Archer Aviation Inc. (ACHR) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related accompanying notes included elsewhere in this Annual Report. Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located in our Annual Report on Form 10-K for the year ended December 31, 2023, filed on February 29, 2024, for a comparison of our results of operations for the years ended December 31, 2023 and 2022. The following discussion includes forward-looking statements, which are based on our current expectations and beliefs concerning future developments and the potential effects of such developments 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 Annual Report. 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 I, Item 1A, “Risk Factors” in this Annual Report.
Overview
Headquartered in Silicon Valley, California, Archer is developing the technologies and aircraft to power the future of advanced aviation. We plan to provide customers with advanced aircraft and related technologies and services in the United States and internationally in both the commercial and defense sectors. We unveiled our first planned production aircraft, an eVTOL aircraft, Midnight, in November 2022. In December 2024, we launched Archer Defense, entering into a strategic partnership with Anduril to jointly develop a next-generation aircraft for defense applications. In December 2024, we completed construction of our high-volume aircraft manufacturing facility, ARC, located in Covington, Georgia. We plan to start our initial production of aircraft at this facility in the first half of 2025 and ramp our production there to support our commercialization efforts. We are first and foremost working to commercialize our Midnight aircraft which is intended to be used in air taxi operations in and around major cities around the world. To do so, we are working with aviation authorities, countries, cities, and strategic partners in select locations globally to obtain certification of our Midnight aircraft and build out UAM networks that will utilize our Midnight aircraft in their operations. Our goal is to begin early commercial operations with our Midnight aircraft in Abu Dhabi in the UAE and ramp our operations from there. In parallel, we plan to continue to advance the development of our aircraft for Archer Defense, as well as other technologies to support the future of advanced aviation.
Our Planned Lines of Business
By maintaining an innovative and disciplined approach to new product and service development, manufacturing, and commercialization we believe that we can deliver advanced aviation technologies and solutions that can service a broad range of industries and applications. We intend to operate in the following areas:
•Commercial: This is planned to consist of the sale of our commercial aircraft (“Archer Direct”), such as Midnight, to aircraft operators as well as technologies and services related thereto, including, commercial launch (i.e., certification, testing, training, demonstration, market survey and early trial operations), and maintenance and repair. In addition, we plan to provide direct-to-consumer aerial ride share services utilizing our aircraft and potentially others in select metropolitan areas around the world with consumers being able to book rides via an app-based platform (“Archer UAM”).
•Defense: This is planned to consist of the sale of next-generation aircraft and related technologies for defense applications. Our initial product is intended to be a hybrid-propulsion VTOL aircraft that we are jointly developing with Anduril. We have also been partnering with the DoD since 2021 on a series of projects through the USAF AFWERX program with the goal of helping the AFWERX Agility Prime program assess the transformational potential of the vertical flight market and eVTOL technologies for DoD purposes. We continue to advance this partnership and deliver under the related contracts we have entered into with the USAF, which include the delivery of our Midnight aircraft to the USAF, the sharing of additional flight test data and certification related test reports, pilot training, and the development of maintenance and repair operations.
To date, we have not generated significant revenue from either of these planned areas. We will use our cash and cash equivalents for the foreseeable future as we continue to develop our aircraft and technologies and services related thereto, manufacturing operations and work to commercialize our aircraft. 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 aircraft certifications and other government approvals to begin commercial operations. For example, any significant delays in obtaining such certifications and other government approvals may require us to raise additional capital above our existing cash on hand and delay our generation of significant revenues.
35
Table of Contents
Our Aircraft
Our Midnight aircraft is designed around our proprietary 12-tilt-6 distributed electric propulsion platform. Midnight is the evolution of our demonstrator aircraft, Maker, which we developed and used to validate its aircraft configuration and key enabling technologies. Midnight is designed to carry four passengers plus a pilot, bring an enhanced level of safety and deliver on a reduced level of noise as compared to traditional helicopters. Our Midnight aircraft is built around key advanced aviation technologies we have developed, including what we believe to be cutting-edge electric propulsion and flight control systems. We have paired those with systems and components sourced from leading aerospace suppliers many of which are already being used on certified aircraft today, with the goal of reducing Midnight’s certification risk, as well as its development timelines and costs. The aircraft is purpose-built for its intended use case of air taxi operations in major cities across the globe, with its range and payload being optimized around back-to-back short distance trips of around 20-miles, with minimal charging time between trips. Our approach to designing Midnight focuses on combining high function and high emotion, with the goal of inspiring passengers to want to experience it, similar to the feeling that was evoked during the Golden Age of aviation in the 1950s.
We continue to work to optimize our Midnight aircraft design for both manufacturing and certification. 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 eVTOL, traditional commercial aerospace, as well as electric propulsion backgrounds, we have built a team that enables us to move through the design, development, and certification of our eVTOL aircraft, thus helping us to achieve our end goal of bringing to market our eVTOL aircraft as efficiently as possible. We continue to work to certify Midnight with certain aviation authorities around the globe so that it can be used in our planned commercial operations as soon as possible.
Our aircraft under development for Archer Defense is planned to be a hybrid-propulsion, Midnight-like VTOL aircraft with both a low thermal and acoustic signature purpose built for next generation defense use cases. We are jointly developing this aircraft with Anduril. Our goal is to bring together our ability to rapidly develop advanced VTOL aircraft using existing commercial parts and supply chains and Anduril's deep expertise in artificial intelligence, missionization, and systems integration, to accelerate the speed to market for critical hybrid VTOL aircraft capabilities at a fraction of the cost of more traditional alternatives. To support this effort, we intend to invest in the development of our hybrid-propulsion platform, as well as in critical capabilities like the manufacturing of composites and battery cells needed for this aircraft and also potentially on our commercial aircraft.
Components of Results of Operations
Revenue
We are still working to design, develop, certify, and bring up manufacturing of our aircraft and thus have not generated revenue from any 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 manufacturing bring up of our aircraft and development of related technologies and services.
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 Federal Aviation Administration (“FAA”) towards our goal of achieving certification of our eVTOL aircraft on an efficient timeline. Research and development expenses consist primarily of personnel-related costs (including salaries, bonuses, benefits, and stock-based compensation) for employees focused on research and development activities, costs associated with developing and building prototype aircraft, associated facilities costs, and depreciation. 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.
36
Table of Contents
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, associated facilities costs, depreciation, and technology and dispute resolution agreements expense. We expect our general and administrative expenses to increase as we hire additional personnel and consultants to support our operations and comply with applicable regulations.
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 United Purchase Agreement and the Warrant to Purchase Shares Agreement with United Airlines Inc. (“United”).
Other Income (Expense), Net
Other income (expense), net consists of miscellaneous income and expense items, including the change in fair value of our warrant liabilities.
Interest Income, Net
Interest income, net primarily consists of interest income from our cash and cash equivalents and short-term investments in marketable securities, net of interest on notes payable.
Results of Operations
The following table sets forth our consolidated statements of operations for the periods indicated:
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change $ | Change % | |||||||||||
| (In millions) | ||||||||||||||
| Operating expenses: | ||||||||||||||
| Research and development (1) | $ | 357.7 | $ | 276.4 | $ | 81.3 | 29.4 | % | ||||||
| General and administrative (1) | 152.0 | 168.4 | (16.4) | (9.7) | % | |||||||||
| Other warrant expense | — | 2.1 | (2.1) | (100.0) | % | |||||||||
| Total operating expenses | 509.7 | 446.9 | 62.8 | 14.1 | % | |||||||||
| Loss from operations | (509.7) | (446.9) | (62.8) | 14.1 | % | |||||||||
| Other income (expense), net | (48.8) | (26.9) | (21.9) | 81.4 | % | |||||||||
| Interest income, net | 21.9 | 16.4 | 5.5 | 33.5 | % | |||||||||
| Loss before income taxes | (536.6) | (457.4) | (79.2) | 17.3 | % | |||||||||
| Income tax expense | (0.2) | (0.5) | 0.3 | (60.0) | % | |||||||||
| Net loss | $ | (536.8) | $ | (457.9) | $ | (78.9) | 17.2 | % |
(1) Includes stock-based compensation expense as follows:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Research and development | $ | 49.0 | $ | 28.9 | ||
| General and administrative | 59.8 | 16.3 | ||||
| Total stock-based compensation expense | $ | 108.8 | $ | 45.2 |
37
Table of Contents
Comparison of the Year Ended December 31, 2024 and 2023
Research and Development
Research and development expenses increased by $81.3 million, or 29.4%, for the year ended December 31, 2024, compared to the year ended December 31, 2023, as we invested in people and materials to advance our technology development. The increase was primarily due to an increase of $42.4 million in personnel-related expenses due to a significant increase in our workforce from the prior year, an increase of $20.1 million in stock-based compensation expenses, and an increase of $17.4 million in costs related to professional services and tools and materials to support our increased research and development activities. The remainder of the increase was made up of other incidental items.
General and Administrative
General and administrative expenses decreased by $16.4 million, or 9.7%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The decrease was primarily due to a decrease of $58.3 million in the charge for the warrant issued to Wisk Aero LLC, to purchase up to 13,176,895 shares of our Class A common stock with an exercise price of $0.01 per share (the “Wisk Warrant”), and a decrease of $14.7 million in professional service expenses mainly due to legal fees and expenses. The decrease was partially offset by a reversal of previously recognized stock-based compensation expense of $59.1 million associated with the forfeiture of the unvested portion of the restricted stock units (“RSUs”) granted to our founders pursuant to the terms and conditions of the Business Combination Agreement immediately prior to closing (the “Founder Grant”) issued to the Company’s former co-CEO. See Note 7 - Commitments and Contingencies and Note 9 - Stock-Based Compensation to our consolidated financial statements for further details on our commitments and contingencies and stock-based compensation, respectively. The remainder of the decrease was made up of other incidental items.
Other Warrant Expense
Other warrant expense decreased by $2.1 million, or 100.0%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The decrease was primarily due to the vesting of United warrants associated with specific milestones during the year ended December 31, 2023. The warrants associated with the specific milestones fully vested in the first quarter of 2023. See Note 9 - Stock-Based Compensation to our consolidated financial statements for further details on our warrants.
Other Income (Expense), Net
Other income (expense), net decreased by $21.9 million, or 81.4%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The decrease was primarily due to changes in fair value of our warrant liabilities. See Note 3 - Summary of Significant Accounting Policies to our consolidated financial statements for further details.
Interest Income, Net
Interest income, net increased by $5.5 million, or 33.5%, for the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase was primarily due to interest income from our cash and cash equivalents.
Liquidity and Capital Resources
As of December 31, 2024, our principal sources of liquidity were cash and cash equivalents of $834.5 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. We believe that our existing cash and cash equivalents will be sufficient for at least the next 12 months to meet our requirements and plans for cash, including meeting our working capital requirements and capital expenditure requirements.
38
Table of Contents
On October 5, 2023, we entered into a credit agreement (the “Credit Agreement”) with Synovus Bank, as administrative agent and lender, and the additional lenders (the “Lenders”) from time to time. We may request the Lenders to provide multiple delayed term loan advances (together, the “Loan”) in an aggregate principal amount of up to $65.0 million for the construction and development of our manufacturing facility in Covington, Georgia. The Loan under the Credit Agreement shall accrue interest from and including the date the applicable advance is made but excluding the repayment date at a rate of the secured overnight financing rate (“SOFR”), plus 2.0% subject to a SOFR floor of 0.0%. We are required to make interest-only payments for 36 months on the Loan starting on November 14, 2023, followed by monthly interest and principal payments for the remaining maturity, with any outstanding principal, interest and other then outstanding indebtedness due at maturity. The Credit Agreement matures on the earlier of October 5, 2033 or the date on which the outstanding Loan has been declared or automatically becomes due and payable pursuant to the terms of the Credit Agreement. Our obligations under the Credit Agreement are jointly and severally guaranteed by our current and future wholly-owned domestic subsidiaries, and are secured by cash, general intangibles, instruments, securities, financial assets, security entitlements and other property maintained in a money market account at Synovus Bank. As of December 31, 2024, we had drawn down $65.0 million of the Loan.
In November 2023, we filed a shelf registration statement on Form S-3 with the SEC and a related prospectus supplement pursuant to which we may, from time to time, sell shares of our Class A common stock, having an aggregate value of up to $70.0 million, pursuant to a Controlled Equity OfferingSM Sales Agreement (the “Sales Agreement”) with the placement agent (the “First ATM Program”). The First ATM Program was fully utilized in May 2024. During the years ended December 31, 2024 and 2023, we sold 10,275,033 and 3,109,097 shares of Class A common stock, respectively, under the First ATM Program, for net proceeds of $48.1 million and $19.5 million, respectively.
In May 2024, we filed a shelf registration statement on Form S-3 with the SEC that permits the offering of an aggregate of up to $95.0 million of shares of our Class A common stock or preferred stock, debt securities, warrants, and units (the “2024 Shelf Registration Statement”), including a prospectus for the sale under the Sales Agreement of shares of our Class A common stock, having an aggregate value of up to $70.0 million (the “Second ATM Program”). The Second ATM Program was fully utilized in November 2024. During the year ended December 31, 2024, we sold 20,644,100 shares of Class A common stock under the Second ATM Program for net proceeds of $68.0 million.
In November 2024, we filed a shelf registration statement on Form S-3ASR with the SEC and a related prospectus for the sale under the Sales Agreement of shares of our Class A common stock, having an aggregate value of up to $70.0 million (the “Third ATM Program”, and together with the First ATM Program and the Second ATM Program, the “ATM Program”). During the year ended December 31, 2024, we sold 2,052,484 shares of Class A common stock under the Third ATM Program for net proceeds of $21.7 million. As of December 31, 2024, we had $47.5 million remaining eligible for sales under the Third ATM Program.
We pay the placement agent a commission rate of up to 3.0% of the gross proceeds from any shares of Class A common stock sold through the Sales Agreement.
On June 27, 2024, pursuant to the Forward Purchase Agreement, dated as of January 3, 2023, by and between us and Stellantis N.V. (“Stellantis Forward Purchase Agreement”), we elected to draw down the $55.0 million remaining available under the Stellantis Forward Purchase Agreement associated with Milestone 3 (as defined in the Stellantis Forward Purchase Agreement). In accordance therewith, on July 1, 2024, we issued 17,401,153 shares of Class A common stock to Stellantis N.V. (“Stellantis”) for gross proceeds of approximately $55.0 million.
On August 8, 2024, we entered into subscription agreements with certain investors providing for the private placement of our Class A common stock at a purchase price of $3.35 per share (the “First 2024 PIPE Financing”), pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act. A portion of the First 2024 PIPE Financing closed on August 12, 2024 for 49,283,582 shares of our Class A common stock for net proceeds of approximately $158.0 million, after deducting offering costs. The remaining portion of the First 2024 PIPE Financing covering an aggregate of 2,982,089 shares of our Class A common stock was issued and sold to Stellantis for gross proceeds of approximately $10.0 million on January 6, 2025.
39
Table of Contents
On December 11, 2024, we entered into subscription agreements with certain investors providing for the private placement of our Class A common stock at a purchase price of $6.65 per share (the “Second 2024 PIPE Financing”, and together with the First 2024 PIPE Financing, the “2024 PIPE Financings”), pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act. A portion of the Second 2024 PIPE Financing closed on December 13, 2024 for 63,909,776 shares of our Class A common stock for net proceeds of approximately $407.7 million, after deducting offering costs. The remaining portion of the Second 2024 PIPE Financing covering an aggregate of 751,879 shares of our Class A common stock to be issued and sold to Stellantis for anticipated gross proceeds of approximately $5.0 million is subject to the satisfaction of certain closing conditions, including approval by our stockholders.
In the long term, our ability to support our working capital and capital expenditure requirements will depend on many factors, including:
•the level of research and development expenses we incur as we continue to develop our eVTOL aircraft and other products and services to be provided in our planned business lines;
•capital expenditures needed to bring up our aircraft manufacturing capabilities, including for both the build out of our manufacturing facilities, component purchases necessary to build our aircraft and support the development of our airline operations;
•general and administrative expenses as we scale our operations; and
•sales, marketing and distribution expenses as we build, brand and market our business lines, products and services.
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, pre-delivery payments, equity financing and debt financing.
The following includes our short-term and long-term material cash requirements from known contractual obligations as of December 31, 2024:
Notes Payable
See Note 6 - Notes Payable to our consolidated financial statements for further details on our debt.
Leases
We lease office, lab, hangar, and storage facilities in the normal course of business. Under our operating leases as noted in Note 7 - Commitments and Contingencies to our consolidated financial statements, we have current obligations of $6.1 million and long-term obligations of $14.9 million.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| (In millions) | ||||||
| Net cash provided by (used in): | ||||||
| Operating activities | $ | (368.6) | $ | (271.6) | ||
| Investing activities | (82.0) | 420.7 | ||||
| Financing activities | 820.4 | 250.1 |
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 any 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.
40
Table of Contents
Net cash used in operating activities during the year ended December 31, 2024 was $368.6 million, resulting from a net loss of $536.8 million, adjusted for non-cash items consisting primarily of $108.8 million in stock-based compensation, a gain of $49.5 million due to a change in fair value of our warrant liabilities, $11.7 million in depreciation, amortization and other, $8.1 million of research and development warrant expenses related to the warrants issued to Stellantis (see Note 9 - Stock-Based Compensation to our consolidated financial statements for further details), and a $5.6 million non-cash charge for the Wisk Warrant. The net cash used in changes in our net operating assets and liabilities was $17.2 million.
Net cash used in operating activities during the year ended December 31, 2023 was $271.6 million, resulting from a net loss of $457.9 million, adjusted for non-cash items consisting primarily of a $70.3 million non-cash charge comprised of a $26.3 million non-cash charge associated with the initial vested tranche of shares underlying the Wisk Warrant and a $44.0 million non-cash charge for the unvested portion of the Wisk Warrant, relating to the Technology and Dispute Resolution Agreements (see Note 7 - Commitments and Contingencies to our consolidated financial statements for further details), $45.2 million in stock-based compensation which includes the reversal of $59.1 million of stock-based compensation expense related to the forfeiture of one of the Founder Grants, a loss of $32.9 million due to a change in fair value of our warrant liabilities, and $17.5 million of research and development warrant expense related to the warrants issued to Stellantis (see Note 9 - Stock-Based Compensation to our consolidated financial statements for further details). The net cash provided by changes in our net operating assets and liabilities of $13.2 million was primarily related to a $9.2 million increase in accounts payable due to timing of payments.
Cash Flows Provided by (Used in) Investing Activities
Net cash used in investing activities during the year ended December 31, 2024 was $82.0 million, driven by purchases of property and equipment within the period.
Net cash provided by investing activities during the year ended December 31, 2023 was $420.7 million, driven by proceeds from maturities of short-term investments of $465.0 million, offset by purchases of property and equipment of $44.3 million within the period.
Cash Flows Provided by Financing Activities
Net cash provided by financing activities during the year ended December 31, 2024 was $820.4 million, driven by gross proceeds from the 2024 PIPE Financings of $590.1 million, proceeds from the total aggregate number of shares issued under the ATM Program of $138.3 million, proceeds from issuance of debt of $57.5 million, and proceeds from issuance of Class A common stock to Stellantis with an aggregate value of $55.0 million, partially offset by payments of offering costs in connection with the 2024 PIPE Financings for $24.3 million.
Net cash provided by financing activities during the year ended December 31, 2023 was $250.1 million, driven by gross proceeds from the subscription agreements with certain investors in August 2023 providing for the private placement of our Class A common stock pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of $145.0 million, proceeds from the issuance of Class A common stock to Stellantis with an aggregate value of $95.0 million, and proceeds from shares issued under the ATM Program of $20.7 million, partially offset by the repayment of term loans to Silicon Valley Bank, a division of First-Citizens Bank & Trust Company, for $10.0 million.
Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated 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.
The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgements, often as a result of the need to make estimates of matters that are inherently uncertain.
41
Table of Contents
We believe that the following critical accounting policies involve a greater degree of judgment or complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to a full understanding and evaluation of our consolidated financial statements. For additional information, refer to Note 3 - Summary of Significant Accounting Policies to our consolidated financial statements.
Stock-Based Compensation
We account for stock-based compensation awards granted to employees and non-employees by recording compensation expense based on each award’s grant date estimated fair value over the vesting period, in accordance with ASC 718, Compensation — Stock Compensation. We estimate the fair value of RSUs based on the fair value of our common stock on the date of grant.
The fair value of RSUs that vest based on service conditions is determined based on the value of the underlying common stock at the date of grant. The Founder Grants vest when either a market condition or performance condition is satisfied. We determined the fair value of the performance award by utilizing the trading price on September 16, 2021. 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 condition award, we estimated the fair value using a Monte Carlo simulation model. We recognize compensation expense for the market award on a straight-line basis over the derived service period. Determining the fair value for the market condition award under this model requires subjective assumptions, including the expected volatility of the price of our common stock. 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 cancelled.
Income Taxes
We are subject to income taxes in the United States and other jurisdictions. Our income tax provision consists of an estimate of federal, state and foreign income taxes based on enacted federal, state and foreign tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws.
We recognize tax benefits from uncertain tax positions only if we believe that it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of issues under audit or expiration of statute of limitation, changes in or interpretations of tax law. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences may affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and results of operations.
Significant judgment is applied when assessing the need for valuation allowances and includes the evaluation of historical income (loss) adjusted for the effects of non-recurring items. Areas of estimation include consideration of future taxable income. We have placed a full valuation allowance against our federal and state deferred tax assets since the recovery of the assets is uncertain. Should a change in circumstances lead to a change in judgment about the utilization of deferred tax assets in future years, the adjustment related to valuation allowances would be reported as an increase to income.
Recent Accounting Pronouncements
See Note 3 - Summary of Significant Accounting Policies to our consolidated financial statements for a discussion about accounting pronouncements recently adopted and recently issued and not yet adopted.
Credit Risk
Financial instruments, which subject us to concentrations of credit risk, consist primarily of cash and cash equivalents. Our cash and cash equivalents are held at several long-standing financial institutions located in the United States. At times, cash account balances with any one financial institution may exceed Federal Deposit Insurance Corporation insurance limits ($250 thousand per depositor per institution). We have not experienced any losses due to these excess deposits and believe this risk is not significant. We have established guidelines regarding diversification of our investments and their maturities that are designed to preserve principal and achieve liquidity requirements. We review these guidelines and modify them as necessary based on updated liquidity needs and changes in our operations and financial position.
42
Table of Contents