Q2 2022 Rockley Photonics Holdings Ltd Earnings Call
Chairman and Chief Executive Officer, and Chad Becker, Interim Chief Financial Officer.
This call is being webcast and will be archived on the investor relations section of ROCLEAS 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 burn, revenue guidance, financial projections and financial performance, and our
and outlook and factors affecting the foregoing.
These forward-looking statements are subject to risks and uncertainties that 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 the risk factor 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 on 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, Rocklea reports certain non-GAAP financial measures that do not conform to generally accepted accounting principles. We believe that these non-GAAP measures enhance the understanding of our performance.
Reconciliation of these gap and non- GAAP measures are included in the tables found in our earnings press release.
Now I'll turn the call over to Andrew.
Thank you Gwyn and thank you all for joining us for our second quarter 2022 Earnings Conference call.
Today I'll start by briefly discussing our results and then talk about our business.
In the second quarter we generated revenues of $1.5 million.
Our gap net loss for the second quarter was $54.2 million plus non-cash charges related to the CLN of $67.6 million for a total of $121.8 million.
This compares to a loss of $41.8 million in the first quarter of 2022, which included an interest payment for our debt and expenses for our day-to-comes business.
We ended the quarter with $46.6 million in cash, cash equivalents and investments.
In a few moments, Chad will provide more detail on our financials.
A full summary of our financial statements.
is available on the investor relations section of our website.
Turning to our business.
I'm especially happy to speak with you on the first anniversary of our business combination.
One year ago, I could not have imagined how far our business would have come.
As I readdress you, we are at an extraordinary point for the company as we move from R&D to starting production of a solution that I believe will truly change the way we approach healthcare and will help improve the health and wellness of people worldwide.
As you know, there's an ongoing convergence of medtech and consumer wearable markets as they vie for dominance in the health and wellness marketplace.
We believe that Rockly's solution fits firmly at the center of this convergence, and that our biosensing solution will help to provide competitive differentiation to our partners and customers.
is our commitment to helping to change the healthcare landscape from a sick care system to a truly healthcare system.
We believe that not only is technology enabling this change, but also society's realization that we can and must do better.
We need to learn how to improve our base final health.
And by providing a comprehensive biomarker monitoring solution, we believe that we will offer tools to enable consumers, patients and healthcare providers to be able to use
to improve health outcomes by acting on the data received from our products.
In the US nearly 20% of the US GDP is spent on sick care.
We believe that our solution has the potential to reduce the cost of treatment and improve health outcomes by identifying symptoms of illness and chronic disease much earlier.
by helping people understand their physiology as they work towards positive outcomes.
We believe our devices will help to enable wellness proactively rather than waiting to treat illness reactively.
Now I'd like to provide some insights.
into our markets.
Today we have 19 customers across the consumer wearables Medtech market representing six of the top 10 largest wearable companies and two of the five largest Medtech companies.
We continue to increase our engagement with these and other customers.
It's worth noting that in Medtag we have customer interest across multiple segments including patient monitoring, clinical trials, health and wellness monitoring, lifestyle management, pharmaceuticals and fitness. We believe that this expanded customer base should provide us with multiple opportunities in the market and will allow us to not be overly reliant on any one customer.
Turning to consumer wearables, in June we announced that one of our tier one consumer wearable customers had begun an evaluation program using Rockly's photonic based sensing technology.
Under the program, Rockly's Vitaspec Pro comprehensive non-invasive biomarker measurement solution has been evaluated for potential integration into the customer's future wearable products.
The Tier 1 customer adds to Rockly's growing list of global consumer electronics manufacturers to receive shipments of our VitalSpec Pro technology, which is expected to enable the non-invasive measurement of alcohol, glucose and lactate from a wrist-worn device.
This evaluation is a big milestone as it will further the development of our Pro solution.
In Medtech, during the quarter we signed a supply agreement and received our first purchase order for our bioptics baseline band from a global health organization.
Technology provider.
This was a very exciting accomplishment for us.
We plan to begin shipping units to the customer in the fourth quarter.
The customer also provided their forecast for 2023 purchases, which includes a significant ramp throughout the year, as we achieve ISO and other regulatory qualifications. This first order is truly exciting as it means that we could have some devices on the wrist of end users by year-end.
To that end, we received production bioptics baseline band devices from our manufacturing partner. I'm delighted to have this near final version in my hands and look forward to showing the device to you throughout the quarter.
Another important announcement for us was our agreement to partner with the US government
top 10 clinical research organisation.
This new customer will work with us to develop and evaluate our bioptics wristband, our cloud services and other elements of our biosensing platform.
We believe this partnership will provide the first opportunity to integrate our health monitoring solution into a CRO's clinical research studies.
By offering an expanded range of biomarkers including core body temperature, hydration, blood pressure, alcohol, glucose and lactate
This partnership not only will expand our reach in MedTec, but it also has the potential to significantly aid CROs by creating opportunities for clinicians and researchers to conduct decentralized trials and gain crucial insight into the health and well-being of patients throughout the trials regardless of their location.
We recently made several announcements that I believe will help to enhance our understanding of our markets and regulatory landscape as well as sharpening our overall strategic vision.
First, I am delighted to welcome Richard Kunz to our board of directors.
Rick brings an incredibly broad background in multiple areas of healthcare. Most recently he served as Chief Medical and Scientific Officer at Medtronic. He was also the founder and Chief Scientific Officer.
the Harvard Clinical Research Institute, a university-based contract research organization which coordinates National Institute of Health and industrial clinical trials with the FDA.
Additionally, he directed numerous multi-center clinical trials, authored more than 250 original peer-reviewed publications and served as an Associate Professor of Medicine at the Harvard Medical School. I am very excited to have Rick on our board.
We also announced the formation of our Scientific Advisory Board or SAB. This group of experts brings experience in therapies for diseases associated with diabetes and cardiology, as well as human hydration and fundamental spectroscopy and is tasked with helping to further the company's ongoing efforts to revolutionise wearable biosensing technology.
The newly formed SAB will support Rocklea's mission to empower people to make better informed decisions about their health and wellbeing.
Now I'll update you on our human trials. In the second quarter we expanded on our preliminary human studies into core body temperature, hydration and blood pressure with larger follow-on studies of these biomarkers ahead of the launch of bioptics baseline bound.
Our focus was on a broad range of study participants and use cases and additional validation data was collected.
Our bioptics baseline band is expected to launch in the fourth quarter.
The data that we've collected continues to support the results of our previous studies and helps us fine-tune the performance of the Rockly Sensing platform with the goal of providing accuracy that is closer to the gold standard than any of the commercially available devices.
As a reminder, 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 of our PRO solution, which includes the measurement of alcohol, glucose and lactate, in addition to the biomarkers available in our baseline technology. We are very pleased with the early results. We plan to update you on the results of our human studies for each biomarker as we complete various programs throughout the year.
Now I'd like to update you on our move to production.
To ready ourselves for our production ramp in 2023, we've assembled a network of suppliers to support our manufacturing. We built a dual source strategy to ensure a diversified supply chain that we hope will help mitigate potential issues with any one supplier. We've made significant progress in our wristband manufacturing capability.
As we move to the next phase of production, I'm very optimistic, as the team we've assembled is world-class.
and has the know-how to steer us through this stage.
Now I'd like to update you on our Datacomps asset.
In the second quarter, we received what we thought was a very good offer for this business.
As we moved through the negotiations, it became apparent that the buyer was trying to overstep the terms of the original agreement.
we realized that it was crucial to protect our IP and our business.
With our focus on the production of our baseline band, it became clear that actively trying to monetize our data comma asset had become a distraction.
Since stopping the transaction, we repurpose most of the DataComm staff and resources.
We are not proactively pursuing a similar type of transaction for the DataComm business.
We have eliminated its expenses, making the transaction cash flow neutral, thereby achieving our financial objectives.
We still believe there is an opportunity to monetize our Datacom asset, but as we move to production, all our energies must be focused on our baseline bank.
I strongly believe that Rockly is pursuing the right path for our future. We continue to develop highly sophisticated solutions that will provide individuals and healthcare professionals with a powerful holistic view of human health through insights provided by multiple biomarkers.
Our solution will allow these audiences to monitor and track trends in an individual's health and wellness.
I believe this will profoundly change today's system as we move from providing sick care to true health care.
The insights that our products will enable have the potential to change one's daily life by providing a deeper understanding of the impact of lifestyle choices on one's health, helping physicians identify serious health conditions and possible disease states earlier, allowing for more affordable prevention measures and providing a real opportunity for remote patient monitoring.
I believe our solution, which utilizes our very powerful technology, will help to profoundly change healthcare for the better.
We've reached a very exciting time at Rocklea. As I sit in our office in Pasadena, I'm amazed at how far we've come.
I truly feel the excitement around the office as we move towards the production stage.
We believe what we are doing is truly exceptional as we are building a technology that will truly change the current healthcare system and will help improve the health and wellness of people worldwide.
With that, I will turn the call over to Chad for a review of our financial performance in the quarter. Thank you.
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 the remainder of 2022.
We recorded revenue of approximately 1.5 million dollars in the second quarter.
Revenue for the quarter was solely related to non-recurring engineering services from our customers.
revenue is recognized based on mutually agreed performance obligation and acceptance.
Cost of revenue was $2.3 million, resulting in a gross profit of negative $800,000.
It is important to note that expenses are recorded as incurred, even if revenue has not been recognized.
In Q2, R&D expenditures were $26.3 million, which includes a slight increase in product design services and third-party engineering, as well as other expenses as we build our infrastructure to support our product efforts ahead of our second half 2022 production ramp.
This compares to R&D expenditures of $24.8 million in Q1.
SG&A expenses increased from $10.9 million in Q1 to $21 million in the second quarter due to non-capitalized fees related to the recent issuance of our convertible notes.
For the second quarter, our cash burn was impacted by several expenses which resulted in higher cash outlays.
These expenses included $10 million in non-capitalized deal fees and other one-time expenses, including expenses for our Datacom business of roughly $1.6 million, related mainly to salaries and staff partner spend.
As Andrew noted, our efforts to repurpose our DataComm employees and eliminate those expenses is expected to be cash flow neutral compared to our previous divestment plan.
Excluding these expenses, cash used in operating activities during the quarter totaled approximately $29.6 million.
and improvement from the first quarter as we implemented programs to reserve capital and reduce cash burn.
We believe that our cash burn will be lower in the second half of 2022 as we work towards reducing expenses.
We ended the quarter with $46.6 million in cash, cash equivalents, and investments.
We did not utilize any funds from our ELOC and as a reminder We believe that we will receive additional funds from a UK R&D tax credit
Looking ahead to 2022, our core product revenue guidance is $5 million to $10 million.
While we believe that there may be future opportunities to monetize our Datacom assets, we have not included any revenue from it in our guidance.
For 2023, we plan to issue revenue guidance on our third quarter earnings call.
In wrapping up my prepared remarks, I'll just add that we believe the opportunity in front of us is large and that with discipline we will execute on our roadmap ahead. I will now turn the call back to the operator to open up the call for questions.
Ladies and gentlemen, at this time, if you would like to ask a question, simply press star and one on your telephone keypad. Pressing star and one will place your line into a queue and will take your questions one at a time. Also, a friendly reminder that if you're joining us today on a speakerphone, please return to your handset prior to pressing star and one to be certain that your signal does reach our equipment. Once again, ladies and gentlemen, that is star and one if you would like to ask a question. We'll hear first from Quinn Bolton at Needham.
Hi guys, congratulations on the first volume purchase order for the Biotix platform. I guess I was hoping you might be able to provide a little bit more detail on that initial contract and Andrew you mentioned the possibility or forecast for a pretty significant ramp in 2023. Yes.
quantify how much this initial purchase order might generate in revenue and then give us a sense as you look into 2023, could this customer generate, you know, tens of millions of dollars, single-digit millions of dollars, just any kind of ballpark we could think about as we're trying to model 2023. Thank you.
Thanks, Gwyn. Yeah, hi. This is a very, very, very big opportunity. This alone could make the company extremely substantial. So this customer has provided us with initial purchase order but has given us also the forecast for the year ahead and we have a good grasp of the overall market opportunity associated with this particular channel over the next couple of years.
And so it is, it's a very, very large opportunity.
Just maybe.
Would that be hundreds of thousands potentially of risk bands or I mean is it you have substantial and like it's pretty large order or potential? Yes, the addressable market through this channel is in the millions of units in due course.
Got it. Perfect. Second question for me, just was wondering if you might be able to update us on your efforts in the consumer electronics segment. I believe you were going to be providing samples to a Tier 1 customer in the fourth quarter with a potential launch of a customer device sometime in 2023. Is that still the right time frame to be thinking about for the consumer electronics opportunity?
We're working very closely with all of the consumer customers that we've got on their design in processes. At this point in time we can't say anything about their specific launch plans but those design in activities are going very very very well. It is worth noting that since we took the company public a year ago there really has been a shift around in terms of the timing.
that our own wristband, the bioptics wristband that you now see, has really accelerated ahead of everything else and is our focus in terms of revenue for next year. The design and activities associated with the consumer device companies are very exciting. They represent tens of thousands of units just in their own sort of qualification and ramp up phase and then building.
inventory. But what we can see at this time is with great firmness is around our own wristband which gives us a lot of confidence as we look forward
Great. That's very helpful. And then just maybe one for Chad. How should we think about OPEX? I know you said that, you know, on the one hand, you've, you know, taken actions to reduce OPEX in the second half, but it sounds like much of the staff that was deployed on DataComm has been redeployed to focus on the healthcare and the medical device opportunity. And so I'm just trying to, you know, sort of think about.
those two comments and what it implies for OpEx on a quarterly basis into the second half of this year.
Yeah, I would just like to say that the entire company is committed to the efficient use of cash. And, you know, I'm just pleased how the entire organization is committed to that cause. So whether it's hiring employees or investing the cap backs, we just continue to be very diligent with the cash usage. And as we've mentioned in the past, our target for the cash burn, we are focusing on doing our best to be on the lower range of that band. We are going to continue to do our best to be on the lower range of that band.
Thank you for your question, sir. Next we'll move to Paul Silverstein at Cowan.
Andrew, before I ask my real question, I want to make sure I understand you correctly in this call and from your press release.
I think what you're telling us.
is that the consumer wearable opportunity, which, correct me if I'm wrong, you previously projected $300 to $320 million of revenue for $23.
You've now removed that guidance. I heard you say The initial option is tens of thousands of units, but I think you're telling us
that you no longer expect any of the consumer wearable companies to go forward in a meaningful way in 23. I just want to make sure that I understand that correctly before I ask you some other questions.
No, it's not quite what we've said, but we've said that our own wristband going into the medical applications, and it's designed specifically for that area, is dominating us for 2023 in terms of our expectations for the year. From the consumer device customer point of view, there's still a huge amount of activity and design inactivity going on in that area. But it is predicated on those customers launching their products for us to be able to...
to forecast those customers beyond the tens of thousands of units that are relevant to the build-up, if you like, of their own qualification of their own devices. So as we look forward, we're seeing a greater level of certainty in terms of our revenues of 2023 driven by our own device, which is exceeding our previous expectations in terms of its potential.
But Andrew, I'm not trying to be argumentative, but I'm confused.
You had a 300 to 320 million guidance out there based on consumer wearables.
you now have your MedTech that steps up.
The way you're presenting it, it sounds like it's a choice, which it shouldn't be. I would think that the MedTech opportunity, which has manifested itself faster.
than you all had previously conveyed, that that should increase your confidence, that's the 300 to 320, and frankly, even more than increase the confidence, should augment, it should be something north of that. But by virtue of taking away that guidance,
Again, I'm not trying to be argumentative here, I'm just trying to understand. By taking away, it sounds like you don't have the confidence on the wearable side anymore. Otherwise, you want to remove the guidance. You'd be telling us now with the strength of MedTech having materialized, you're looking at something even greater than 300 to 320. What am I not understanding? consuming well.
I think it's a good point Paul. There's definitely as we look at our projections going out into in a future years and when you think about it earlier in this year, then the certainty associated with any of the revenues had a particular risk associated with it. Now we find ourselves in a situation where we are much much more certain about the prospects of our own wristband.
and where that is much more in our control. So there's always going to be risks associated with our customers in terms of, particularly in the consumer device area, in terms of their launch and their particular ramp. So our confidence in the mix is definitely moved towards the MedTech area. And you are right to point out that in the consumer device area, there is an element of...
less certainty in terms of the ramp-up. But the fundamental point is that our overall business prospects in our view are actually stronger than they ever have been before because when you look at the wearable device ourselves, you look at the average selling price, you look at the margin associated with it, you look at the diversity of customers that we've got in that particular area, this is a very exciting prospect for the business.
And it leads the way now in a way where initially we thought the consumer device customers were going to lead the way. Now we're in a position where that order book, if you like, and visibility is firming up earlier on the MedTech side, which is a more profitable and in a sense exciting business. And then when you look at the overall size of the individual markets, if you look at those two markets in terms of their dollar representation for us, they're about equal in terms of size.
They're both still strongly there, but the medtech, you're right to observe, the medtech has definitely accelerated ahead.
But Andrew, if they're equal in size, why are you all backing away from the original guidance? And the real question is, on the consumer wearable side, given that time has marched on, and one would think objectively that at this point in time you'd have greater visibility.
And I'm trying to understand what's happened. It's not just one customer, it's not just Apple. It sounds like.
As a general proposition, the consumer wearable companies are taking more time. Not that it won't materialize. The real question is, if we dial back the clock in time...
Y'all had stated that there were no meaningful hurdles.
from a technology standpoint that will remain to be overcome for adoption and deployment. And I'm trying to understand what's changed. It sounds like something's changed with consumer wearable companies where they're not moving forward consistent with what your original expectations were. And again, the question is, what's changed? Is it a technology hurdle issue? Is it a commercial issue? What's changed?
I don't think anything has changed, but from our point of view in terms of our emphasis and our effort in terms of getting product out there, clearly we're seeing a stronger pool with more profitability from the Medtech area. So if you look at the utilization of our own cash and capital in terms of our own efforts to meet the numbers for 2023, it's just so much clearer for us in the Medtech area.
than it is in the consumer device area. And in the consumer device area, we continue the design in processes, but our hands are, in a sense, in our position is in the hands of those consumer device companies in terms of their launch program. So I think we're making the message pretty clear that the emphasis has moved towards the medical device companies. The opportunity, as you rightly point out, in the consumer device area.
is still there, but we are in the hands of those companies in terms of their own launch programs.
All right, my last question again, I just want to make sure understand this is Xiaomi or another consumer wearable technology company
place a significant order with you for inclusion in their devices shipping in 23. You're not telling us that you don't have the production capability to satisfy both your Medtech customers and your consumer wearable customers and this is all about a choice you're making to focus on Medtech as opposed to consumer wearables.
I would think that would be crazy.
I think that would be crazy, but I'll let you respond.
Yeah, I'm not sure I fully understood the question, but in terms of the production capacity, obviously the utilization of production capacity to sell products that sell for, how will I put it, 10 times as much as the components that go in a consumer wearable is within, very much within the interests of the company to be able to do that. So there is a clear prioritization that we're communicating here that we have a
a much much higher selling price for our own medical orientated wearable and we have a much higher margin potential in that area.
I'll take more of the questions offline. I appreciate it. Thank you.
Okay, thanks, Paul.
Thank you.
And our next question is going to come from the line of Tim Chavous with Northland Capital Markets. Go ahead.
Jim, are you there?
Can you hear me?
Yep, we can hear you, Tim.
Sorry about that.
I just want to follow up on the size of the potential volume opportunities. I think last call.
And I don't know whether this is in reference to a combination of consumer and medtech or what have you, but...
I just thought you could ship something under a million units in calendar 22, you know in the hundreds of thousands
and multi-million in 23. And again, that could be a range of ASPs there, but even then I think we were talking more about the wristband and anything else.
I mean, can you provide some sort of update on those expectations? It sounds like maybe... a step back?
You know, some sort of update on those expectations. It sounds like maybe.
22 might be a little lighter, but 23 might be pretty similar in terms of those metrics that you set out.
Last quarter.
And I'll follow up from there.
Okay, thanks, Chad. Chad, do you want to take that? Sure. You know, Tim, I think at this point and from my perspective, you know, we have not and we won't be providing guidance for the number of units that we expect to sell next year. But what I, we do believe that the majority of the sales next year will come from our MedTech customers.
And these are the units that have the higher SP and higher gross margin potential.
All right, I think you may have done that. Maybe you didn't. The company may have at least talked in broad strokes about those numbers. So I don't think I made those up, but I suppose it's possible. From a customer account standpoint, looks like you mentioned being at 19.
Currently, I think that's up to from the last count. Anything notable to discuss in terms of new customer additions, either on consumer or MedTech.
We've gotten a sense more than enough customers. Yes, we did add a further two in the MedTech area and I mean the engagement with these customers, we've made some announcements associated with shipment of components to these companies. The engagement is very deep at a corporate level with many of them and we're very excited with the progress. In a sense, we don't need any more customers, we've got the pipeline full.
10 or 20 bucks in modules at 20 or 30. If I were to go.
you know halfway in between there and and say $20 is your kind of component ASP if you will.
Is that a reasonable expectation for either Rockways or kind of an end?
Retail ASP or can you kind of talk us through that a little bit? Thanks.
Yeah, yeah, that you've got the right kind of idea in terms of the of the of the ASP there and we haven't been explicit about that but we were explicit about the chipsets and modules into the consumer market. So you're absolutely on the money there that basically the work that the team has done in order to produce our own bioptics wearable, which by the way is an extremely good reference for the
for the consumer market, but it's specifically designed for a whole range of different sectors in the medical field and in the health and wellness field and in kind of professional deployment.
And as a complete device, you've got various different price points.
You've got the price point of what we would call an unregulated device. You then got a price point that goes up that relates to when that device receives FDA approval for the biomarkers. And then we're talking here about the baseline band and then of course what follows that is the pro band which again is a more powerful device and would have a higher selling price and again go up in terms of selling price in in terms of regulated.
We're trying to get the message across here that through incredible efforts to build...
the bioptics band ourselves and the customer reception associated with the device, we've been able to elevate the average selling price very, very dramatically with a roadmap that just continues to take it up with further enhancements in performance through going from unregulated to regulated and creating an extremely exciting opportunity for us in that product area alone.
The other element of it which we don't have a full handle on in terms of our own kind of internal view at this point in time is on the recurring revenues associated with the use of the platform with what we call connect software, discover software, and the infer applications that sit on the platform. Now those areas could turn out to be extremely profitable.
And if you look at the metrics in terms of what people in wearable devices charge for functions on a monthly basis, those numbers are typically in the $10 to $30 range. They are significant upside for the model. And the way that we've architected things here is that we've created a platform that's very open.
And that platform means that if, for example, when you look at use of this technology in clinical research trials, for example, it's very, very data intensive. There's a particular software kind of architecture that one's got to sit into. We've already done with one partner the integration into that software architecture. So we've created a platform that can adapt to whether it's in hospital patient monitoring, remote patient monitoring.
clinical trials, monitoring, we've created a platform that can easily adapt into each one of these environments, plug in very efficiently, and where as the data flows through our connect and cloud elements through into our customers' environments, that is a continued ongoing repeatable revenue opportunity for us, which we see as upside in terms of where we've been looking so far.
Thanks very much.
And thank you to everyone that posed a question during today's conference. At this time we have no further signals from our queue, so I'd like to turn it back to you Mr. Rickman for any additional or closing remarks you may have.
Thank you for participating in our call today. We are very excited about the opportunities ahead of us and are looking forward to providing you with updates as we move through 2022 and beyond. Thank you everybody.
Ladies and gentlemen, this does conclude today's teleconference, and we do thank you all for your participation. You may now disconnect your lines, and we hope that you enjoy the rest of your day.