Rockley Photonics Holdings Limited Ordinary Shares

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 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 US GAAP reporting, Rockley 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. 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.

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 Datacom's 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 addressed to 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 Rockley'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. At our core 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 baseline health. And by providing a comprehensive biomarker monitoring solution, we believe that we will offer tools to enable consumers, patients, and health care providers to improve health outcomes by acting on the data receive 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 Medtech 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 allow us to not be overly reliant on any one customer. Turning to consumer wearables, in June we announced that one of our Tier 1 consumer wearable customers had begun an evaluation program using Rocklea's photonic-based sensing technology. Under the program, Rocklea's VitaSpec Pro comprehensive non-invasive biomarker measurement solution is being evaluated for potential integration into the customer's future wearable products. The Tier 1 customer adds to Rockley'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 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 wrists 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 a top 10 clinical research organization. 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 MedTech, 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 Kuntz 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 of 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 Harpoft. 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 revolutionize wearable biosensing technology. The newly formed SAB will support Rockley's mission to empower people to make better informed decisions about their health and well-being. 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 Band. 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 Rockley 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 the 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 Datacom asset had become a distraction. Since stopping the transaction, we repurpose most of the Datacom staff and resources. We are not proactively pursuing a similar type of transaction for the Datacom 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 band. I strongly believe that Rockley 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 healthcare. 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 Rockley. 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're 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 in the second quarter. Revenue for the quarter was solely related to non-recurring engineering services from our customers, and 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 FAB partner spend. As Andrew noted, our efforts to repurpose our Datacom 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 preserve 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.