This prospectus supplement supplements the prospectus
dated October 26, 2021 (the “Prospectus”), which forms a part of our registration statement on Form S-1 (No. 333-260121),
as amended. This prospectus supplement is being filed to update and supplement the information in the Prospectus with the information
contained in our Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 12, 2021
(the “Report”). Accordingly, we have attached the Report to this prospectus supplement.
The Prospectus and this prospectus supplement
relate to the issuance by us of an aggregate of up to 25,398,947 shares of our Class A Common Stock, $0.0001 par value per share
(the “Class A Common Stock”), issuable upon exercise of warrants, which consists of: (i) up to 8,732,280 shares
of Class A Common Stock issuable upon the exercise of warrants (the “Private Warrants”), consisting of: (a) 8,000,000
Private Warrants issued to Atlas Crest Investment LLC (the “Sponsor”) and its permitted transferees in connection with the
initial public offering of Atlas Crest Investment Corp. (“Atlas”) and (b) 732,280 Private Warrants issued to a lender
in connection with a certain loan and security agreement, and (ii) up to 16,666,667 shares of Class A Common Stock issuable
upon the exercise of warrants (the “Public Warrants”) originally issued in the initial public offering of Atlas.
In addition, the Prospectus and this prospectus
supplement relate to the offer and sale from time to time by the selling securityholders named in the Prospectus or their permitted transferees
(the “selling securityholders”) of (i) up to 166,605,041 shares of Class A Common Stock consisting of (a) up
to 12,500,000 shares of Class A Common Stock issued in a private placement to the Sponsor and its permitted transferees in connection
with the initial public offering of Atlas, (b) up to 61,512,500 shares of Class A Common Stock, consisting of 60,000,000 PIPE
Shares (as defined in the Prospectus) and 1,512,500 shares of Class A Common Stock issued to satisfy certain fees related to the
Business Combination and PIPE Financing (each as defined in the Prospectus), (c) up to 8,732,280 shares of Class A Common Stock
issuable upon the exercise of the Private Warrants, and (d) up to 83,860,761 shares of Class A Common Stock (including shares
of Class A Common Stock issuable upon the conversion of shares of our Class B Common Stock, par value $0.0001 per share, warrants
and other convertible securities) pursuant to that certain Amended and Restated Registration Rights Agreement, dated September 16,
2021, between us and the selling securityholders, granting such holders registration rights with respect to such shares and (ii) up
to 8,732,280 Private Warrants.
(Former name, former address, and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes ¨ No
¨
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes ¨ No
¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.:
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant
to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes ¨ No
¨
As of November 8, 2021, the number of shares of the registrant’s
Class A common stock outstanding was 157,268,036, and the number of shares of the registrant’s Class B common stock outstanding
was 80,062,758.
Retroactive Application of Reverse Recapitalization
As discussed in Note 4, Reverse Recapitalization
and Related Transactions, the Business Combination is accounted for as a reverse recapitalization of equity structure. Pursuant to U.S.
GAAP, we recast our consolidated condensed statements of redeemable convertible preferred stock and stockholders’ equity from December 31,
2019 to the Closing Date, the total stockholder’s equity within our consolidated condensed balance sheet as of September 30,
2020 and the weighted average outstanding shares, basic and diluted for the nine months ended September 30, 2020 by applying the
recapitalization retroactively.
In addition, we recast the stock class and issued
and outstanding number of stock, exercise prices of options, and warrants for each balance sheet period presented in these consolidated
condensed financial statements and the accompanying notes.
Retroactive Application of Reverse Recapitalization to the Consolidated
Condensed Statements of Stockholders’ Equity
Pursuant to the terms of the Business Combination
Agreement, as part of the closing, all of the issued series seed redeemable convertible preferred stock and series A redeemable convertible
preferred stock of Legacy Archer were automatically converted into Legacy Archer common stock at a 1:1 ratio, which were converted again,
along with all other issued and outstanding common stock of Legacy Archer, into 124,735,762 shares of New Archer Class A and Class B
common stock at an Exchange Ratio of 1.00656519 (“Exchange Ratio”). Additionally, each of Legacy Archer options, RSUs, and
warrants that were outstanding immediately prior to the closing of the Business Combination remained outstanding and converted into options,
RSUs, and warrants for New Archer Class A and Class B common stock equal to the number of Legacy Archer common stock, subject
to such options, RSUs, or warrants, multiplied by the Exchange Ratio at an exercise price per share equal to the current exercise price
per share for such option or warrant divided by the Exchange Ratio, with the aggregate amount of shares of New Archer Class A and
B common stock issuable upon exercise of such options, RSUs, and warrants to be 60,260,483.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Retroactive Application of Reverse Recapitalization
to the Consolidated Condensed Statements of Operations and Comprehensive Loss
Furthermore, based
on the retroactive application of the reverse recapitalization to our consolidated condensed statements of redeemable convertible preferred
stock and stockholders’ equity, we recalculated the weighted average shares for the nine months ended September 30, 2020.
The basic and diluted weighted-average Legacy Archer common stock were retroactively converted to New Archer Class A and B common
stock using the Exchange Ratio to conform to the recast in the consolidated condensed statements of redeemable convertible preferred
stock and stockholders’ equity.
Retroactive Application of Reverse Recapitalization
to the Consolidated Condensed Balance Sheets
Finally, to
conform to the retroactive application of recapitalization to our statements of redeemable convertible preferred stock and stockholders’
equity, the Company reclassified the $5.9 million of Legacy Archer series seed redeemable convertible preferred stock and the $55.6 million
of Legacy Archer series A redeemable convertible preferred stock to APIC, less amounts attributable to the par value of the common stock
as adjusted, as of September 30, 2020.
Cash and Cash Equivalents
Cash consists of cash on deposit with financial
institutions. Cash equivalents consist of short-term, highly liquid financial instruments that are readily convertible to cash and have
maturities of three months or less from the date of purchase. Cash and cash equivalent balances were $796.2 million and $36.6 million
as of September 30, 2021 and December 31, 2020, respectively, of which money market funds were $0.3 million and $34.4 million
as of September 30, 2021 and December 31, 2020, respectively. Money market funds, which are considered cash equivalents, are
recorded at fair value and classified as Level 1 within the fair value hierarchy.
Fair Value Measurements
We apply the provisions of Accounting Standards
Codification (“ASC”) 820, Fair Value Measurement, which defines a single authoritative definition of fair value, sets
out a framework for measuring fair value and expands on required disclosures about fair value measurements. The provisions of ASC 820
relate to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring and nonrecurring
basis. The standard clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering
such assumptions, the standard establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as
follows:
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets
or liabilities accessible to the reporting entity at the measurement date.
|
|
Level 2
|
Other than quoted prices included in Level 1 inputs that are
observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
Level 3
|
Unobservable inputs for the asset or liability used to measure
fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any,
market activity for the asset or liability at the measurement date.
|
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
The carrying amounts of our cash, accounts payable,
accrued compensation and accrued liabilities approximate fair value due to the short-term nature of these instruments. The following table
presents information about our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2021
and December 31, 2020 and indicates the fair value hierarchy of the valuation inputs we utilized to determine such fair value:
Description
|
|
Level
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
1
|
|
|
$
|
0.3
|
|
|
$
|
34.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability – Public Warrants
|
|
|
1
|
|
|
$
|
27.7
|
|
|
$
|
—
|
|
Warrant Liability – Private Placement Warrants
|
|
|
3
|
|
|
$
|
13.2
|
|
|
$
|
—
|
|
Public Warrants
The measurement
of the public warrants as of September 30, 2021 is classified as Level 1 due to the use of an observable market quote in an active
market under the ticker ACHR WS. The quoted price of the public warrants was $1.59 per warrant as of September 30, 2021. Refer to
Note 13 for additional information about the public warrants.
Private Placement Warrants
We utilize a Monte Carlo simulation model for
the private placement warrants at each reporting period, with changes in fair value recognized in the statement of operations and comprehensive
loss. The estimated fair value of the private placement warrant liability is determined using Level 3 inputs. Inherent in a binomial options
pricing model and Monte Carlo simulation model are assumptions related to expected share-price volatility, expected life, risk-free interest
rate and dividend yield.
The key inputs into the Monte Carlo simulation
model for the private placement warrants are as follows:
Input
|
|
September 30,
2021
|
|
Stock price
|
|
$
|
8.88
|
|
Strike price
|
|
$
|
11.50
|
|
Dividend yield
|
|
|
0.00
|
%
|
Term (in years)
|
|
|
4.96
|
|
Volatility
|
|
|
29.6
|
%
|
Risk-free rate
|
|
|
0.97
|
%
|
We recognized a loss in connection with changes
in the fair value of warrant liabilities of $0.1 million within other income in the statement
of operations and comprehensive loss during the three and nine months ended September 30, 2021.
Refer to Note 13 for additional information about the private placement warrants.
Financial Instruments Not Recorded at Fair Value on a Recurring
Basis
Certain financial instruments, including debt,
are not measured at fair value on a recurring basis in the balance sheets. The fair value of debt as of September 30, 2021 approximates
its carrying value.
Assets and Liabilities Recorded at Fair Value on a Non-Recurring
Basis
Certain assets and liabilities are subject to
measurement at fair value on a non-recurring basis if there are indicators of impairment or if they are deemed to be impaired as a result
of an impairment review.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Intangible Assets, Net
Intangible assets consist solely of domain names
and are recorded at cost, net of accumulated amortization, and if applicable, impairment charges. Amortization of domain names is provided
over a 15-year estimated useful life on a straight-line basis or based on the pattern in which economic benefits are consumed, if reliably
determinable. We review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. We have analyzed a variety of factors in light of the known impact to date of the COVID-19 pandemic
on our business to determine if any circumstance could trigger an impairment loss, and, at this time and based on the information presently
known, do not believe that it is more likely than not that an impairment loss has been incurred.
As of September 30, 2021 and December 31,
2020, the gross carrying amount for domain names was $0.5 million with $28 thousand and $3 thousand recorded in accumulated amortization
on our balance sheets in each period, respectively. During the three and nine months ended September 30, 2021, we recognized
amortization expense of $8 thousand and $25 thousand, respectively, included within general and administrative expenses in the statements
of operations and comprehensive loss. The Company did not recognize any amortization expense during the three and nine months ended September 30,
2020.
Property and Equipment, Net
Property and equipment are stated at historical
cost less accumulated depreciation. Expenditures for major renewals and betterments are capitalized, while minor replacements, maintenance,
and repairs, which do not extend the asset lives, are charged to operations as incurred. Upon sale or disposition, the cost and related
accumulated depreciation is removed from the accounts, and any difference between the selling price and net carrying amount is recorded
as a gain or loss in the statements of operations and comprehensive loss.
Depreciation on property and equipment is calculated
using the straight-line method over the estimated useful lives of the assets as follows:
|
|
Useful Life
(in years)
|
|
|
Furniture, fixtures, and equipment
|
|
|
5
|
|
Computer hardware
|
|
|
3
|
|
Computer software
|
|
|
3
|
|
Website design
|
|
|
2
|
|
Leasehold improvements
|
|
|
Shorter of lease
term or the asset
standard life
|
|
Impairment of Long-Lived Assets
We review our long-lived assets, consisting primarily
of property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. Such triggering events or changes in circumstances may include: a significant decrease in the market price of
a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being or intended to be used,
a significant adverse change in legal factors or in the business climate, the impact of competition or other factors that could affect
the value of a long-lived asset, a significant adverse deterioration in the amount of revenue or cash flows expected to be generated from
an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development
of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a
long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly
before the end of its previously estimated useful life. We perform impairment testing at the asset group level that represents the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these
assets is determined by comparing the forecasted undiscounted cash flows attributable to such assets including any cash flows upon their
eventual disposition to their carrying value. If the carrying value of the assets exceeds the forecasted undiscounted cash flows, then
the assets are written down to their fair value. We determined there was no impairment of long-lived assets during all periods presented.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Operating Expenses
Research and Development
Research and development (“R&D”)
costs are expensed as incurred and are primarily comprised of personnel-related costs including salaries, bonuses, benefits, and stock-based
compensation for employees focused on R&D activities, costs associated with building prototype aircraft, other related costs, depreciation
and an allocation of general overhead. R&D efforts focus on the design and development of our eVTOL aircraft, including certain of
the systems that are used in it.
General and Administrative
General and administrative expenses are primarily
comprised of personnel-related costs including salaries, bonuses, benefits, and stock-based compensation for employees associated with
our administrative services such as finance, legal, human resources, information technology, other related costs, depreciation, and an
allocation of general overhead. General and administrative expenses include $101.7 million of expense related to the vesting of a
certain portion of the restricted stock units granted to our founders pursuant to the terms and conditions of the Business Combination
Agreement immediately prior to closing (the “Founder Grants”), for the three and nine months ended September 30,
2021. Refer to Note 10 for additional information.
Other Warrant Expense
Other warrant expense consists of expense related
to the vesting of warrants issued in conjunction with the execution of Purchase Agreement, Collaboration Agreement, and Warrant Agreement
with United Airlines Inc. Refer to Note 10 for additional information.
Stock-Based Compensation
Our stock-based compensation awards consist of
options granted to employees and non-employees and restricted stock units granted to employees, directors, and non-employees that convert
into shares of our Class A common stock upon vesting. We recognize stock-based compensation expense in accordance with the provisions
of ASC 718, Compensation - Stock Compensation. ASC 718 requires the measurement and recognition of compensation expense for all
stock-based compensation awards made to employees, directors, and non-employees to be based on the grant date fair values of the awards.
We estimate the fair value of share options using
the Black-Scholes option-pricing model. The value of the award is recognized as expense over the requisite service period on a straight-line
basis.
Determining the grant date fair value of the awards
using the Black-Scholes option-pricing model requires management to make assumptions and judgments, including but not limited to the following:
Expected term — The
estimate of the expected term of employee awards is determined in accordance with the simplified method, which estimates the term based
on an averaging of the vesting period and contractual term of the option grant. We use the contractual term for non-employee awards.
Expected volatility — Since
we were a private entity without sufficient historical data on the volatility of our common stock, the expected volatility used is based
on the volatility of similar entities (referred to as “guideline companies”) for a period consistent with the expected term
of the award.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Risk-free interest rate — The
risk-free interest rate used to value awards is based on the United States Treasury yield in effect at the time of grant for a period
consistent with the expected term of the award.
Dividend yield — We
have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future.
Forfeiture rate — We have elected
to account for forfeitures as they occur and will record stock-based compensation expense assuming all option holders will complete the
requisite service period. If an employee forfeits an award because they fail to complete the requisite service period, we will reverse
stock-based compensation expense previously recognized in the period the award is forfeited.
Fair value of common stock
Our board of directors grants stock options with
exercise prices equal to the fair value of our common stock on the date of grant.
Prior to the closing of the Business Combination
on the Closing Date, we determined the fair value of our common stock at the time of the grant of stock options in accordance with the
American Institute of Certified Public Accountants (“AICPA”) Accounting and Valuation Guide: Valuation of Privately-Held-Company
Equity Securities Issued as Compensation (the “AICPA Practice Aid”). We determined the fair value of our common stock based
on a variety of factors including, but not limited to (i) the results of contemporaneous independent third-party valuations of our
common stock and the prices, rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our
common stock; (ii) the lack of marketability of our common stock; (iii) actual operating and financial results; (iv) current
business conditions and projections; (v) the likelihood of achieving a liquidity event, such as an IPO or sale of the Company, given
prevailing market conditions, and (vi) precedent transactions involving our shares.
As provided in the AICPA Practice Aid, there are
several approaches for setting the value of an enterprise and various methodologies for allocating the value of an enterprise to its outstanding
equity. We determined the fair value of equity awards using a combination of the market and income approach. Within the market approach,
the guideline public company method was used, which employs the use of ratios developed from the market price of traded shares from publicly
traded companies considered reasonably similar to the Company. Under the income approach, the enterprise value was estimated using the
discounted cash flow method, which involves estimating the future cash flows of a business for a discrete period and discounting them
to their present value. In allocating enterprise value to our outstanding equity, we applied a hybrid approach, which consisted of the
option pricing method (“OPM”) and probability-weighted expected return method (“PWERM”). The OPM treats securities,
including debt, common and preferred stock, as call options on the enterprise’s value, with exercise prices based on the securities’
respective liquidation preferences and conversion values. The PWERM estimates the fair market value of the common stock based on an analysis
of future values for the enterprise assuming various exit scenarios, such as IPO, merger or sale, staying private, and liquidation.
In conducting the valuations, we considered all
objective and subjective factors that we believed to be relevant in the valuation conducted, including management’s best estimate
of our business condition, and prospects and operating performance at the valuation dates. There are significant judgments and estimates
inherent in these valuations.
Net Loss Per Share
Basic net loss per share is calculated by dividing
net loss attributable to common stockholders by the weighted-average number of common shares outstanding. For all periods presented, the
calculation of basic net loss per share excludes shares issued upon the early exercise of stock options where the vesting conditions have
not been satisfied.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Because we reported net losses for all periods
presented, diluted loss per share is the same as basic loss per share.
Contingently issuable shares, including equity
awards with performance conditions, are considered outstanding common shares and included in basic net loss per share as of the date that
all necessary conditions to earn the awards have been satisfied. Prior to the end of the contingency period, the number of contingently
issuable shares included in diluted net loss per share is based on the number of shares, if any, that would be issuable under the terms
of the arrangement at the end of the reporting period.
Because we reported net losses for all periods
presented, all potentially dilutive common stock equivalents are antidilutive and have been excluded from the calculation of net loss
per share. The diluted net loss per common share were the same for Class A and Class B common shares because they are entitled
to the same liquidation and dividend rights.
The following table presents the number of antidilutive
shares excluded from the calculation of diluted net loss per share:
​
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
​
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Options to purchase common stock
|
|
|
10,296,564
|
|
|
|
3,738,589
|
|
|
|
10,296,564
|
|
|
|
3,738,589
|
|
Unvested restricted stock units
|
|
|
31,888,836
|
|
|
|
856,084
|
|
|
|
31,888,836
|
|
|
|
856,084
|
|
Warrants
|
|
|
32,519,357
|
|
|
|
—
|
|
|
|
32,519,357
|
|
|
|
—
|
|
Total
|
|
|
74,704,757
|
|
|
|
4,594,673
|
|
|
|
74,704,757
|
|
|
|
4,594,673
|
|
Comprehensive Loss
There were no differences between net loss and
comprehensive loss presented in the statements of operations and comprehensive loss for the three and nine months ended September 30,
2021 and 2020.
Recently adopted accounting pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases
(Topic 842) (“ASU 2016-02”), which outlines a comprehensive lease accounting model that supersedes the current lease
guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease
terms greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements.
In July 2018, the FASB issued ASU 2018-11, which provides the option of an additional transition method that allows entities to initially
apply the new lease guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings
in the period of adoption. The Company entered into its first lease in July of 2020 and applied ASU 2016-02 to this lease and subsequent
leases.
In June 2018, the FASB issued ASU 2018-07,
Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU
2018-07”). This amendment expands the scope of Topic 718, Compensation — Stock Compensation (which
only included share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently,
the accounting for share-based payments to nonemployees and employees is substantially aligned. ASU 2018-07 supersedes Subtopic 505-50,
Equity—Equity-Based Payments to Non-Employees. Early adoption of ASU 2018-07 is permitted and should be applied on a prospective
basis. The Company began applying ASU 2018-07 during 2020 upon the Company’s first grant of share-based payment awards. No share-based
payments were granted prior to 2020.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820) (“ASU 2018-13”), which modifies, removes, and adds certain disclosure requirements
on fair value measurements based on the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to
Financial Statements. The ASU is effective for all entities for fiscal years beginning after December 15, 2019. The amendments on
changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair
value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent annual
period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented
upon their effective date. The Company has applied ASU 2018-13 to all periods presented.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
In November 2019, the FASB issued ASU 2019-08,
Compensation — Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606) (“ASU
2019-08”), which requires entities to measure and classify share-based payments to a customer in accordance with the guidance in
ASC 718, Compensation — Stock Compensation. ASU 2019-08 expanded the scope of Topic 718 to include awards issued
to customers for purposes of measurement and classification and amended portions of ASC 606, Revenue from Contracts with Customers,
to refer to this guidance. The amount that would be recorded as a reduction in revenue would be measured based on the grant date fair
value of the share-based payment in accordance with Topic 718. The Company adopted ASU 2019-08 on January 1, 2021 and has applied
its provisions to the measurement of the warrants issued to United Airlines. Refer to Note 10 for details.
In December 2019, the FASB issued ASU 2019-12, Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This amendment was issued
to simplify the accounting for income taxes by removing certain exceptions for recognizing deferred taxes, performing intraperiod allocation,
and calculating income taxes in interim periods. Further, ASU 2019-12 adds guidance to reduce complexity in certain areas, including recognizing
deferred taxes for tax basis goodwill and allocating taxes to members of a consolidated group. The Company has applied ASU 2019-12 to
all periods presented, and there was no adoption date impact to its financial statements.
Recently issued accounting pronouncements not yet adopted
In August 2020, the FASB issued ASU 2020-06,
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for convertible
instruments by removing certain separation models in ASC 470-20, Debt—Debt with Conversion and Other Options, for convertible
instruments. The ASU updates the guidance on certain embedded conversion features that are not required to be accounted for as derivatives
under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital, such
that those features are no longer required to be separated from the host contract. The convertible debt instruments will be accounted
for as a single liability measured at amortized cost. Further, the ASU made amendments to the EPS guidance in Topic 260 for convertible
instruments, the most significant impact of which is requiring the use of the if-converted method for diluted EPS calculation, and no
longer allowing the net share settlement method. The ASU also made revisions to Topic 815-40, which provides guidance on how an entity
must determine whether a contract qualifies for a scope exception from derivative accounting. The amendments to Topic 815-40 change the
scope of contracts that are recognized as assets or liabilities. The ASU is effective for public business entities for interim and annual
periods beginning after December 15, 2021, with early adoption permitted. Adoption of the ASU can either be on a modified retrospective
or full retrospective basis. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements
and related disclosures.
Note 4 - Reverse Recapitalization and Related Transactions
Upon the consummation of the Business Combination,
in accordance with the terms and conditions of the Business Combination Agreement, all issued and outstanding Legacy Archer common stock
was converted into shares of common stock of New Archer at the Exchange Ratio. Additionally, upon closing the Business Combination, Legacy
Archer received $257.6 million in cash proceeds released from Atlas’ trust account, after redemptions of $242.4 million. At closing,
each non-redeemed outstanding share of Atlas Class A common stock was converted into one share of Class A common stock of New
Archer.
Upon consummation of the Business Combination,
the shares of Legacy Archer held by Legacy Archer shareholders converted into 124,735,762 shares of common stock of New Archer, including
54,987,838 shares of Class A common stock and 69,747,924 shares of Class B common stock.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
While the legal acquirer in the Business Combination
was Atlas, for accounting and financial reporting purposes under U.S. GAAP, Legacy Archer is the accounting acquirer and the Business
Combination was accounted for as a “reverse recapitalization.” A reverse recapitalization does not result in a new basis of
accounting, and the financial statements of the combined entity represent the continuation of the financial statements of Legacy Archer
in many respects. Under this method of accounting, Atlas was treated as the “acquired” company. Accordingly, the consolidated
assets, liabilities, and results of operations of Legacy Archer became the historical financial statements of New Archer, and Atlas’
assets and liabilities were consolidated with Legacy Archer’s on the Closing Date. Operations prior to the Business Combination
are presented as those of New Archer in reports subsequent to the Closing Date. The net assets of Atlas were recognized at their carrying
value immediately prior to the closing with no goodwill or other intangible assets recorded and were as follows, net of transaction costs
(in millions):
Cash
|
|
$
|
201.8
|
|
Warrant liability
|
|
|
(39.5
|
)
|
Net assets acquired
|
|
$
|
162.3
|
|
Additionally, as part of the recapitalization,
1,875,000 shares of Atlas Class A common stock held by Atlas Crest Investment LLC (the “Atlas Sponsor”) were exchanged
with 1,875,000 shares of New Archer Class A common stock that will be subject to forfeiture if the vesting condition is not met over
the three-year term following the Closing Date. The vesting condition states that these earn-out shares of New Archer Class A common
stock will vest if the New Archer’s Class A common stock volume weighted average price, as defined in the Amended and Restated
Sponsor Letter Agreement, by and among Atlas Sponsor, Atlas, Legacy Archer and the individuals named therein, is greater than or equal
to $12.00 per share for any period of ten (10) trading days out of twenty (20) consecutive trading days.
The earn-out shares were recognized at fair value
upon the closing of the Business Combination and classified in stockholders’ equity (with no net impact to APIC) since the earn-out
shares were determined to be indexed to the Company’s own equity and meet the requirements for equity classification.
Pursuant to the terms of the Business Combination
Agreement, all of the issued and outstanding series seed redeemable convertible preferred stock and series A redeemable convertible preferred
stock converted into 64,884,120 shares of Legacy Archer common stock immediately prior to the Business Combination. Then, as of the closing
of the Business Combination, all outstanding shares of Legacy Archer common stock converted into 124,735,762 shares of New Archer Class A
and B common stock. Additionally, each of Legacy Archer options, RSUs, and warrants that were outstanding immediately prior to the closing
of the Business Combination remained outstanding and converted into options, RSUs, and warrants for New Archer Class A and Class B
common stock equal to the number of the Company’s common stock, subject to such options, RSUs, or warrants, multiplied by the Exchange
Ratio at an exercise price per share equal to the current exercise price per share for such option or warrant divided by the Exchange
Ratio, with the aggregate amount of shares of New Archer Class A and B common stock issuable upon exercise of such options, RSUs,
and warrants to be 60,260,483. Additionally, 10,004,612 of outstanding RSUs vested at the closing of the Business Combination into New
Archer Class B common stock.
Substantially concurrently with the execution
of the Business Combination Agreement, Atlas entered into Subscription Agreements (the “Subscription Agreement”) with certain
investors in the PIPE Financing (the “Subscription Investors”). Pursuant to the Subscription Agreements, the Subscription
Investors agreed to purchase, and Atlas agreed to sell to the Subscription Investors, an aggregate of 60,000,000 shares of New Archer
Class A common stock for a purchase price of $10 per share, or an aggregate of $600 million in gross cash proceeds. Pursuant to the
Subscription Agreements, Atlas granted certain registration rights to the Subscription Investors with respect to the shares issued and
sold in the PIPE Financing. The closing of the PIPE Financing occurred immediately prior to the closing of the Business Combination. In
conjunction with the PIPE Financing, 1,512,500 shares of New Archer Class A common stock were issued to satisfy certain fees related
to the Business Combination and PIPE Financing.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
The number of shares of common stock issued immediately
following the consummation of the Business Combination were as follows:
|
|
Number of shares
|
|
Class A and B common stock outstanding on July 1, 2021
|
|
|
52,572,374
|
|
|
|
|
|
Common Stock issued through option exercises between July 1, 2021 and September 16, 2021
|
|
|
4,738,344
|
|
|
|
|
|
Vesting of Unvested Shares between July 1, 2021 and September 16, 2021
|
|
|
2,540,925
|
|
|
|
|
|
Common Stock outstanding prior to the Business Combination
|
|
|
|
|
|
|
59,851,643
|
|
Conversion of Preferred Stock
|
|
|
64,884,120
|
|
|
|
|
|
Common Stock attributable to Atlas
|
|
|
36,385,693
|
|
|
|
|
|
Adjustment related to Reverse Recapitalization*
|
|
|
|
|
|
|
101,269,813
|
|
Restricted Stock Units vested at Closing
|
|
|
|
|
|
|
10,004,612
|
|
Common Stock attributable to PIPE Financing
|
|
|
|
|
|
|
61,512,500
|
|
Total shares of common stock as of Closing of Business Combination and Related Transactions as of September 16, 2021
|
|
|
|
|
|
|
232,638,568
|
|
* The corresponding adjustment to APIC related to the reverse recapitalization
was comprised of (i) $162.3 million which represents the fair value of the consideration transferred in the Business Combination,
less the excess of the fair value of the shares issued over the value of the net monetary assets of Atlas, net of transaction costs and
(ii) $61.5 million which represents the conversion of the convertible preferred stock into New Archer Class A and Class B
common stock.
At the Closing Date, Legacy Archer had 56,390,023
outstanding options and RSUs under the 2019 Plan (as defined below) in addition to 13,112,602 outstanding warrants, which remained outstanding
and converted into 70,265,095 options, RSUs, and warrants in New Archer Class A or B common stock, as derived by multiplying the
number of Legacy Archer common stock subject to such option or warrant by the Exchange Ratio. In addition, of the RSUs outstanding immediately
prior to the closing of the Business Combination, 10,004,612 vested at closing into New Archer Class B common stock. The options
and warrants shall be exercised at an exercise price per share equal to the current exercise price per share for such option or warrant
divided by the Exchange Ratio.
Following the Business Combination, Atlas’
warrants to purchase 24,666,667 shares of New Archer Class A common stock, consisting of (i) 16,666,667 public warrants listed
on the NYSE and (ii) 8,000,000 private warrants, each with an exercise price of $11.50 per share, remained outstanding.
As part of the closing, total direct and incremental
transaction costs aggregated $81.8 million, of which $10.9 million was expensed as part of the Business Combination, $55.8 million
was recorded to APIC as equity issuance costs, and the remaining $15.1 million was settled through the issuance of shares of New
Archer Class A common stock.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 5 - Property and Equipment, Net
Property and equipment,
net, consists of the following (in millions):
​
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Furniture, fixtures, and equipment
|
|
$
|
1.8
|
|
|
$
|
1.0
|
|
Computer hardware
|
|
|
1.6
|
|
|
|
0.5
|
|
Website design
|
|
|
0.5
|
|
|
|
0.1
|
|
Leasehold improvements
|
|
|
0.9
|
|
|
|
0.1
|
|
Construction in progress
|
|
|
0.4
|
|
|
|
—
|
|
Total property and equipment
|
|
|
5.2
|
|
|
|
1.7
|
|
Less: Accumulated depreciation
|
|
|
(0.9
|
)
|
|
|
(0.1
|
)
|
Total property and equipment, net
|
|
$
|
4.3
|
|
|
$
|
1.6
|
|
The following table presents depreciation expense
included in each respective expense category in the statements of operations and other comprehensive loss (in millions):
​
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
​
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Research and development
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
General and administrative
|
|
|
0.1
|
|
|
|
—
|
|
|
|
0.3
|
|
|
|
—
|
|
Total depreciation expense
|
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
—
|
|
Note 6 - Related Party Transactions
Partial Recourse Promissory Notes
On November 21, 2020, we entered into a partial
recourse promissory note arrangements with each of our founders which provided each of them with a partial recourse loan as consideration
for the issuance of stock, which proceeds were used for the exercise of 2,662,885 shares, per founder, of our common stock pursuant to
the outstanding option agreements issued by us to the founders on November 3, 2020. Due to the partial recourse nature of the notes,
the promissory note arrangements are considered nonrecourse loans in their entirety for accounting purposes and thus are accounted for
as in-substance share options. The purchase price for the shares was $0.15 per share for a total amount of $0.4 million paid by each founder.
The notes bear interest at a rate of 0.38% per annum, compounded annually. The promissory notes may be repaid at any time and from time
to time and are due upon the earlier of five years from issuance or upon a deemed liquidation event, initial draft registration statement
filing, or within 90 days of the respective founder’s termination. Concurrent with the execution of the notes, the founders early
exercised their common stock options at the exercise price of $0.15 per share in accordance with the terms of the early exercise agreements.
These options are subject to vesting conditions and are subject to forfeiture in the form of a Company repurchase option at the original
$0.15 per share price if the founders terminate employment prior to the vesting dates of the original option agreements.
We determined that the stock options exercised
by a nonrecourse note are considered unexercised until the nonrecourse note is repaid. Because the loan is deemed nonrecourse for accounting
purposes, the principal and interest represent the strike price of the in-substance awards for the purposes of fair valuing the in-substance
awards, and the principal and interest on the note and shares underlying the in-substance share options will not be recorded on our balance
sheets or statements of operations and comprehensive loss.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
We estimated the fair value of the in-substance
share options using the Black-Scholes option-pricing model and compared this fair value to the value of the original awards immediately
prior to the issuance of the promissory note. We determined that the promissory note terms did not result in incremental fair value of
these awards and no incremental compensation cost would be recognized under the promissory note arrangement. The grant date fair value
of the original award is recognized as expense over the requisite service period on a straight-line basis.
The partial recourse promissory notes were repaid
in full prior to the closing of the Business Combination.
Note 7 - Notes Payable
Long-term notes payable consisted
of the following (in millions):
​
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Silicon Valley Bank (“SVB”) Term Loans
|
|
$
|
20.0
|
|
|
$
|
—
|
|
PPP Loan
|
|
|
—
|
|
|
|
0.9
|
|
Term Loans unamortized loan issuance fees and costs
|
|
|
(1.3
|
)
|
|
|
—
|
|
Total debt, net of issuance costs
|
|
|
18.7
|
|
|
|
0.9
|
|
Less current portion, net of loan issuance fees and costs
|
|
|
(7.0
|
)
|
|
|
(0.6
|
)
|
Total long-term notes payable, net of loan issuance fees and costs
|
|
$
|
11.7
|
|
|
$
|
0.3
|
|
PPP Loan
On March 27,
2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES
Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments,
net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations,
increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement
property. The CARES Act also appropriated funds for the U.S. Small Business Administration (“SBA”) Paycheck Protection Program
(“PPP”) loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster
Loans to provide liquidity to small businesses harmed by COVID-19.
On April 9, 2020, we entered into a PPP Loan
with JPMorgan Chase Bank, N.A. under the PPP of the CARES Act and received total proceeds of $0.9 million, with interest accruing at a
rate of 0.98% per annum. The application for these funds required the us to, in good faith, certify that the current economic uncertainty
made the loan request necessary to support the ongoing operations of the Company and that we will use the loan funds to retain workers,
maintain payroll, or make mortgage, lease, and utility payments. In accordance with the requirements of the CARES Act, we used the proceeds
for payroll costs. In June 2021, the Company received notification from the SBA that the loan and accrued interest were forgiven
in full. Accordingly, we recorded a gain on forgiveness of PPP loan and interest in the consolidated condensed statement of operations
and comprehensive loss.
SVB Loan
On July 9, 2021, we, as the borrower, entered
into a Loan and Security Agreement with SVB and SVB Innovation Credit Fund VIII, L.P. (“SVB Innovation”) as the lenders, and
SVB as the collateral agent. The total principal amount of the loans is $20 million (the “Term Loans”), and all obligations
due under the Term Loans are collateralized by all of our right, title, and interest in and to its specified personal property in favor
of the collateral agent. The term loans include events of default and covenant provisions, whereby accelerated repayment may result if
we were to default. The Term Loans are subject to a final payment fee which was determined to be zero as a result of the completion of
the Business Combination prior to October 10, 2021 (the “Outside Date”). Commencing on December 31, 2021, we shall
repay the term loans in 24 equal monthly installments which include principal and interest. The interest rate on the loans is a floating
rate per annum equal to the greater of (1) 8.5% and (2) the Prime Rate plus the Prime Rate Margin (each as defined in the Loan
and Security Agreement), which increases by 2% per annum upon the occurrence of an event of default. As of September 30, 2021, we
accrued interest of $0.1 million, and for the three months ended September 30, 2021, the Company recognized interest expense of $0.4
million.
Archer Aviation Inc.
Notes to Consolidated
Condensed Financial Statements (Unaudited)
Additionally, in conjunction
with the issuance of the Term Loans, we agreed to issue 366,140 warrants to SVB and 366,140 warrants to SVB Innovation, totaling 732,280
warrants. We issued the warrants to the lenders as consideration for entering into the Term Loans, representing a loan issuance fee. Each
warrant provides SVB and SVB Innovation with the right to purchase one share of our Class A common stock. We determined the warrants
do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, we classified the warrants as liabilities
at their fair value and adjust the warrants to fair value at each reporting period. This liability is subject to re-measurement at each
balance sheet date until exercised, and any change in fair value is recognized as a gain or loss in our statement of operations and comprehensive
loss. See Note 13 - Liability Classified Warrants for further details. The initial offsetting entry to the warrant liability was a debt
discount recorded to reflect the loan issuance fee. We estimated the fair value of the warrants at the issuance date to be $1.2 million
using the probability-weighted fair value of the warrants under two scenarios, the Business Combination occurring prior to, or after,
the Outside Date, with the first scenario of the Business Combination occurring prior to the Outside Date weighted at 95% and the second
scenario of the Business Combination occurring after the Outside Date weighted at 5%. For the second scenario, we determined the fair
value of the warrants using a Monte Carlo simulation approach. Determining the fair value of these warrants under this model requires
subjective assumptions.
Upon the closing of the Business
Combination, the SVB warrants became public warrants. The subsequent measurement of the SVB warrants as of September 30, 2021 is
classified as Level 1 due to the use of an observable market quote in an active market under the ticker ACHR WS. The quoted price of the
public warrants was $1.59 as of September 30, 2021.
We also incurred issuance
costs of $0.2 million. The loan issuance fee and issuance costs will be amortized to interest expense over the commitment period of 30
months. During the three and nine months ended September 30, 2021, we recognized interest expense in the amount of $0.1 million to
the amortization of the loan issuance fee and issuance costs. The unamortized balance of the discount and issuance costs totaled $1.3
million as of September 30, 2021.
The future scheduled principal
maturities of notes payable as of September 30, 2021 are as follows (in millions):
Note 8 - Commitments and Contingencies
Operating Leases
The Company leases office, lab, hangar, and storage
facilities under various operating lease agreements with lease periods expiring between 2022 and 2023 and generally containing periodic
rent increases and various renewal and termination options.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
On August 18, 2021, we entered into a lease
agreement to lease 27,790 square feet of general office and R&D space, which has a non-cancelable lease term of 18 months. We obtained
control of the initial 20,184 square feet on October 1, 2021 and expect to take control of the remaining 7,606 square feet on December 1,
2021. The aggregate future rent payment obligations total approximately $2.2 million, which includes an upward adjustment in month
13. This does not include payment of additional rent to cover our share of the annual operating expenses of the building. In addition,
we paid a security deposit in the amount of $0.3 million, which the landlord may retain for base rent and other damages, in the event
of our default under the lease agreement. The Company’s lease costs were as follows (in millions):
​
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
​
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Operating lease cost
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
1.2
|
|
|
$
|
—
|
|
The Company’s weighted-average remaining
lease term and discount rate were as follows:
​
|
|
Nine Months Ended September 30,
|
|
​
|
|
2021
|
|
|
2020
|
|
Weighted-average remaining lease term (in months)
|
|
|
19.2
|
|
|
|
—
|
|
Weighted-average discount rate
|
|
|
10.8
|
%
|
|
|
—
|
|
The minimum aggregate future obligations under
our non-cancelable operating leases as of September 30, 2021 were as follows (in millions):
Remaining 2021
|
|
$
|
0.5
|
|
2022
|
|
|
1.8
|
|
2023
|
|
|
0.7
|
|
Total future lease payments
|
|
|
3.0
|
|
Less: imputed interest
|
|
|
(0.3
|
)
|
Present value of future lease payments
|
|
$
|
2.7
|
|
Supplemental cash information and non-cash activities
related to right-of-use assets and lease liabilities were as follows (in millions):
​
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
​
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Operating cash outflows from operating leases
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
1.2
|
|
|
$
|
—
|
|
Operating lease assets obtained in exchange for new lease liabilities
|
|
|
0.4
|
|
|
|
—
|
|
|
|
1.4
|
|
|
|
—
|
|
Letter of Credit
In conjunction with our operating lease for our
headquarters, we entered into a standby letter of credit in favor of the Company’s lessor, in lieu of paying cash to the lessor
to satisfy the security deposit requirements of the leased property. The standby letter of credit was issued on September 15, 2020
for an amount of $0.3 million and expired on September 30, 2021. On June 24, 2021, we entered into a standby letter of credit
for the same amount, which expires on September 1, 2022. The letter of credit automatically renews annually until September 1,
2023, unless cancelled earlier by us.
Litigation
During the ordinary course of our business, we
may be subject to legal proceedings, various claims, and litigation. Such proceedings can be costly, time consuming, and unpredictable,
and therefore, no assurance can be given that the final outcome of such proceedings will not materially impact financial condition or
results of operations.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Wisk Litigation and Government Investigation
On April 6, 2021, Wisk brought a lawsuit
against us in the United States District Court for the Northern District of California alleging misappropriation of trade secrets and
patent infringement. On June 1, 2021, we filed a motion to dismiss the trade secret claims and filed counterclaims. On June 15,
2021, Wisk amended its complaint, and the following day we filed a motion to dismiss the amended complaint. On July 13, 2021, we
filed amended counterclaims. On July 27, 2021, Wisk filed a motion to strike and dismiss certain of our amended counterclaims. On
August 10, 2021, we filed an opposition to Wisk’s motion to strike and dismiss certain of the amended counterclaims. On August 24,
2021, the Court denied our motion to dismiss the trade secret claims. On September 14, 2021, the Court denied Wisk’s motion
to strike and dismiss certain of our amended counterclaims. A trial on Wisk’s claims and our counterclaims has been scheduled to
begin on January 30, 2023. We continue to strongly believe Wisk’s lawsuit is without merit. We will continue to vigorously
defend ourselves against Wisk’s claims and pursue our counterclaims.
On May 19, 2021, Wisk filed a motion for
preliminary injunction and expedited discovery. On June 23, 2021, we filed an opposition to the motion for preliminary injunction.
On July 22, 2021, the Court denied Wisk’s motion for preliminary injunction. On August 20, 2021, Wisk filed a notice of
appeal of the Court’s denial of the motion for preliminary injunction. On September 30, 2021, Wisk withdrew its notice of appeal
of the District Court’s denial of the motion for preliminary injunction.
Prior to Wisk bringing the lawsuit against us,
on March 30, 2021, one of our employees, who is a former employee of Wisk, had a search warrant executed at his home in connection
with a federal investigation. We placed this former Wisk employee on paid administrative leave in connection with this government investigation,
which we believe is focused on conduct prior to the employee joining the Company. We are cooperating with the investigation of the employee.
As of November 12, 2021, the investigation is ongoing. In addition, we and three of our employees, who are also former Wisk employees,
received grand jury subpoenas from the United States Attorney’s Office for the Northern District of California in relation to the
same investigation. The grand jury subpoenas seek documents and information about our business, including our hiring practices and intellectual
property.
We cannot predict the timing or outcome of the
litigation or government investigation or range of reasonably possible loss, if any, from either but a negative result could have a material
adverse effect on our financial position, liquidity, operations, and cash flows.
Note 9 - Preferred and Common Stock
Amended and Restated Certificate
of Incorporation
Upon the
effectiveness of our amended and restated certificate of incorporation on September 16, 2021, we are authorized to issue up
to 700,000,000 shares of Class A common stock, par value $0.0001 per share, 300,000,000 shares of Class B common stock, par
value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share. There were 157,013,725 and 49,828,517
shares of Class A common stock issued and outstanding as of September 30, 2021 and December 31, 2020, respectively. There
were 79,876,025 and 66,714,287 shares of Class B common stock issued and outstanding as of September 30, 2021 and December 31,
2020, respectively.
Preferred Stock
As of September 30, 2021, no shares of preferred
stock were outstanding, and the Company has no present plans to issue any shares of preferred stock.
Pursuant to the terms of our amended and restated
certificate of incorporation, shares of preferred stock may be issued from time to time in one or more series. The board of directors
is authorized to fix the voting rights, if any, designations, powers and preferences, the relative, participating, optional or other special
rights, and any qualifications, limitations and restrictions thereof, applicable to the shares of each series of preferred stock. The
board of directors is able to, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect
the voting power and other rights of the holders of the common stock and could have anti-takeover effects. The ability of the board of
directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change of
control or the removal of existing management.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Class A and Class B Common Stock
Except for voting rights and conversion rights,
or as otherwise required by applicable law, the shares of our Class A common stock and Class B common stock have the same powers,
preferences, and rights and rank equally, share ratable and are identical in all respects as to all matters. The rights, privileges, and
preferences are as follows:
Voting
Holders of the Company’s Class A common
stock are entitled to one vote per share on all matters to be voted upon by the stockholders, and holders of Class B common stock
are entitled to ten votes per share on all matters to be voted upon by the stockholders. The holders of Class A common stock and
Class B common stock will generally vote together as a single class on all matters submitted to a vote of the stockholders, unless
otherwise required by Delaware law or the Company’s amended and restated certificate of incorporation.
Dividends
Holders of Class A common stock and Class B
common stock are entitled to receive such dividends, if any, as may be declared from time to time by the Company’s board of directors
in its discretion out of funds legally available therefore. No dividends on common stock have been declared by the Company’s board
of directors through September 30, 2021.
Preemptive Rights
Stockholders have no preemptive or other subscription
rights and there are no sinking fund or redemption provisions applicable to Class A common stock and Class B common stock.
Conversion
Each share of Class B common stock is convertible
at any time at the option of the holder into one share of Class A common stock. In addition, each share of Class B common stock
will automatically convert into one share of Class A common stock upon transfer to a non-authorized holder. In addition, Class B
common stock is subject to “sunset” provisions, under which all shares of Class B common stock will automatically convert
into an equal number of shares of Class A common stock upon the earliest to occur of (i) the ten-year anniversary of the closing
of the Business Combination, (ii) the date specified by the holders of two-thirds of the then outstanding Class B common stock,
voting as a separate class, and (iii) when the number of Class B common stock represents less than 10% of the aggregate number
of Class A common stock and Class B common stock then outstanding. In addition, each share of Class B common stock will
automatically convert into an equal number of Class A common stock upon the earliest to occur of (a) in the case of a founder
of the Company, the date that is nine months following the death or incapacity of such founder, and, in the case of any other holder,
the date of the death or incapacity of such holder, (b) in the case of a founder of the company, the date that is 12 months following
the date that such founder ceases to provide services to the Company and our subsidiaries as an executive officer, employee or director
of the Company, and, in the case of any other holder, immediately at the occurrence of any such event, and (c) in the case of a founder
of the Company or any other holder, at least 80% (subject to customary capitalization adjustments) of the Class B common stock held
by such founder (on a fully as converted/as exercised basis) as of immediately following the closing of the Business Combination having
been transferred (subject to exceptions for certain permitted transfers).
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Liquidation
In the event of our voluntary or involuntary liquidation,
dissolution, distribution of assets or winding-up, subject to preferences that may apply to any shares of preferred stock outstanding
at the time, the holders of the Company’s common stock will be entitled to receive an equal amount per share of all of our assets
of whatever kind available for distribution to stockholders, after the rights of the holders of any preferred stock have been satisfied.
Note 10 - Stock-Based Compensation
2021 Stock Plan
In August 2021, we adopted the 2021 Equity
Incentive Plan (“2021 Plan”), which was approved by the stockholders of the Company in September 2021 and became effective
immediately upon the closing of the Business Combination. The 2021 Plan provides for the grant of incentive and non-statutory stock options,
stock appreciation rights, restricted stock awards, restricted stock units, performance awards, and other awards to employees, directors,
and non-employees. Initially, the aggregate number of shares of Class A common stock that may be issued under the plan will not exceed
7,453,588 shares. In addition, the number of shares of Class A common stock reserved for issuance under the 2021 Plan will automatically
increase on January 1st of each year, starting on January 1, 2022 and ending on December 31, 2030, in an amount equal to
the lesser of (1) 2.0% of the total number of shares of Class A common stock outstanding on December 31 of the preceding
year, or (2) a lesser number of Class A common stock determined by the board of directors prior to the date of the increase.
The maximum number of Class A common stock that may be issued on the exercise of incentive stock options under the 2021 Plan is 22,360,764
shares.
2019 Stock Plan
Stock Options
In January 2021, we granted 1,277,622 incentive
and non-statutory stock options under Legacy Archer’s 2019 Equity Incentive Plan (the “2019 Plan”). Following the Business
Combination, we assumed the outstanding stock options under the 2019 Plan and converted such stock options into options to purchase our
common stock. Such stock options will continue to be governed by the terms of the 2019 Plan and the stock option agreements thereunder,
until such outstanding options are exercised or until they terminate or expire. The 2019 Plan terminated in connection with the Business
Combination, and no further awards will be made under the 2019 Plan.
A summary of our employee stock option activity
is as follows (in millions, except share and per share data):
​
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of January 1, 2021
|
|
|
11,240,403
|
|
|
$
|
0.11
|
|
|
|
9.61
|
|
|
$
|
137.9
|
|
Granted
|
|
|
1,211,885
|
|
|
|
0.15
|
|
|
|
​
|
|
|
|
​
|
|
Exercised
|
|
|
(3,261,086
|
)
|
|
|
0.12
|
|
|
|
​
|
|
|
|
34.7
|
|
Expired/forfeited
|
|
|
(19,074
|
)
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2021
|
|
|
9,172,128
|
|
|
|
0.12
|
|
|
|
8.90
|
|
|
|
80.4
|
|
Exercisable as of September 30, 2021
|
|
|
306,665
|
|
|
|
0.05
|
|
|
|
8.47
|
|
|
|
2.7
|
|
Vested and expected to vest as of September 30, 2021
|
|
|
9,172,128
|
|
|
|
0.12
|
|
|
|
8.90
|
|
|
|
80.4
|
|
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
A summary of our non-employee stock option activity
is as follows (in millions, except share and per share data):
​
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of January 1, 2021
|
|
|
1,396,696
|
|
|
$
|
0.15
|
|
|
|
9.84
|
|
|
$
|
17.1
|
|
Granted
|
|
|
65,737
|
|
|
|
0.15
|
|
|
|
​
|
|
|
|
​
|
|
Exercised
|
|
|
(337,997
|
)
|
|
|
0.15
|
|
|
|
​
|
|
|
|
4.4
|
|
Outstanding as of September 30, 2021
|
|
|
1,124,436
|
|
|
|
0.15
|
|
|
|
9.10
|
|
|
|
9.8
|
|
Exercisable as of September 30, 2021
|
|
|
54,691
|
|
|
|
0.15
|
|
|
|
9.16
|
|
|
|
0.5
|
|
Vested and expected to vest as of September 30, 2021
|
|
|
1,124,436
|
|
|
|
0.15
|
|
|
|
9.10
|
|
|
|
9.8
|
|
Determination of Fair Value
The assumptions used in the Black-Scholes option
pricing model are provided in the following table.
​
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Risk-free interest rate:
|
|
|
​
|
|
|
|
​
|
|
Employee stock options
|
|
|
0.62
|
%
|
|
|
0.52 — 1.52
|
%
|
Non-employee stock options
|
|
|
1.08
|
%
|
|
|
0.79
|
%
|
Expected term (in years):
|
|
|
​
|
|
|
|
​
|
|
Employee stock options
|
|
|
6.32
|
|
|
|
6.02 — 6.32
|
|
Non-employee stock options
|
|
|
10.00
|
|
|
|
10.00
|
|
Expected volatility:
|
|
|
​
|
|
|
|
​
|
|
Employee stock options
|
|
|
87.94
|
%
|
|
|
60.00 — 70.00
|
%
|
Non-employee stock options
|
|
|
88.03
|
%
|
|
|
60.00
|
%
|
Dividend yield:
|
|
|
​
|
|
|
|
​
|
|
Employee stock options
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Non-employee stock options
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Grant date fair value per share:
|
|
|
​
|
|
|
|
​
|
|
Employee stock options
|
|
$
|
13.65
|
|
|
|
$0.02 — $0.08
|
|
Non-employee stock options
|
|
$
|
13.68
|
|
|
$
|
0.10
|
|
We recognized stock-based compensation expense
of $0.9 million and $0.1 million for employee and non-employees, respectively, for stock options for the three months ended September 30,
2021. For the nine months ended September 30, 2021, we recognized stock-based compensation expense of $2.6 million and $0.3 million
for employees and non-employees, respectively. For the three and nine months ended September 30, 2020, we recognized an immaterial
amount of stock-based compensation expense related to stock options for employees.
As of September 30, 2021, the total remaining
stock-based compensation expense for unvested stock options was $14.5 million and $0.7 million for employees and non-employees, respectively,
which are expected to be recognized over a weighted-average period of 1.5 years and 1 year for employees and non-employees, respectively.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Restricted Stock
Immediately prior to closing of the Business Combination,
each of our founders was granted 20,009,224 restricted stock units under the 2019 Stock Plan pursuant to the terms and conditions of the
Business Combination Agreement. Considering each of the founder’s existing equity ownership and assuming the Founder Grants fully
vest, it would result in each of the founders owning approximately 18% of all outstanding shares of the Total Outstanding Capitalization
of the Company (as defined in the Business Combination Agreement). One-quarter of each Founder Grant vests upon the achievement of the
earlier to occur of (i) a price-based milestone or (ii) a performance-based milestone, with a different set of such price and
performance-based milestones applying to each quarter of each Founder Grant and so long as the achievement occurs within seven years following
the closing of the Business Combination.
We account for the Founder Grants as four separate
tranches, with each tranche consisting of two award grants, a performance award grant and market award grant. Each tranche vests when
either the market condition or performance condition is satisfied (only one condition is satisfied). We determined the fair value of the
performance award by utilizing the trading price on the Closing Date. When the applicable performance milestone is deemed probable of
being achieved, we will recognize compensation expense for the portion earned to date over the requisite period. For the market award,
we determined both the fair value and derived service period using a Monte Carlo simulation model on the Closing Date. The Company will
recognize compensation expense for the market award on a straight-line basis over the derived service period. If the applicable performance
condition is not probable of being achieved, compensation cost for the value of the award incorporating the market condition is recognized,
so long as the requisite service is provided. If the performance milestone becomes probable of being achieved, the full fair value of
the award will be recognized, and any remaining expense for the market award will be canceled.
The following assumptions were used to estimate
the fair value, using the Monte Carlo simulation, of the market award grant:
​
|
|
September 30, 2021
|
|
Stock price
|
|
$
|
9.92
|
|
Term (in years)
|
|
|
7
|
|
Volatility
|
|
|
55.00
|
%
|
Risk-free interest rate
|
|
|
1.13
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
As of September 30, 2021, one-quarter of
each Founder Grant, totaling 5,002,306 shares each of Class B common stock, has vested. Accordingly, the Company recorded expense
of $101.7 million in general and administrative expenses in the statements of operations and comprehensive loss.
A summary of our restricted stock activity is
as follows:
​
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Price
|
|
Outstanding as of January 1, 2021
|
|
|
570,722
|
|
|
$
|
0.04
|
|
Granted
|
|
|
40,018,448
|
|
|
|
7.28
|
|
Vested
|
|
|
(10,575,334
|
)
|
|
|
9.39
|
|
Outstanding as of September 30, 2021
|
|
|
30,013,836
|
|
|
|
6.39
|
|
For the three and nine months ended September 30,
2021, the Company recognized stock-based compensation expense of $101.7 million related to restricted stock units granted to the
Company’s founders, as discussed above. For the nine months ended September 30, 2021 and three and nine months ended September 30,
2020, the Company recognized an immaterial amount of stock-based compensation expense related to restricted stock awards for non-employees.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
As of September 30, 2021, the total remaining
stock-based compensation expense for unvested restricted stock was $295.2 million, which is expected to be recognized over a weighted-average
period of 3 years.
The Company records stock-based compensation expense
for stock-based compensation awards based on the fair value on the date of grant. The stock-based compensation expense is recognized ratably
over the course of the requisite service period.
The Company has elected to account for forfeitures
as they occur and will record stock-based compensation expense assuming all stockholders will complete the requisite service period. If
an employee forfeits an award because they fail to complete the requisite service period, the Company will reverse stock-based compensation
expense previously recognized in the period the award is forfeited.
The following table presents stock-based compensation
expense included in each respective expense category in the statements of operations and other comprehensive loss (in millions):
​
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
​
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Research and development
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
2.2
|
|
|
$
|
—
|
|
General and administrative
|
|
|
102.0
|
|
|
|
—
|
|
|
|
102.5
|
|
|
|
—
|
|
Total stock-based compensation expense
|
|
$
|
102.8
|
|
|
$
|
—
|
|
|
$
|
104.7
|
|
|
$
|
—
|
|
Employee Stock Purchase Plan
In August 2021, we adopted the 2021 Employee
Stock Purchase Plan (the “ESPP”), which became effective immediately upon the closing of the Business Combination. The ESPP
permits eligible employees to purchase shares of Class A common stock at a price equal to 85% of the lower of the fair market value
of Class A shares on the first day of an offering or on the date of purchase. The maximum number of shares of Class A common
stock that may be issued under the ESPP will not exceed 4,969,059 shares. Additionally, the number of shares of Class A common stock
reserved for issuance under the ESPP will automatically increase on January 1st of each year, beginning on January 1, 2022 and
continuing through and including January 1, 2031, by the lesser of (i) 1.0% of the total number of shares of Class A common
stock outstanding on December 31st of the preceding calendar year; (ii) 9,938,118 shares of Class A common stock; or (iii) such
lesser number of shares of the Company as determined by the board of directors.
Collaboration and Warrant Agreements
United Airlines
On January 29, 2021, the Company entered
into a Purchase Agreement, Collaboration Agreement, and a Warrant agreement with United Airlines Inc. (“United”). Under the
terms of the Purchase Agreement, United has a conditional purchase order for up to 200 of our aircraft, with an option to purchase an
additional 100 aircraft. Those purchases are conditioned upon us meeting certain conditions that include, but are not limited to, the
certification of our aircraft by the Federal Aviation Administration (“FAA”) and further negotiation and reaching of mutual
agreement on certain material terms related to the purchases. We issued 14,741,764 warrants to United to purchase shares of the Company’s
common stock. Each warrant provides United with the right to purchase one share of our Class A common stock at an exercise price
of $0.01 per share. The warrants vest in four equal installments in accordance with the following milestones: the execution of the Purchase
and Collaboration Agreements, completion of the Business Combination, the certification of the aircraft by the FAA, and the initial sale
of aircraft to United.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
On January 29, 2021, a valuation of the Company’s
common stock was performed, valuing the Company’s common stock at $13.35 per share. The value of the common stock was determined
using a hybrid approach of the OPM and PWERM, with the PWERM weighted at 80% primarily based on management’s expectation of the
planned merger as described in Note 1 and the OPM weighted at 20% due to uncertainties in the timing of other possible scenarios. The
Company used the OPM to allocate value in a stay private scenario. Given the $0.01 exercise price, each warrant also had a fair value
of $13.35 at the grant date.
The Company determined that as a result of the
relationship established by signing the Purchase Agreement, United is a customer with the intention of obtaining the output of the Company’s
ordinary activities (design and production of aircraft). United has not contracted to share in the risks and benefits of development of
the aircraft, and United is not otherwise involved in the development of the aircraft. As a result, the Company accounts for the Purchase
and Collaboration Agreements under ASC 606, Revenue from Contracts with Customers. The Company identified the sale of each aircraft
ordered by United as a separate performance obligation in the contract. As the performance obligations have not been satisfied, the Company
has not recognized any revenue as of September 30, 2021.
With respect to the four warrant vesting milestones
outlined above, the Company accounts for them as consideration payable to a customer under ASC 606 related to the future purchase of aircraft
by United. Pursuant to ASC 718, the Company measured the grant date fair value of the warrants to be recognized upon the achievement of
each of the four milestones and the vesting of the related warrants. The Company determined that the warrants will be classified as equity
awards based on the criteria of ASC 480 and ASC 718.
Pursuant to ASC 606, consideration payable to
the customer is generally accounted for as a reduction to revenue and recorded at the later of when (i) the entity recognizes revenue
for the transfer of related goods, or (ii) the entity pays the consideration. Due to the nature of the four warrant vesting milestones,
and the Company’s unique circumstances upon the actual or anticipated vesting dates as described below, the recognition pattern
and cost presentation of each will differ. For the first milestone, issuance of the warrant in conjunction with the execution of the Purchase
and Collaboration Agreements, the Company has recorded the grant date fair value of the respective warrant tranche at the vesting date
upon satisfaction of the milestone. The Company does not believe that the consideration payable for the first milestone was provided in
exchange for a distinct good or service. Rather, the consideration was to induce United to commit to a contingent purchase agreement for
an aircraft from the Company. The related costs for this milestone were recorded in other warrant expense in the statements of operations
and comprehensive loss due to the absence of historical or probable future revenue. For the second milestone, the completion of the Business
Combination transaction, the related costs were also recorded in other warrant expense in the statements of operations and comprehensive
loss due to the absence of historical or probable future revenue. For the third warrant vesting milestone, the certification of the aircraft
by the FAA, the Company will assess whether it is probable that the award will vest at the end of every reporting period. If and when
the award is deemed probable of vesting, the Company will begin capitalizing the grant date fair value of the associated warrant as an
asset through the vesting date and subsequently amortize the asset as a reduction to revenue as it sells the new aircraft to United. For
the fourth milestone, the sale of aircraft to United, the Company will record the cost associated with the vesting of each portion of
warrants within this milestone as a reduction of the transaction price as revenue is recognized for each sale of the aircraft. As of September 30,
2021, the first and second vesting milestones had been achieved. Accordingly, the Company recorded the associated expense of $39.1 million
and $117.3 million for the three and nine months ended September 30, 2021, respectively, related to 8,845,058 warrants that vested.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
FCA US LLC
On November 6, 2020, we entered into a Collaboration
Agreement with FCA US LLC (“FCA”), in which both parties agreed to work together to complete a series of fixed duration collaboration
projects related to our ongoing efforts to design, develop, and bring up production capabilities for our aircraft. In exchange for services
to be provided by FCA under the Collaboration Agreement, we issued a warrant to FCA on November 6, 2020, in which FCA has the right
to purchase up to 1,671,202 shares of our Class A common stock at an exercise price of $0.01 per share (subject to appropriate adjustment
in the event of a stock dividend, stock split, combination, or other similar recapitalization). In September 2020, a valuation of
the Company’s common and preferred stock was performed, valuing our common stock and Series A Preferred Stock at $0.15 and
$1.20 per share, respectively. The warrant expires on November 6, 2025. Shares under the warrant vest based on the completion of
specific aircraft development milestones identified under the Collaboration Agreement which are expected to be achieved on a rolling basis
through December 2022.
As the Company is currently in pre-revenue stage
and is not generating any revenue from the collaboration agreement, all costs incurred with third parties are recorded based on the nature
of the cost incurred. The Company accounts for the warrant in accordance with the provisions of ASC 718. The Company will assess whether
it is probable that the award will vest for each of the seven milestones at the end of every reporting period. If and when the award is
deemed probable of vesting, the Company will recognize compensation expense for the portion of the grant determined probable of vesting
on a straight-line basis over the duration of each milestone. If services had been provided by FCA prior to management determining the
milestone is probable of being achieved, a cumulative catch-up adjustment will be recorded for services performed in prior periods. Costs
incurred under the Collaboration Agreement and warrant are associated with the design, development, and bring up of production for our
aircraft and are recorded in R&D expense in the statements of operations and comprehensive loss. During the three and nine months
ended September 30, 2021, the Company recorded $0.1 million of expense related to the completion of four milestones, amounting to
986,010 shares that have vested.
FCA Italy S.p.A.
On July 19, 2021, we entered into a Manufacturing
Consulting Agreement with an affiliate of FCA, FCA Italy S.p.A. (“FCA Italy”), in which both parties agreed to work together
to complete a series of fixed duration projects to develop manufacturing and production processes in connection with our ongoing efforts
to bring up production capabilities for our aircraft. In conjunction with the Manufacturing Consulting Agreement, we issued a warrant
to FCA Italy, in which FCA Italy has the right to purchase up to 1,077,024 shares of our Class A common stock at an exercise price
of $0.01 per share. In August 2021, a valuation of the warrant was performed, valuing it at $8.98 per share. The shares underlying
the warrant vest in two equal installments in accordance with two time-based milestones.
The Company accounts for the warrant in accordance
with ASC 718. The Company recognized compensation cost for half of the shares that were fully vested upon execution of the Manufacturing
Consulting Agreement. The Company will recognize compensation cost for the remaining half of the warrant as the related services are received
from FCA Italy on a straight-line basis over the service period of 12 months. During the three months ended September 30, 2021, the
Company recorded $5.6 million of expense in R&D expense in the statements of operations and comprehensive loss related to the
warrants that vested.
Note 11 - Income Taxes
We recognized zero and an immaterial amount of
income tax expense for the three and nine months ended September 30, 2021, respectively, resulting in an effective tax rate of 0%.
The Company did not recognize an income tax benefit/(expense) during the three and nine months ended September 30, 2020. The effective
tax rate is different from the federal statutory tax rate primarily due to a full valuation allowance against deferred tax assets.
In assessing the realizability of deferred tax
assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those
temporary differences become deductible. Based upon the analysis of federal and state deferred tax balances, future tax projections, and
the Company’s lack of taxable income in the carryback period, the Company recorded a full valuation allowance against the federal
and state deferred tax assets as of September 30, 2021 and 2020.
Archer Aviation Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 12 - 401(k) Savings Plan
We maintain a 401(k) savings plan for the
benefit of our employees. We make matching contributions equal to 50% of each employee contribution, subject to the maximum amount established
by the Internal Revenue Service. All current employees are eligible to participate in the 401(k) savings plan. Our matching contributions
were approximately $0.2 million and $0.5 million for the three and nine months ended September 30, 2021, respectively, and $0.1 million
and $0.2 million for the three and nine months ended September 30, 2020, respectively.
Note 13 - Liability Classified Warrants
As of September 30,
2021, there were 17,398,947 public warrants outstanding. Public warrants may only be exercised for a whole number of shares. No
fractional shares are issued upon exercise of the public warrants. The public warrants became exercisable on October 30, 2021, 12
months after the closing of the initial public offering of Atlas. The public warrants will expire five years from the consummation of
the Business Combination or earlier upon redemption or liquidation.
Once the public warrants become exercisable, the
Company may redeem the public warrants for redemption:
|
•
|
in whole and not in part;
|
|
•
|
at a price of $0.01 per public warrant;
|
|
•
|
upon not less than 30 days’ prior written notice of redemption
to each warrant holder; and
|
|
•
|
if, and only if, the closing price of the Class A common
stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like)
for any 20 trading days within a 30-trading day period commencing after the warrants become exercisable and ending three business days
before the Company sends the notice of redemption to the warrant holders.
|
If and when the warrants become redeemable by
the Company, the Company may exercise its redemption right even if the Company is unable to register or qualify the underlying securities
for sale under all applicable state securities laws.
Each public warrant entitles the registered holder
to purchase one share of Class A common stock at a price of $11.50 per share. The exercise price and number of Class A common
stock issuable upon exercise of the public warrants may be adjusted in certain circumstances including in the event of a share dividend,
extraordinary dividend or recapitalization, reorganization, merger or consolidation. The public warrants will not be adjusted for issuances
of Class A common stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle
the public warrants.
As of September 30, 2021, there were 8,000,000
private placement warrants outstanding. The private placement warrants are identical to the public warrants underlying the shares sold
in the initial public offering of Atlas, except that the private placement warrants and the shares of Class A common stock issuable
upon the exercise of the private placement warrants will not be transferable, assignable or salable until 30 days after the completion
of the Business Combination, subject to certain limited exceptions. Additionally, the private placement warrants will be exercisable on
a cashless basis and will be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the
private placement warrants are held by someone other than the initial purchasers or their permitted transferees, the private placement
warrants will be redeemable by the Company and exercisable by such holders on the same basis as the public warrants.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Quarterly Report on Form 10-Q includes
forward-looking statements. These forward-looking statements are based on our current expectations and beliefs concerning future developments
and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated.
See the section titled “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q. Our
actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences
include, but are not limited to, those set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on
Form 10-Q and the section titled “Risk Factors” in the Company’s prospectus filed with the Securities and Exchange
Commission (the “SEC”) pursuant to Rule 424(b)(3) under the Securities Act of 1933, as amended (the “Securities
Act”), on October 26, 2021 (the “Prospectus”). The following discussion should be read in conjunction with our
financial statements and related notes thereto included elsewhere in this report and the audited financial statements as of and for the
year ended December 31, 2020 set forth in the Prospectus.
Overview
We are a former blank check company incorporated
on August 26, 2020 under the name Atlas Crest Investment Corp. (“Atlas”) as a Delaware corporation and formed for the
purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination
with one or more businesses.
Business Combination
On September 16, 2021 (the “Closing
Date”), Archer Aviation Inc., a Delaware corporation (prior to the closing of the Business Combination, “Legacy Archer”),
Atlas, and Artemis Acquisition Sub Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Atlas (“Merger Sub”),
consummated the closing of the transactions contemplated by the Business Combination Agreement, dated February 10, 2021, as amended
and restated on July 29, 2021, by and among Atlas, Legacy Archer and Merger Sub (the “Business Combination Agreement”),
following approval at a special meeting of the stockholders of Atlas held on September 14, 2021 (the “Special Meeting”).
Unless otherwise specified or unless the context otherwise requires, references herein Legacy Archer refers to Archer prior to the Business
Combination and references herein to “New Archer” refers to Archer following the Business Combination.
Pursuant to the terms of the Business Combination
Agreement, a business combination of Legacy Archer and Atlas was effected by the merger of Merger Sub with and into Legacy Archer, with
Legacy Archer surviving the merger (the “Surviving Entity”) as a wholly-owned subsidiary of Atlas (the “Merger,”
and, collectively with the other transactions described in the Business Combination Agreement, the “Business Combination”).
Following the consummation of the Merger on the Closing Date, the Surviving Entity changed its name from Archer Aviation Inc. to Archer
Aviation Operating Corp., and Atlas changed its name from Atlas Crest Investment Corp. to Archer Aviation Inc. and it became the successor
registrant with the SEC. Prior to the closing of the Business Combination, the Class A common stock and public warrants of Atlas
were listed on the New York Stock Exchange (“NYSE”) under the symbols “ACIC” and “ACIC WS,” respectively.
New Archer Class A common stock and public warrants are currently listed on the NYSE under the symbols “ACHR” and “ACHR
WS,” respectively.
Additionally, certain investors had agreed to
subscribe for and purchase an aggregate of up to $600.0 million of common stock of the combined company (“PIPE Financing”).
The PIPE Financing was consummated substantially concurrent with the closing of the Merger.
The Business Combination generated gross cash
proceeds of $857.6 million, including $600.0 million proceeds from the PIPE Financing. Total direct and incremental transaction
costs aggregated $81.8 million, of which $10.9 million were expensed as part of the Business Combination, $55.8 million
were recorded to APIC as equity issuance costs, and the remaining $15.1 million was settled through the issuance of shares of New
Archer Class A shares.
Our Business
Our mission is to advance the benefits of sustainable
air mobility. Our goal is to move people throughout the world’s cities in a quick, safe, sustainable, and cost-effective manner.
To accomplish this goal, we are designing and developing an electric vertical takeoff and landing (“eVTOL”) aircraft for use
in future urban air mobility (“UAM”) networks.
Our eVTOL aircraft will be fully electric and
will emit zero emissions during operations. The goal of our eVTOL aircraft design is to maximize safety while minimizing operating costs
and noise. We look to accomplish that goal through the use of a distributed electric propulsion system with inherent redundancy and far
fewer parts than a typical internal combustion propulsion system found in similarly sized aircraft or rotorcraft today. The reduced number
of parts not only translates into fewer critical parts on the aircraft from a safety perspective, but will also significantly reduce the
maintenance requirements versus internal combustion propulsion systems found in similarly sized aircraft and rotorcraft today.
We have optimized our eVTOL aircraft design for
both manufacturing and certification by using advancements in key enabling technologies such as high-energy batteries, high-performance
electric motors, an advanced fly-by-wire flight control system, and a lightweight and efficient aircraft structure.
The development of an eVTOL aircraft that meets
our business requirements demands significant design and development efforts on all facets of the aircraft. We believe that by bringing
together a mix of talent with both eVTOL and traditional commercial aerospace backgrounds we are building a team that will allow us to
move through the design, development, and certification of our eVTOL aircraft with the Federal Aviation Administration (“FAA”)
in an efficient manner, thus allowing us to achieve our end goal of bringing to market our eVTOL aircraft.
Our Planned Lines of Business
Upon receipt of all necessary FAA certifications
and any other government approvals necessary for us to manufacture and operate our aircraft, we intend to operate two complementary lines
of business. Our core focus is direct-to-consumer (“Archer UAM”) with our secondary focus being business-to-business (“Archer
Direct”).
Archer UAM
We plan to operate our own UAM ecosystem (“Archer
UAM”) initially in select major U.S. cities, such as Los Angeles and Miami. Our UAM ecosystem will operate using our eVTOL aircraft
which is currently in development. We project that the cost to manufacture and operate our eVTOL aircraft will be such that it will be
able to enter the UAM ride-sharing market at a price point that is competitive with ground-based ride sharing services today. We will
continue to evaluate our go-to-market strategy based on, among other things, estimated demand, readiness of the required infrastructure,
and the scale of our UAM aircraft fleet.
Archer Direct
We also plan to selectively sell a certain amount
of our eVTOL aircraft to third parties (“Archer Direct”). We have entered into a purchase agreement with United Airlines Inc.
(“United”) for the conditional purchase of up to $1 billion worth of aircraft, with an option for another $500 million
worth of aircraft. We will look to determine the right mix of selling our eVTOL aircraft versus using them as part of our UAM ecosystem
based on, among other factors, our capital needs, our volume of manufacturing, our ability to ramp Archer UAM operations, and the purchase
demand from our Archer Direct customers.
To date, we have not generated any revenue from
either of these planned categories, as we continue to design, develop, and seek the governmental approvals necessary to operate our eVTOL
aircraft and Archer UAM. We will use the net proceeds from the Business Combination for the foreseeable future to continue to fund our
efforts to bring our eVTOL aircraft to market. The amount and timing of any future capital requirements will depend on many factors, including
the pace and results of the design and development of our aircraft and manufacturing operations, as well as our progress in obtaining
necessary FAA certifications and other government approvals. For example, any significant delays in obtaining such FAA certifications
and other government approvals will likely require us to raise additional capital above our existing cash on hand and delay our generation
of revenues.
Impact of COVID-19
In March 2020, the World Health Organization
declared the outbreak of COVID-19 a global pandemic. The rapid spread of COVID-19 caused volatility and disruption in financial markets
and prompted governments and businesses to take unprecedented measures such as travel restrictions, quarantines, shelter-in-place orders,
and business shutdowns. The impact of the COVID-19 pandemic continues to evolve due to, among other reasons, the emergence of additional
variants or strains of COVID-19. As such, the full magnitude of the pandemic’s effect on our financial condition, liquidity, and
future results of operations is uncertain. Management continues to actively monitor our financial condition, liquidity, operations, suppliers,
industry, and workforce, but currently does not anticipate any material impairments as a result of COVID-19 and will continue to evaluate
the impact of COVID-19 on an ongoing basis. See Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q
for more information.
Components of Results of Operations
Revenue
We are still working to design, develop, certify,
and bring up manufacturing of our eVTOL aircraft and thus have not generated any revenues from either of our planned lines of business.
We do not expect to begin generating significant revenues until we are able to complete the design, development, certification, and bring
up of manufacturing of our eVTOL aircraft.
Operating Expenses
Research and Development
Research and development activities represent
a significant part of our business. Our research and development efforts focus on the design and development of our eVTOL aircraft, including
certain of the systems that are used in it. As part of those activities, we continue to work closely with the FAA towards our goal of
achieving certification of our eVTOL aircraft on an efficient timeline. Research and development expenses consist of personnel-related
costs (including salaries, bonuses, benefits, and stock-based compensation) for employees focused on research and development activities,
costs associated with building prototype aircraft, other related costs, depreciation, and an allocation of general overhead. We expect
research and development expenses to increase significantly as we progress towards the certification and manufacturing of our eVTOL aircraft.
We cannot determine with certainty the timing,
duration or the costs necessary to complete the design, development, certification, and manufacturing bring up of our eVTOL aircraft due
to the inherently unpredictable nature of our research and development activities. Development timelines, the probability of success,
and development costs may differ materially from expectations.
General and Administrative
General and administrative expenses consist primarily
of personnel-related costs (including salaries, bonuses, benefits, and stock-based compensation) for employees associated with administrative
services such as finance, legal, human resources, information technology, other related costs, and depreciation and an allocation of our
general overhead. We expect our general and administrative expenses to increase in absolute dollars as a result of operating as a publicly-traded
company, including expenses to comply with the rules and regulations applicable to publicly-traded companies, as well as additional
expenses customary for a publicly-traded company, such as directors’ and officers’ liability insurance, director fees, and
additional internal and external accounting and legal fees and expenses.
At this time, we are unable to estimate the costs
of defending the ongoing Wisk Aero LLC (“Wisk”) litigation or any potential settlement or award of damages related thereto
and thus, we have not established any related reserves. For a description of our material pending legal proceedings, see Note 8 - Commitments
and Contingencies of the notes to the consolidated condensed financial statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
Other Warrant Expense
Other warrant expense consists entirely of non-cash
expense related to the vesting of warrants issued in conjunction with the execution of the Purchase and Warrant Agreements with United.
We expect to incur additional expense as these warrants vest upon satisfaction of certain milestones outlined in the applicable agreements.
Other Expense, Net
Other expense, net primarily consists of miscellaneous
income and expense items. Interest expense primarily consists of interest on notes payable
net of interest income from money market accounts.
Results of Operations
The following table sets forth our consolidated
condensed statements of operations for the periods indicated:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
Change $
|
|
|
2021
|
|
|
2020
|
|
|
Change $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development (1)
|
|
$
|
23.1
|
|
|
$
|
6.7
|
|
|
$
|
16.4
|
|
|
$
|
44.6
|
|
|
$
|
13.6
|
|
|
$
|
31.0
|
|
General and administrative (1)
|
|
|
114.1
|
|
|
|
0.6
|
|
|
|
113.5
|
|
|
|
143.1
|
|
|
|
2.3
|
|
|
|
140.8
|
|
Other warrant expense
|
|
|
39.1
|
|
|
|
—
|
|
|
|
39.1
|
|
|
|
117.3
|
|
|
|
—
|
|
|
|
117.3
|
|
Total operating expenses
|
|
|
176.3
|
|
|
|
7.3
|
|
|
|
169.0
|
|
|
|
305.0
|
|
|
|
15.9
|
|
|
|
289.1
|
|
Loss from operations
|
|
|
(176.3
|
)
|
|
|
(7.3
|
)
|
|
|
(169.0
|
)
|
|
|
(305.0
|
)
|
|
|
(15.9
|
)
|
|
|
(289.1
|
)
|
Gain on forgiveness of PPP loan
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.9
|
|
|
|
—
|
|
|
|
0.9
|
|
Other expense, net
|
|
|
(0.4
|
)
|
|
|
—
|
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Loss before income taxes
|
|
|
(176.7
|
)
|
|
|
(7.3
|
)
|
|
|
(169.4
|
)
|
|
|
(304.5
|
)
|
|
|
(16.1
|
)
|
|
|
(288.4
|
)
|
Net loss
|
|
$
|
(176.7
|
)
|
|
$
|
(7.3
|
)
|
|
$
|
(169.4
|
)
|
|
$
|
(304.5
|
)
|
|
$
|
(16.1
|
)
|
|
$
|
(288.4
|
)
|
(1) Includes stock-based compensation expense as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Research and development
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
2.2
|
|
|
$
|
—
|
|
General and administrative
|
|
|
102.0
|
|
|
|
—
|
|
|
|
102.5
|
|
|
|
—
|
|
Total stock-based compensation expense
|
|
$
|
102.8
|
|
|
$
|
—
|
|
|
$
|
104.7
|
|
|
$
|
—
|
|
Comparison of the Three and Nine Months Ended September 30,
2021 and 2020
Research and Development
Research and development expenses increased by
$16.4 million for the three months ended September 30, 2021, compared to the same period ended September 30, 2020. The increase
was primarily due to an increase of $16.4 million in personnel-related expenses and allocated facilities expenses due to significantly
increasing our workforce from the prior period and an increase in stock-based compensation.
Research and development expenses increased by
$31.0 million for the nine months ended September 30, 2021, compared to the same period ended September 30, 2020. The increase
was primarily due to an increase of $23.5 million in personnel-related expenses and allocated facilities expenses due to significantly
increasing our workforce in the first nine months of 2021. The increase was also due to increases of $1.7 million and $5.7 million
pertaining to third-party consultant expenses and tools and materials, respectively, to support our increased research and development
activities.
General and Administrative
General and administrative expenses increased
by $113.5 million for the three months ended September 30, 2021, compared to the same period ended September 30, 2020. This
increase was primarily due to an increase of $104.8 million in personnel-related expenses and allocated facilities costs due to a
significant increase in stock-based compensation, which was primarily related to the vesting of one-quarter of the Founder Grants that
were granted immediately prior to closing pursuant to the terms and conditions of the Business Combination Agreement. In addition, there
was an increase in legal and professional service expenses of $7.7 million pertaining to the Business Combination and company readiness
for going public, as well as legal fees and expenses related to the Wisk litigation, as described in detail in Note 8 - Commitments and
Contingencies of our consolidated condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q.
General and administrative expenses increased
by $140.8 million for the nine months ended September 30, 2021, compared to the same period ended September 30, 2020. This increase
was primarily due to an increase of $108.9 million in personnel-related expenses and allocated facilities costs due to a significant
increase in our workforce and stock-based compensation, which was primarily related to the vesting of one-quarter of the Founder Grants
that were granted immediately prior to closing pursuant to the terms and conditions of the Business Combination Agreement. In addition,
there was an increase in legal fees and expenses and professional service expenses of $26.4 million pertaining to the Business Combination
and company readiness for going public, as well as legal fees and expenses related to the Wisk litigation. There was also an increase
of $5.1 million pertaining to advertising and marketing expenses.
Other Warrant Expense
Other warrant expense increased by $39.1 million
and $117.3 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods ended September 30,
2020. These increases were due to $78.2 million and $39.1 million of non-cash expense recognized in the first and third quarter
of 2021, respectively, related to the vesting of warrants associated with the execution of the Purchase and Warrant Agreements with United,
in satisfaction of specific milestones.
Gain on Forgiveness of PPP Loan
In June 2021, we received notification that
our PPP Loan (as defined below) and accrued interest were forgiven in full, resulting in an increase of $0.9 million in gain on extinguishment
of the loan and interest for the nine months ended September 30, 2021, compared to the same period ended September 30, 2020.
Other Expense, Net
Other expense, net, increased by $0.4 million
and $0.2 million for the three and nine months ended September 30, 2021, respectively, compared to the same periods ended September 30,
2020. The increase in both of these periods primarily was due to increased interest expense related to the Term Loans, which was entered
into in July 2021. See Note 7 - Notes Payable of our consolidated condensed financial statements included elsewhere in this
Quarterly Report on Form 10-Q for additional information.
Liquidity and Capital Resources
As of September 30, 2021, our principal sources
of liquidity were cash and cash equivalents of $796.2 million. We have incurred net losses since our inception and to date have not generated
any revenues. We expect to incur additional losses and higher operating expenses for the foreseeable future.
The Business Combination generated net cash proceeds
of $801.8 million. We expect that the net cash proceeds from the Business Combination along with our cash balances held prior to the closing
date will be sufficient to fund our current operating plan for at least the next 12 months from the date the consolidated condensed financial
statements are available to be issued.
Our future capital requirements will depend on
many factors, including:
|
•
|
the level of research and development expenses we incur as we continue to develop our eVTOL aircraft;
|
|
•
|
capital expenditures needed to bring up our aircraft manufacturing capabilities, including for both the build out of our manufacturing
facilities and component purchases necessary to build our aircraft;
|
|
•
|
capital expenditures needed to support the infrastructure required to launch our UAM network;
|
|
•
|
general and administrative expenses as we scale our operations;
|
|
•
|
interest expense from our debt financing; and
|
|
•
|
sales, marketing and distribution expenses as we build, brand and market our eVTOL aircraft and UAM network.
|
Until such time as we can generate significant
revenue from our business operations, we expect to finance our cash needs primarily through existing cash on hand, public or private equity
or debt financings or other capital sources, including potential collaborations and other similar commercial arrangements. However, we
may be unable to raise additional capital or enter into such other commercial arrangements when needed, on favorable terms or at all.
To the extent that we raise additional capital through equity or convertible debt financings, the ownership interest of our stockholders
could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our
current stockholders. Additionally, these financings may require us to agree to covenants limiting or restricting our ability to take
specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise funds through collaborations
or other similar commercial arrangements with third parties, we may have to relinquish valuable rights which in turn may reduce the value
of our common stock. If we are unable to raise additional capital through equity or debt financings or commercial arrangements when needed,
we may be required to delay, limit, reduce or terminate certain business operations.
Loan and Security Agreement
On July 9, 2021, we entered into a Loan and
Security Agreement, as borrower, with Silicon Valley Bank (“SVB”) and SVB Innovation Credit Fund VIII, L.P. (“SVB Innovation”)
as the lenders, and SVB as the collateral agent. The total principal amount of the loans is $20.0 million (the “Term Loans”),
and all obligations due under the Term Loans are collateralized by all of our rights, title and interest in and to our specified personal
property in favor of the collateral agent. The interest rate on the Term Loans is a floating rate per annum equal to the greater of (1) 8.5%
and (2) the Prime Rate plus the Prime Rate Margin, which increases by 2% per annum upon the occurrence of an event of default. The
proceeds were required to be used solely for the working capital or to fund the Company’s general business purpose. The Term Loans
are subject to a final payment fee ranging between zero and 5.5% of the original aggregate principal amount depending on the timing of
repayment.
Cash Flows
The following table summarizes our cash flows
for the periods indicated:
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Net cash used in operating activities
|
|
$
|
(59.5
|
)
|
|
$
|
(15.2
|
)
|
Net cash used in investing activities
|
|
|
(3.0
|
)
|
|
|
(0.4
|
)
|
Net cash provided by financing activities
|
|
|
822.1
|
|
|
|
46.6
|
|
Cash Flows Used in Operating Activities
We continue to experience negative cash flows
from operations as we are still working to design, develop, certify, and bring up manufacturing of our eVTOL aircraft and thus have not
generated any revenues from either of our planned lines of business. Our cash flows from operating activities are significantly affected
by our cash investments to support the growth of our research and development activities related to our eVTOL aircraft, as well as the
general and administrative functions necessary to support those activities and operations as a publicly traded company. Our operating
cash flows are also impacted by the working capital requirements to support growth and fluctuations in personnel-related expenditures,
accounts payable, accrued interest and other current liabilities, and other current assets.
Net cash used in operating activities during the
nine months ended September 30, 2021 was $59.5 million, resulting from a net loss of
$304.5 million, adjusted for non-cash items consisting primarily of $117.3 million in other
warrant expense related to the vesting of United warrants and $104.7 million in stock-based compensation primarily related to the
vesting of one-quarter of the Founder Grants that were granted immediately prior to closing pursuant to the terms and conditions of the
Business Combination Agreement. The net cash provided by changes in our net operating assets
and liabilities of $16.2 million was primarily related to a $16.9 million increase
in accounts payable related to Wisk litigation costs, parts and materials used in our research and development activities, and
advertising and marketing activities.
Net cash used in operating activities during the
nine months ended September 30, 2020 was $15.2 million, resulting from a net loss of $16.1 million, adjusted for non-cash items consisting
of primarily $0.3 million in non-cash interest primarily related to our convertible notes. The net cash provided by changes in our
net operating assets and liabilities of $0.5 million was primarily related to a $1.4 million increase in accounts payable offset by an
increase of $0.9 million in prepaid expenses. Both increases are related to parts & materials and outside contractors from the
ramp up in our research and development activities.
Cash Flows Used in Investing Activities
Net cash used
in investing activities during the nine months ended September 30, 2021 and 2020 was $3.0 million and $0.4 million, respectively,
driven by purchases of property and equipment within those respective periods.
Cash Flows Provided by Financing Activities
Net cash provided by financing activities during
the nine months ended September 30, 2021 was $822.1 million, consisting primarily of $20.0 million in proceeds from the issuance
of debt, $600.0 million in proceeds from the PIPE Financing, and $201.8 million net proceeds from the Business Combination.
Net cash provided by financing activities during
the nine months ended September 30, 2020 was $46.6 million, consisting primarily of proceeds received from the issuance of preferred
stock, net of issuance costs.
Contractual Obligations and Commitments
The following table summarizes our contractual
obligations and commitments as of September 30, 2021:
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1 to 3
years
|
|
|
3 to 5
years
|
|
|
After 5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Operating lease obligation (1)
|
|
$
|
5.2
|
|
|
$
|
0.6
|
|
|
$
|
4.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note payable (2)
|
|
|
20.0
|
|
|
|
—
|
|
|
|
20.0
|
|
|
|
—
|
|
|
|
—
|
|
Note payable accrued interest
|
|
|
2.4
|
|
|
|
1.6
|
|
|
|
0.8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
27.6
|
|
|
$
|
2.2
|
|
|
$
|
25.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(1)
|
Operating lease obligation is primarily related to the corporate headquarters lease expiring on June 30, 2023. As of September 30,
2021, the Company has entered into six real estate lease agreements.
|
|
(2)
|
Note payable is related to the Term Loans. Refer to Note 7 - Notes Payable of our condensed financial statements included elsewhere
in this Quarterly Report on Form 10-Q.
|
The commitment amounts in the table above are
associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum
services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table
does not include obligations under agreements that we can cancel without a significant penalty.
Paycheck Protection Program
In April 2020, we obtained a loan of approximately
$0.9 million pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act (the “PPP Loan”), with
interest accruing on the PPP Loan at a rate of 0.98% per annum. The Paycheck Protection Program was established as part of the CARES Act
and provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the business, subject
to certain limitations. The loan and accrued interest are forgivable after 24 weeks so long as the borrower uses the loan proceeds for
eligible purposes, including payroll, benefits, rent, and utilities. We applied for loan forgiveness under the CARES Act and received
forgiveness of the loan and accrued interest in full from the Small Business Administration in June 2021.
Off-Balance Sheet Arrangements
As of September 30, 2021, we did not have
any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our consolidated condensed financial statements
and accompanying notes have been prepared in accordance with GAAP. The preparation of these consolidated condensed financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and expenses, and related disclosures.
We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.
We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there
are material differences between these estimates and our actual results, our future financial statements will be affected.
For additional information about our critical
accounting policies and estimates, see the disclosure included elsewhere in this Form 10-Q as well as Note 3 - Summary of Significant
Accounting Policies in the notes to the consolidated condensed financial statements included elsewhere in this Form 10-Q.
Recent Accounting Pronouncements
See Note 3 - Summary of Significant Accounting
Policies to the consolidated condensed financial statements included elsewhere in this Form 10-Q for a discussion about accounting
pronouncements recently adopted and recently issued not yet adopted.
Credit Risk
Financial instruments, which subjects us to concentrations
of credit risk, consist primarily of cash, cash equivalents, and deposits. Our cash and cash equivalents are held at major financial institutions
located in the United States of America. At times, cash account balances with any one financial institution may exceed Federal Deposit
Insurance Corporation insurance limits ($250 thousand per depositor per institution). Management believes the financial institutions that
hold our cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to cash and cash equivalents.
Emerging Growth Company Status
Section 107(b) of the Jumpstart Our
Business Startups Act of 2012 (“JOBS Act”) provides that an emerging growth company can take advantage of an extended transition
period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. Atlas initially elected, and now we have elected, to take
advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure
requirements available to emerging growth companies. As a result of the accounting standards election, we are not subject to the same
implementation timeline for new or revised accounting standards as other public companies that are not emerging growth companies which
may make comparison of our financials to those of other public companies more difficult.
We have also elected to take advantage of some
of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as we qualify as an
emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of
the Sarbanes-Oxley Act and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden
parachute payments.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary
course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial
market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates.
Interest Rate Risk
At September 30, 2021, we had a $20.0 million
balance outstanding under our Term Loans, which bears interest at a floating rate, as described in Note 7 - Notes Payable of our consolidated
condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q. If interest rates rise, our debt service
obligations under the Term Loans would increase even if the amount borrowed remained the same, which would affect our results of operations.
We have not used any derivative financial instruments to manage our interest rate risk exposure. At September 30, 2021, a hypothetical
100 basis point increase in the interest rates would have had an immaterial impact on interest expense under our Term Loans.
Item 4. Controls and Procedures
Limitations on Effectiveness of Controls and
Procedures
In designing and evaluating our disclosure controls
and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the
fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls
and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our
co-Chief Executive Offices and Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act) as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 of the Exchange Act, as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation and as a result of the material weaknesses
described below, our co-Chief Executive Officers and Chief Financial Officer concluded that, as of September 30, 2021, our disclosure
controls and procedures were not effective at the reasonable assurance level.
In light of the material
weaknesses in our internal control over financial reporting, we performed additional analysis and other procedures to validate that our
financial information contained in this Form 10-Q was prepared in accordance with U.S. GAAP. Following such additional analysis and
procedures, our management, including our co-Chief Executive Officers and Chief Financial Officer, has concluded that our consolidated
condensed financial statements state fairly, in all material respects, our financial position, results of our operations and our cash
flows for the periods presented in this Quarterly Report on Form 10-Q, in conformity, in all material respects, with U.S. GAAP.
Material Weaknesses in Internal Control over
Financial Reporting
A
material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected
or prevented on a timely basis.
In
connection with the preparation and audit of our financial statements for 2020, we identified certain control deficiencies in the design
and operation of our internal control over financial reporting that constituted material weaknesses. The material weaknesses are:
|
▪
|
We did not design and maintain an effective control environment commensurate with our financial reporting
requirements. We lack a sufficient number of trained professionals with (i) an appropriate level of accounting knowledge, training
and experience to appropriately analyze, record and disclose accounting matters timely and accurately, and (ii) an appropriate level
of knowledge and experience to establish effective processes and controls. Additionally, the limited personnel also resulted in an inability
to consistently establish appropriate authorities and responsibilities in pursuit of financial reporting objectives, as demonstrated by,
among other things, insufficient segregation of duties in our finance and accounting functions.
|
The
material weakness in the control environment contributed to the following additional material weaknesses:
|
▪
|
We did not design and maintain an effective risk assessment process
at a precise enough level to identify new and evolving risks of material misstatement in our financial statements. Specifically, changes
to existing controls or the implementation of new controls have not been sufficient to respond to changes to the risks of material misstatement
to financial reporting.
|
|
▪
|
We did not design and maintain formal accounting policies, procedures
and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over the preparation
and review of business performance reviews, account reconciliations and journal entries.
|
|
▪
|
We did not design and maintain effective controls over information
technology (“IT”) general controls for information systems that are relevant to the preparation of our financial statements.
Specifically, we did not design and maintain:
|
|
•
|
user access controls to ensure appropriate segregation of duties
and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate company personnel;
|
|
•
|
program change management controls to ensure that IT program and
data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized, and implemented
appropriately; and
|
|
•
|
computer operations controls to ensure that data backups are authorized
and monitored.
|
These material weaknesses resulted in immaterial
audit adjustments to the research and development expense and property and equipment line items in Archer’s financial statements
and related disclosures for the years ended December 31, 2020 and 2019, and a revision to Archer’s condensed financial statements
for the period ended March 31, 2021 to reclassify certain costs within operating expenses from research and development expense to
other warrant expense. Additionally, each of these material weaknesses could result in a misstatement of substantially all of Archer’s
accounts or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented
or detected.
Remediation Measures
We are in the early stages
of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404(a) of
Sarbanes-Oxley Act and we are taking steps to remediate the material weaknesses. Management, with the participation of the Audit Committee
and the Board of Directors, is engaged in remedial activities to address the material weaknesses described above. Those remediation measures
are ongoing and include the following:
|
▪
|
We have hired and plan to continue to hire accounting and IT personnel. During 2021, we hired a Chief
Financial Officer, Chief Information Officer, operational accountants, and an accounts payable team to bolster our accounting and IT capabilities
and capacity, and to establish and maintain our internal controls;
|
|
▪
|
We designed and continue to implement controls to formalize roles and review responsibilities to align
with our team’s skills and experience and designing and implementing formal controls over segregation of duties;
|
|
▪
|
We have engaged third party professionals to assist management in designing and implementing a formal
risk assessment process to identify and evaluate changes in our business and the impact on our internal controls;
|
|
▪
|
We are implementing formal processes, policies, and procedures supporting
our financial close process, including completion of business performance reviews and creation of standard balance sheet reconciliation
templates and journal entry controls; and
|
|
▪
|
We continue to design and implement IT general controls, including controls over the review and updating of user access rights and
privileges and implementing more robust IT policies and procedures over change management, data backup authorization and computer operations.
|
We believe we are making progress toward achieving
the effectiveness of our internal control over financial reporting and disclosure controls and procedures. The actions that we are taking
are subject to ongoing senior management review, as well as Audit Committee oversight. We will not be able to conclude whether the steps
we are taking will fully remediate these material weaknesses in our internal control over financial reporting until we have completed
our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required
to remediate the material weaknesses in our internal control over financial reporting, which may necessitate additional implementation
and evaluation time. We will continue to assess the effectiveness of our internal control over financial reporting and take steps to remediate
the known material weaknesses expeditiously.
Changes in Internal Control Over Financial
Reporting
We are taking actions to remediate the material
weaknesses relating to our internal control over financial reporting. Except as otherwise described above, there were no changes in our
internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 1A. Risk Factors
Investing in our securities involves risks.
You should consider carefully the risks and uncertainties described below, together with all of the other information in this Quarterly
Report, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and our unaudited consolidated condensed financial statements and related notes, before deciding whether to purchase any of our securities.
Our business, results of operations, financial condition, and prospects could also be harmed by risks and uncertainties that are not presently
known to us or that we currently believe are not material. If any of these risks actually occur, our business, results of operations,
financial condition, and prospects could be materially and adversely affected. Unless otherwise indicated, references in these risk factors
to our business being harmed will include harm to our business, reputation, brand, financial condition, results of operations, and prospects.
In such event, the market price of our securities could decline, and you could lose all or part of your investment.
Risks Related to Our Business and Industry
We are an early-stage company with a history of losses, and expects
to incur significant expenses and continuing losses for the foreseeable future.
As of September 30, 2021, we have incurred
a year-to-date net loss of $304.5 million and have incurred a net loss of approximately $330.3 million since inception through September 30,
2021. We believe that we will continue to incur operating and net losses each quarter until at least the time we begin generating significant
revenues from our planned lines of business, which is not expected to occur until late 2024 or 2025 and may occur later or not at all.
Even if we are able to successfully launch our Archer UAM or Archer Direct lines of business, there can be no assurance that such lines
of business will be financially successful. Our potential profitability is dependent upon the successful development and successful commercial
introduction and acceptance of our aircraft, which may not occur.
We expect the rate at which we will incur losses
to be significantly higher in future periods as we:
|
•
|
continue to design, develop, manufacture and market our aircraft;
|
|
•
|
continue to design and develop the Archer UAM network;
|
|
•
|
continue to utilize our third-party partners for design, supply and manufacturing;
|
|
•
|
expand our production capabilities, including costs associated with outsourcing the manufacturing of our aircraft;
|
|
•
|
build up inventories of parts and components for our aircraft;
|
|
•
|
manufacture an inventory of our aircraft;
|
|
•
|
expand our design, development and servicing capabilities;
|
|
•
|
increase our sales and marketing activities and develop our distribution infrastructure;
|
|
•
|
work with third party partners to develop pilot training programs; and
|
|
•
|
increase our general and administrative functions to support our growing operations and to operate as a public company.
|
Because we will incur the costs and expenses from
these efforts before we receive any incremental revenues with respect thereto, our losses in future periods will be significant. In addition,
we may find that these efforts are more expensive than we currently anticipate or that these efforts may not result in the revenues we
expect, which could further increase our losses.
We are still developing our fully operational demonstrator eVTOL
aircraft, has not yet obtained FAA certification of our production eVTOL aircraft under development and we have yet to manufacture or
deliver any aircraft to customers, which makes evaluating our business and future prospects difficult and increases the risk of investment.
We were incorporated in October 2018 and
have a limited operating history in designing, developing, and working to certify an eVTOL aircraft. Our eVTOL aircraft is in the development
stage and we do not expect our first production vehicle to be produced until 2024, 2025 or later. We are still working to obtain FAA type
certification of our eVTOL aircraft (including the G-2 and G-3 issue paper milestones, which, among other things, establish the applicable
airworthiness and environmental regulations, special conditions, and procedural requirements that must be met to achieve FAA type certification).
Our current eVTOL demonstrator aircraft (the Maker aircraft) has not yet flown and is not scheduled to conduct its first test flight until
later this year. As a result, we have no experience as an organization in high volume manufacturing of aircraft. Some of our current and
potential competitors are larger and have substantially greater resources than we have and expect to have in the future. As a result,
those competitors may be able to devote greater resources to the development of their current and future technologies, the promotion and
sale of their offerings, and/or offer their technologies at lower prices. In particular, our competitors may be able to receive Type,
Airworthiness or Production certification from the FAA covering their eVTOL aircraft prior to us receiving such certificates. Our current
and potential competitors may also establish cooperative or strategic relationships amongst themselves or with third parties that may
further enhance their resources and offerings. Further, it is possible that domestic or foreign companies or governments, some with greater
experience in the aerospace industry or greater financial resources than we possess, will seek to provide products or services that compete
directly or indirectly with ours in the future. Any such foreign competitor, for example, could benefit from subsidies from, or other
protective measures by, its home country.
We cannot assure you that we or our partners will
be able to develop efficient, automated, cost-efficient manufacturing capability and processes, and reliable sources of component supplies
that will enable us to meet the quality, price, engineering, design and production standards, as well as the production volumes, required
to successfully commercialize our aircraft. You should consider our business and prospects in light of the risks and significant challenges
we face as a new entrant into a new industry, including, among other things, with respect to our ability to:
|
•
|
design and produce safe, reliable and quality aircraft on an ongoing basis;
|
|
•
|
obtain the necessary regulatory approvals in a timely manner, including receipt of FAA certifications covering our aircraft and, in
turn, any other government approvals necessary for marketing, selling and operating the Archer UAM service;
|
|
•
|
build a well-recognized and respected brand;
|
|
•
|
establish and expand our customer base;
|
|
•
|
successfully market not just our aircraft but also the other services we intend to provide, such as aerial ride sharing services;
|
|
•
|
successfully service our aircraft after sales and maintain a good flow of spare parts and customer goodwill;
|
|
•
|
improve and maintain our operational efficiency;
|
|
•
|
successfully execute our manufacturing and production model and maintain a reliable, secure, high-performance and scalable technology
infrastructure;
|
|
•
|
predict our future revenues and appropriately budget for our expenses;
|
|
•
|
attract, retain and motivate talented employees;
|
|
•
|
anticipate trends that may emerge and affect our business;
|
|
•
|
anticipate and adapt to changing market conditions, including technological developments and changes in competitive landscape; and
|
|
•
|
navigate an evolving and complex regulatory environment.
|
If we fail to adequately address any or all of
these risks and challenges, our business may be harmed.
Our Purchase Agreement with United is conditional and is currently
the only order for our aircraft. If the order conditions are not met, or if this order is otherwise cancelled, modified or delayed, our
prospects, results of operations, liquidity and cash flow will be harmed.
Our Purchase Agreement with United is conditional
and is currently the only order for our aircraft. Those conditions include, among other things, us receiving certification of our aircraft
by the FAA and further negotiation and reaching mutual agreement on certain material terms, such as aircraft specifications, warranties,
usage and transfer of the aircraft, performance guarantees, delivery periods, most favored nation provisions, the type and extent of assistance
to be provided by United in obtaining certification of the aircraft for its intended use, territorial restrictions, rights to jointly
developed intellectual property, escalation adjustments and other matters. The obligations of United to consummate the order will arise
only after all of such material terms are agreed by the parties. Further, and in addition to other termination rights set forth in the
Purchase Agreement and the Collaboration Agreement, if the parties do not agree on such material terms, either party will have the right
to terminate the agreements if such party determines in its discretion that it is not likely that such material terms will be agreed in
a manner that is consistent with such party’s business and operational interests (as those interests may change from time to time).
If this order is cancelled, modified or delayed, or otherwise not consummated, our prospects, results of operations, liquidity and cash
flow will be affected.
Our business plan requires a significant amount of capital. In
addition, our future capital needs may require us to sell additional equity or debt securities that may dilute our stockholders or introduce
covenants that may restrict our operations or our ability to pay dividends.
We expect our capital expenditures and operating
expenses to continue to be significant in the foreseeable future as we develop our aircraft and business, and that our level of capital
expenditures and operating expenses will be significantly affected by the aircraft development and certification process as well as subsequent
customer demand for our aircraft. We believe our current cash balances will be sufficient to fund our current operating plan for at least
the next 12 months. However, we expect that in the coming years we will need to make significant investments in our business, including
development of our aircraft, bring up of manufacturing capabilities, the infrastructure to support Archer UAM, and investments in our
brand. In addition, over the next few years we expect to continue to incur ongoing expenses related to the Wisk litigation, which are
difficult to predict. These investments and expenses may be greater than currently anticipated or there may be investments or expenses
that are unforeseen, and we may not succeed in acquiring sufficient capital to offset these higher expenses and achieve significant revenue
generation. We have a limited operating history and no historical data on the demand for our planned Archer UAM and Archer Direct businesses.
As a result, our future capital requirements are difficult to predict and our actual capital requirements may be different from those
we currently anticipate. We may need to seek equity or debt financing to finance a portion of our future capital requirements. Such financing
might not be available to us when needed or on terms that are acceptable.
Our ability to obtain the necessary financing
to carry out our business plan is subject to a number of factors, including general market conditions and investor acceptance of our planned
business model. These factors may make the timing, amount, terms and conditions of such financing unattractive or unavailable to us. If
we are unable to raise sufficient capital, we may have to significantly reduce our spending and/or delay or cancel our planned activities.
We might not be able to obtain any financing, and we might not have sufficient capital to conduct our business as projected, both of which
could mean that we would be forced to curtail or discontinue our operations.
In addition, our future capital needs and other
business needs or plans could require us to sell additional equity or convertible debt securities or obtain a credit facility. The sale
of additional equity or convertible debt securities could dilute our stockholders. The incurrence of indebtedness would also result in
increased debt service obligations and could result in operating and financing covenants that restrict our operations or our ability to
pay dividends to our stockholders.
If we cannot raise additional capital when we
need or want to, our operations and prospects could be negatively affected.
Our future success depends on the continuing efforts of our key
employees and on our ability to attract and retain highly skilled personnel and senior management.
Our future success depends, in part, on our ability
to continue to attract and retain highly skilled personnel. In particular, we are highly dependent on the contributions of our co-founders,
Brett Adcock and Adam Goldstein, as well as other members of our management team. The loss of any key personnel could make it more difficult
to achieve on our business plans. Although we have generally entered into employment offer letters with our key personnel, these agreements
have no specific duration and provide for at-will employment, which means our key personnel may terminate their employment relationship
with us at any time.
Competition for highly skilled personnel is often
intense, especially in the San Francisco Bay Area where we are located, and we may incur significant costs to attract them. We may not
be successful in attracting, integrating, or retaining qualified personnel to fulfill our current or future needs. We have, from time
to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate
qualifications. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection
with their employment. If the perceived value of our equity or equity awards declines, it may adversely affect our ability to retain highly
skilled employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business, operating results,
financial condition and future growth prospects could be harmed.
We have identified certain material weaknesses in our internal
control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses
in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report
our financial condition or results of operations, which may adversely affect our business and stock price.
In connection with the preparation and audit of
our financial statements for the year ended December 31, 2020, certain material weaknesses were identified in our internal control
over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting
such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. The material weaknesses identified are as follows:
|
•
|
We did not design and maintain an effective control environment commensurate with our financial reporting requirements. We lacked
a sufficient number of trained professionals with (i) an appropriate level of accounting knowledge, training and experience to appropriately
analyze, record and disclose accounting matters timely and accurately, and (ii) an appropriate level of knowledge and experience
to establish effective processes and controls. Additionally, the limited personnel resulted in an inability to consistently establish
appropriate authorities and responsibilities in pursuit of financial reporting objectives, as demonstrated by, among other things, insufficient
segregation of duties in our finance and accounting functions. This material weakness in the control environment contributed to the other
material weaknesses discussed below.
|
|
•
|
We did not design and maintain an effective risk assessment process at a precise enough level to identify new and evolving risks of
material misstatement in our financial statements. Specifically, changes to existing controls or the implementation of new controls have
not been sufficient to respond to changes to the risks of material misstatement to financial reporting.
|
|
•
|
We did not design and maintain formal accounting policies, procedures and controls to achieve complete, accurate and timely financial
accounting, reporting and disclosures, including controls over the preparation and review of business performance reviews, account reconciliations
and journal entries.
|
|
•
|
We did not design and maintain effective controls over information technology (“IT”) general controls for information
systems that are relevant to the preparation of our financial statements. Specifically, we did not design and maintain:
|
|
•
|
user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial
applications, programs, and data to appropriate company personnel;
|
|
•
|
program change management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting
records are identified, tested, authorized, and implemented appropriately; and
|
|
•
|
computer operations controls to ensure that data backups are authorized and monitored.
|
These material weaknesses resulted in immaterial
audit adjustments to the research and development expense and property and equipment line items in our financial statements and related
disclosures for the years ended December 31, 2020 and 2019, and a revision to our consolidated condensed financial statements for
the period ended March 31, 2021 to reclassify certain costs within operating expenses from research and development expense to other
warrant expense. Additionally, each of these material weaknesses could result in a misstatement of substantially all of our accounts or
disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or
detected.
We have begun our work to remediate these material
weaknesses. Those remediation measures are ongoing and include the following:
|
•
|
Hiring additional finance, accounting, and IT personnel during 2021, including a new chief financial officer, chief information officer
and other finance, accounting, and IT personnel to bolster our finance, accounting, and IT capabilities and capacity, and to establish
and maintain our internal controls;
|
|
•
|
Designing and implementing controls to formalize roles and review responsibilities to align with our team’s skills and experience
and designing and implementing formal controls over segregation of duties;
|
|
•
|
Designing and implementing a formal risk assessment process to identify and evaluate changes in our business and the impact on our
internal controls;
|
|
•
|
Designing and implementing formal processes, policies and procedures supporting our financial close process, including completion
of business performance reviews and creation of standard balance sheet reconciliation templates and journal entry controls; and
|
|
•
|
Designing and implementing IT general controls, including controls over the review and update of user access rights and privileges,
change management processes and procedures, and data backup authorization and monitoring.
|
While we believe these efforts will remediate
the material weaknesses, we may not be able to complete our evaluation, testing or any necessary remediations in a timely fashion, or
at all. We cannot assure you that the measures we have taken to date and may take in the future, will be sufficient to remediate the control
deficiencies that led to our material weaknesses in internal control over financial reporting or that they will prevent or avoid potential
future material weaknesses. The effectiveness of our internal control over financial reporting is subject to various inherent limitations,
including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human
error and the risk of fraud. Any failure to design or maintain effective internal controls over financial reporting or any difficulties
encountered in their implementation or improvement could increase compliance costs, negatively impact share trading prices, or otherwise
harm our operating results or cause us to fail to meet our reporting obligations.
If we experience harm to our reputation and brand, our business,
financial condition and results of operations could be adversely affected.
Continuing to increase the strength of our reputation
and brand for achieving our business plans is critical to our ability to attract and retain employees, customers, and other business partners.
In addition, our growth strategy may include expansion through joint ventures, minority investments or other partnerships with strategic
business partners, which may include event activations and cross-marketing with other established brands, all of which may be dependent
on our ability to build our reputation and brand recognition. The successful development of our reputation and brand will depend on a
number of factors, many of which are outside our control. Negative perception of our platform or company may harm our reputation and brand,
including as a result of:
|
•
|
complaints or negative publicity or reviews about our aircraft or service offerings from either our Archer UAM or Archer Direct customers
or negative publicity reviews about other brands or events we are associates with, even if factually incorrect or based on isolated incidents;
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changes to our operations, safety and security, privacy or other policies that users or others perceive as overly restrictive, unclear
or inconsistent with our values;
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illegal, negligent, reckless or otherwise inappropriate behavior by our management team or other employees, our Archer Direct customers,
our Archer UAM customers or our other business partners;
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actual or perceived disruptions or defects in our aircraft or aerial ride sharing platform, such as data security incidents, platform
outages, payment processing disruptions or other incidents that impact the availability, reliability or security of our offerings;
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litigation over, or investigations by regulators into, our aircraft or our operations or those of our Archer Direct customers or other
business partners;
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a failure to operate our business in a way that is consistent with our values;
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negative responses by our Archer Direct or Archer UAM customers to urban air mobility offerings;
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perception of our treatment of employees, contractors, Archer Direct or Archer UAM customers or our other business partners and our
response to their sentiment related to political or social causes or actions of management; or
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any of the foregoing with respect to our competitors, to the extent such resulting negative perception affects the public’s
perception of us or our industry as a whole.
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In addition, changes we may make to enhance and
improve our offerings and balance the needs and interests of our Archer Direct and Archer UAM customers may be viewed positively from
one group’s perspective (such as our Archer UAM customers) but negatively from another’s perspective (such as third-party
companies that purchase and operate our aircraft), or may not be viewed positively by either our Archer Direct or Archer UAM customers.
If we fail to balance the interests of these two different customer bases or make changes that they view negatively, our customers may
stop purchasing our aircraft or stop using our Archer UAM service or take fewer flights, any of which could adversely affect our reputation,
brand, business, financial condition and results of operations.
The markets for our offerings are still in development, and if
such markets do not materialize, or grow more slowly than we expect or fail to grow as large as we expect, our business, financial condition
and results of operations could be harmed.
The markets for eVTOL aircraft are still in development,
and our success in these markets is dependent upon our ability to effectively design, develop, and certify eVTOL aircraft market and gain
traction of air urban air mobility as a substitute for existing methods of transportation and the effectiveness of our other marketing
and growth strategies. If the public does not perceive urban air mobility as beneficial, or chooses not to adopt urban air mobility as
a result of concerns regarding safety, affordability or for other reasons, then the market for our offerings may not materialize, may
develop more slowly than we expect or may not achieve the growth potential we expect, any of which could harm our business, financial
condition and results of operations.
Growth of our business will require significant
investments in our infrastructure, technology, and marketing and sales efforts. If our business does not have sufficient capital required
to support these investments, our results of operations will be negatively affected. Further, our ability to effectively manage growth
and expansion of our operations will also require us to enhance our operational systems, internal controls and infrastructure, human resources
policies and reporting systems. These enhancements will require significant capital expenditures and allocation of valuable management
and employee resources.
The eVTOL aircraft industry may not continue to develop, eVTOL
aircraft may not be adopted by the market, eVTOL aircraft may not be certified by government authorities or eVTOL aircraft may not be
an attractive alternative to existing modes of transportation, any of which could adversely affect our prospects, business, financial
condition and results of operations.
eVTOL aircraft involve a complex set of technologies,
which we must continue to further develop and rely on our Archer Direct and Archer UAM customers to adopt. However, before eVTOL aircraft
can fly passengers, we must receive requisite certifications and approvals from governmental authorities. There are currently no eVTOL
aircraft certified by the FAA for commercial operations in the United States, and there is no assurance that our design, development and
certification efforts will result in our receiving FAA certification of our aircraft. In order to achieve FAA certification, the performance,
reliability and safety of eVTOL aircraft must be proven, none of which can be assured. In particular, there is a risk that we will not
obtain one or more certifications from the FAA that are required for ultimate commercial use of our aircraft, or will experience delays
in receiving one or more of these certifications. Even if our eVTOL aircraft receive Type certification, Production certification, and
Airworthiness certification, eVTOL aircraft operators must conform eVTOL aircraft to their operational licenses, which requires FAA approval,
and individual pilots also must be licensed and approved by the FAA to fly eVTOL aircraft, which could contribute to delays in any widespread
use of eVTOL aircraft and potentially limit the number of eVTOL aircraft operators available to purchase aircraft from or partner with
us.
Additional challenges to the adoption of our eVTOL
aircraft and UAM network, all of which are outside of our control, include:
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market acceptance of eVTOL aircraft;
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state, federal or municipal regulatory and licensing requirements for our eVTOL aircraft and UAM network operations;
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necessary changes to existing infrastructure to enable adoption, including installation of necessary charging and other equipment;
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public perception regarding the safety of eVTOL aircraft.
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There are a number of existing laws, regulations
and standards that may apply to eVTOL aircraft, including standards that were not originally intended to apply to electric aircraft. The
promulgation of additional federal, state, and local laws and regulations that address eVTOL aircraft more specifically could delay our
ability to commercially launch our eVTOL aircraft and UAM network. In addition, there can be no assurance that the market will accept
eVTOL aircraft, that we will be able to execute on our business strategy, or that our offerings utilizing eVTOL aircraft will obtain the
necessary government approvals or be successful in the market. There may be heightened public skepticism of this nascent technology and
its adopters. In particular, there could be negative public perception surrounding eVTOL aircraft, including the overall safety and the
potential for injuries or death occurring as a result of accidents involving eVTOL aircraft, regardless of whether any such safety incidents
occur involving us. Any of the foregoing risks and challenges could adversely affect our prospects, business, financial condition and
results of operations.
We may be unable to manage our future growth effectively, which
could make it difficult to execute our business strategy.
If our business grows as planned, of which there
can be no assurance, we will need to expand our sales, marketing, operations, and the number of partners with whom we do business. Our
continued growth could increase the strain on our resources, and we could experience operating difficulties, including difficulties in
hiring, training and managing an increasing number of employees. These difficulties may result in the erosion of our brand image, divert
the attention of management and key employees and impact financial and operational results. The continued expansion of our business may
also require additional office space for administrative support. If we are unable to drive commensurate growth, these costs, which include
lease commitments, marketing costs and headcount, could result in decreased margins, which could have an adverse effect on our business,
financial condition and results of operations.
Operation of aircraft involves a degree of inherent risk. We
could suffer losses and adverse publicity stemming from any accident involving small aircraft, helicopters or charter flights and in particular
from any accident involving eVTOL aircraft.
The operation of aircraft is subject to various
risks, and demand for air transportation, including our urban air mobility offerings, has and may in the future be impacted by accidents
or other safety issues regardless of whether such accidents or issues involve our eVTOL aircraft or third-party eVTOL aircraft. Air transportation
hazards, such as adverse weather conditions and fire and mechanical failures, may result in death or injury to personnel and passengers
and which could impact client or passenger confidence in a particular aircraft type or the air transportation services industry as a whole
and could lead to a reduction in passenger volume, particularly if such accidents or disasters were due to a safety fault. Safety statistics
for air travel are reported by multiple parties, including the Department of Transportation (“DOT”) and National Transportation
Safety Board, and are often separated into categories of transportation. Because our urban air mobility offerings may include a variety
of transportation methods, fliers may have a hard time determining how safe urban air mobility services are and their confidence in urban
air mobility may be impacted by, among other things, the classification of accidents in ways that reflect poorly on urban air mobility
services or the transportation methods urban air mobility services utilize.
We believe that safety and reliability are two
of the primary attributes fliers consider when selecting air transportation services. Our failure to maintain standards of safety and
reliability that are satisfactory to fliers may adversely impact our ability to attract and retain customers. We are at risk of adverse
publicity stemming from any public incident involving us, our people or our brand. Such an incident could involve the actual or alleged
behavior of our employees, contractors, or partners. Further, if our eVTOL aircraft, whether operated by us or a third party, is involved
in a public incident, accident, catastrophe or regulatory enforcement action, we could be exposed to significant reputational harm and
potential legal liability. The insurance we carry may be inapplicable or inadequate to cover any such incident, accident, catastrophe
or action. In the event that our insurance is inapplicable or inadequate, we may be forced to bear substantial losses from an incident
or accident. In addition, any such incident, accident, catastrophe or action involving our eVTOL aircraft or eVTOL aircraft generally
could create an adverse public perception, which could harm our reputation, result in air travelers being reluctant to use our services,
and adversely impact our business, results of operations and financial condition. If us or one of our third-party aircraft operators were
to suffer an accident or lose the ability to fly certain aircraft due to safety concerns or investigations, us or such operators may be
required to cancel or delay certain flights until replacement aircraft and personnel are obtained.
Our operations may also be negatively impacted
by accidents or other safety-related events or investigations that occur in or near the airports and vertiports we plan to utilize for
our urban air mobility services. For example, if an accident were to occur at a vertiport we rely on for certain flights in the future
(assuming we are granted government operating authority to do so), we may be unable to fly into or out of that vertiport until the accident
has been cleared, any damage to the facilities have been repaired and any insurance, regulatory or other investigations have been completed.
Additionally, the battery packs in our aircraft
are expected to use lithium-ion cells. On rare occasions, lithium-ion cells can rapidly release the energy they contain by venting smoke
and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. While we have taken measures to enhance the
safety of our battery designs, a field or testing failure of our aircraft could occur in the future, which could subject us to lawsuits,
product recalls, or redesign efforts, all of which would be time-consuming and expensive. Also, negative public perceptions regarding
the suitability of lithium-ion cells for aerospace applications or any future incident involving lithium-ion cells such as an aircraft
or other fire, even if such incident does not involve our aircraft, could seriously harm our business.
From time to time we are expected to store varying
amounts of lithium-ion cells at our facilities. In addition, our manufacturing partners and suppliers are expected to store a significant
number of lithium-ion cells at their facilities. Any mishandling of battery cells may cause disruption to the operation of our facilities
or our manufacturers. A safety issue or fire related to the cells could disrupt operations or cause manufacturing delays. Such damage
or injury could lead to adverse publicity and potentially a safety recall. Moreover, any failure of a competitor’s eVTOL aircraft
or energy storage product may cause indirect adverse publicity for us and our aircraft. Such adverse publicity could negatively affect
our brand and harm our business, prospects, financial condition and operating results.
Our business may be adversely affected by labor and union activities.
Although none of our employees are currently represented
by a labor union, it is common throughout the aerospace industry generally for many employees at aerospace companies to belong to a union,
which can result in higher employee costs and increased risk of work stoppages. We may also directly and indirectly depend upon other
companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized
by such unions could harm our business, financial condition or operating results.
We expect that our Purchase Agreement with United and that future
purchase agreements with other customers will be subject to indexed price escalation clauses which could subject us to losses if we have
cost overruns or if increases in our costs exceed the applicable escalation rate.
Commercial aircraft sales contracts are often
entered into years before the aircraft are delivered. In order to help account for economic fluctuations between the contract date and
delivery date, aircraft pricing generally consists of a fixed amount as modified by price escalation formulas derived from labor, commodity
and other price indices. Our revenue estimates are based on current expectations with respect to these escalation formulas, but the actual
escalation amounts are outside of our control. Escalation factors can fluctuate significantly from period to period and changes in escalation
amounts can significantly impact revenues and operating margins in our business. We can make no assurance that any customer, current or
future, will exercise purchase options, fulfill existing purchase commitments or purchase additional products or services from us. The
terms and conditions of the Purchase Agreement with United regarding price escalation clauses are yet to be determined, and there is no
assurance that they will be determined in a manner that will mitigate the risks described above.
We currently rely and will continue to rely on third-party partners
to provide and store the parts and components required to manufacture our aircraft, and to supply critical components and systems, which
exposes us to a number of risks and uncertainties outside our control.
We are substantially reliant on our relationships
with our suppliers and service providers for the parts and components in our aircraft. If any of these suppliers or service partners were
to experience delays, disruptions, capacity constraints or quality control problems in our manufacturing operations, or if they choose
to not do business with us, we would have significant difficulty in procuring and producing our aircraft, and our business prospects would
be significantly harmed. These disruptions would negatively impact our revenues, competitive position and reputation. In addition, our
suppliers or service partners may rely on certain state tax incentives that may be subject to change or elimination in the future, which
could result in additional costs and delays in production if a new manufacturing site must be obtained. Further, if we are unable to successfully
manage our relationship with our suppliers or service partners, the quality and availability of our aircraft may be harmed. Our suppliers
or service partners could, under some circumstances, decline to accept new purchase orders from or otherwise reduce their business with
us. If our suppliers or service partners stopped manufacturing our aircraft components for any reason or reduced manufacturing capacity,
we may be unable to replace the lost manufacturing capacity on a timely and comparatively cost-effective basis, which would adversely
impact our operations.
The manufacturing facilities of our suppliers
or service partners and the equipment used to manufacture the components for our aircraft would be costly to replace and could require
substantial lead time to replace and qualify for use. The manufacturing facilities of our suppliers or service partners may be harmed
or rendered inoperable by natural or man-made disasters, including earthquakes, flooding, fire and power outages, or by public health
issues, such as the ongoing COVID-19 pandemic, which may render it difficult or impossible for us to manufacture our aircraft for some
period of time. The inability to manufacture our aircraft components or the backlog that could develop if the manufacturing facilities
of our suppliers or service partners are inoperable for even a short period of time may result in the loss of customers or harm our reputation.
We do not control our suppliers or service partners
or such parties’ labor and other legal compliance practices, including their environmental, health and safety practices. If our
current suppliers or service partners, or any other suppliers or service partners which we may use in the future, violates U.S. or foreign
laws or regulations, we may be subjected to extra duties, significant monetary penalties, adverse publicity, the seizure and forfeiture
of products that we are attempting to import or the loss of our import privileges. The effects of these factors could render the conduct
of our business in a particular country undesirable or impractical and have a negative impact on our operating results.
We have been, and may in the future be, adversely affected by
health epidemics and pandemics, including the ongoing global COVID-19 pandemic, the duration and economic, governmental and social impact
of which is difficult to predict, which may significantly harm our business, prospects, financial condition and operating results.
We face various risks related to public health
issues, including epidemics, pandemics and other outbreaks, including the ongoing COVID-19 pandemic. The impact of COVID-19, including
changes in consumer and business behavior, pandemic fears and market downturns, supply shortages and restrictions on business and individual
activities, has created significant volatility in the global economy. The spread of COVID-19 has also created a disruption in the manufacturing,
delivery and overall supply chain of aircraft manufacturers and suppliers, and has led to a global decrease in aircraft sales and usage
in markets around the world. The duration and long-term impact of COVID-19 on our business is currently unknown.
The pandemic has resulted in government authorities
implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, stay-at-home or shelter-in-place
orders, and business shutdowns. These measures may adversely impact our employees and operations and the operations of our suppliers,
vendors and business partners, and may negatively impact our sales and marketing activities and the production schedule of our aircraft.
In addition, various aspects of our business cannot be conducted remotely, including the testing and manufacturing of our aircraft. These
measures by government authorities may remain in place for a significant period of time and they are likely to continue to adversely affect
our testing, manufacturing and building plans, sales and marketing activities, business and results of operations.
The spread of COVID-19 has caused us and many
of our contractors and service providers to modify their business practices (including employee travel, recommending that all non-essential
personnel work from home and cancellation or reduction of physical participation in meetings, events and conferences), and we and our
contractors and service providers may be required to take further actions as may be required by government authorities or that we determine
are in the best interests of our employees, customers, suppliers, vendors and business partners. There is no certainty that such actions
will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities. If significant portions
of our workforce or contractors and service providers are unable to work effectively, including due to illness, quarantines, social distancing,
government actions or other restrictions in connection with the COVID-19 pandemic, our operations will be impacted.
The extent to which the COVID-19 pandemic impacts
our business, prospects and results of operations will depend on future developments, which are highly uncertain and cannot be predicted,
including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact
and how quickly and to what extent normal economic and operating activities can resume. The COVID-19 pandemic could limit the ability
of our customers, suppliers, vendors and business partners to perform, including third-party suppliers’ ability to provide components
and materials used in our aircraft. We may also experience an increase in the cost of raw materials used in our commercial production
of our aircraft. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result
of COVID-19’s global economic impact, including ongoing supply chain shortages.
There are no comparable recent events which may
provide guidance as to the effect of the COVID-19 pandemic, and, as a result, the ultimate impact of the COVID-19 pandemic or other health
pandemics or epidemics is highly uncertain and subject to change. We do not yet know the full extent of COVID-19’s impact on our
business, operations, or the global economy as a whole. However, the effects could have a material impact on our results of operations,
and we will continue to monitor the situation closely.
Our long-term success and ability to significantly grow our revenue
will depend, in part, on our ability to establish and expand into international markets and/or expand market segments.
Our future results will depend, in part, on our
ability to establish and expand our presence within international markets and may also depend on our expansion into additional market
segments, such as defense or logistics/cargo. Our ability to expand into these markets will depend upon our ability to obtain the necessary
international governmental certifications and regulatory approvals, adapt to international markets and new market segments, understand
the local customer base, and address any unique local technological requirements. Our ability to expand internationally involves various
risks, including, but not limited to, the need to invest significant resources in such expansion, and the possibility that returns on
such investments will not be achieved in the near future or at all in these less familiar competitive environments. We may also choose
to conduct our international business through joint ventures, minority investments or other partnerships with local companies as well
as co-marketing with other established brands. If we are unable to identify partners or negotiate favorable terms, our international growth
may be limited. In addition, we may incur significant expenses in advance of generating material revenue as we attempt to establish our
presence in particular international markets or market segments outside of aircraft sales and operating a UAM network to carry passengers.
We are subject to cybersecurity risks to our operational systems,
security systems, infrastructure, integrated software in our aircraft and customer data processed by us or third-party vendors.
We are at risk for interruptions, outages and
breaches of our: (a) operational systems, including business, financial, accounting, product development, data processing or production
processes, owned by us or our third-party vendors or suppliers; (b) facility security systems, owned by us or our third-party vendors
or suppliers; (c) aircraft technology including powertrain and avionics and flight control software, owned by us or our third-party
vendors or suppliers; (d) the integrated software in our aircraft; or (e) customer data that we process or our third-party vendors
or suppliers process on our behalf. Such incidents could: disrupt our operational systems; result in loss of intellectual property, trade
secrets or other proprietary or competitively sensitive information; compromise certain information of customers, employees, suppliers,
or others; jeopardize the security of our facilities; or affect the performance of in-product technology and the integrated software in
our aircraft.
We plan to include avionics and flight control
software services and functionality that utilize data connectivity to monitor aircraft performance and to enhance safety and enable cost-saving
preventative maintenance. The availability and effectiveness of our services depend on the continued operation of information technology
and communications systems. Our systems will be vulnerable to damage or interruption from, among others, physical theft, fire, terrorist
attacks, natural disasters, power loss, war, telecommunications failures, viruses, worms, trojan horses, denial or degradation of service
attacks, ransomware, social engineering schemes, insider theft or misuse or other attempts to harm our systems. We intend to use our avionics
and flight control software and functionality to log information about each aircraft’s use in order to aid us in aircraft diagnostics
and servicing. Our customers may object to the use of this data, which may increase our vehicle maintenance costs and harm our business
prospects.
Moreover, there are inherent risks associated
with developing, improving, expanding and updating our current systems, such as the disruption of our data management, procurement, production
execution, finance, supply chain and sales and service processes. These risks may affect our ability to manage our data and inventory,
procure parts or supplies or manufacture, deploy, deliver and service our aircraft, adequately protect our intellectual property or achieve
and maintain compliance with, or realize available benefits under, applicable laws, regulations and contracts. We cannot be sure that
these systems upon which we rely, including those of our third-party vendors or suppliers, will be effectively implemented, maintained
or expanded as planned. If we do not successfully implement, maintain or expand these systems as planned, our operations may be disrupted
and our ability to accurately and timely report our financial results could be impaired. Moreover, our proprietary information or intellectual
property could be compromised or misappropriated, and our reputation may be adversely affected. If these systems do not operate as we
expect them to, we may be required to expend significant resources to make corrections or find alternative sources for performing these
functions.
Failure to comply with federal, state and foreign laws and regulations
relating to privacy, data protection and consumer protection, or the expansion of current laws and regulations or the enactment of new
laws or regulations in these areas, could adversely affect our business and our financial condition.
We are subject to or affected by a number of federal,
state and local laws and regulations, as well as contractual obligations and industry standards, that impose certain obligations and restrictions
with respect to data privacy and security, and govern our collection, storage, retention, protection, use, processing, transmission, sharing
and disclosure of personal information including that of our employees, customers and others. Most jurisdictions have enacted laws requiring
companies to notify individuals, regulatory authorities and others of security breaches involving certain types of data. Such laws may
be inconsistent or may change or additional laws may be adopted. In addition, our agreements with certain customers may require us to
notify them in the event of a security breach. Such mandatory disclosures are costly, could lead to negative publicity, result in penalties
or fines, result in litigation, may cause our customers to lose confidence in the effectiveness of our security measures and require us
to expend significant capital and other resources to respond to and/or alleviate problems caused by the actual or perceived security breach.
The global data protection landscape is rapidly
evolving, and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. We may not
be able to monitor and react to all developments in a timely manner. For example, California adopted the California Consumer Privacy Act
(the ‘‘CCPA’’), which became effective in January 2020. The CCPA establishes a privacy framework for covered
businesses, including an expansive definition of personal information and data privacy rights for California residents. The CCPA includes
a framework with potentially severe statutory damages and private rights of action. The CCPA requires covered businesses to provide new
disclosures to California residents, provide them new ways to opt-out of certain disclosures of personal information, and allow for a
new cause of action for data breaches. As we expand our operations, the CCPA may increase our compliance costs and potential liability.
Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States.
Other states have begun to propose similar laws. Compliance with any applicable privacy and data security laws and regulations is a rigorous
and time-intensive process, and we may be required to put in place additional mechanisms to comply with such laws and regulations.
In addition, we are or may become subject to a
variety of foreign laws and regulations regarding privacy, data protection, and data security. These laws and regulations are continuously
evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting,
particularly with respect to foreign laws. Such laws and regulations often have changes in scope, may be subject to differing interpretations,
and may be inconsistent among different jurisdictions. For example, the European General Data Protection Regulation (“GDPR”),
which became effective in May 2018, includes operational requirements for companies that receive or process personal data of residents
of the European Union that are broader and more stringent than those previously in place in the European Union. The GDPR includes significant
penalties for non-compliance, including fines of up to €20 million or 4% of total worldwide revenue.
Additionally, we may be subject
to evolving laws and regulations regarding the transfer of personal data outside of the European Economic Area, or EEA. Recently, the
Court of Justice of the European Union ruled that the EU-U.S. Privacy Shield is an invalid transfer mechanism, but upheld Standard Contractual
Clauses as a valid transfer mechanism. The validity of data transfer mechanisms remains subject to legal, regulatory, and political developments
in both Europe and the United States The invalidation of the EU-U.S. Privacy Shield and potential invalidation of other data transfer
mechanisms could have a significant adverse impact on our ability to process and transfer personal data outside of the EEA.
Governments are continuing
to focus on privacy and data security, and it is possible that new privacy or data security laws will be enacted or existing laws will
be amended in a way that is material to our business. Any significant change to applicable laws, regulations, or industry practices regarding
our users’ data could require us to modify our services and features, possibly in a material manner, and may limit our ability to
develop new products, services, and features. Although we have made efforts to design our policies, procedures, and systems to comply
with the current requirements of applicable state, federal, and foreign laws, changes to applicable laws and regulations in this area
could subject us to additional regulation and oversight, any of which could significantly increase our operating costs.
We publish privacy policies and other documentation
regarding our collection, processing, use and disclosure of personal information and/or other confidential information. Although we endeavor
to comply with our published policies and other documentation, we may at times fail to do so or may be perceived to have failed to do
so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees, contractors, service providers or
vendors fail to comply with our published policies and documentation. Such failures can subject us to potential local, state and federal
action if we are found to be deceptive, unfair, or misrepresentative of our actual practices. Claims that we have violated individuals’
privacy rights or failed to comply with data protection laws or applicable privacy notices even if we are not found liable, could be expensive
and time-consuming to defend and could result in adverse publicity that could harm our business.
We are subject to risks associated with climate change, including
the potential increased impacts of severe weather events on our operations and infrastructure.
The potential physical effects of climate change,
such as increased frequency and severity of storms, floods, fires, fog, mist, freezing conditions, sea-level rise and other climate-related
events, could affect our operations, infrastructure and financial results. Certain of the locations where our terminal facilities are
expected to initially be located in connection with our aerial ride sharing operations are susceptible to the impacts of storm-related
flooding and sea-level rise, which could result in costs and loss of revenue. we could incur significant costs to improve the climate
resiliency of our infrastructure and otherwise prepare for, respond to, and mitigate such physical effects of climate change. We are not
able to accurately predict the materiality of any potential losses or costs associated with the physical effects of climate change.
We intend to retain certain personal information about our customers,
employees or others that, if compromised, could harm our financial performance and results of operations or prospects.
We are subject to a wide variety of laws in the
United States and other jurisdictions related to privacy, data protection and consumer protection that are often complex and subject to
varying interpretations. As a result, these privacy, data protection and consumer protection laws may change or develop over time through
judicial decisions or as new guidance or interpretations are provided by regulatory and governing bodies and such changes or developments
may be contrary to our existing practices. This may cause us to expend resources on updating, changing or eliminating some of our privacy
and data protection practices.
We plan to collect, store, transmit and otherwise
process data from our aircraft, our customers, our employees and others as part of our business and operations, which may include personal
data or confidential or proprietary information. We also work with partners and third-party service providers or vendors that collect,
store and process such data on our behalf and in connection with our aircraft. There can be no assurance that any security measures that
we or our third-party service providers or vendors have implemented will be effective against current or future security threats. If a
compromise of data were to occur, we may become liable under our contracts with other parties and under applicable law for damages and
incur penalties and other costs to respond to, investigate and remedy such an incident. Our systems, networks and physical facilities
could be breached, or personal information could otherwise be compromised due to employee error or malfeasance, if, for example, third
parties attempt to fraudulently induce our employees or our customers to disclose information or usernames and/or passwords. Third parties
may also exploit vulnerabilities in, or obtain unauthorized access to, platforms, systems, networks and/or physical facilities utilized
by our service providers and vendors.
Our aircraft contain complex information technology
systems and built-in data connectivity to share aircraft data with ground operations infrastructure. We plan to design, implement and
test security measures intended to prevent unauthorized access to our information technology networks, our aircraft and related systems.
However, hackers may attempt to gain unauthorized access to modify, alter and use such networks, aircraft and systems to gain control
of or to change our aircraft’s functionality, performance characteristics, or to gain access to data stored in or generated by the
aircraft. A significant breach of our third-party service providers’ or vendors’ or our own network security and systems could
have serious negative consequences for our business and future prospects, including possible fines, penalties and damages, reduced customer
demand for our aircraft or urban aerial ride sharing services and harm to our reputation and brand.
We may not have adequate insurance coverage. The
successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our
insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse
effect on our business. In addition, we cannot be sure that our existing insurance coverage will continue to be available on acceptable
terms or that our insurers will not deny coverage as to any future claim.
The requirements of being a public company may strain our resources,
divert management’s attention and affect our ability to attract and retain additional executive management and qualified board members.
We are subject to the reporting requirements of
the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act,
the listing requirements of the NYSE and other applicable securities rules and regulations. Compliance with these rules and
regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and
increase demand on our systems and resources, particularly after we are no longer an emerging growth company. The Exchange Act requires,
among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. The Sarbanes-Oxley
Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting.
In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to
meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted
from other business concerns, which could adversely affect our business and operating results. Although we have already hired additional
employees to comply with these requirements, we may need to hire more employees in the future or engage outside consultants, which would
increase our costs and expenses.
In addition, changing laws, regulations, and standards
relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance
costs, and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations,
in many cases due to their lack of specificity, and, as a result, their application in practice may evolve or otherwise change over time
as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters
and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with
evolving laws, regulations, and standards (or changing interpretations of them), and this investment may result in increased selling,
general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance
activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing
bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us,
and our business may be adversely affected. Being a public company and the associated rules and regulations also make it more expensive
for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher
costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board
of directors, particularly to serve on our audit committee, compensation committee, and nominating and governance committee, and qualified
executive officers.
As a result of disclosure of information in the
filings required of a public company, our business and financial condition is more visible, which may result in threatened or actual litigation,
including by competitors. If such claims are successful, our business and operating results could be adversely affected, and even if the
claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could
divert the resources of our management and adversely affect our business and operating results. In addition, as a result of our disclosure
obligations as a public company, we have reduced flexibility and are under pressure to focus on short-term results, which may adversely
affect our ability to achieve long-term profitability.
We are or may be subject to risks associated with strategic relationships
or other opportunities and may not be able to identify adequate strategic relationship opportunities, or form strategic relationships,
in the future.
We have entered into strategic relationships,
and may in the future enter into additional strategic relationships or joint ventures or minority equity investments, in each case with
various third parties for the production of our aircraft as well as with other collaborators with capabilities on data and analytics and
engineering. These alliances subject us to a number of risks, including risks associated with sharing proprietary information, non-performance
by the third-party and increased expenses in establishing new strategic relationships, any of which may adversely affect our business.
We may have limited ability to monitor or control the actions of these third parties and, to the extent any of these strategic third parties
suffer negative publicity or harm to their reputation from events relating to their business, we may also suffer negative publicity or
harm to our reputation by virtue of our association with any such third-party.
Strategic business relationships will be an important
factor in the growth and success of our business. However, there are no assurances that we will be able to continue to identify or secure
suitable business relationship opportunities in the future or our competitors may capitalize on such opportunities before we do. Moreover,
identifying such opportunities could require substantial management time and resources, and negotiating and financing relationships involves
significant costs and uncertainties. If we are unable to successfully source and execute on strategic relationship opportunities in the
future, our overall growth could be impaired, and our business, prospects, financial condition and operating results could be adversely
affected.
When appropriate opportunities arise, we may acquire
or license additional assets, products, technologies or businesses that are complementary to our existing business. In addition to possible
stockholder approval, we may need approvals and licenses from relevant government authorities for the acquisitions or licenses and to
comply with any applicable laws and regulations, which could result in increased delay and costs, and may disrupt our business strategy
if we fail to do so. Furthermore, acquisitions and the subsequent integration of new assets and businesses into our own would likely require
significant attention from our management and could result in a diversion of resources from our existing business, which in turn could
have an adverse effect on our operations. Acquired assets or businesses may not generate the financial results we expect. Acquisitions
could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant
goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired
business. Moreover, the costs of identifying and consummating acquisitions may be significant.
We have been sued by a competitor alleging misappropriation by
us of certain of their trade secrets and infringement by us of certain of their patents. These proceedings as well as any other proceedings
relating to these allegations and similar allegations or legal proceedings in the future may be time-consuming and expensive and, if adversely
determined, could delay, limit or prevent our ability to commercialize our aircraft or otherwise execute on our business plans.
On April 6, 2021, Wisk brought a lawsuit
against us in the United States District Court in the Northern District of California alleging misappropriation of trade secrets and patent
infringement. On June 1, 2021, we filed a motion to dismiss the trade secret claims and filed counterclaims. On June 15, 2021,
Wisk amended its complaint, and the following day we filed a motion to dismiss the amended complaint. On July 13, 2021, we filed
amended counterclaims. On July 27, 2021, Wisk filed a motion to strike and dismiss certain of our amended counterclaims. On August 10,
2021, we filed an opposition to Wisk’s motion to strike and dismiss certain of the amended counterclaims. On August 24, 2021,
the Court denied our motion to dismiss the trade secret claims. On September 14, 2021, the Court denied Wisk’s motion to strike
and dismiss certain of our amended counterclaims. A trial on Wisk’s claims and our counterclaims has been scheduled to begin on
January 30, 2023.
On May 19, 2021, Wisk filed a motion for
preliminary injunction and expedited discovery. On June 23, 2021, we filed an opposition to the motion for preliminary injunction.
On July 22, 2021, the Court denied Wisk’s motion for preliminary injunction. On August 20, 2021, Wisk filed a notice of
appeal of the Court’s denial of the motion for preliminary injunction. On September 30, 2021, Wisk withdrew its notice of appeal
of the District Court’s denial of the motion for preliminary injunction.
Prior to Wisk bringing the lawsuit against us,
on March 30, 2021, one of our employees, who is a former employee of Wisk, had a search warrant executed at his home in connection
with a federal investigation. We placed this former Wisk employee on paid administrative leave in connection with this government investigation,
which we believe is focused on conduct prior to the employee joining us. We are cooperating with the investigation of the employee. As
of November 12, 2021, the investigation is ongoing. In addition, we and three of our employees, who are also former Wisk employees,
received grand jury subpoenas from the United States Attorney’s Office for the Northern District of California in relation to the
same investigation. The grand jury subpoenas seek documents and information about our business, including our hiring practices and intellectual
property.
The proceedings are in the early stages. We cannot
predict their outcome or impact on us and our business. With respect to the federal investigation of the former Wisk employee, there can
be no assurance that we will not be named as a subject or target of the pending investigation or other government investigations in the
future. We have incurred and expect to continue to incur significant costs in defending and responding to the proceedings. Our business
plan does not include the cost of defending a long-term litigation with Wisk or any meaningful award of damages or settlement with Wisk.
Therefore, a negative result in these proceedings could have a material adverse effect on our reputation, financial position, liquidity,
operations, and cash flows.
In addition, other holders of intellectual property
rights relating to electric aircraft or any other technology relevant to our products or services may initiate legal proceedings alleging
infringement or misappropriation of such rights by us and our employees, either with respect to our own intellectual property or intellectual
property our licenses from third parties.
Our pending proceedings and other future legal
proceedings against us or our employees, regardless of outcome or merit, could be time consuming and expensive to defend or resolve, result
in substantial diversion of management and technical resources, delay, limit or prevent our ability to make, develop, commercialize or
deploy our aircraft and aerial ride sharing services and deteriorate our reputation and our business relationships, any of which could
make it more difficult or impossible for us to operate our business or otherwise execute on our business plan and significantly adversely
affect our business, financial condition, or results of operations. In the event of an adverse outcome of the litigation, we may have
to cease developing and/or using the asserted intellectual property, which could significantly adversely impact our business, financial
condition, or results of operation.
In response to a determination or resolution that
we or any of our employees have infringed upon or misappropriated a third party’s intellectual property rights, we may be required
to take certain actions, including (without limitation) one or more of the following:
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cease development, sales or use of our aircraft or other products;
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pay substantial damages, interest, attorneys’ fees, costs and other amounts;
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transfer intellectual property rights to a competitor;
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obtain a license from the owner of the asserted intellectual property right, which license may not be available on reasonable terms
or at all;
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terminate the employment of key employees;
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develop or re-develop an alternative design of our aircraft; or
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re-develop one or more other aspects or systems of our aircraft or other offerings.
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A successful claim of infringement or misappropriation
against us or any of our employees could delay, limit or prevent our ability to commercialize our aircraft and could significantly adversely
affect our business, prospects, financial condition or operating results. Even if we are successful in defending against these claims,
litigation could result in substantial costs and distraction to the company and our management over many years.
Our business may be adversely affected if we are unable to protect
our intellectual property rights from unauthorized use by third parties.
Failure to adequately protect our intellectual
property rights could result in our competitors offering similar products or services, potentially resulting in the loss of some of our
competitive advantage and a decrease in our revenue, which could adversely affect our business, prospects, financial condition and operating
results. Our success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish
this, we will rely on a combination of patents, trade secrets (including know-how), employee and third-party nondisclosure agreements,
copyrights, trademarks, intellectual property licenses and other contractual rights to establish and protect our rights in our technology.
The protection of our intellectual property rights
will be important to our future business opportunities. However, the measures we take to protect our intellectual property from unauthorized
use by others may not be effective for various reasons, including the following:
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any patent applications we submit may not result in the issuance of patents (and patents have not yet issued to us based on our pending
applications);
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the scope of our patents that may subsequently issue may not be broad enough to protect our proprietary rights;
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Our issued patents may be challenged or invalidated by third parties;
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Our employees or business partners may breach their confidentiality, non-disclosure and non-use obligations to us;
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third parties may independently develop technologies that are the same or similar to ours;
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the costs associated with enforcing patents, confidentiality and invention agreements or other intellectual property rights may make
enforcement impracticable; and
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current and future competitors may circumvent or otherwise design around our patents.
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Patent, trademark, copyright and trade secret
laws vary throughout the world. Some foreign countries do not protect intellectual property rights to the same extent as the laws of the
United States. Further, policing the unauthorized use of our intellectual property rights in foreign jurisdictions may be difficult. Therefore,
our intellectual property rights may not be as strong or as easily enforced outside of the U.S.
Also, while we have registered and applied for
trademarks in an effort to protect our investment in our brand and goodwill with customers, competitors may challenge the validity of
those trademarks and other brand names in which we have invested. Such challenges can be expensive and may adversely affect our ability
to maintain the goodwill gained in connection with a particular trademark.
To the extent we expand our international activities,
our exposure to unauthorized use of our technologies and proprietary information may increase. We may also fail to detect unauthorized
use of our intellectual property, or be required to expend significant resources to monitor and protect our intellectual property rights,
including engaging in litigation, which may be costly, time-consuming, and divert the attention of management and resources, and may not
ultimately be successful. If we fail to meaningfully establish, maintain, protect and enforce our intellectual property rights internationally,
our business, financial condition and results of operations could be adversely affected.
Our aerial ride sharing operations will initially be concentrated
in a small number of urban areas, which makes our business particularly susceptible to natural disasters, outbreaks and pandemics, economic,
social, weather, growth constraints and regulatory conditions or other circumstances affecting these metropolitan areas.
We expect to initially launch our aerial ride
sharing offering in limited jurisdictions subject to receipt of the necessary operating approvals. Accordingly, our business and results
of operations are particularly susceptible to adverse economic, regulatory, political, weather and other conditions in other markets that
may become similarly concentrated. As a result of our geographic concentration, our business and financial results relating to our aerial
ride sharing operations will be particularly susceptible to natural disasters, outbreaks and pandemics, economic, social, weather, growth
constraints and regulatory conditions or other circumstances in each of these metropolitan areas. In addition, any changes to local laws
or regulations within these key urban areas that affect our ability to operate or increase our operating expenses in these markets would
have an adverse effect on our business, financial condition and operating results.
Disruption of operations at the locations where
our vertiport facilities are expected to initially be located, whether caused by labor relations, utility or communications issues or
fuel shortages, could harm our business. Certain locations may regulate flight operations, such as limiting the number of landings per
year, which could reduce our aerial ride sharing operations. Bans on eVTOL operations or the introduction of any new permitting requirements
would significantly disrupt our operations. In addition, demand for our Archer UAM services could be impacted if drop-offs or pick-ups
of fliers become inconvenient because of vertiport rules or regulations, or more expensive for fliers because of vertiport-imposed
fees, which would adversely affect our business, financial condition and operating results.
We expect concentration in large metropolitan
areas and heavily trafficked airports also makes our business susceptible to an outbreak of a contagious disease, such as the Ebola virus,
Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, Zika virus, COVID-19 or any other
similar illness, both due to the risk of a contagious disease affecting the urban area through the high volume of travelers flying into
and out of such areas and the ease at which contagious diseases can spread through densely populated areas, as seen with the spread of
COVID-19 in Los Angeles, California and New York, New York.
Natural disasters, including tornados, hurricanes,
floods and earthquakes, and severe weather conditions, such as heavy rains, strong winds, dense fog, blizzards or snowstorms, may damage
our facilities, those of our Archer Direct customers or otherwise disrupt flights into or out of the vertiports from which our aircraft
arrive or depart.
Major urban areas, including those in which we
expect to operate in, are also at risk of terrorist attacks, actual or threatened acts of war, political disruptions and other disruptions.
The occurrence of one or more natural disasters, severe weather events, epidemic or pandemic outbreaks, terrorist attacks or disruptive
political events in regions where our facilities are or will be located, or where our Archer Direct customers’ facilities are located,
could adversely affect our business.
If we fail to maintain proper and effective internal controls
over financial reporting our ability to produce accurate and timely financial statements could be impaired.
Pursuant to Section 404 of the Sarbanes-Oxley
Act, our management will be required to report upon the effectiveness of our internal control over financial reporting. When we lose our
status as an “emerging growth company” and become an “accelerated filer” or a “large accelerated filer,”
our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial
reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting
are complex and require significant documentation, testing, and possible remediation. To achieve compliance with Section 404 within
the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is
both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants
and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve
control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting
and improvement process for internal control over financial reporting. This process will be time-consuming, costly, and complicated.
We have experienced control deficiencies, including
the material weaknesses in our internal control over financial reporting described elsewhere in this Quarterly Report on Form 10-Q,
and may experience other control deficiencies in the future. Any failure to maintain internal control over financial reporting could severely
inhibit our ability to accurately report our financial condition, operating results, or cash flows.
If we are unable to conclude that our internal
control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness
in our internal control over financial reporting, or if we are unable to remediate our existing material weaknesses in our internal control
over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of
our common stock could decline, and we could be subject to sanctions or investigations by the NYSE, the SEC, or other regulatory authorities.
Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective
control systems required of public companies, could also restrict our future access to the capital markets.
We are an “emerging growth company” within the meaning
of the Securities Act, and the reduced reporting requirements applicable to emerging growth companies could make our securities less attractive
to investors and may make it more difficult to compare our performance to the performance of other public companies.
We are an “emerging growth company”
as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. As such, we are eligible for and may take advantage
of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies
for as long as we continue to be an emerging growth company, including, but not limited to, (a) not being required to comply with
the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (b) reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements and (c) exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result,
our stockholders may not have access to certain information they may deem important. We will remain an emerging growth company until the
earliest of (1) the last day of the fiscal year (a) following October 30, 2025, (b) in which we have total annual
gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value
of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which
we have issued more than $1.0 billion in non-convertible debt securities during the prior three year period. We cannot predict whether
investors will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less
attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise would
be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.
Further, Section 102(b)(1) of the JOBS
Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies
(that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered
under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company
can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but
any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when
a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company,
can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our
financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has
opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards
used.
Our management team has limited experience
managing a public company.
Most members of our management
team have limited experience managing a publicly traded company, interacting with public company investors and regulators, and complying
with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our
transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities
laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant
attention from our senior management and could divert their attention away from the day-to-day management of our business, which could
adversely impact our business, operating results, and financial condition.
Our amended and restated certificate of incorporation requires,
to the fullest extent permitted by law, that derivative actions brought in our name, actions against our directors, officers, other employees
or stockholders for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware,
which may have the effect of discouraging lawsuits against our directors, officers, other employees or stockholders.
Our amended and restated certificate of incorporation
provides that (i) unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by the applicable
law, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any stockholder (including a beneficial owner)
to bring (1) any derivative action or proceeding brought on behalf of us, (2) any action or proceeding asserting a claim of
breach of a fiduciary duty owed by any current or former director, officer or other employee of ours or any stockholder of ours to us
or our stockholders, (3) any action asserting a claim against us or any of our current or former directors, officers or other employees
arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our bylaws, (4) any action
or proceeding to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws, (5) any action
or proceeding as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware, and (6) any action asserting
a claim against us or any director, officer or other employee of ours or any stockholder, governed by the internal affairs doctrine, in
all cases to the fullest extent permitted by law and subject to the court’s having personal jurisdiction over the indispensable
parties named as defendants, and (ii) unless we consent in writing to the selection of an alternative forum, the federal district
courts of the United States of America shall, to the fullest extent permitted by law, be the exclusive forum for the resolution of any
complaint asserting a cause of action arising under the Securities Act or the rules and regulations promulgated thereunder. Any person
holding, owning or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and to have consented
to this forum selection provision.
This choice of forum provision may limit a stockholder’s
ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees
or stockholders, which may discourage lawsuits with respect to such claims, although such stockholders will not be deemed to have waived
our compliance with federal securities laws and the rules and regulations thereunder. However, there is no assurance that a court
would enforce the choice of forum provision contained in our amended and restated certificate of incorporation. If a court were to find
such provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in
other jurisdictions, which could harm our business, operating results and financial condition.
The warrants originally issued by Atlas are accounted for as
liabilities and changes in the value of these warrants could have a material effect on our financial results.
On April 12, 2021, the staff of the SEC (the
“SEC Staff”) expressed its view that certain terms and conditions common to special purpose acquisition company (“SPAC”)
warrants may require the warrants to be classified as liabilities instead of equity on the SPAC’s balance sheet. As a result of
the SEC Staff’s statement, Atlas reevaluated the accounting treatment of its public warrants and private placement warrants, and
determined to classify the warrants as derivative liabilities measured at fair value, with changes in fair value reported in its statement
of operations for each reporting period.
See Note 13 – Liability Classified Warrants
for additional information about our public and private warrants that were originally issued by Atlas. ASC 815-40 provides for the remeasurement
of the fair value of such derivatives at each balance sheet date, with a resulting non-cash gain or loss related to the change in the
fair value being recognized in earnings in the statement of operations and comprehensive loss. As a result of the recurring fair value
measurement, our financial statements and results of operations may fluctuate quarterly based on factors which are outside of our control.
Due to the recurring fair value measurement, we expect that we will recognize non-cash gains or losses on our warrants each reporting
period and that the amount of such gains or losses could be material.
Risks Relating to Ownership of Our Securities Following the Business
Combination
The price of our Class A common stock and warrants may be
volatile and you could lose all or part of your investment as a result.
The price of our Class A common stock and
warrants may fluctuate due to a variety of factors, including:
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results of operations that vary from the expectations of securities analysts and investors;
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results of operations that vary from those of our competitors;
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the impact of the COVID-19 pandemic and its effect on our business and financial conditions;
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changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities
analysts and investors;
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declines in the market prices of stocks generally;
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strategic actions by our or our competitors;
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announcements by us or our competitors of significant contracts, acquisitions, joint ventures, other strategic relationships or capital
commitments;
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any significant change in our management;
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changes in general economic or market conditions or trends in our industry or markets, such as recessions, interest rates, local and
national elections, international currency fluctuations, corruption, political instability and acts of war or terrorism;
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changes in business or regulatory conditions, including new laws or regulations or new interpretations of existing laws or regulations
applicable to our business;
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future sales of our common stock or other securities;
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investor perceptions or the investment opportunity associated with our common stock relative to other investment alternatives;
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the public’s response to press releases or other public announcements by us or third parties, including our filings with the
SEC;
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litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors;
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guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;
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the development and sustainability of an active trading market for our stock;
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actions by institutional or activist stockholders;
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changes in accounting standards, policies, guidelines, interpretations or principles; and
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other events or factors, including those resulting from natural disasters, war, acts of terrorism or responses to these events.
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These broad market and industry fluctuations may
adversely affect the market price of our common stock, regardless of our actual operating performance. In addition, price volatility may
be greater if the public float and trading volume of our common stock is low.
In the past, following periods of market volatility,
stockholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial
cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.
Because there are no current plans to pay cash dividends on our
common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater
than that which you paid for it.
We intend to retain future earnings, if any, for
future operations, expansion and debt repayment and there are no current plans to pay any cash dividends for the foreseeable future. The
declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our board of directors.
Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available
cash and current and anticipated cash needs, capital requirements, contractual, legal, tax, and regulatory restrictions, implications
on the payment of dividends by us to our stockholders or by our subsidiaries and such other factors as our board of directors may deem
relevant. In addition, our ability to pay dividends is limited by covenants of our existing and outstanding indebtedness and may be limited
by covenants of any future indebtedness we incur. As a result, you may not receive any return on an investment in our common stock unless
you sell our common stock for a price greater than that which you paid for it.
If securities analysts do not publish research or reports about
our business or if they downgrade ours stock or our sector, our stock price and trading volume could decline.
The trading market for our common stock will rely
in part on the research and reports that industry or financial analysts publish about us or our business. We will not control these analysts.
In addition, some financial analysts may have limited expertise with our model and operations. Furthermore, if one or more of the analysts
who do cover us downgrade our stock or industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research
about our business, the price of our stock could decline. If one or more of these analysts ceases to cover us or fails to publish reports
on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.
Future sales, or the perception of future sales, by us or our
stockholders in the public market following the Business Combination could cause the market price for our common stock to decline.
The sale of shares of our common stock in the
public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our common stock. These
sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future
at a time and at a price that it deems appropriate.
All shares issued in the Business Combination
are freely tradable without registration under the Securities Act and without restriction by persons other than our “affiliates”
​(as defined under Rule 144 of the Securities Act, “Rule 144”), including our directors,
executive officers and other affiliates.
Atlas Crest Investment LLC (“Sponsor”)
and certain substantial holders of Legacy Archer’s common stock (determined on an as-converted basis) (the “Investors”)
have agreed, subject to certain exceptions, not to transfer or dispose of our common stock during the period from the date of the closing
of the Business Combination through the earlier of (i) 180 days after the consummation of the Business Combination, (ii) the
date that the closing price of our common stock equals or exceeds $12.00 for 20 trading days within any 30 trading day period following
the 90th day following the Business Combination and (iii) the consummation of a liquidation, merger, capital stock exchange, reorganization
or other similar transaction that results in all of our stockholders having the right to exchange their shares of our common stock for
cash, securities or other property.
Upon the expiration or waiver of the lock-ups
described above, shares held by the Investors and certain other stockholders of our common stock will be eligible for resale, subject
to volume, manner of sale and other limitations under Rule 144, when such rule becomes applicable to us. In addition, pursuant
to the Amended and Restated Registration Rights Agreement, the Investors and certain other stockholders will have the right, subject to
certain conditions, to require us to register the sale of their shares of our common stock under the Securities Act. By exercising their
registration rights and selling a large number of shares, these stockholders could cause the prevailing market price of our common stock
to decline. Following closing of the Business Combination, 198,552,323 shares of common stock and up to 18,024,399 shares of common stock
issuable upon the exercise of warrants are covered by such registration rights.
As restrictions on resale end or if these stockholders
exercise their registration rights, the market price of shares of our common stock could drop significantly if the holders of these shares
sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional
funds through future offerings of our class A common stock or other securities.
In addition, outstanding warrants to purchase
an aggregate of 24,666,667 shares of our common stock became exercisable on October 30, 2021. Each warrant entitles the holder thereof
to purchase one (1) share of our Class A common stock at a price of $11.50 per whole share, subject to adjustment. Warrants
may be exercised only for a whole number of shares of our Class A common stock. To the extent such warrants are exercised, additional
shares of our Class A common stock will be issued, which will result in dilution to the then existing holders of our common stock
and increase the number of shares eligible for resale in the public market.
In addition, the shares of our common stock reserved
for future issuance under our equity incentive plans will become eligible for sale in the public market once those shares are issued,
subject to provisions relating to various vesting agreements, lock-up agreements and, in some cases, limitations on volume and manner
of sale applicable to affiliates under Rule 144, as applicable. We will file one or more registration statements on Form S-8
under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common
stock issued pursuant to our equity incentive plans. Any such Form S-8 registration statements will automatically become effective
upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market.
In the future, we may also issue our securities
in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition
could constitute a material portion of our then-outstanding Class A common stock. Any issuance of additional securities in connection
with investments or acquisitions may result in additional dilution to our stockholders.
Anti-takeover provisions in our governing documents could delay
or prevent a change of control.
Certain provisions of our amended and restated
certificate of incorporation and our amended and restated bylaws have an anti-takeover effect and may delay, defer or prevent a merger,
acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price for the shares held by our stockholders.
These provisions provide for, among other things:
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the ability of our board of directors to issue one or more series of preferred stock;
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a dual-class share structure;
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advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual
meetings;
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certain limitations on convening special stockholder meetings;
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limiting the ability of stockholders to act by written consent; and
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our board of directors have the express authority to make, alter or repeal our amended and restated bylaws.
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These anti-takeover provisions could make it more
difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders.
As a result, our stockholders may be limited in their ability to obtain a premium for their shares. These provisions could also discourage
proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other
corporate actions you desire.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The information required by this Item 2 is contained in our Current
Report on Form 8-K filed with the SEC on September 22, 2021.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit
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Description
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2.1††
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Amended and Restated Business Combination Agreement,
dated as of July 29, 2021, by and among Atlas Crest Investment Corp., Artemis Acquisition Sub Inc. and Archer Aviation Inc.
(incorporated by reference to Exhibit 2.1 to Form 8-K (File No. 001-39668), filed July 29, 2021)
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3.1
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Amended and Restated Certificate of Incorporation of
Archer Aviation Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K (File No. 001-39668), filed September 22,
2021)
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3.2
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Amended and Restated Bylaws of Archer Aviation Inc.
(incorporated by reference to Exhibit 3.2 to Form 8-K (File No. 001-39668), filed September 22, 2021)
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10.1
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Form of Subscription Agreement (incorporated by
reference to Exhibit 10.2 to Form 8-K (File No. 001-39668), filed February 10, 2021)
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10.2
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Amended and Restated Sponsor Letter Agreement, dated
as of July 29, 2021, by and among Atlas Crest Investment Corp., Atlas Crest Investment LLC, Archer Aviation Inc., and the individuals
named therein (incorporated by reference to Exhibit 10.1B to Registration Statement on Form S-4 (File No. 333-254007),
filed August 3, 2021)
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10.3†
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Archer 2021 Equity Incentive Plan (incorporated by reference
to Exhibit 10.8 to Form 8-K (File No. 001-39668), filed September 22, 2021)
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10.4†
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Form of Stock Option Grant Package under Archer
2021 Equity Incentive Plan (incorporated by reference to Exhibit 10.9 to Form 8-K (File No. 001-39668), filed September 22,
2021)
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10.5†
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Form of RSU Grant Package under Archer 2021 Equity
Incentive Plan (incorporated by reference to Exhibit 10.10 to Form 8-K (File No. 001-39668), filed September 22,
2021)
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10.6†
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Form of Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.11 to Form 8-K (File No. 001-39668), filed September 22, 2021)
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10.7†
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Offer Letter, dated September 16, 2021, by and
between the Company and Brett Adcock (incorporated by reference to Exhibit 10.12 to Form 8-K (File No. 001-39668),
filed September 22, 2021)
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10.8†
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Offer Letter, dated September 16, 2021, by and
between the Company and Adam Goldstein (incorporated by reference to Exhibit 10.13 to Form 8-K (File No. 001-39668),
filed September 22, 2021)
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10.9†
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Offer Letter, dated November 19, 2019, by and between
the Company and Tom Muniz (incorporated by reference to Exhibit 10.19 to Registration Statement on Form S-4 (File No. 333-254007)
filed August 10, 2021)
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10.10
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Form of Subscription Agreement (incorporated by
reference to Exhibit 10.2 to Form 8-K (File No. 001-39668), filed February 10, 2021)
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10.11
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Amended and Restated Registration Rights Agreement,
by and between the Company and certain stockholders, dated September 16, 2021 (incorporated by reference to Exhibit 10.2
to Form 8-K (File No. 001-39668), filed September 22, 2021)
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10.12
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Loan and Security Agreement, dated July 9, 2021,
by and among Silicon Valley Bank, in its capacity as administrative agent and collateral agent, Silicon Valley Bank and SVB Innovation
Credit Fund VIII, L.P., as lenders, and Archer Aviation Inc. (incorporated by reference to Exhibit 10.10 to Registration Statement
on Form S-4 (File No. 333-254007), filed August 3, 2021)
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10.13
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Form of Indemnity Agreement (incorporated by reference
to Exhibit 10.26 to Form 8-K (File No. 001-39668), filed September 22, 2021)
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31.1
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Certification of Principal Executive Officer pursuant
to Rules 13a-14(a) and 15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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31.2
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Certification of Principal Executive Officer pursuant
to Rules 13a-14(a) and 15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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104
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Cover Page Interactive Data File (formatted as
Inline XBRL and contained in Exhibit 101)
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*
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The certifications furnished in Exhibits 32.1, 32.2 and 32.3 hereto are deemed to accompany this Quarterly Report on Form 10-Q
and are not deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that
section, nor shall they be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
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†
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Indicates management contract or compensatory plan or arrangement.
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††
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Certain of the exhibits and schedules to these exhibits have been omitted in accordance with Regulation S-K Item 601(a)(5). The registrant
agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request.
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