Revolution.Aero Uplift: Midnight milestones for AAM

Deep Dive

So far this year 2,118 orders, commitments, LOIs and strategic partnerships for advanced aircraft have been announced. But only one pre-delivery payment.

United Airlines’ recent $10m pre-delivery payment (PDP) to Archer stood out. The California-based startup, which also revealed the name of its prototype as Midnight, hailed the payment as a “watershed moment for the eVTOL industry”. It also said the payment validates confidence in the commercialisation of eVTOLs.

“Until this week with United and Archer, no cash has been transferred from one company to another. Other agreements have been paper agreements/LOIs [letters of intent], not actual payments,” Adam Goldstein, CEO of Archer, tells Revolution.Aero.

Archer’s chief financial officer, Mark Mesler called the payment a standard commercial arrangement with future deposits following “traditional aerospace payment terms.” Although traditional aerospace terms can vary.

With most commercial aircraft and business jet orders, customers pay a deposit (which technically is a pre-delivery payment). They then make a payment when the order is formally executed and make between one and four payments depending on how far out delivery is. The final payment on delivery is usually less than 25% of the total price. But these terms can vary a lot.

Manufacturers talk about hard landing profiles and soft-landing profiles. The profile can change completely depending on the credit risk of the customer (or, as many airlines have poor credit, how good the customer is at negotiating). Some customers push for hard landings – where the bulk of the payment comes at delivery. Manufacturers, especially when launching new aircraft, tend to front-load payments to get cash in to fund development.

Pre-delivery payments are, as Archer stressed, typically non-refundable unless the aircraft is not delivered.  One big risk for customers is the manufacturer filing for insolvency and them failing to get deposits bank. However, buyers may ask for refund guarantees from commercial banks to get round this. These are very common with superyachts and commercial shipping (It is not unusual for superyacht buyers to buy the yard out of insolvency to finish building their yacht).

United is clearly very good at buying aircraft. It has practised with commercial aircraft manufacturers for many years. It is also an investor in Archer.

As The Air Current revealed, United received around 14m penny warrants when it placed its order which enables it to purchase common stock at $0.01 per share. The warrants are to be vested and exercised across four milestones: the completion of the warrant agreement, Archer’s SPAC combination, final FAA certification and acceptance of delivery and final payment by United for each aircraft. Two of those have passed with 8.8m warrants vested.

The Air Current says that on August 9, the day before the PDP was announced, a filing with the US Securities and Exchange Commission shows that Archer and United amended the last milestone’s conditions. Now more than 4.4m shares will become “vested and exercisable by United upon the occurrence of certain alternate vesting conditions”.

But the amended conditions will not be known until Archer’s next set of financials. Which means it’s not yet possible to work out the real significance of United’s payment.

Payments aside, expenses and losses went up in the last quarter compared with the first three months of 2022. Archer posted generally accepted accounting principles (GAAP) operating expenses of $80.2m, non-GAAP operating expenses of $50m and a net loss of $71.7m in Q2. That compares with $65.3m, $39.6m and $59.2m respectively in Q1. The firm is predicting operating expenses for Q3 to rise to between $95m and $103m.

Based on that spending, the $10m payment, which should appear as a cash deposit on the balance sheet, will cover about a week-and-a-half of operations in terms of cash burn.

Ending the quarter with a cash position of $655m, Archer’s share price has risen 10% recently to close at $4.84 on August 12 and more than 50% in the month leading up. An increase which reflects the progress made on commercialisation, it said.

“We’re very happy with the financial standing of the company and have full confidence in our business plan. We continue to be one of the most well-capitalised companies in the sector. UAM is an undertaking that will be measured in years and decades, but we continue to adhere to our stated timelines as we move through the design, development, testing, and certification phases of our growth,” says Goldstein.

“We’ll be able to share more about our manufacturing facility in the months ahead. For now, we’re looking forward to the start of production next year,” he adds.

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