Rockley Photonics Holdings Limited
Q1 2022 Earnings Call Transcript

Published: 12 May 2022

[Operator:]

Good day, ladies and gentlemen, and welcome to the Rockley Photonics First Quarter 2022 Earnings Conference Call. All lines have been placed on listen-only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Ms. Gwyn Lauber. Please go ahead, ma’am.

[Gwyn Lauber:]

Thank you, operator, and welcome, everyone. This is Gwyn Lauber, Vice President, Investor Relations at Rockley Photonics. Today, we released the results of our first quarter ended March 31, 2022. A copy of the earnings press release, along with supplemental financial tables are available on the Investor Relations section of our website at investors.rockleyphotonics.com. With me on today’s call are Dr. Andrew Rickman, OBE’s Chairman and Chief Executive Officer; and Mahesh Karanth, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of Rockley’s website. Before I turn the call over to Andrew, I’d like to note that today’s discussion will contain forward-looking statements. These forward-looking statements include, but are not limited to, the anticipated, features, benefits, scope, focus, status and goals of our platform, technology, products, studies, and partnerships with third parties, our ability to bring and the timing of bringing our products to market, our product development schedules, our strategies, our research and development plans, our customers, our commercial and market opportunities and trends, our debt obligations, our costs and expenses, our cash resources, cash burns, revenue guidance, financial projections and financial performance and our outlook and factors affecting the foregoing. These forward-looking statements are subject to risks and uncertainties, which may cause actual results to vary materially from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those discussed in our earnings press release and in the Risk Factors section of our Annual Report on Form 10-K as well as our other filings with the SEC. Any forward-looking statements that are made on this call are based as of assumptions as of today. We undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, Rockley reports certain non-GAAP financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations of these GAAP and non-GAAP measures are included in the tables found in our earnings press release. Now, I’ll turn the call over to Andrew. Andrew?

[Andrew Rickman:]

Thank you, Gwyn, and thank you all for joining us for our first quarter 2022 earnings conference call. Today, I’ll start by briefly discussing our results and then talk about our business. In the first quarter, we generated revenues of $1 million. Our GAAP net loss which includes an interest payment for our debt and expenses from our datacoms business was $41.8 million in the first quarter compared to a total loss of $14.7 million in the fourth quarter of 2021, which benefited from a one-time R&D tax credit. After completing the financing, cash, cash equivalents and investments will be approximately $118 million A summary of our financial statement is available on the Investor Relations section of our website. In a few moments Mahesh will provide the details of our financials and our recently completely financing. I’ll start with some comments about the transaction. Earlier today, we announced the completion of an $81.5 million investment in Rockley, with an option to purchase an additional $81.5 million in notes and warrants. Throughout the process, I was very pleased with the quality of the investors who expressed interest in our company and the excitement that they exhibited when we showed them our technology. I believe that their investment is an acknowledgment of our product development, the success we’ve had with our customers and the many opportunities ahead of us. These investments will help fund the company as we move towards production Which we believe will begin in the second half of 2022. These new investors along with many long-term investors who are listening into the call understand the importance of investments that Rockley is making as we work towards fulfilling our goal of creating a unique solution that has the potential to improve the house and well being of people around the globe by allowing them to have a better understanding of their health and well being. The core of our business is our belief in the importance of taking a holistic view of an individual and their help. By monitoring multiple biomarkers and recording them over time trends in health can be identified. Many practitioners including Dr. David Klonoff, Clinical Professor of Medicine at the University of California San Francisco and a renowned diabetes expert, understands the importance insights that this holistic view provides. They have device methodologies to take this approach but I often challenged to do this successfully. Patient compliance, high costs and lack of availability have presented insurmountable challenges. Until now, the world is just beginning to witness technological innovation in wearable devices. Wearables coupled with the information that machine learning and artificial intelligence can detect and analyze is impacting healthcare in profound ways. This information could potentially provide early diagnosis of diseases, it can understand a person’s physiological state and provide actionable intelligence based on the person’s needs and it could help to manage chronic diseases. These innovations may lower health care costs and potentially save lives. Rockley goal is to develop a solution which will harm practitioners and individuals with actionable personal intelligence by providing a holistic view of one’s health. Our noninvasive continuous biosensing solution will identify, collect and interpret biomarkers that will alert a practitioner or a person to change it in one’s health, potentially long before the change might be noticed using traditional methods that provides a snapshot into a patient at one moment in time. We believe our solution has the potential to help with disease prevention, to lower the cost of health care and to improve health outcomes. Thanks to the anonymous data that each person will provide, combined with the analysis of that data through machine learning and AI. Users can potentially be alerted to changes to their health, much earlier enabling them to act much sooner, thereby creating the opportunity for better outcomes. We believe our solution will expand medical monitoring from a single point in time to a longitudinal measure of health, giving the user a much more complete view of their health. In recent months, I’ve spoken with many of you and even sat down with a few of you face-to-face. Through these interactions, I realized it might be helpful if I further explained our customer base to you. This insight may help you to better understand our strategy and opportunities ahead of market. Today we have 17 customers across the consumer wearables and MedTech markets, representing six out of 10 of the largest vulnerable companies and two of the 10 largest MedTech companies. We believe that this expanded customer base should allow us to not be overly reliant on any one customer. Our customers fall into two categories The first category includes customers who prefer to work with multiple vendors who each supply a small part of a large design. These customers then put all the pieces together into their products. The second much larger category works with us to provide them with our entire solution We work together to achieve their goals and to build a strong final product. We believe the second category benefits from our expertise in developing silicon photonics based, bio sensing solutions, and in measurement science. Unique critical skills as I needed to be successful in developing this new technology. We have made significant progress in developing our product platform and believe that we are years ahead of any other technology and any competitor in our field. The second group of customers benefits from our innovations allowing them to advance their product development strategies giving them an advantage over customers to pursue strategy. For us, we believe the second category will provide a significant revenue and higher profits particularly for our medtech customers who are interested in our full stack solution that includes our wearable band. In the last few months, we’ve seen the beginning of the convergence of consumer wearables and medtech to massive markets, with Rockley’s biosensing technology well-positioned at the center, we believe we will benefit from this convergence. I believe that we are on track in the development of both vital spec solution for our consumer wearable customers and bioptic for medtech customers. We plan to offer our baseline and pro solutions to both markets. Now I’d like to provide some insight into our markets. In medtech, I’m very excited about the opportunity to have in this market. A year ago, we had two assumptions about the medtech market. We believe that they would be slower to adopt a solution and that they would only be interested in an FDA regulated version. These assumptions were wrong. We’re currently working with earlier doctors on multiple use cases including certain pre and postoperative solutions for our medtech customers under the general health and wellness guidance for our baseline and pro bands. They are interested in our full solution to patient monitoring, clinical trials and other applications. We believe the economics of these solutions will be very favorable for Rockley because the full solution should provide higher average selling price and margins. We finished the first quarter by announcing that we entered into a development partnership with Medtronic to jointly develop a wearable device that utilizes our bioptic biomarker sensing platform. This partnership combines Medtronic’s strengths in providing inpatient care with Rockley’s expertise in photonics based health monitoring. I believe that this collaboration will help to advance our vision of providing healthcare professionals and end users with a holistic view of an individual. We are excited about this partnership because we believe it will help us develop solutions to enable round the clock in time non-invasive monitoring of a person’s biomarkers empowering permissions to personalize care to actionable data. We will explore future opportunities to expand our relationship with Medtronic and other medtech companies as we look to deliver the next generation of wearable devices that we hope will enable a new level of patient care. Also in the first quarter, we announced that we shipped samples of our recently announced bioptic product line to multiple medtech customers. Bioptics is a full biomarker sensing platform for professional healthcare and offers the first of its kind non-invasive continuous bio sensing wristband. The platform will enable measurement of an extensive range of biomarkers and will be supported by custom cloud based analytics and AI. To meet increasing demand for our medtech customers bioptics was launched two years earlier than planned. Customer interest in both general health and wellness solutions and FDA regulated versions continues to behind and we expect the first commercial products for a general health and wellness version of our baseline band solution to be available in the second half of 2022 with production ramp in 2023. To this end, we confirmed the design of our Baseline band prototype, having received input from our partners, customers and global healthcare leaders. We are working with our contract manufacturers to support our production run for the Baseline band in the second half of 2022. Turning to our consumer wearables, we recently achieved a very important milestone, shipping VitalSpex Pro technology for the non-invasive measurement of alcohol, glucose and lactate to an early access, tier-1 consumer wearables customers. The shipment of this advanced biomarker sensing technology is important for Rockley, because this is a significant step towards integrating our Biosensing Technology into smart wearables. We believe this integration will provide a realistic view of one’s health and has the potential to transform health outcomes by enabling early detection of certain conditions allowing for improved management and treatment of illnesses. We also have opportunities with our consumer wearable customers for general health and wellness and FDA regulated versions of our baseline and pro solutions. As health and wellness becomes more of a focus with end users, these customers also will a standard and a medical grade solution that they can offer their end users at different subscription levels. As a business, we believe we are taking the right steps and demonstrating through our customers that we are building a product portfolio that has significant potential to change healthcare. This milestone further demonstrates that our vision is the right one. At the heart of what we do on our human trials, these IRB approved studies bring together people and technology creating real world scenarios that provide us with insight into the efficacy of our solution. I’m truly delighted to say that our initial work in the labs has been validated by these studies, producing results that both exceed the generally accepted methods of measurement and in some cases provide the first primary method to measure what could be life threatening conditions. These studies are where our solution moves from theoretical to revolutionary. In December, we released the results of our first preliminary human studies. In this core body temperature study, we were able to achieve results far closer to the gold standard than any of today’s generally available devices. The study was the first human study in a series designed to evaluate and refine the performance of Rockley’s sensing platform to measure this biomarker. Since the initial study, we conducted additional core body temperature studies completing a second study and working towards finalizing the results of the third. I’m very pleased to say that by fine tuning our solution through these ongoing studies we are achieving results that are even more accurate than our previous results and closer to the gold standard than any of the commercially available devices. In the first quarter, we also announced that we successfully completed the first stage of our human studies examining the measurement of blood pressure using Rockley’s biomarker sensing platform. In addition to demonstrating that photonics space sensor while on the risk can measure blood pressure non-invasively. The study showed that Rockley’s risk based platform produces strong correlation of heart rate and heart rate variability measurements with results from commonly used electrocardiogram or ECG equipment. Since that time, we increase the number of subjects in the study so that we can continue training and test more robust machine learning models. And finally, just a few days ago, we announced the results of our preliminary study measuring hydration levels using Rockley’s non-invasive biomarker sensing platforms. Our study showed that Rockley wearable device was able to correctly predict dehydration in humans 99% of the time and detect the normal state for water content 82% of the time. The ability to monitor changes in body hydration levels on a routine basis through a Rockley powered device has the potential to help people and help health care professionals make better informed choices about their hydration needs, including the amount and timing of consumption. We also announced that we created a hydration index, a powerful new measurement scale designed to provide a simple way to understand personal hydration levels. Until now there was no single gold standard method for measuring hydration. Instead healthcare professionals use a combination of costly and time consuming laboratory tests to assess the osmolality and electrolyte concentration in patients’ fluid. Core body temperature, blood pressure and hydration biomarkers along with heart rate, heart rate variability, respiration and blood oxygen levels will be measured in our baseline solution. We are also conducting early stage studies for our pro solution which includes the measurement of alcohol, lactate and glucose. In addition to the biomarkers available in our baseline technology, we are very pleased with the results. Our plan is to release the results of these human studies as we complete various stages of these programs throughout the year. And now I’d like to discuss the opportunity that we’ve created through our ecosystem. In speaking with our customers and partners, we realized that the power behind a solution is not just a unique biosensing technology but also the data that naturally flows through the Rockley devices. Today, we are building a framework for collecting measurements across large populations of over long time periods that will enable our data scientists working with partners to discover new patterns in the data. These patterns can be turned into cloud based services for healthcare recommendations and predictions tailored to an individual wearing in Rockley Center. Developing the cloud and machine learning stack jointly with our hardware and sensor quality allows us to optimize the performance of the entire system. For example, enabling us to iterate quickly on sense of designs informed by our growing collection of data from wearable sensors, this library of datasets is seeded by our human studies, our partners studies and eventually our customers. Finally we are building a subscription based machine learning and software ecosystem that will enable our customers to integrate our analytic services into their applications and even to create their own models from our center data and deploy these services to the rest of the Rockley center community. We believe this platform will help our customers to be more efficient in monitoring their patients more successful in their drug development and will provide them with new revenue sharing opportunities. I strongly believe that Rockley is presuming the right path for our future. We continue to develop a highly sophisticated solution that will provide individuals and healthcare professionals with a powerful holistic view of the human body through insights into multiple biomarkers. This will allow both audiences to monitor and track trends in an individual’s health. I believe this will allow the current market to move from sick care to true healthcare. The insights we will provide have the potential to change one’s daily life by providing a deeper understanding of the impact of lifestyle choices in real-time to help physicians identify serious health conditions and possible disease states earlier, allowing for more affordable prevention measures and to provide a real opportunity for remote monitoring of patients and the elderly. I believe our solution which utilizes a very powerful technology will help to profoundly change healthcare for the better. Finally, I want to offer my sincere thanks to the entire Rockley team. The team is working extremely hard because we moved towards production in the second half of 2022. Their support is making our vision a reality and I believe their work will forever change people’s lives for the better. With that, I will turn the call over to Mahesh for a review of our financial performance in the quarter. Thank you.

[Mahesh Karanth:]

Thank you, Andrew, and good afternoon everyone. On today’s call, I will discuss some key topics that will provide you with a deeper understanding of our business. I will end by providing an update on our outlook for 2022. The recorded revenue of approximately $1 million in the first quarter. Revenue for the first quarter is solely related to nonrecurring engineering services from our customers, and revenue is recognized based on mutually agreed performance obligations and acceptance. Cost of revenue was $3.4 million resulting in a gross loss $2.4 million. It is important to note that expenses are recorded has incurred even if revenue has not been recognized. Q1 R&D expenditures increased because of a slight increase in headcount as well as other expenses as we build our infrastructure to support our product efforts ahead of our second half 2022 correction rent . Q4 four R&D does not provide an appropriate comparison, because of R&D tax credit in that quarter. As I mentioned last quarter we implemented a number of programs to preserve capital and reduce of our cash burn. This enabled us to decrease SG&A expenses from $12.4 million in Q4 to $10.9 million in the first quarter. For the first quarter our cash burn was impacted by several expenses, which resulted in higher cash out lays. These expenses included a debt plus interest repayment of $7.5 million to our lenders and other one-time expenses including expenses for our datacom business of approximately $3.6 million. Excluding this expenses cash used in operating activities during the quarter totaled approximately $34 million in line with the fourth quarter as we supported programs to enable our production rent. We believe that our cash burn will be lower in the second half of 2022 as we work towards reducing expenses. Recurring operating expenses for our datacom business are approximately $2.5 million and mainly include salaries and fat partners spend. We expect these expenses to wind down once we monetize the datacom business. Since announcing our plan to monetize the datacom business we have had strong interest from companies interested in that business and technology. We will provide an update on these efforts when it is appropriate. We ended the quarter with $36.4 million in cash, cash equivalents and investment. We did not utilize any funds from our As a reminder we believe that we will receive additional funds from UK R&D tax credit and from monetization of our datacom communication business. Subsequent to quarter end we raised $81.5 million through a convertible loan note, which has Andrew mentioned will enable us to advance the development of our biosensing solutions for the consumer wearable and medtech market. Looking ahead for 2022, our revenue guidance is $20 million $30 million, which we continue to expect to be primarily driven by monetizing our data communications assets, NRE and product dales. In wrapping up my prepared remarks, we are pleased with our operational progress so far this year and believe we remain well positioned to execute on our roadmap head. I will now turn the call back to the operator to open-up the call for questions.

[Operator:]

Thank you, sir. We will take our first question from Quinn Bolton with Needham and Company. Your line is open. Please go ahead.

[Quinn Bolton:]

Hey guys can you hear me.

[Andrew Rickman:]

Yes we can. Hi, Quinn.

[Quinn Bolton:]

Hi, Andrew. Obviously you guys are making a lot of progress on the products and solutions both for the consumer and the medtech markets, but I guess wanted to get some more clarification on the financing that you announced this morning. I guess first, can you give us some sense of the number of shares underlying the convertible notes and the warrants issued? And then you mentioned there’s an option for another 81.5 million, who has – what is the timing sort of associated with that option? Is that something you would expect to potentially happened pretty quickly or is there a time frame on that option for the second round of notes?

[Andrew Rickman:]

Yes. Hi, Quinn. We have actually released the 8-K wherein we have put out all the details. So I would encourage you to take a look at that. From a – at a high level as we said we will be raising $81 million now with an option to raise another $81 million over the next year. The pricing for this round was $3.08 per share. We still have a $15 million of ELOC in place. So the company which will provide the company approximately about $200 million of liquidity. Very good group of investors; we can’t mention the names who spent a lot of time with us understanding the business and the future opportunities.

[Quinn Bolton:]

Understood. Okay. That would be great. Please continue if you had mode.

[Andrew Rickman:]

No. No. More details about the deal structure and the coupon or the warrant, everything is mentioned in that 8-K.

[Quinn Bolton:]

Okay. I guess the second sort of question sort of around that the expense reduction that that you mentioned programs to reduce expenses in the second half is that mostly just the monetization of the data come assets and that $2.5 million of associated expenses going away or are there other actions on the biomarker sensing side where you also see an opportunity to reduce the level of expenses in the second half?

[Andrew Rickman:]

It’s predominantly on the datacom side, the datacom side as we said; we have got a very good attraction at this stage. We should be announcing something sharky. Once that is done unlike the previous deal, if you recall the deal we were talking with the JV partners we would continue to have the headcount and also do the fab partner spend and get a higher amount whereas with this we may get a lower amount but we will not be spending any more money as we move forward. So that from a company’s point of view and the shareholders point of view we felt this will be the right move for us as we bring the cost down. That is probably the main thing. Then there are certain biomarkers which have an impact in the 2025 timeframe, those biomarkers we will not be taking a very active step at this stage and we will push that out next year. So that is how we will combine all those expenses reduction as we move forward.

[Quinn Bolton:]

Great. And then just what for Andrew you mentioned products moving into production in the second half of the year, is that both on the consumer wearable and the medtech device side or is that mostly just on the fiber optics and the medtech side for the second half of this year.

[Andrew Rickman:]

It’s both because the chip set that goes inside the fiber optics and is essentially the VitalSpex chipset to go into consumer wearable customers as well. So it’s both activities.

[Quinn Bolton:]

Okay. Great I’ll get back in the queue. Thank you.

[Operator:]

We’ll go next to Tim Savageau with Northland Capital. Your line is open sir. Please go ahead.

[Tim Savageau:]

Hi, good afternoon. I’m wondering if you might be able to, you mentioned kind of gearing up with the supply chain contract manufacturers for production volumes of those baseline bands here in the second half. At this point can you characterize, what those production volumes might look like or are we talking about kind of an initial seeding of the market or what you consider to be full or meaningful production or any color on kind of the scale of that ramp. I think would be great.

[Andrew Rickman:]

Would you like to take that Mahesh?

[Mahesh Karanth:]

I will, thanks Andrew. At this stage for this year our production ramp will be less than a million units. For the next year it will be in multi million unit’s volume. So if you look at the next year you’ll be talking north of 1000 wafers and again you expect that to be kind of spread across. Yes, I guess Andrew you mentioned you expect both markets to be targeted consumer in medtech but would you know expect a bias either way. And in addition you know given your comments that the baseline unit contains the same optical sensing engine as part of that ramp, do you expect shipments of that that engine to ramp up as well outside of the baseline.

[Andrew Rickman:]

That’s correct Yes

[Tim Savageau:]

Okay, thanks very much.

[Andrew Rickman:]

Thanks, Tim.

[Operator:]

All right, there were no other questions holding. That will conclude today’s Q&A session. I’ll turn it back for any additional or closing comments.

[Gwyn Lauber:]

Thank you for participating in our call today. We’re very excited about the opportunities ahead of us and we’re looking forward to providing me with updates in the near future. Thank you everybody.

[Operator:]

Ladies and gentlemen, that will conclude today’s call. We thank you for your participation. You may disconnect at this time.