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spk00: by pressing star followed by 1 on your telephone keypad. Thank you. The Rockley Photonics second quarter 2021 results call is due to begin shortly. Thank you for your patience. As another reminder, if you'd like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keyboard.
spk01: Thank you. Bye.
spk00: Ladies and gentlemen, hello and welcome to the Rocklea Photonics second quarter 2021 results call. My name is Maxine and I'll be coordinating the call today. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to your host, Gwynne Lauber, Vice President of Investor Relations to begin. Gwynne, please go ahead when you're ready.
spk01: Thank you, Operator, and welcome, everyone. This is Gwen Lauber, Vice President of Investor Relations at Rockley Photonics. Today, after the U.S. market closed, we released our results for the second quarter and did June 30, 2021. If you did not receive a copy of our earnings press release, you may obtain it from Investor Relations section of our website at investors.rockleyphotonics.com. With me on today's call are Dr. Andrew Rickman, OBE Founder and Chief Executive Officer, and Mahesh Karan, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of Rocklea's website. Before I turn the call over to Andrew, I'd like to note that today's discussion will contain forward-looking statements including but not limited to the anticipated features and benefits of our technology and products, ability and timing with respect to bringing our products to market and our product development schedules, our strategies, our customers, our commercial and market opportunities and trends, and our cash resources and financial outlooks. 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 our 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, Rockley reports certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliation of these GAAP and non-GAAP measures are included in the tables found in the press release. Now I'll turn the call over to Andrew.
spk03: Thank you, Gwen, and thank you all for joining us for Rockley's first zoning call as a public company. I want to start by thanking the entire Rockley team for their outstanding work and support during the SPAC public listing process. We completed our business combination with SC Health on August the 11th, And we began trading on August the 12th on the NYSE under the ticker symbol RKLY, a major milestone in our company's growth trajectory and clear validation of the technology we've developed. We received approximately $168 million in gross proceeds from the business combination, which will help us accelerate the commercial launch of our unique sensing platform that we announced during the second quarter. As has become common with recent SPAC business combinations, our SPAC sponsor, SC Health, experienced higher redemptions than we anticipated. While this means that we receive less funds than expected, Rockley's model was designed to operate efficiently as we get our product to market. Based on the current funding, we believe we are able to reach our goal of getting our wearables solution to market. We believe our strong balance sheet will also help us advance our development of commercial opportunities for the application of silicon photonics across a variety of other industries, including data communications, automotive safety, and other applications. Integrated optics can contribute to the betterment of the quality of life. We started this journey eight years ago with a vision to build a unified silicon photonics process engineered from the ground up, high-volume manufacture, and with the core capabilities suitable for broad market applications. It's remarkable to see where we are today. As a global leader in silicon photonics, we are revolutionizing the consumer health and wellness industries. Today, we are in the pre-alpha stage, meaning we have produced our pre-alpha generation of modules and are conducting human studies and fine-tuning our devices. Having taped out the alpha version of the modules, we believe we are on track with our product development schedule and well on our way to achieve the goals that we set those many years ago. For those of you who may be new to Rockley, I would like to start out with a brief overview of the company and our market opportunity before delving into our second quarter results and recent business highlights. Our team has developed a photonic sensing platform that we believe is transformational compared to existing technology in health and wellness and med tech industries in terms of its range, accuracy, and efficiency, among other things. Our module compresses the sensing capabilities of traditional benchtop technology onto a wearable chip. Our revolutionary technology is up to 1,000 times more accurate and up to 1 million times higher resolution than existing LEDs you see in high-end smartwatches today. And our technology is protected by a deep moat of patents, know-how, and trade secrets covering numerous domains. Moreover, we have a CapEx Lite fabulous model with seeded manufacturing ecosystem running wholly owned proprietary processes for rapid and efficient scalability. Our goal is to empower consumers to own their health. by giving them personalized insight and information to self-manage their wellbeing. This will mean being able to detect diseases earlier, better manage nutrition, and give people better intelligence about managing their own health. With this goal in mind, we've been able to shrink a laboratory spectrometer onto a chip, creating a clinic on the wrist. Our clinic on the wrist digital health center system has the potential to monitor multiple biomarkers, including core body temperature, blood pressure, body hydration, alcohol, lactate, and glucose, amongst others. Our technology is designed to be worn anywhere on your body where there is blood perfusion. We believe this is a game changer for wearables in both consumer and medical devices. and it has the potential to revolutionize the way we monitor our health going forward by significantly increasing the functionality of wearable devices. Our end-to-end sensing platform combines hardware and application firmware in a module for OEM manufacturers that can be augmented with cloud analytics for certain clinical and medical partnership applications. This enables customers to provide meaningful and actionable insights to their users. Access to this technology will help change the healthcare paradigm to move away from costly chronic care and focus on keeping people at the peak of their health and allow for early intervention. Some of the key trends driving this emerging healthcare need include greater consumer focus on preventative health, proliferation of wearable tech, and a COVID-driven rethinking of at-home monitoring solutions. Notably, the World Health Organization estimates that 12% of global population spends more than 10% of their household income on healthcare. Our technology is positioned to alter the way the world accesses critical health information through telehealth, condition monitoring, and racially unbiased wearable technology in undeserved communities. We have a huge market opportunity ahead of us as the growing universe of healthcare monitoring devices incorporates additional sensing capabilities, combined with an increased consumer focus on health and wellness. Importantly, our market opportunity is validated by leading blue-chip customers, We are currently engaged or contracted with consumer electronic customers holding more than 55% of the smartphone and more than 50% of the wearables market, as well as medical device companies, including one of the largest players in the medtech space. Our immediate commercial focus is wearables, mobile, and medical devices, which represent a very attractive addressable market of more than $48 billion. Further, our technology can be applied to many other industry verticals and use cases, and long-term, we see many more avenues for growth. leveraging big data and predictive analytics, including data center connectivity, machine vision, and computer connectivity. Now, I'll turn to our Q2 results. During the second quarter, we generated revenue of $2.2 million, up from $1.8 million in the first quarter of 2021. Gap net loss was $30.6 million in the second quarter compared to a $64.8 million gap net loss in the first quarter of 2021. Mahesh will provide additional color on our financial results. I'll wrap up with some recent business highlights. In recent months, we achieved several important milestones that support our growth strategy. During the second quarter, we unveiled an end-to-end digital health monitoring solution based on our spectrophotometer on a chip sensing module to augment our wearable capabilities and to accelerate deployment for customers and partners. By designing the ability to measure a new range of biomarkers non-invasively in a single compact module, our mobile sensing solution has the potential to transform that landscape of health and wellness solutions by significantly increasing the functionality of wearable devices. Additionally, through existing agreements and joint ventures, we have continued to develop commercial opportunities for the application, of silicon photonics in data communications, and we have increased our efforts to enhance these relationships and to explore new partnerships. We also completed the construction of our Irvine, California laboratory to capitalize on the deep silicon photonics and biomedical talent pool in the area. and we made progress in bolstering our operational capability for future growth with the continued development of a resilient, scalable supply chain. These are important milestones that will help to prepare us for the commercial launch of our product offering, which we expect to begin in 2022. And we strengthened our board with several key appointments that bring public company board experience, varied experience in relevant industries, and functions and expertise in building high-performance companies. I'm delighted to welcome these talented new individuals to our board. Overall, we are very pleased with our second quarter performance and thrilled to be here today as a newly public company. As we embark on the next phase of our growth as a public company, we are now in a much stronger position to create solutions that can provide a new class of actionable insights, transform digital healthcare, and deliver life-changing benefits to people across the globe. With that, I'll turn the call over to Mahesh for a detailed review of our financial performance in the quarter. Thank you.
spk07: Thank you, Andrew. And let me add my welcome to everybody this afternoon. Turning to our Q2 results, we reported revenues of $2.2 million, which was up 22% from Q1 revenue of $1.8 million. As a reminder, we are in the pre-alpha stage of developing what we believe to be the game-changing technology for the broad health and wellness sector, as well as other large industries that we believe will benefit from our leading technologies. As such, Our revenues for the quarter came from non-recurring engineering activities. On second quarter, the cost of revenue was $4.5 million compared to $3.7 million in the first quarter of 2021. Our non-GAAP cost of revenue was $4.2 million compared to $3.5 million in Q1 of 2021. Our cost of revenue fluctuates from period to period depending on several factors, including the timing of the completion of project milestones. Moving to operating expenses, we recorded total gap operating expenses of $24.3 million in the second quarter, compared to $23.3 million in the prior quarter. GAAP SG&A expenses were $6.7 million compared to $7.3 million in Q1 2021. And GAAP R&D expenses were $17.6 million versus $16 million in Q1 2021. The increase in expenses was driven primarily by an increase in our headcount as we worked towards getting our product to market. Total non-GAAP operating expenses for the second quarter was $22.6 million compared to $20.8 million during the first quarter of 2021. Non-GAAP SG&A expenses were $6.2 million compared to $5.9 million in Q1 2021. Non-GAAP R&D expenses totaled $16.4 million in Q2 versus $14.9 million in Q1. We are highly focused on driving our technology forward, and our R&D efforts are essential to our ability to remain on track for our customers' projected product rollout. As we scale the business, we expect our expenses to fluctuate as a percentage of revenue, period to period, but will generally decrease over the long term. Moving to net income, we recorded a loss of $30.6 million compared to a $64.8 million loss in Q1 2021. This is primarily driven by the change in fair value of our convertible loan notes. With the close of business combination, The majority of the convertible loan notes were converted into ordinary shares. We do not anticipate any further expenses related to these notes. Adjusted EBITDA, a non-GAAP measure, was a loss of $23.4 million in the second quarter, which compared to a loss of $21.4 million in the first quarter of 2021, in line with our expectations. Over the long term, as we scale the business and achieve operating leverage, we expect our operating margins to improve. Our net cash used in operating activities increased in the second quarter, totaling to $29.6 million, compared to $24.9 million in Q1 2021. The sequential increase was primarily driven by our execution on our growth plan and the transaction costs for the business combination. Year over year, our use of cash increased significantly as we assembled a team that we believe we need to get our wearable solution to the market. While this caused our cash burn rate to increase, we believe we are operating at an efficient and appropriate level. Finally, as Andrew mentioned, due to the unexpectedly high redemption that SC Health experienced, we emerged as a public company with less cash than we initially planned. At the end of June 30, 2021, We had $35.4 million in cash, and that amount increased to $168 million following the close of our transaction. Despite having less cash than we had anticipated, we believe that we remain on track with the production rollout plans of our announced customers. I would note that it is possible that we may need to look at alternatives to address our lower cash positions, but our immediate business plan remains sufficiently funded. I would also note that our 2021 outlook remains unchanged. We previously discussed generating $27.5 million in top-line revenues and with a gross margin of approximately 12% and the EBITDA loss of $109 million. This guidance includes a significant technical sale in the second half and has with similar deals, there is always the chance that the transaction can slip into 2022. It's also worth noting that there remain significant commercial opportunities for our silicon photonics technology in data communications, and we continue to enhance this relationship and to explore new partnerships. With that, let me turn it back over to Andrew.
spk03: Thank you, Mahesh. Let me conclude by reiterating our excitement for the opportunities we see available to Rockley as we drive the technology curve forward to enable our global customers to create the next generation health and wellness solutions. I want to thank you all for listening in. And with that, I'd like to open it up for questions.
spk00: If you would like to ask a question, please press star followed by one on your telephone keypad now. If you do change your mind, please press star followed by two. When preparing to ask your question, please ensure your line is unmuted. Our first question comes from Tristan Guerra from Baird. Your line is now open.
spk02: Hi, guys, and congratulations on going public. You talked about the pre-alpha stage, and if you could describe the terminology and threshold that you need to reach for each of the next stages, what each of them entail, you know, until you get ready for mass production.
spk03: Christian, thank you for the question, and thank you for your kind comments. So the pre-alpha stage is the stage where we are optimizing the algorithms through human trials, and this will continue through the course of this year. We have taped out the alpha phase, so the various chips that are required will come back through the course of the rest of this year, and they will be built up into modules, and then they will take over in the human trials phase at the beginning of next year. Now, those pre-alpha devices from a physical hardware perspective will be the devices to go to market for our customers, which we start shipping in volume projected at the end of 2022. And they will go into our customers' wearables. And through those, through being in the customer's wearables, they'll go through another set of human trials to verify that in that format that the algorithms are still delivering the performance that is required.
spk02: Okay. Well, thank you very much for the call. And then as my follow-up question, how should we look at the potential for technology or trucking type of acquisitions? Do you feel that near-term or even medium-term, you have everything you need in-house, or would you be looking at complements to your existing technology and which area, if that's the case, you feel that there is a need to build in?
spk03: Yeah, great question. We do have a phenomenal team and a phenomenal set of capabilities that come all the way from the semiconductor process technology all the way through, obviously, device design, packaging. the algorithms, the software, all the way to the data analytics in the cloud. We have built through a combination of recruiting extraordinary people over the last few years and through acquisition that set of capabilities. We, of course, continue to have our eye open to other technologies. um acquisition opportunities that can further accelerate um uh what we're doing here uh and allow us to you know exceed uh expectations um but there's no no announcement on that at this point in time and um of course one of the reasons for for going public is to give ourselves the currency to be able to afford that option okay and then last question
spk02: capacity readiness, obviously, you're going to be shipping and competing into very large volume requirements at smartphone OEMs. What are the steps we should be looking at in terms of how you're prepping up capacity and getting ready for that volume ramp?
spk03: Another good question. To think about the capacity that's required here, the fundamental chips that are required and wafer-level processing, on the silicon photonics, you've got the silicon wafer, and then you also, in parallel with that, you've got the 3,500. technology wafers as well. And we have dual sourcing in both of those areas and significant capacity available. So we're not our projections are to take us to, for example, you know, north of a billion dollar revenue company by 2024. do not put huge strain on those partners. We're talking, you know, 5% to maximum 15% of their capacity. So from that perspective, you know, we're in good shape. We've been working with these partners for multi, multi years, perfecting the manufacturing technology. It's worth noting in the field of silicon photonics that – that wafer-level processing is just one element of it. There's also a very critical element here, which is the combination of bringing the 3-5 semiconductor material together with the silicon photonic wafers. And also, we call that a post-backend process step. And also, in the post-backend, there is a large amount of automated inspection, wafer-level testing, burn-in, etc. And this whole back-end part of the post-back-end part of the line, we have developed that entirely in-house. It's very unique. It's another huge piece of our competitive advantage. And what it allows us to do, which we don't see anywhere else in the field of silicon photonics, let alone in this relevant area, it allows us to do absolutely zero touch to the die, the silicon botonics die, all the way through wafer scale, all the way to the end, when you have known good die that are diced and then sent to the CM for putting together in a module. We're putting in place the CM capacity now through various negotiations with partners, but that has a reasonable lead time for our ramp up. And those partners will replicate the initial line that we've built as I've described at the back end. And then on the electronic side, we are, you know, ASIC that goes in the module that does all the control is coming from, you know, a very large ASIC supplier, a CMOS supplier, foundry, and we don't see any capacity issues associated with that whatsoever.
spk02: Great. Well, thanks. That's very useful, and congratulations again.
spk03: Thank you, Tristan.
spk00: Our next question comes from Quinn Bolton from Needham & Company. Your line is now open.
spk04: Hi, guys. Let me add my congratulations on the business combination and now being publicly traded. Andrew, I wanted to start with you. Samsung recently announced its Galaxy Watch 4 with I think what the company is advertising is its bioactive sensor that measures, among other biomarkers, body composition and blood pressure. Wondering if you might be able to discuss the technology used in the Galaxy Watch 4 and how your platform compares with the technology that Samsung may be using today.
spk03: Thank you, Quinn, and thanks for your kind comments and a great question. I can't comment directly on what's inside a Samsung Galaxy 4 watch, but what I can tell you about is basically how those general type of biomarkers or bioinsight is possible with the existing technology today. So in existing devices today, and that includes outwardly what you see in Samsung 4, you've got LEDs that are measuring, a green LED is measuring your pulse, and there's a red and infrared LED that's measuring your blood oxygen level. And there are also accelerometers that are measuring your motion. And additional parameters are coming to market with these type of devices through further algorithms that correlate the devices. the data coming from those sensors to various additional biomarkers. They're not the breakthrough biomarkers that are going to give you the insight into health and wellness and the diagnosis of disease that we're bringing with our technology. But it just shows that with this type of sensing technology, a greater insight comes not just with the physical measurement technology, but the increased learning of correlating the results that you get from what are today very simple sensors to various states, such as, for example, body mass. Now, from our point of view, what we're bringing is something with many orders of magnitude greater performance. And so what you'll expect to see over the course of time is that our initial algorithms will deliver the biomarker outputs that we've already mentioned. But over time, that learning and correlation of the combination of all of those biomarkers will provide massive increase in insight into a whole range of diseases. Now, blood pressure is an interesting one. The way that blood pressure devices without a cuff work today is they look at the change in the volume of blood, basically, during your pulse, and that's a representation of the elasticity of your vascular system. You have to calibrate them with a cuff to start with, and that's how existing devices are coming to market. Again, in that particular parameter, we bring, I can't go into the detail, but we bring a far, far greater level of accuracy to measuring the critical information that brings you to the blood pressure measurement. So we believe that we will be enhancing that parameter as well as bringing, you know, lactate, alcohol, glucose, and other important metabolites to the wrist. Great.
spk04: Thank you. And then for Mahesh, I guess two questions. One, I believe in the press release you mentioned a $23 million backlog. Wondering if you could comment sort of over what time period that backlog may be realized. And then second, you mentioned greater than expected redemptions. And so you're sort of now have $168 million of cash on the balance sheet. It sounds like you think that $168 million will get you into volume production for consumer or wearable devices, but wondering, does that get you all the way through to cash flow break-even, or do you think that there could be additional financing requirements to get you to cash flow break-even based from the lower starting cash positions?
spk07: Yeah, thanks for the question. On the first one, on backlog, we should be able to complete that backlog in the next 12 to 15 months. Then on your next question, as we had said, despite having less cash than we anticipated, we believe that we remain on track with the production rollout plans of our announced customers. I would note that it is possible that we may need to look at alternatives to address our lower cash position, but our immediate business plan remains sufficiently funded.
spk04: Understood. Thank you very much, and congratulations.
spk07: Thank you.
spk00: Our next question comes from Robert Manger from Karen. Your line is now open.
spk06: Hi, gentlemen. I'm here on behalf of Paul Silverstein. Congratulations on what you've accomplished so far. Some of my questions were already asked a little earlier, but I was wondering if you could give any more insight regarding any potential technical hurdles you see between now and launching a product for consumer use.
spk03: Thank you, Robert, and thank you for your comments and all the best to Paul. Obviously, as a team, this is our third Silicon Photonics company, and we focus very, very... hard right from the outset eight years ago to build what we call a a zero touch complete wafer scale solution to the manufacturer of silicon photonics this this didn't exist before and doesn't exist today in any other vendors that we see everybody has to uh you know do um kind of micro positioning and uh kind of dye level activity associated with their devices so we've created in our belief, the first platform in silicon photonics that allows complete wafer scale all the way to the end of known good dye before basically you singulate and those dye go to put population into the module. So that area would be obviously the area that anybody would have the most concern. And that is where we focused and we've spent, you know, about a part of our $400 million that we've raised prior to going public. Beyond the back end, beyond the silicon photonics way for scale processing, then the assembly of the module is conventional microelectronics assembly onto a PCB module, and we don't see any significant risks associated with that. Of course, reliability is a very important thing, and there are some key pieces of innovation in our technology, particularly in things like material science, which would put questions on the reliability. But that reliability work has gone extremely well, and we're very, very pleased with it. And we're very conscious from our, you know, multiple years of experience of the importance of reliability. Yeah, I mean, we focus very, very carefully on all of these issues, but our experience and the way that we set out to mitigate all of our risks have today been tracking to plan.
spk06: Along those lines, in terms of reliability and such, the module handset makers are kind of notorious for their qualification processes. Can you give us some idea of the discussions you've been having with your near-term customers to date and where you are in that process and how that's been going?
spk03: Yes. So the typical process, design in and qualification process with customers for their next generation products. And where we are is being designed into the 2023 generation of products. It involves us shipping in the course of next year tens of thousands of units to support our customers' qualification processes. And you will have seen the other day that we announced our complete platform, including a reference design. So our reference wearable is ahead of our expectations. our customers and providing our customers with that insight into qualification performance in the real application. But our customers are planning very significant, as they do, very significant trials using, as I say, many thousands of our parts in order to pass their internal qualification.
spk06: Okay, thank you very much.
spk03: Pleasure.
spk00: Our next question comes from Tim Savage from Northland Capital Markets. Your line is now open.
spk05: Hi, good afternoon. And I have questions sort of building on the last discussion there. From a customer-facing perspective, you guys have been discussing this kind of funnel scenario of over 100 potential targets and getting down toward several major engagements. I wonder if we look toward the bottom of that funnel in terms of customer engagements and contracts or moving in that direction. if there's been any notable developments on that front of late or that you might expect here as we head into the second half. Thanks.
spk03: Thanks, Tim. Yes, the funnel continues to process and expand at the bottom end, so there is a great deal of customer interest and engagement here. As we said, where we engage or contracted with customers is more than 55% of the smartphone and 50% of the wearables market. And that has continued to increase. So it is in excess of these numbers. And so that's a very significant portion of the market. Of course, there is kind of a somewhat of a limit of how many customers that you can actually work with in terms of the design and process, but we're very happy with the leading nature of those customers that we have got to that stage of the commercial relationship.
spk05: Great. Thanks. And still along those lines, any update on you know, I guess, you know, wearable device type efforts versus what you might be planning, you know, kind of for mobile phones or mobile devices, maybe farther down the line, any of those opportunities coming into any sharper focus.
spk03: Yes, so the interest in the wearables is a combination of our basic and advanced modules, depending on the customer and their particular space in the market. On the phone side, there are other exciting aspects to the use there. Obviously, the use case is slightly different because it's not continuous in the way that a wearable is, but it's also a parameter that – that we measure, we actually haven't talked much about, is biometrics. So what we're recording, the spectral information that we're recording, is unique to an individual and is a biometrics that can be used by customers to unlock their devices. And so what you'll see in the smartphone area is more of the basic set of functions, but also an identification and biometric set of functions are getting traction as well within the module.
spk05: Great. Pardon me. Great. Thanks very much, and congrats on the deal. Thank you, Jim.
spk00: This concludes our Q&A session, so I'll hand it back to you, Andrew, for closing remarks.
spk03: Thank you very much. So thank you for listening to our call today. We look forward to update you on our progress in the next quarter. Thank you, everybody.
spk00: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.
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