Arrival(ARVL) - 2021 Q4 - Annual Report

Form 6-K Filing Information This Form 6-K recasts Arrival's financial statements for three years ended December 31, 2021, to reflect a change in reporting currency from Euro to U.S. dollar, effective Q1 2022 Filing Overview This Form 6-K recasts Arrival's financial statements for three years ended December 31, 2021, to reflect a change in reporting currency from Euro to U.S. dollar, effective Q1 2022 - The company changed its reporting currency from Euro to U.S. dollar (USD), effective from the first quarter of 2022[3] - This report recasts financial information for the three years ended December 31, 2021, to reflect the new USD reporting currency[3] - The filing includes Exhibit 99.1 (Financial Results) and Exhibit 99.2 (Operating and Financial Review and Prospects), which are incorporated by reference into other registration statements[5] ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS Overview Arrival aims to revolutionize the commercial EV market through in-house design, components, and scalable microfactories, targeting underserved van, bus, and car segments - Arrival's mission is to transform the design, assembly, and distribution of commercial EVs using in-house technologies and low-cost, scalable microfactories[12] - The initial focus is on commercial vans, buses, and cars, targeting a market segment believed to be underserved by other EV manufacturers[13] - A key agreement with UPS includes an initial order for 10,000 electric vans with an option for an additional 10,000, potentially valued at up to $1.2 billion[14] - The company has a joint development agreement with HKMC, expiring in November 2024, to develop vehicles using Arrival's technologies[15] Updated Microfactory and Other Cost Estimates Arrival projects $75 million in capital expenditure for its Bicester microfactory through 2022, while facing increased costs from in-house battery assembly and raw material inflation - The Bicester, UK microfactory is expected to have a total capital expenditure of approximately $75 million through 2022[16] - The company is incurring additional costs due to decisions to assemble battery modules in-house, pre-pay for battery cell capacity, and scale its administrative functions[17] - Arrival is experiencing industry-wide increases in the cost of raw materials such as aluminum and petrochemicals[17] Vehicle Volumes and Revenue Expectations for 2022 Arrival revised its 2022 forecast to 400-600 van sales, prioritizing vehicle certification, production initiation, and quality as Bicester and Charlotte microfactories begin operations - The company revised its 2022 business plan, now expecting to produce and sell 400 to 600 Arrival Vans[18] - Production of the Arrival Van is scheduled to begin in Bicester in Q3 2022 and in Charlotte in Q4 2022[18] - Priorities for 2022 are completing vehicle certification for the Bus and Van, starting production, and ensuring the highest possible quality[18] Key Factors Affecting Operating Results As a pre-revenue company, Arrival's success hinges on product development, capital raising, commercialization, and regulatory compliance, with progress in prototypes and non-binding orders - The company is pre-revenue and its performance depends on product development, capital raising, commercialization, and regulatory compliance[19] - Development milestones achieved include building and testing Van prototypes and completing the first two Bus trial milestones[21] - Arrival is dependent on its ability to raise sufficient capital from third-party sources until it can generate revenue from product sales[23] - As of March 2, 2022, the company had non-binding orders, letters of intent, or MOUs for approximately 134,000 vehicles, including the UPS order[25] Important Information About Non-IFRS Financial Measures Arrival uses non-IFRS measures like Adjusted EBITDA, reporting a $202.9 million loss in 2021, primarily impacted by a $1.17 billion listing expense - The company uses EBITDA and Adjusted EBITDA as non-IFRS measures to help investors evaluate operating results[30][31] Reconciliation of Net Loss to Non-IFRS Measures (in thousands of USD) | | Year ended December 31, 2021 | Year ended December 31, 2020 | | :--- | :--- | :--- | | (Loss) for the year/period | (1,304,381) | (95,447) | | Interest (income)/expense, net | 141 | 2,500 | | Tax (income)/expense | 7,515 | (20,421) | | Depreciation and amortization | 24,337 | 11,071 | | EBITDA | (1,272,388) | (102,297) | | Impairment losses and write-offs | 39,378 | 456 | | Share option expense | 2,668 | 10,697 | | Listing expense | 1,168,515 | — | | Change in fair value of warrants | (122,299) | — | | Fair value movement of embedded derivative | (35,448) | — | | Fair value movement on employee loans | 6,038 | — | | Reversal of difference between fair value and nominal value of loans | (1,906) | — | | Foreign exchange (gain)/loss, net | (2,328) | 663 | | Transaction bonuses | 14,900 | — | | Adjusted EBITDA | (202,870) | (90,481) | A. Operating Results Arrival, a pre-revenue company, reported a $1.44 billion operating loss in 2021, primarily due to a $1.19 billion non-cash listing expense, alongside significant increases in administrative and R&D expenses Results of Operations (in thousands of USD) | | For the Year Ended December 31, 2021 | For the Year Ended December 31, 2020 | % Changes | | :--- | :--- | :--- | :--- | | Administrative Expenses | (171,030) | (86,178) | 98.5% | | Research and Development Expenses | (57,080) | (20,585) | 177.3% | | Listing expense | (1,188,335) | — | * | | Operating Loss | (1,439,129) | (112,364) | * | | Net Finance Income/(Expense) | 142,263 | (3,504) | (4160.0)% | | Loss for the Year | (1,304,381) | (95,447) | * | - Administrative expenses rose by $84.9 million (98.5%) in 2021, driven by increased wages, salaries, and property costs to support expanding operations[48] - Research and development expenses grew by $36.5 million (177.3%) in 2021 due to an expanded engineering headcount and higher program consumable costs[49] - A one-off listing expense of $1.188 billion was recorded in 2021, representing the non-cash cost of the business combination with CIIG[51] - Net finance income was $142.2 million in 2021, compared to a $3.5 million expense in 2020, primarily due to a $122.3 million positive fair value change in warrants[52][54] B. Liquidity and Capital Resources As of December 31, 2021, Arrival held $900.6 million in cash, deemed sufficient for 12 months, boosted by $1.4 billion in financing activities, with total contractual obligations at $636.1 million - As of December 31, 2021, cash and cash equivalents amounted to $900.6 million[57] - Management believes current cash on hand is sufficient to meet working capital and capital expenditure needs for at least the next twelve months[57] Summary of Cash Flows (in thousands of USD) | | For the Year Ended December 31, 2021 | For the Year Ended December 31, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | (273,008) | (88,691) | | Net cash used in investing activities | (312,584) | (122,463) | | Net cash generated from financing activities | 1,405,209 | 180,838 | | Net increase/(decrease) in cash | 819,617 | (30,316) | - In November 2021, Arrival issued $320.0 million in green convertible senior notes due 2026, with a 3.50% annual interest rate, generating net proceeds of $309.6 million[72][73] C. Research and development, patents and licenses, etc. Arrival prioritizes R&D and IP protection, with its vertically integrated approach resulting in approximately 50% proprietary components for the Van and 40% for the Bus by value - The company invests significant resources in R&D to create a unique value proposition and differentiation from competitors[79] - Arrival protects its IP through patents, trademarks, designs, and trade secrets[80] - Due to its vertically integrated approach, approximately 50% of the Arrival Van's components and 40% of the Arrival Bus's components (by value) are proprietary[80] D. Trend information Arrival aims to capitalize on EV demand with its microfactory approach, targeting the commercial van, bus, and ride-hailing car markets with competitive pricing and tailored solutions - Arrival Van: Aims to produce a light commercial van at a price point between traditional combustion vehicles and other EVs, but with better payload and battery flexibility[84] - Arrival Bus: Targets the $154 billion transit bus market, aiming to accelerate the transition to zero-emission public transport with its innovative design[85] - Arrival Car: Being developed in partnership with Uber to address the ride-hailing market, focusing on driver comfort, safety, and durability for high-mileage use[86] E. Critical Accounting Estimates Preparation of IFRS financial statements requires management to make significant estimates and assumptions, impacting reported assets, liabilities, and expenses - The preparation of financial statements requires management to make estimates and assumptions based on historical experience and other factors, which affect reported financial figures[87] ITEM 17: FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm KPMG LLP issued a clean opinion on Arrival's IFRS financial statements, noting the retrospective currency change and highlighting critical audit matters including development cost capitalization and merger accounting - KPMG LLP issued an opinion that the financial statements are fairly presented in conformity with IFRS[92] - The auditor highlighted the change in presentation currency from Euro to USD, which was applied retrospectively to all periods presented[93] - Critical Audit Matters were identified, including: - Capitalisation of development costs - Accounting for the merger with CIIG Merger Corp - Recoverability of employee loans[96][99][101] Consolidated Financial Statements This section presents the consolidated financial statements for 2019-2021, restated in USD, including the Statement of Profit or Loss, Financial Position, Changes in Equity, and Cash Flows Consolidated Statement of Profit or (Loss) (in thousands of USD) | | Dec 31, 2021 | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | :--- | | Operating loss | (1,439,129) | (112,364) | (58,033) | | Net finance income/(expense) | 142,263 | (3,504) | (3,565) | | Loss before tax | (1,296,866) | (115,868) | (61,598) | | Tax (expense)/income | (7,515) | 20,421 | 7,757 | | Loss for the year | (1,304,381) | (95,447) | (53,841) | Consolidated Statement of Financial Position (in thousands of USD) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | TOTAL ASSETS | 1,769,765 | 552,058 | | Cash and cash equivalents | 900,606 | 82,314 | | Intangible assets and goodwill | 414,674 | 210,723 | | Property, plant and equipment | 271,607 | 138,317 | | TOTAL EQUITY AND LIABILITIES | 1,769,765 | 552,058 | | Total Equity | 1,225,578 | 393,052 | | Total Non-Current Liabilities | 462,601 | 111,245 | | Total Current Liabilities | 81,586 | 47,761 | Notes to the consolidated financial statements These notes detail accounting policies and financial figures, covering basis of preparation, significant policies, segment information, asset/liability details, listing expense, share-based payments, and litigation Note 2. BASIS OF PREPARATION Financial statements are prepared on a going concern basis under IFRS, with a retrospective change in presentation currency from Euro to USD, and management asserts sufficient liquidity for 12 months - The Group changed its reporting currency from Euro to US dollars effective January 1, 2022, and applied this change retrospectively[141] - The financial statements have been prepared on a going concern basis. Management believes the cash on hand of $900.6 million as of Dec 31, 2021, is sufficient to fund the business for at least 12 months[133][135] - Management does not consider the Russia-Ukraine conflict to have a material impact on the Group's activities or cashflows for the purpose of the going concern assessment[140] Note 3. SIGNIFICANT ACCOUNTING POLICIES This note details critical accounting policies, including capitalization of development costs, fair value measurement of financial instruments, expected credit loss model, and significant management judgments - Development costs are capitalized as intangible assets when they meet specific criteria under IAS 38, including technical feasibility, intent to complete, and ability to generate future economic benefits[171] - Convertible notes with variable conversion features are treated as hybrid instruments, with the conversion option separated and accounted for as an embedded derivative at fair value through profit or loss[213] - Management applies significant judgment and estimates in several key areas, including impairment testing, capitalization of development costs, valuation of share-based payments, recoverability of employee loans, and the fair value of warrants and embedded derivatives[220] Note 5. OPERATING SEGMENTS Arrival operates as a single 'Automotive' segment, with non-current assets primarily concentrated in the United Kingdom and the United States - The Group is managed and reports as a single operating segment: Automotive[280] Non-Current Assets by Geography (in thousands of USD, 2021) | | Property, Plant & Equipment | Intangible Assets & Goodwill | | :--- | :--- | :--- | | UK | 202,077 | 414,623 | | US | 47,818 | - | | Spain | 12,453 | - | | Russia | 6,084 | - | | Others | 3,175 | 51 | | Total | 271,607 | 414,674 | Note 7. INTANGIBLE ASSETS AND GOODWILL Intangible assets and goodwill increased to $414.7 million in 2021, primarily from capitalized development costs, with a $17.6 million impairment charge for non-core projects Intangible Assets and Goodwill (in thousands of USD) | | Goodwill | Assets under construction | Patent, trademarks, etc. | Software | TOTAL | | :--- | :--- | :--- | :--- | :--- | :--- | | Net book Value at Jan 1, 2021 | 33 | 207,142 | 471 | 3,077 | 210,723 | | Additions | — | 225,885 | — | 6,103 | 231,988 | | Impairments | — | (17,243) | (325) | — | (17,568) | | Net book Value at Dec 31, 2021 | 30 | 408,193 | 74 | 6,377 | 414,674 | - Assets under construction primarily relate to development projects for electric vehicles, components, and software[300] - An impairment loss of $16.1 million was recorded for assets under development related to the Charging Stations and Roborace cash-generating units, which are no longer considered core projects[301] Note 15. LOANS AND BORROWINGS Loans and borrowings increased significantly in 2021 to $451.5 million non-current, driven by $320 million in convertible notes and increased lease liabilities Loans and Borrowings Breakdown (in thousands of USD, Dec 31, 2021) | | Non-current | Current | | :--- | :--- | :--- | | Lease liabilities | 173,904 | 13,076 | | Convertible notes | 159,021 | 1,182 (interest) | | Embedded derivatives | 118,600 | — | | Total | 451,525 | 14,258 | - In November 2021, Arrival issued $320 million in convertible notes due 2026 with a 3.5% interest rate[384][385] - The conversion feature of the notes is accounted for as a separate derivative liability because it could require a variable number of shares to be issued upon conversion. It was initially valued at $152.5 million[384][386] Note 16. WARRANTS Arrival issued public and private warrants during its business combination, with most exercised or redeemed by year-end 2021, leaving 2.4 million private warrants outstanding - As part of the merger, Arrival issued 7,175,000 private warrants and 12,937,493 public warrants with a total initial fair value of $208.6 million[396] - On June 18, 2021, Arrival announced the redemption of all outstanding public warrants for cash at an exercise price of $11.50 per share[398] Warrant Movement During 2021 (in thousands) | | Number of Warrants | Value (USD) | | :--- | :--- | :--- | | Warrants issued by Arrival | 20,112 | 208,586 | | Change in fair value | — | (122,299) | | Warrants exercised | (17,009) | (82,669) | | Warrants redeemed | (712) | (7) | | Total Outstanding at Dec 31, 2021 | 2,392 | 3,611 | Note 22. LISTING EXPENSE The business combination was accounted for as a reverse merger, resulting in a significant non-cash listing expense of $1.17 billion under IFRS 2 - The transaction was accounted for as a reverse merger, which resulted in a non-cash listing expense recognized in the statement of profit or loss[433][434] Listing Expense Calculation (in thousands of USD) | | Amount | | :--- | :--- | | Fair value of shares issued | 1,591,090 | | Fair Value of Warrants transferred | 208,586 | | Total value of consideration | 1,799,676 | | Less: Fair Value of net asset received | (631,161) | | Reverse merger impact (IFRS 2) | 1,168,515 | | Other expenses directly linked | 19,820 | | Total listing expense | 1,188,335 | Note 23. SHARE BASED PAYMENTS Arrival operates multiple equity incentive plans, including SOP, RSP, and RSUs, with a $4.7 million SOP expense in 2021 and a strike price currency change to USD - The company has multiple share-based payment plans: Share Option Plan (SOP), Restricted Share Plan (RSP), and Restricted Stock Units (RSU)[438][440][458] - The total SOP charge for 2021 was $4.7 million, with part of the cost capitalized and part expensed[442] - In August 2021, the SOP was modified to change the strike price currency from EUR to USD, setting the new strike price at $7.19[442][453] - In 2021, 50,000 new RSUs were issued to Non-Executive Directors with a grant date fair value of $707,577[458] Note 26. CLAIMS AND LITIGATIONS Arrival faces multiple shareholder class action lawsuits alleging false or misleading statements regarding operations and financial performance, which the company intends to vigorously defend - The company is a defendant in several putative class action lawsuits filed by shareholders[471][472][473] - Allegations generally concern false or misleading statements about the company's operations, financial performance, and growth prospects[471][473] - Arrival intends to vigorously defend against the ongoing legal actions[475] Note 28. SUBSEQUENT EVENTS Key subsequent events include the Russia-Ukraine conflict's non-material impact on operations and the grant of 3.5 million new RSUs in January 2022 - Regarding the Russia-Ukraine conflict, Arrival has relocated employees and data from Russia and does not expect a material adverse impact on its business or financial condition[477] - On January 24, 2022, Arrival granted 3,495,662 Restricted Stock Units (RSUs) to employees and other eligible participants[478]