Archer Aviation Inc. (ACHR) Q4 2021 Earnings Report, Transcript and Summary

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. [Operator Instructions] 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. Also, please note that on this call, 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 Investor Relations website. 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 fulsome 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 make clear 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, which Archer holds itself most accountable. These four areas are: one, aircraft technology. The focus here is advancing the key enabling technologies and design and 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 3 years. Additional detail and specifics are worth reviewing. Importantly, Archer achieved all of its stated 2021 goals and our summary business roadmap. We are currently on track to achieving 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 have achieved this yet, completing Maker’s first full transition cruise flight, and lastly, to select our manufacturing site and begin the construction process. Before I hand it over, let me give a quick update on the production aircraft progress. As a reminder, Maker is our full-scale demonstrator aircraft, which we are using to help inform the design and engineering of our production aircraft. This production aircraft is our piloted four-passenger commercial aircraft that we intend to certify and use in our airline operations. After completing our conceptual design review process for our production aircraft in October 2021, we are currently progressing towards our preliminary design review milestone. In order to complete our preliminary design, we are working through the very detailed preliminary design process. 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. Currently, we also continue to conduct a variety of testing and analysis to optimize the various elements of our production aircraft. This testing includes key areas such as the technology of the battery cells, aerodynamics and acoustics. For instance, we are currently conducting some very informative wind tunnel tests to help optimize our electric motor, propeller aircraft interactions, and in addition, we are conducting some critical acoustic testing with our partners at Stellantis. Listeners can read more about these tests in our shareholder letter. Ultimately, our production aircraft is progressing very well and remain 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. In the way we design, to the way we test, to the way we manufacture and everything in between, safety is always number one. I will now pass it over to Adam for a more fulsome 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 worth noting are our updates on our Maker aircraft and on certification. In terms of our Maker aircraft, over 2 years ago, Archer’s goal was set to begin flying in 2021 and we are so 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. With regards to 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 continuing to make 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 think is a best-in-class powertrain team led by Dr. Michael Schwekutsch, former VP of Engineering at Tesla and Senior Director on Apple’s Special Projects Group. We hired Mark Mesler as our new CFO. Mark’s background is extremely well suited to Archer’s needs. He helped lead his former employer of Bloom Energy through its IPO process, including the expansion of their financial infrastructure to support their transition from a private to public company. He also has excellent experience across hardware, sustainability and aerospace. We are thrilled to have Mark on our team. We also 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 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 in 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 5 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 lines in the world. They have all come together to develop a solution for a transformational problem, transitioning how we as a society migrate 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 a 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 some perspective on strategic financial planning, the challenge of taking emerging growth companies that are disrupting well-established business sectors into the public markets and the critical elements of business and financial strategy in the eVTOL space. And I also very much appreciate the importance of clear, consistent and transparent communication with the financial community that enables our investors and the analysts that cover the company to understand our business strategy, our financial disclosures and the best way 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 that gets 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 do that, we are executing a capital-efficient strategy that includes staying focused on designing and manufacturing an eVTOL aircraft, optimized for servicing short distance urban routes, approximately 20 to 30 miles on average. To get to commercial operations in the most expeditious manner, our engineering development efforts are focused on certain 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. What that means is that we are not vertically integrating our supply chain. We believe this 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 4, was $132 million. Based on publicly-available information, we believe we have the lowest annualized cash burn of any publicly-traded companies in the sector. Pivoting to our team, we continue to assemble a world-class team to deliver on our business outlook. I know that it’s easy for a company to say, but here at Archer, we have some real proof points to validate this position. Just look at the recent new Archer team members, Board members and Techno Advisory Board additions this past quarter as outlined earlier by Adam and in our shareholder letter and our recent announcements, and you can see the critical experience and technical knowledge we are bringing together to help us achieve our certification and commercialization goals. This team’s ability to go from the design of Maker to its first hover in just 2 years this past December, is an extraordinary accomplishment within the sector. This is just one further proof point that we have the team to execute on our business strategy and deliver on our business outlook. 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, we have $3.14 of cash per outstanding share as of the end of Q4 ‘21. Further, our Q4 ‘21 cash balance is 5.7x our Q4 ‘21 annualized cash burn rate as I previously defined it. There is no doubt we are one of the best capitalized companies in the sector. These are among the key reasons that when I was deciding whether the joint team Archer, I have real confidence and also why I’m looking 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 generally characterized by investments in people materials to develop and mature the technology for our eVTOL aircraft. And our focus is now starting to transition from work on our Maker demonstrator aircraft to our production aircraft. In addition, we are making investments across a number of functions to shore up capability needed as we have transitioned 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 because of $9.8 million less stock-based compensation and warrant expense, driven by lower share price 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 due to the vesting of certain brands to our Founders upon achievement of certain 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 Atlas for 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 in the rearview mirror, our efforts are now focused on delivering on our 2022 business power work milestones. We are clearly 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’s not unusual for technology companies to make trade secret claims against others in attempt to stifle competition or slow new product introductions. That said, we believe this outcome continues to support 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 share is 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 manufacture in commercialization of our business model, we will create an operating rhythm to 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 are what we need to meet market demand as we transition to commercialization. In terms of investor sentiment, we recognize that the urban air mobility sector is challenging for investors to get their arms around and understand what success means. We believe that ambiguity is keeping many interested investors on the sidelines, not only from Archer but the urban air mobility space in general. The wide range in valuation for these standard 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. This is a true wide range, given that to the best of our knowledge, only two of us in the sector have achieved a G-1 certification basis. I note that we are at the lower end of that valuation range. Given this dynamic, over the course of the next year, I want to provide transparency to investors on how we are creating value and tracking towards our business outlook through education and how we define success going forward across critical elements, such as the FAA certification process. The operating physics of flight for eVTOL technology and how that impacts choice of design and form factors, key engineering and operational milestones, our business model that we will execute upon commercialization, our unit level economics and any other relevant items that are on investors’ minds. This won’t be a big bang data dump, but over the course of the next year or so, we will begin providing information to help investors better understand the space and how we believe Archer will excel in it. Finally, coming back to the near-term, let’s look at 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 right capitalization to deliver on our business outlook and achieve certification and commenced 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. With that, operator, let’s open it up for questions.

[Operator Instructions] The first question is from the line of 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 time frame and the ramp-up regarding the first cruise test flight? So you’ve mentioned you expect to conduct it in second half of the year, any chance to 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 for Makers first hover when it’s planned, 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 time line to market. Overall, we’re taking a very measured, strategic and thoughtful basically really disciplined approach to our flight testing to make sure we go through the proper steps from hover all the way through the transition flight envelope. But one thing might be helpful is I have Tom Muniz, Archer’s Chief Operating Officer on the call. Tom has over a decade of eVTOL experience. I figure Tom 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 really successful first flight in December. First flights are never easy, but the team did a great job, flight went off as planned. I think it speaks to what Brett mentioned earlier, which is the approach we’re taking, just very methodical step-by-step flight test is a very incremental process, right? You expand the flight envelope in small steps, make sure everything is good before you keep progressing. So to answer your question, maybe in a bit of a roundabout way, 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, validating our flight control laws, 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 over saying now that it’s expected later this year?

Andres, it’s Brett. Yes, I will detail a little bit more here. We put some stuff 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 our – both the manufacturing site and beginning construction this year. It’s not something we can disclose here on the call, but we are getting very close, and we are to 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 really using that to develop plans on 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 perspective, a flight planning perspective, we do a lot of integration and ground testing work. We then move into hover flights. From there, we really work to expand the flight and blow from hover to full cruise flight or a full wing-borne flight on the wing. Our real focus as of today is really getting to full wing-borne flight. So, the whole team and energy around the flight testing group is focused on fully expanding the flight envelope here. Now, we expect to do that this year and full flight envelope expansion. It’s an important engineering milestone for us to get to as we gather more data about how the aircraft is behaving in full transition flight and full cruise flight environment. And again, we are just using all of this for Maker to help advance our timeline as it relates to our production aircraft, make better engineering decisions, make better decisions around certification. And so far, we have gotten 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 we will continue to do this year.

Thanks Brett. Just expanding – there was a report out this morning that question, 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 maybe discuss any differences that you are expecting in the production aircraft battery from what you had put out about Maker, including maybe any changes that you have made as a result of your dialogue with the FAA or as part of the preliminary design review?

Yes, certainly. This is Brett again, David. So, yes, I think first is we are not going to be able to comment on other people’s technologies in battery areas. But I can say a few things here. First, is Archer is serving a market for urban air mobility. We are not doing these longer distance regional transport trips. So, we are really focused around – in and around cities. We think it’s a long-term multi-trillion dollar industry. We get really excited about helping fix the traffic problems that exist today and move passengers around. The second, and as you mentioned this, since day one, we have worked to design an aircraft using today’s technologies with aircraft design being one of our, we call key enabling technologies. We have a really quite large sophisticated flight sciences and aerodynamics team internally. It’s important to note that as it relates to the aircraft design process, we are not taking any bets today on technology advancements. It’s not something we are interested in doing at all. And even when the business started, I even went as far as publishing the physics of Maker on our website, which shows our assumptions for range and aircraft performance. We try to be as visible as possible about this math. Third, Archer has designed our aircraft around readily-available battery technologies that we have today. They are in our labs, and we have gone through thousands of cell cycles to verify this. We are verifying this for the adequate amount of power and energy needs that we will need in our nominal mission. And we are also validating this from a safety perspective at the cell reliability side. We really want as a requirement for us to make sure we are designing our aircraft with batteries that exist today and technologies that exist today. We don’t want to take any technology bets. And then lastly here, I think it’s important to call out, this is a very capital-intensive space. We feel very well capitalized for the journey we are on and our track for commercialization. But 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 have seen commodity costs expand significantly since you guys had put out your initial estimates on what you thought it was going to 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 it’s 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. So, the nice thing is we have time to negotiate these contracts, time to kind of make our way through the current supply chain challenges that we are seeing. You are right, commodity costs have been coming up. But honestly, we haven’t seen that too strongly in the contracts that we have been working so far. We remain really optimistic and on track to hit our overall business targets and including the overall sort of operating economic model of the business, even with all the data we have today around supply chain. Does that make sense?

Yes. Thanks Tom.

Thank you, Mr. Zazula. [Operator Instructions] The next question is from the line of Josh Sullivan with The Benchmark Company. You may proceed.

Good afternoon. How should we think about cash use cadence through the year? Can you hold on to your title here with lowest burn in the sector throughout the year? Maybe where are you on engineers or total employee headcount at this point? Maybe where will you be at year end and the timing of any other cash needs or large cash needs through the year?

Hi Josh, this is Mark. Thanks for the question. Good to hear from you. We are going to – we have agreed to provide quarterly guidance going forward. But I think you can think about the pace of growth quarter-over-quarter, consistent with what you saw probably from Q4 to Q1, just to give you a ballpark of how you could potentially model it. We have clearly – there may be some lumpier type expenses with respect to engineering materials, etcetera, in any given quarter. But I think on average, that’s how you could think about the pace of spending throughout the year. Is that helpful?

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

Yes. Hey, it’s Brett. It’s a good question. So, from the outset, we have gone through a pretty structured process last several years with the FAA. We have gotten through the intake board process several years ago with FAA staff, the Archer project, and we have gone through now the full G-1 certification basis, which the FAA approved for us back in September. We have now been – since been working through the G-2 means of compliance work. None of that process has changed whatsoever, same status quo. We are working every day, every week with FAA, giving supporting issue papers and the documents set out for that process. And we fully expect to get to the G-2 certification means of compliance work in 2022. So, everything for us is on track. We have had an incredible dialogue with the FAA. It’s one of our core focuses here at the company, is the design around certification. So, we really need to listen to the FAA. We design around as many existing Federal guidelines as possible. And we are not trying to, again same with the battery comment earlier, we are not trying to take any big bets here. We are trying to design under many guidelines as possible, and we have been working tirelessly with the FAA here to make sure our aircraft conforms as much of the existing regulatory parts as possible.

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

Hey, this is Adam Goldstein. I would like to really just 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 that 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. And we have significant cash in our balance sheet. We have a disciplined financial plan that we are going to use to invest against our operational roadmap. And that’s really going to help us get to market in 2024 and beyond. And then finally, we have significant momentum in 2022. We are well on our way 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.