Thank you, Mr. Hu. Hello, everyone. I'm Edward Xu, Chief Strategy Officer of Yihang. First, I'm glad to help translate CEO's remarks into English.
Hello, everyone. Thank you all for joining our earnings conference call today. I would like to start by sharing with you our business progress for the first half of twenty twenty one. Then I will give you some highlights our business plans for second half. As I shared with you in our last quarterly earnings call, has led the way in UAM operation with the aim to become an Ergon air mobility platform operator empowered by our autonomous aerial vehicles.
To achieve this exciting goal, we have made relentless efforts and careful preparations in the past few months. As you know, we newly released our VT30 passenger grade AAV as one of our flagship products besides the EHAN 216. The release of the VT30 fully demonstrated our technological strength in the field of AV Industries, and it is also complementary to the EH216, which is designed for short to medium range intra city air mobility. Our priority is to launch interesting air mobility first with application of EHang 26 to make urban Air taxi, a reality. I believe many of you know that we have made quite a number of trial is carrying passengers and cargoes during recent shares.
There are still people looking forward to taking a ride with our EHang 26 For flight experts, I think what EHA has done essentially in the past few years is not only to build AVs, to build safety. Over the years, we have been making trial flights with good safety records. Meanwhile, we have accumulated abundant experiences and also problems that may help us think seriously for further improvement, which we have been working on recently to ensure top safety record in the upcoming operations of our AAVs After the formulation of airworthiness standards and completion of the certification process, we have been making comprehensive preparations from various perspectives. In terms of sales, we delivered 18 units of EHang 26 ADB in the first half of twenty twenty one, including 15 units in the first quarter and 3 units in the second quarter. As we mentioned in our last earnings conference call, Yihang is gradually transitioning into an operation platform model from our product sales centric model, which is also reflected in our actual AAV sales performance.
Next, I'm glad to share with you the progress of our 100 air mobility routes initiative. As of now, we have screened and tested 7 operation stores, most of which are located in South China, In addition to the ones that are operated by our partners, we position our operations as new transportation mode for island hopping, low attitude aero tourism and suburban transportation. We started by focusing on South China and plan to expand gradually to other areas in China. So far, we have targeted 15 self run operation spots, 6 are in Guangdong province and another 6 in the Yangtze River Delta region. We also plan to assist our customers to conduct operations in additional 21 locations.
Meanwhile, our collaboration with the CAC for EHang 216 hype certification is going down very well. CAAC has officially accepted our application on January 19, of 2021. It spearheaded the project team by recruiting over 20 experts from the country To start the certification process, we have held several rounds of review meetings inspections in Guangzhou and Hezhou. Critical consensus has been reached between the expert team at EHA on the basis of complete understanding of the design features of EH216. Now the type certification process Proceeding in an orderly manner in accordance as planned.
We have taken the EH216 type certification program as the company's top priority. We expect to work with the CEC to formulate airworthiness certification standards for the ER26 passenger grade AUVs in the Q3 of this year, which will be unprecedented in the aviation industry. In addition, we expect to obtain the type certificate for ER-two sixteen within the next 4 to 6 months. We will strive to complete all the relevant certification inspection work ahead of schedule within this year. In terms of new products, We have released our brand new type of hybrid eVTOL, the VT30, in May of this year, which is designed for longer range urban air mobility.
V830 is designed to travel distance of up to 300 kilometers with a design flight time of up to 100 minutes. It complements to the existing EHang 26, a product focusing on short to medium distance intercity air mobility. Currently, VT30 is undergoing large number of internal trial flights and has made good progress. Our EHAN 216F, The firefighting model and other auxiliary products have filled the gap in urban high rise firefighting. In January of 2021, we successfully completed the technical examination of the EH216F by the China National Firefighting Equipment Quality Supervision Testing Center, which certified the reliability of our products as firefighting equipment and pave the way for the commercialization of the EHANCE 216F AAV.
Subsequently, we will start to promote, design and deliver the EHang 216F related orders. With so many technical advantages, We believe it will play an important role in the real scenarios of firefighting, rescue and emergency activities in various places. With our new production facility in Gufu, Guangdong officially put into operation in June of 2021, Our production capacity has been increased. The facility is mainly used for the production of the EHAN216 service of passenger grade AUVs and others. Phase 1 covers a gross floor area of 24,000 square meters has designed initial annual capacity of about $600,000 Although the Investor Day, which was scheduled to be held at the new Yunfu production facility on August 18, has been unexpectedly caught up by the local government Right before the event due to the reemergence of the COVID-nineteen cases in Guangdong, we still hope to reschedule the event after the lift of the traveling ban.
We will then expect to provide investors with opportunities for in person visits and communications. In the first half of the year, we continue to carry out a large number of trial flights, which are in line with CAC's regulatory methods to encourage trial flights first and integrate the trial operation experiences into the certification process. For example, we made trial and demo flights at the opening ceremony of the Chinese Super League in Guangzhou, at the Digital China Summit in Fuzhou in Japan and in Beijing for the first time and over South China Sea from Zhuhai, Henxin to Dongau Island, etc. In June, we participated in the anti COVID-nineteen campaign in Guangzhou by transporting medical and emergency supplies to quarantine areas using the EH216 and EH216L AAV. In Europe, we have successfully been selected and deeply involved in a large number of urban air mobility projects supported by the European Union and have reached extensive industry collaborations with the government and partners in Spain, France, Italy and other countries.
Looking forward to the second half of the year, we expect to continue to sell and deliver our service of AAV During the strategic transition of our business model, we have also maintained sufficient cash reserves for at least 12 to 24 months to support the smooth progress of our business development in the future. Although the transition may lead to a potential decline in the short term sales revenues, we will continue to vigorously advance the preparations and the gradual implementation of our 100 air mobility routes initiative, which we view as more importantly continuously expanding our operation spots and routes, increasing the frequencies of transport flights, expanding existing professional air mobility operation team, so as to create income from our operations and make it eventually becomes our main pillar of revenue soon and to enable Ehab to be the world's first company to start the commercialization of urban air mobility operations. And last, I would like to say that Ehan will move step by step towards our strategic goal of becoming an urban air mobility platform operator. Meanwhile, we are very pleased to see that more and more upstream and downstream companies are joining the emerging UAM industry.
We are confident will continue to lead the way and maintain our comprehensive competitiveness in the global UAM market. Thank you for all our investor support. Above were Mr. Hu's remarks. Following his remarks, I'm going to elaborate our strategic transitioning in the 1st 2 quarters and our plan for the future.
We have defined our goal as to build and advance the global U. M. Operation platform. We have switched our focus more towards AUV operations in Q2 of 2021, which led to a scale down in our sales level. Moreover, the re attack by COVID-nineteen in South China had adverse impact on the sales deliveries of our AUVs in the period as well.
On the other hand, we started to explore the field of practical UAM operations. Specifically, we built our UEM operation team by recruiting industry professionals from world class organizations. We believe we are able to leverage their valuable experiences and backgrounds in leading aviation and mobility companies such as Airbus, Hai Long Airlines, Hong Kong Express, Hong Kong Airlines, Citi helicopter, BMW, IBM, etcetera, and to build a whole new operation platform for AUVs, what we call GWM 3.0. More importantly, we have started to implement our 1 100 routes initiative by screening and testing appropriate spots for UAM routes. So far, we have screened and tested 7 spots for AUV operation, mostly located in South China.
We position our operation to offer a new transportation mode for island hopping, low attitude air tourism and suburban transportation. Our initial focus is on the Guangdong, Hong Kong Macau Great Bay area and plan to expand gradually to other areas in China. Based upon our latest operation plan, we have targeted 15 self run operation spots, including 6 in Guangdong and 6 in Eastern China. We're also planning to help our customers to launch operations in 21 spots, including 10 in Guangdong and 4 in Guangxi. In achieving our operational goals, we are working broadly with our local partners, including government authorities and business organizations from industries such as real estate, tourism, construction, transportation and aviation, who are able to share their valuable resources, especially in Thailand and in demand and infrastructure.
Our goal is to build our mode to give us a 1st mover advantage in the U. S. Industry. Meanwhile, our collaboration with the Cboe Aviation Administration of China for EHang 2 16 type certification is going on very well. The CAC has officially accepted our application on January 19, 2021.
Set up a project team by recruiting over 20 experts nationwide to start the certification process. We have held several rounds of meetings and inspections to conduct the airworthiness reviews of the design, safety and operations of our EH216 ADVs. We are hopeful that further reviews and tests will be completed in the next 4 to 6 months when the type certificate for EHAN216 could be granted by CEC, which shall pave the way for larger scale operations of our EVs. Looking ahead, we will continue to implement our 100 urban air mobility route initiative, I accelerate the testing process. We will strengthen our existing partnerships with key entities, including CAC, local governments and business organizations.
We expect to acquire new resources by demonstrating our successful models, which should further expand our operational scale. Meanwhile, we will also actively look for various business opportunities to better monetize our model at this stage By generating ancillary revenues from advertisements, static displaying of all AAVs, student camps, training schools, wedding shows, etcetera. I will now turn the call over to our CFO, Mr. Richard Liu, to provide the financial results. Richard, please go ahead.
Thank you.
Thank you, Edward, and hello, everyone. Before I go into details, please note that all numbers presented are in RMB, unless stated otherwise. All percentage changes are on a year over year basis, unless otherwise specified. Detailed analysis are contained in our earnings press releases, which are available on our IR website. I'm going to highlight some of the key points here.
As our business is and operation platform oriented model. The shift is gradual and important. Our revenues indicated a delicate balance during this digit transition period. In Q1 2021, total revenues were RMB23 1,000,000, an increase of 22.1 percent year over year. The EHang216 series of passenger grade AAV sold in Q1 was 15 units compared to 9 units in Q1 last year.
Q2 revenues were RMB12.2 million, a decrease of 65.9 percent year over year because 3 units of AAVs were sold in Q2 compared to 16 units sold in Q2 last year. This revenue decrease in Q2 is an anticipated impact of the We continue to optimize the cost structure of our air mobility products and improved overall gross margin. Q1 gross margin was 63.2%, an increase of 3.9% points from that in Q1 last year, Q2 gross margin reached a record high of 68%, 10.4 percentage points increase year over year. This was mainly due to the completion of a higher margin control system for smart city management project, in addition to continuous cost structure optimization in Q2. Adjusted operating expenses, which are operating expenses excluding share based compensation expenses, increased by $3,400,000 to $34,500,000 in Q1 and by $24,500,000 to $59,900,000 in Q2, compared to the numbers in the same period of last year.
The increase in Q2 was mainly due to the continuous increase R and D expenditures for developing and upgrading AAV models, including the newly released long range VT30 designed for intercityairtransportation and increases in proof of provisions related to the new virus outbreak impacts and additional expenses related to the extended filing of our 2020 Annual Report. Adjusted operating loss in Q1 2021 was $17,300,000, a $1,900,000 improvement compared with that of 19 $200,000 in Q1 last year. In Q2, adjusted operating loss was $49,400,000 compared to $11,100,000 in last Q2 due to lower revenues and higher adjusted operating expenses in Q2 this year. Actual results, adjusted net loss in Q1 2021 was $13,700,000 compared with that of $18,500,000 in Q1 last year, and in Q2 2021 was $49,100,000 compared with that of $11,700,000 in Q2 last year. In respect of the balance sheet and the cash flow, we ended the Q2 with $406,500,000 of cash and cash equivalents and short term investments, which we believe are adequate to support operations for the next 12 to 24 months.
More importantly, we achieved again positive quarterly operating cash flow in Q1 this year of $16,200,000 last time was in Q4 2019. This again reflects the unique inherent value in our business and the continuous efforts that the company has been taking to run a healthy operation and minimize the cash burn in the development process. Now let's turn to the business outlook. We expect to maintain the annual revenue forecast in 2021 can range between RMB130 1,000,000 RMB180 1,000,000 as we strategically transition into a more operation platform oriented model and the commercialization of EHang 2 16F, the firefighting model among other products. That concludes our prepared remarks.
So let's now open the call for questions. Operator, please go ahead.
Certainly. Ladies and gentlemen, we will now begin
the question and answer session.
We have the first question coming from the line of Tim Searle from Morgan Stanley. Please go ahead.
Hello. Hi. Thanks for taking my questions and congrats on the results. Question from my side. The first one, I think Mr.
Hu, at the beginning of this call, mentioned that the company It's a good progress in terms of transforming into the upper air transportation operator. So on the full year basis, could you please share some further information how much of the revenue Or how many percentage of revenue could be contributed by this kind of air or urban transportation related operation? And my second question is about the volume sales, because you mentioned EHAN shipped 18 units in the first half. So just based on our guidance, it means that second half, we still need to have some progress. But in light of the rest of the COVID lockdowns, What's our latest guidance regarding the volume?
And how many of the units would contribute by something like the government project, For example, Yihan 216F. So those are my questions. Thank you.
Okay. Thanks, Tim. This is Edward. Answer your first question I try to answer your first question because we did not have everything the numbers there. As you know that in the first half, we have been moving gradually from sales centric model more towards the operation platform, operating model, right?
And but now the key bottleneck is still the regulatory issue, I. E, the type certification. So that's why we are also very focusing on this type certification. But why we are moving towards the operation so early is because In order to achieve this goal, we need to do more preparations and especially to set up our team. As you know, we recruited professionals from world class organizations and set up a very talented team.
And also we need to accumulate enough experiences. And so as you can see, especially in Q2 of this year, we made a lot for these preparations technically And in human resources and also we visited so many places and did screening and testing of different spots for real operation, right? So that's all. I think we are still in the very early stage to prepare all these necessary elements. This is a very necessary step for us to do, right?
And so far, I think we made a very good preparation. And looking into the second half, We are going to launch the operation very smoothly. And yes, in the next few months, you are going to see the release of more operational routes and so which
is approved of our work.
But in terms of revenues, as I said, so far based upon our estimate, for each AAB, Our target is to generate about RMB1 1,000,000 of revenues, but this is based upon The approval by the CEC, which means that after obtaining the opportunities from the adhesinery revenue. So for example, we made a very good contract with our advertisement clients Who would like to pay for displaying their logos in the bodies of our AV, right? And also we round up with some corporate customers. For example, one Corporate customer in the 2nd quarter, they contributed about RMB100000 revenue, right, which is with only this one customer. So we are trying different ways of generating revenues from our existing equipment, right?
But still, we acknowledge that it is too early to tap the full potential of commercial revenues because we are not able to explicitly sell ticket for passengers taking a ride of our AUV, right. But with a lot of trial flights and experience accumulated, This would definitely pave the way for our further commercialization, which is planned after the certification. So I think as Mr. Hu mentioned, we did very well in terms of this collaboration. And so we are very hopeful that the type certification could be obtained Within next 4 to 6 months, right?
So, yes, I hope I made myself clear to you. And the next question will be answered by Richard.
Tim, this is Richard. Thanks for The second question I understand regarding the kind of the product sales situation. As we discussed a lot in our remarks, we're in the strategic transition From a product sales focused model to a operation platform oriented model. And also As Edward mentioned earlier, in the Q2, the reattacked by the COVID-nineteen outbreak in Guangdong had adverse impact on the product sales of our AUVs in the quarter. By looking into the second half or the remaining period of this year, It is expected that our product sales focus will be more toward the After the technical examination completion, we actually have been working with The local emergency department and file department of several cities, as we explained in our earnings release such as Qingdao City, Guangzhou City, Hezhou City, etcetera, to utilize Yihang 2 16F in the urban trial rescue growth in those cities with those departments.
So this has laid a good solid foundation for ongoing onward commercialization of the HON 216F. And our business team have been following up with the relevant department in those cities trying to materialize the actual order. And there will
Great. Thank you very much for sharing all the details. Headway and future. Thank you.
Thank
you. Thank you. We have the next question. This is coming from the line of Victor Hugo
Just One question to try to better understand the shift of your business. Basically, you are saying to our to the investors that you are not more Interesting to sell products, but you still have some facility as far as I understand Going forward, so going into the future, Do you think that the product making We'll be the big guys, like, just to mention some guys like Boeing Airbus and so on. And you will be only, let's say, as you say, Managing the road to the infrastructure, all these kind of new frameworks that And when you say, okay, we need authorization, we need approval, you mentioned that you already have 16 routes, You may add 20 routes. The difficulty I have and I believe you have as well, It's a completely new business. Is it how you tend to translate In fact, you get, let's say, 35 routes into potential free cash flow.
So the question is, can you give to me, if you may, a flavor Of one authorized room, let's say, in China or Spain and Italian or Can translate for you in terms of operating free cash flow? And because I think that usually the product because I never believe that we could make the product because to make the product, frankly, you need a lot of CapEx maybe.
Thank you.
Thank you. That's the line to make a lot of CapEx. It's a pretty Interesting, we have a new company right here because the CapEx for you needs to have a lot of money So if you just can give to me a flavor of how to turn, let's say, one of the right routes with one platform into operating free cash. Thank you.
Thank you for your question. Let me clarify that. We're not saying that we are not selling our products. Actually, we are our New facility in Yunfu has just been launched and which increased our capacity to 600 units per year, right? So So basically, as Richard mentioned, our sales will still going on and maybe will be more focused on the EHang 216F, the firefighting version and as well as maybe some logistic version as well.
But in terms of the standard, the EHAN216, we are more focusing on the operation because operation It's very important. Without operation, there is no way for the ultimate commercialization. So meanwhile, we still receive the good interest from our customers who are willing to buy. So the reason we are launching our self operation model is just to set the model for our customers. And We are launching our operation routes successfully and so that it can demonstrate The real value, right?
Because as we estimate, the operating margin of operating the AV can be as high as about 35% or even 40%, right, depending on the scale. So which can prove to be a very successful investment, right? So be attractive for our customers who would buy our for commercial purpose, right? So we are actually doing 2 ways. 1, on the on one hand, we are launching operation on our hand, and we are also helping our customers to launch operation.
And so that's why this 100 Air Mobility Route initiative is about. But on the other hand, we are welcoming our customers, our new customers to buy the AVs from us. And we but we integrate, consolidate all the operations on our platform. So that's the value of our platform. So I hope I make this very clear And hopefully this answered your question.
Okay. Yes, thank you. Yes, so it's When you say you shift into another, is still an integration between your production And these, let's say, all other kind of peculiar facilities, but still you still Are going to produce the vehicle basically?
Yes. We still remain the OEM producer. We will continue to produce our AVs, yes, that's for sure.
Thank you. Seeing no more questions on the line, I would like to hand the conference back to Mr. Liu. Please go ahead, sir.
Thank you, operator. And thank you all for participating on today's call and for all your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.
Thank you. Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may disconnect now.