ARCHER AVIATION INC. 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 theSecurities and Exchange Commission (the "SEC") pursuant to Rule 424(b)(3) under the Securities Act of 1933, as amended (the "Securities Act"), onOctober 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 endedDecember 31, 2020 set forth in the Prospectus. Overview We are a former blank check company incorporated onAugust 26, 2020 under the nameAtlas Crest Investment Corp. ("Atlas") as aDelaware 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 OnSeptember 16, 2021 (the "Closing Date"),Archer Aviation Inc. , aDelaware corporation (prior to the closing of the Business Combination, "Legacy Archer"), Atlas, andArtemis Acquisition Sub Inc. , aDelaware corporation and a direct, wholly-owned subsidiary of Atlas ("Merger Sub"), consummated the closing of the transactions contemplated by the Business Combination Agreement, datedFebruary 10, 2021 , as amended and restated onJuly 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 onSeptember 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 fromArcher Aviation Inc. toArcher Aviation Operating Corp. , and Atlas changed its name fromAtlas Crest Investment Corp. toArcher Aviation Inc. and it became the successor registrant with theSEC . Prior to the closing of the Business Combination, the Class A common stock and public warrants of Atlas were listed on theNew 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 28 -------------------------------------------------------------------------------- Table of Contents 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 theFederal 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
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.
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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 theFAA 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 ongoingWisk 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.
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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
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
Comparison of the Three and Nine Months Ended
Research and Development
Research and development expenses increased by$16.4 million for the three months endedSeptember 30, 2021 , compared to the same period endedSeptember 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 endedSeptember 30, 2021 , compared to the same period endedSeptember 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 endedSeptember 30, 2021 , compared to the same period endedSeptember 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 theWisk 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 endedSeptember 30, 2021 , compared to the same period endedSeptember 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, 31 -------------------------------------------------------------------------------- Table of Contents 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 theWisk 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 endedSeptember 30, 2021 , respectively, compared to the same periods endedSeptember 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
InJune 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 endedSeptember 30, 2021 , compared to the same period endedSeptember 30, 2020 .
Other Expense, Net
Other expense, net, increased by$0.4 million and$0.2 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods endedSeptember 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 inJuly 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 ofSeptember 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. 32 -------------------------------------------------------------------------------- Table of Contents 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
OnJuly 9, 2021 , we entered into a Loan and Security Agreement, as borrower, withSilicon Valley Bank ("SVB") andSVB 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 endedSeptember 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 toWisk 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 endedSeptember 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 endedSeptember 30, 2021 and 2020 was$3.0 million and$0.4 million , respectively, driven by purchases of property and equipment within those respective periods. 33 -------------------------------------------------------------------------------- Table of Contents Cash Flows Provided by Financing Activities Net cash provided by financing activities during the nine months endedSeptember 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 endedSeptember 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 ofSeptember 30, 2021 : Payments Due by Period Less than 1 to 3 3 to 5 After 5 Total 1 year years years years (In millions)
Operating lease obligation (1)
- $ -
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.
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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
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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
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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
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