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[Non-English content] Thank you, Mr. Hu. Hello everyone, I'm Edward Xu, Chief Strategy Officer of EHang. First, I'm glad to help translate Chief Executive Officer'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 2021. I will give you some highlights of our business plans for the second half. As I shared with you in our last quarterly earnings call, EHang has led the way in Urban Air Mobility operation with the aim to become an Urban 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 VT-30 passenger-grade AAV, as one of our flagship products besides the EH 216.
The release of the VT-30 fully demonstrated our technological strength in the field of AAV industry, and it is also complementary to the EH 216, which is designed for short to medium range intra-city air mobility. Our priority is to launch intra-city air mobility first, with application of EH 216 to make urban air taxi a reality. I believe many of you know that we have made quite a number of trial flights carrying passengers and cargos during recent years. There are still people looking forward to taking a ride with our EH 216 for flight experience. I think what EHang has done essentially in the past few years is not only to build AAVs, but 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 improvements, which we have been working on recently. To ensure top safety records 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 the EH 216 AAV in the first half of 2021, including 15 units in the first quarter and three units in the second quarter. As we mentioned in our last earnings conference call, EHang is gradually transitioning into an operation platform model from a 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 Route Initiative. As of now, we have screened and tested seven operation spots, 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-altitude air 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, six are in Guangdong Province and another six i n the Yangtze River Delta region. We also plan to assist our customers to conduct operations in an additional 21 locations. Meanwhile, our collaboration with the Civil Aviation Administration of China for EH 216 type certification is going on very well. CAAC has officially accepted our application on January 19th, 2021.
It has spearheaded a project team by recruiting over 20 experts from the country to start the certification process. We have held several rounds of review meetings and inspections in Guangzhou and Hezhou. Critical consensus has been reached between the expert team at EHang on the basis of complete understanding of the design features of the EH 216. Now, the type certification process are proceeding in an orderly manner in accordance as planned. We have taken the EH 216 type certification program as the company's top priority. We expect to work with the CAAC to formulate airworthiness certification standards for the EH 216 passenger grade AAVs in the third quarter of this year, which will be unprecedented in the aviation industry. In addition, we expect to obtain the type certificate for EH 216 within the next four to six 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 VT-30, in May of this year, which is designed for longer range Urban Air Mobility . VT-30 is designed to travel a distance of up to 300 km with a design of flight time of up to 100 minutes. It complements to the existing EH 216, a product focusing on short to medium distance inter-city air mobility. Currently, VT-30 is undergoing a large number of internal trial flights and has made good progress. Our EH 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 EH 216F by the China National Fire-Fighting Equipment Quality Supervision Testing Center, which certified the reliability of our products as firefighting equipment and paved the way for the commercialization of the EH 216F AAV. Subsequently, we will start to promote, sign, and deliver the EH 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 Yunfu, 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 EH 216 series of passenger grade AAVs and others. Phase I covers a gross floor area of 24,000 sq m and has a designed initial annual capacity of about 600 units.
Although the investor day, which was scheduled to be held at the new Yunfu production facility on August 18, has been unexpectedly called off by the local government right before the event due to the reemergence of the COVID-19 cases in Guangdong, we still hope to reschedule the event after the lift of traveling ban. We will then expect to provide investors with the opportunities for in-person visits and communications.
In the first half of this year, we continued to carry out a large number of trial flights, which are in line with the CAAC's regulatory measures to encourage trial flights first and integrate the trial operation experiences into the certification process. For example, we made a 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's Hengqin to Dongao Island, et cetera. In June, we participated in the anti COVID-19 campaign in Guangzhou by transporting medical and emergency supplies to quarantine areas using the EH 216 and the EH 216L AAVs.
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 products. During the strategic transition of our business model, we have also maintained sufficient cash reserves for at least 12-2 4 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 Route Initiative, which we view as more important through continuously expanding our operation spots and routes, increasing the frequencies of transfer flights, expanding the existing professional air mobility operation team so as to create income from our operations, and make it eventually become our main pillar of revenue soon, and to enable EHang to be the world's first company to start the commercialization of Urban Air Mobility operations. Last, I would like to say that EHang 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 that EHang 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 on our strategic transitioning in the first two quarters and our plan for the future. As we have defined our goal as to build and advance the global UAM operation platform, we have switched our focus more towards AAV operations in the second quarter of 2021, which led to a scale-down in our sales level. Moreover, the re-attack by COVID-19 in South China had adverse impact on the sales and the deliveries of our AAV in the period as well. On the other hand, we started to explore the field of practical UAM operations. Specifically, we built our UAM 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, Hainan Airlines, Hong Kong Express, Hong Kong Airlines, CITIC Offshore Helicopter, BMW, IBM, et cetera, and to build a whole new operation platform for AAVs, what we call UAM 3.0. More importantly, we have started to implement our 100 Air Mobility Route Initiative by screening and testing appropriate spots for UAM routes. So far, we have screened and tested seven spots for AAV operation, most of it located in South China. We position our operation to offer a new transportation mode for island hopping, low altitude aero tourism, and suburban transportation. Our initial focus is on the Guangdong-Hong Kong-Macao 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 six in Guangdong and six in East China. We're also planning to help our customers to launch operations in 21 spots, including 10 in Guangdong and four 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 island and in land and infrastructure. Our goal is to build a moat to give us a first-mover advantage in the UAM industry. Meanwhile, our cooperation with the Civil Aviation Administration of China for EH2 16 type certification is going on very well. The CAAC has officially accepted our application on January 19th of 2021.
It has 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 airworthiness reviews of the design, safety, and operations of our EH 216 AAVs. We are hopeful that the further reviews and tests will be completed in the next four to six months, when the type certificate for EH 216 could be granted by CAAC, which shall pave the way for larger scale operations of our AAVs. Looking ahead, we will continue to implement our 100 Air Mobility Route Initiative by accelerating the testing process. We will strengthen our existing partnerships with key entities, including CAAC, 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 the AAVs, student camps, training schools, wedding shows, et cetera. I will now turn the call over to our Chief Financial Officer, 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 know that all numbers presented are in RMB unless stated otherwise. All percentage changes are on a year-over-year basis unless otherwise specified. Detailed analyses are contained in our earnings press releases, which are available on our Investor Relations website. I'm going to highlight some of the key points here. As our business is strategically transitioning into a more operation platform-oriented model, we sell AAV product to third parties and at the same time are shifting towards an operation platform-oriented model. The shift is gradual and important. Our revenues indicated a delicate balance during this strategic transition period. In Q1 2021, total revenues were RMB 23 million, an increase of 22.1% year-over-year. The EH 216 series of passenger-grade AAVs sold in Q1 were 15 units compared to 9 units in Q1 last year.
Q2 revenues were RMB 12.2 million, a decrease of 65.9% 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 strategic transition. We continue to optimize the cost structure of our air mobility products and improve overall gross margin. Q1 gross margin was 63.2%, an increase of 3.9 percentage points from that in Q1 last year. Q2 gross margin reached a record high of 68%, a 10.4 percentage points increase year-over-year. This was mainly due to the completion of a higher-margin command and 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 RMB 3.4 million- RMB 34.5 million in Q1 and by RMB 24.5 million- RMB 59.9 million in Q2 compared to the numbers in the same periods of last year. The increase in Q2 was mainly due to the continuous increase in R&D expenditures for developing and upgrading AAV models, including the newly released long-range VT-30 designed for intercity air transportation, and increases in 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 RMB 17.3 million, a RMB 1.9 million improvement compared with that of RMB 19.2 million in Q1 last year. In Q2, adjusted operating loss was RMB 49.4 million compared to RMB 11.1 million in last Q2 due to lower revenues and higher adjusted operating expenses in Q2 this year.
As a result, adjusted net loss in Q1 2021 was RMB 13.7 million compared with that of RMB 18.5 million in Q1 last year. In Q2 2021 was RMB 49.1 million compared with that of RMB 11.7 million in Q2 last year. In respect of the balance sheet and the cash flow, we ended the second quarter with RMB 406.5 million of cash and cash equivalents and short-term investments, which we believe are adequate to support operations for the next 12-24 months. More importantly, we achieved again positive quarterly operating cash flow in Q1 this year of RMB 16.2 million. 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 burns in the development process. Now let's turn to the business outlook.
We expect to maintain the annual revenue forecast in 2021 to the range between RMB 130 million and RMB 180 million as we strategically transition into a more operation platform-oriented model, and the commercialization of the EH 216F, the firefighting model, among other products. That concludes our prepared remarks. 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. If you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel the request, please press the pound or hash key. Once again, press star followed by one on your telephone keypad if you wish to ask a question. We have the first question coming from the line of Tim Hsiao 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 has good progress in terms of transforming into the urban air transportation operator. On the full-year basis, could you please share some further information, how much of the revenue or how many percent of revenue could be contributed by this kind of air or urban transportation-related operation? My second question is about the volume sales, because you mentioned EHang shipped 18 units in the first half. Just based on our guidance, it means that second half, we still need to have some progress.
In light of the recent COVID lockdowns, what's our latest guidance regarding the volume, and how many of the units would be contributed by something like the government project, for example, EH 216F? Those are my questions. Thank you.
Okay. Thanks, Tim. This is Edward. I'll answer your first question. I'll try to answer your first question because we may 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 platform operator model, right? Now, the key bottleneck is still the regulatory issue, i.e., the type certification. That's why we are also very focusing on this type certification. 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 the professionals from world-class organizations and set up a very talented team. Also, we need to accumulate enough experiences.
As you can see, especially in second quarter of this year, we made a lot of these preparations technically and in human resources. We revisited so many places and did screening and testing of different spots for real operation, right? 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? So far, I think we made a very good preparation. Looking into the second half, we are going to launch the operation very smoothly. In the next few months, you are going to see the release of more operation routes, which is a proof of our work.
In terms of revenues, as I said, so far based upon our estimate for each AAV, our target is to generate about RMB 1 million of revenues. This is based upon the approval by the CAAC, which means that after obtaining the type certificate. At this stage, we are trying to explore the business opportunities from the ancillary revenue. For example, we made a very good contract with our advertisement client who would like to pay for displaying their logos in the bodies of our AAV. Also, we round up with some corporate customers. For example, one corporate customer in second quarter, they contributed about RMB 100,000 for revenue, which is with only this one customer. We are trying different ways of generating revenues from our existing equipment.
Still, we acknowledge that it is too early to tap the full potential of commercial revenues because we are not able to explicitly sell tickets for passengers taking a ride of our AAV. 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. I think, as Mr. Hu mentioned, we did very well in terms of this CAAC collaboration. We are very hopeful that the type certification could be obtained within next four to six months.
Right. Yeah, I hope I made myself clear to you. The next question will be answered by Richard.
Tim, this is Richard. Thanks for the question. The second question, I understand, regarding 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 an operation platform-oriented model. Also, as Edward mentioned earlier, in the second quarter, the re-attack by the COVID-19 outbreak in Guangdong had a adverse impact on the product sales of our AAV in the quarter. Looking into the second half or the remaining period of this year, it is expected that our product sales focus will be more towards the firefighting model, EH216F, which you know that the technical examination by an NFFE has been completed.
After the technical examination completion, we actually have been working with the local emergency department and the fire department of several cities, as we explained in our earnings release, such as Qingdao City, Guangzhou City, Hezhou City, et cetera, to utilize EH216F in the urban fire rescue drills in those cities with those departments. This has laid a good, solid foundation for ongoing onward commercialization of EH 216F. Our business team have been following up with the relevant department in those cities, trying to materialize the actual order. There will be more cities in the Midwest.
Great. Thank you very much for sharing all the details, Edward and Richard. Thank you.
Thank you.
Thank you. Once again, ladies and gentlemen, it is star followed by one on your telephone keypads to ask a question. Once again, it is star one to ask a question. Ladies and gentlemen, it is star one on your telephone keypad if you wish to ask a question. We have the next question. This is coming from the line of [Vittorio from Creamality]. Please go ahead.
Okay. Yes. Just one question to try to better understand the shift of your business. Basically, you are saying to the investors that you are not more interested to sell products, but you still have some facility, as far as I understand, going forward. Going into the future, do you think that the product making will be the big guys, like, just to mention some guys like Boeing, Airbus, and so on, and you will be only, let's say, managing the route, the infrastructure, all these kind of new frameworks that this aerial urban mobility will do need. I don't know if you have a sort of projection when you say, "Okay, we need authorization, we need approval." You mentioned that you already have 16 routes, and you may add 20 routes.
The difficulty I have, and maybe you have as well, because it's a completely new business, is how to tend to translate the fact that you get, let's say, 35 routes into potential free cash flow. The question is, can you give to me, if you may, a flavor of one authorized route, let's say in China or in Spain and Italy, can translate for you in terms of operating free cash flow? Because I think that this is the product, because I never believed that you could make the product, because to make the product, frankly speaking, you need a lot of capital, maybe.
Frankly speaking, investor doesn't like to make a lot of capital with a pretty interesting, really new company like you, because the CapEx for you needs to have a lot of money that you have for your current business, but it needs to have a lot of money. If you just can give to me a flavor of how to turn, let's say, one authorized route with one platform move into operating free cash. Thank you.
Thank you for your question. Let me clarify that we're not saying that we're not selling our products. Actually, our new facility in Yunfu has just been launched, and which increase our capacity to 600 units per year. Right? Basically, as Richard mentioned, our sales were still going on, and maybe we'll be more focused on the EH 216F, the firefighting version, and as well as maybe some logistic version as well. In terms of the standard EH 216, we are more focusing on the operation, because operation is very important. Without operation, there is no way for the ultimate commercialization. Meanwhile, we still receive the good interest from our customers who are willing to buy. The reason we are launching our self-operation model is just to set the model for our customers.
We are launching our operation route successfully that it can demonstrate the real value, right? Because as we estimate the operating margin of operating AAV can be as high as about 35% or even 40%, right, depending on the scale. Which can prove to be a very successful investment, right? Be attractive for our customers who would buy our AAVs for commercial purpose, right? We are actually doing two ways. One, on one hand, we are launching the operation on our hand, and we are also helping our customers to launch operation. That's why this 100 Air Mobility Route Initiative is about. On the other hand, we are welcoming our customers, our new customers, to buy the AAVs from us. We integrate, consolidate all the operations on our platform. That's the value of our platform.
I hope I make this very clear, and hope this answer the question.
When you say you shift into another, it's still an integration between your production and these, let's say, all other kind of peculiar facility, but you still are going to produce the vehicle, basically.
Yeah. We still remain the Original Equipment Manufacturer producer.
Yes.
Produce our AAVs. Yeah, 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.
Operator.
Ladies and gentlemen, that concludes the conference call for today. Thank you all for your participation. You may disconnect now.