary injunction, concluding that 'Wisk mischaracterizes, and really invents the evidence.' In addition, the judge stated, 'despite getting robust early discovery, including access to engineering documents, Wisk was not able to demonstrate that any of its particular trade secrets were misappropriated.' The court's opinion reinforces what we've been saying, that Wisk's claims are without merit and merely attempts to stifle competition. We're also pleased with the court's order on September 14th, 2021, denying Wisk's motion to dismiss our counterclaims for tortious interference, defamation, and unfair business practices. In denying Wisk's motion, the court found that 'Archer has presented sufficient evidence that it has a reasonable prospect of succeeding on the merits.' We believe these two court rulings and the underlying evidence put us in a favorable position in the litigation. We look forward to proceeding in court both to defend against Wisk's claims and to hold Wisk accountable for its actions described in our counterclaims. With that, I will pass it over to Ben for an update on our Q3 financial results.

Ben Lu, CFO

Thanks Andy. I want to thank everyone for joining and listening to our first earnings call as a public company. As you've heard from Brett and Adam earlier, we are very excited about what we're building here and our ability to execute on that vision. We exited the quarter with $796 million in cash and cash equivalents. Our third quarter capital expenditures were $1.1 million. Our third quarter non-GAAP operating expense was $29 million, driven by investments across our engineering team and in our Maker aircraft, offset by lower marketing and legal costs. This resulted in an adjusted EBITDA loss of $28 million. Our third quarter GAAP operating expense was $176 million, which included stock-based compensation of $103 million, reflecting the one-time vesting of the first tranche of the founder grants resulting from the achievement of our first performance milestone. These grants are structured to align with maximizing shareholder interests through significant stock price appreciation or achieving certain performance milestones. Going forward, the stock-based compensation expense for these grants will be based on the likelihood of the vesting of the remaining three tranches. In the quarter, we recorded a non-cash warrant expense of $39 million related to the vesting of the second tranche of the United warrants. Recall that in our first quarter of 2021, we recorded a $78 million non-cash warrant expense tied to the vesting of the first tranche of the United warrants. The remaining two tranches will be expensed as we meet the remaining milestones. We also recorded a non-cash warrant expense in the third quarter of nearly $6 million related to the vesting of certain tranches of disbalances warrants. The remaining tranches in these warrants will be expensed as we meet the remaining performance and time-based vesting criteria. Now, in terms of our fourth quarter outlook, we anticipate total GAAP operating expense of $65 million to $70 million and non-GAAP operating expense of $35 million to $40 million. This reflects expected stock-based compensation and warrant expense of approximately $30 million as we record a larger than normal stock-based compensation expense to reflect restricted stock units and stock options that could only be granted to existing employees under any effective registration statement, which we expect to occur in the fourth quarter. Overall, we're very excited about where we are and how far we've come along. There will be challenges ahead, and we look forward to addressing them as we execute on our vision to bring sustainable urban air mobility to the masses. With that, we're ready to begin the Q&A portion of today's call. Operator, please open up the line for questions.

Operator, Operator

Thank you. The question-and-answer session is now open. The first question we have comes from Jeff Sullivan of The Benchmark Company. So Josh, please go ahead when you're ready.

Jeff Sullivan, Analyst

Good evening. Can you hear me? Just a question on the overall design thought process with the G-1 issue paper established and now that you're in the process of finalizing the G-2 paper with the FAA, how are you approaching the assembly of the second Maker? Is it an exact duplicate? Or has the G-2 process enhanced your design thoughts, I guess, either on Maker or the preliminary thoughts on the four-passenger aircraft as well?

Brett Adcock, Co-CEO

As we look at our roadmap, starting from the beginning to where we're headed, we've now built seventh-generation subscale aircraft that have flown over 1,000 test hours. We then developed Maker, which we unveiled in June and just got shipped to our flight test facility last month. Maker is a full-scale electric vertical takeoff and landing demonstrator vehicle. We intend to utilize the vehicle to help accelerate our path to market with our production aircraft. This aircraft is critical as we're thinking about key underlying technologies we're developing, the system architectures, and other related certification efforts. As you mentioned, we're building two aircraft for Maker. In parallel, over the last year, we've been designing our production aircraft. This is a piloted four-passenger aircraft that we intend to certify with the FAA and bring to market. The updates related to the FAA progress are important. The intake board process that we started early last year that we got through and the G-1 certification, and even the G-2 means the compliance work we're doing now are all for the production aircraft. The Maker aircraft will maintain the same form it is now. We've learned a lot of great things that will influence and accelerate our production aircraft development plan and flight testing. We plan for a production aircraft to get through the G-2 certification basis in 2022. We anticipate unveiling the aircraft in 2023. The G-1 and G-2 processes are fundamental as our core thesis here at Archer is designing for certification and manufacturing. It's really important to get those steps right. We're designing the right vehicle for the market with the FAA.

Jeff Sullivan, Analyst

Thanks for all the detail there. Maybe a question on the demand side. The mobile booking system you guys are launching in 2023, what are your current thoughts on the necessary internal Archer fleet size to get to a critical scale just to make that booking system successful initially?

Brett Adcock, Co-CEO

It's a great question. This excites me every day. We have the chance to reinvent and transform the way people fly. We'll do this under FAA Part 135. As noted, we plan to operate our own aircraft. We're vertically integrating some traditional OEM work and key technologies to build an enhanced aircraft for our consumers. We plan to operate this across a few core principles. The first is just ensuring we can operate the aircraft safely every day for consumers. These are a new type of electric aircraft, and it’s really important for the folks maintaining and operating them to know how these aircraft function and how they need to be safe. We believe we can create a great service for customers, and ultimately, we think we can build a really profitable long-term business. This is a very large business. We're going to build our own applications as it relates to the booking and check-in process for users to ensure a seamless experience. We plan to release our mobile booking application in 2023. We aim to obtain our Part 135 Certificate by 2024. We're targeting roughly 50% of our aircraft fleet to go through our Archer Direct platform, like partners such as United Airlines with whom we recently announced a commercial agreement. We plan to operate the other 50% in our own network in cities we've announced like Los Angeles and Miami.

Jeff Sullivan, Analyst

And then maybe just one final one from me. As far as expanding the headcount to meet milestones, engineering certification, etc., do you think you're ahead of schedule or is the tight market and inflationary issues causing any hurdles for you?

Brett Adcock, Co-CEO

It's definitely a really competitive market across areas such as traditional eVTOL development, commercial aerospace, and the automotive or electrification sector is a big push for us overall. One of the things we're most proud of here is the team we've assembled; we've literally put together some of the best folks in the world, including Jeff Greenwood, our Chief Test Pilot, who was previously Chief Test Pilot at Bell Helicopter. Our motor team is led by a group of individuals who are ex-Lucid Motor leads or ex-Tesla Inverter leads. We have assembled some of the best talent globally. I believe this really speaks to the attractiveness of the opportunity at Archer. We have a chance to engage in a substantial electrification design process to create a new type of transportation that excites people. We're capitalized well, have good partners like United behind us, and we're making incredible progress on both our technology front and in developing the right solutions, which we believe are critical for making this product work. Today, we're leading many certification efforts with the FAA, which is vital to bringing a product to market.

Jeff Sullivan, Analyst

Great. Thank you for the time.

Operator, Operator

Thank you. The next question on the phone lines comes from David Zazula of Barclays. So, David, please go ahead.

David Zazula, Analyst

Hey Brett, Adam, thanks for taking my questions. I guess, first one up, as far as the method of compliance and G-2 certification that you guys are anticipating, my understanding is that it's difficult to at least at this point show tangible progress towards that. But can you talk a bit about what you believe you will be able to share in the coming year as far as milestones? I think we run into investors that can't believe you guys being relatively newer to the market can achieve that certification so quickly. What should we be monitoring as we look at compliance in the upcoming year?

Adam Goldstein, Co-CEO

That's a really great question. I'll echo some points Brett made on our team front. Eric Wright, who’s leading our certification effort has a long history of certifying vehicles of similar nature, and we have high confidence in our strategy for quickly moving through the certification process. As we've mentioned before, our core strategy here at Archer is really all about designing, certifying, and manufacturing an eVTOL aircraft. This has been our philosophy from the very beginning. Our team has worked tirelessly to achieve the G-1 certification basis. We believe we're one of only two companies globally to have achieved this. Now that we have the aircraft certification requirements established, we've focused much of our efforts on the G-2 paper. We're working on our means of compliance for the G-2 with the FAA and have been doing that since early this year. There are additional steps that will come after that related to compliance, ground testing, and flight testing, which will help us achieve our tech certificate in late 2024, but we’re making considerable progress. The main reason we've been able to move swiftly through the certification process is that we established a solid business model. We designed a vehicle around that business model. These 25-mile nominal mission trips can be done back-to-back throughout the day with minimal charging time, which has decreased risks across the aircraft. Throughout this year, you'll see evidence of our accomplishments as it relates to the certification process.

David Zazula, Analyst

Thanks. And can you talk a bit about how you think the design of your aircraft and keeping it more conceptual at this stage places you in a good position to collaborate with the FAA during the certification process?

Adam Goldstein, Co-CEO

We focused on making sure we design from the very beginning a vehicle that could go through the FAA's process smoothly. It's tempting when building a tech company to add features that could increase value but also add significant risks to the platform. For instance, many groups have asked us why we didn’t include retractable landing gear. We opted not to, as we didn’t believe it contributed enough to the business case and would add complexity that needed certification. We have also simplified our materials selection, sticking with core technologies that we know can pass certification. I believe this focus on reducing risk has significantly aided our speed through the certification process.

David Zazula, Analyst

Awesome. If I could squeeze in one last one for Ben. It seems expenses are rising a bit in Q4 relative to Q3. Can you talk about what capabilities or expense line items you're planning to build out as you look at facilities or other areas to support aircraft design? Thanks.

Ben Lu, CFO

We're guiding our non-GAAP expenses next quarter to be $35 million to $40 million, up from $29 million this past quarter. We're building and scaling a significant company, and we'll grow quickly. A lot of investments are being made across all engineering talent and hiring across multiple disciplines from eVTOL to traditional aerospace, as well as electric batteries. Brett mentioned some key hires, and we'll continue to make critical additions to the team. We'll also invest in our vehicle and R&D. We are essentially scaling a business and a company that can develop, design, and commercialize eVTOL aircraft.

David Zazula, Analyst

Thanks. Congrats on the first quarter.

Ben Lu, CFO

Thanks David.

Operator, Operator

Thank you, David. We now have Andreas Shepherd of Cantor Fitzgerald. So, Andreas, your line is open.

Andreas Shepherd, Analyst

Hey, good afternoon, everyone.

Brett Adcock, Co-CEO

Afternoon.

Andreas Shepherd, Analyst

Hey, congrats again on the first quarter. A lot of my questions have been answered, but maybe a couple of quick clarification questions. So, just want to make sure I'm getting this right. You are hoping or expecting to receive the G-2 issue paper in 2022, and then the type certification before the end of the year in 2024, correct?

Brett Adcock, Co-CEO

That's correct.

Andreas Shepherd, Analyst

Okay, great. And then any sense, I see that you're in the final stages, but any sense when you might finalize the manufacturing site?

Brett Adcock, Co-CEO

We haven't publicly guided to when we're going to announce that. What we have said is that we will select the site and begin construction of the manufacturing facility in 2022. I will say that we've made considerable progress this year, and we've also been working with Stellantis, one of our major OEM and supply chain partners, who has been assisting us throughout the manufacturing process. We are in the finishing stages, and we’re making great progress. We feel very comfortable in being able to meet this milestone next year.

Andreas Shepherd, Analyst

Awesome. That's very helpful. Maybe one more for me, and I realized you haven’t disclosed that either. Totally understand if you're unable to share. But any rough timeline on when you expect the second Maker to be assembled and ready for test flights?

Brett Adcock, Co-CEO

We've started the assembly work on Maker Two and we expect it to be rotated into flight testing in 2022. Maker One will continue to conduct flight tests, starting this year and throughout 2022. Next year, we will have two vehicles in operation for flight testing.

Andreas Shepherd, Analyst

Awesome. Thanks very much, guys. And again, congrats on the quarter.

Brett Adcock, Co-CEO

Thanks.

Operator, Operator

Thank you. We now have Jacqueline Rolf from Deutsche Bank. So Jacqueline, please go ahead when you're ready.

Jacqueline Rolf, Analyst

Hello, can you hear me?

Brett Adcock, Co-CEO

Yes, we can.

Jacqueline Rolf, Analyst

Okay. Thanks. Good morning. Good evening, everybody. This is Jacqueline Rolf from Deutsche Bank speaking on behalf of Addison. My question is, could you go over how much vertical integration you feel is necessary to achieve the economic scale? Thank you.

Brett Adcock, Co-CEO

Great question. This addresses some of our key enabling technologies that we’re developing in house. The first is the electric powertrain, which encompasses electric motors and battery systems. The second focuses on flight control software. The third is system simulation. The fourth is eVTOL aircraft design, and lastly, we’re focused on manufacturing. We believe it's critical to get these areas right for our new aircraft to successfully reach the market. We've made substantial progress on these fronts with the Maker aircraft, which will commence its first hover test flights before the end of the year and then full cruise flights next year. We are investing significant time and resources into this technology. No battery systems or motors today are certified for aviation use. We have different requirements than automotive. Getting these areas right will ensure we create a great, low-cost business for consumers while meeting the FAA's safety requirements for our aircraft.

Kyle Sommers, Analyst

Hey, guys. Congrats on the business combination as well as continuing to build a team. Adam, I think you may have already touched on this, but my question is, for the planes you plan to operate. I was hoping you could touch on what the range of your typical flight will be on a daily basis and how many times per day you think you can achieve that? And then, more importantly, how these assumptions led to your vehicle design? Thanks.

Adam Goldstein, Co-CEO

When we evaluated this industry, we believe that the bulk of demand will center on Urban Air Mobility missions. These are missions in and around cities where people spend considerable time on the ground, typically 60, 75, or 90 minutes. We want to replace that with missions we can fly in 5, 10, or 15 minutes. We believe that's where significant time savings will occur. Reviewing the market, a substantial portion of current traffic sits within 50 miles. Thus, we believe the typical nominal mission we will fly is about 25 miles. We designed our vehicle to accomplish this back-to-back with minimal time on the ground and charging. This allows us to generate as many miles flown per day with the maximum number of passengers. This was a key consideration in our aircraft design, picking the configuration and payload, because that's where we think the market primarily lies. While it may be tempting to look further, the demand appears concentrated within Urban Air Mobility missions.

Kyle Sommers, Analyst

Thanks.

Ron Bornstein, Analyst

Good afternoon, guys. Just wanted to maybe follow up on some of the supply chain aspects. Have you made any announcements yet regarding outside suppliers? More specifically, how you're planning to manage flight control and flight control software, given the aircraft's transition from vertical to horizontal flight?

Brett Adcock, Co-CEO

That's a great question. We consider carefully what we need to do internally versus where we can partner with suppliers focusing on aerospace. We have made several partnerships for the aircraft across various systems, which we’ll continue to announce over the next couple of years. We also have several areas that we believe are critical, requiring significant investments internally to excel—such as our electric powertrain, some software, and system simulation. Regarding the flight control software, you're correct; it's challenging to certify a Fly-by-wire system. We think we have a good plan here. Due to competitive considerations, we’re careful about disclosing specific approaches, but the person leading our flight control system work is Sergio Ferreira, who recently managed this for Gulfstream's Fly-by-Wire program. We have built an excellent internal team to lead our certification development focus, and we know this will be essential. In summary, we see flight control systems and battery systems as integral components for the new aircraft, and we are committed to working with the right groups while maintaining a disciplined approach to getting our aircraft to market with safety, cost, and noise considerations in mind.

Ron Bornstein, Analyst

Great. Thank you very much.

Brett Adcock, Co-CEO

Thank you, Ron.

Operator, Operator

As we have no further questions on the line, I will conclude today's call. Thank you all for joining. You may now disconnect your lines.