| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Cayman Islands | 98-1644526 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
| Emerging growth company | ☒ | |||||
TABLE OF CONTENTS
i
EXPLANATORY NOTE
As previously disclosed, on January 23, 2023, Rockley Photonics Holdings Limited (the “Company”) filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) to implement a “pre-packaged” plan of reorganization (the “Plan”) in order to facilitate the restructuring of the Company. On January 24, 2023, the Company’s ordinary shares, $0.000004026575398 par value per share, trading symbol “RKLY”, and its public warrants, with each whole warrant then exercisable for one ordinary share at an exercise price of $11.50 per share, trading symbol “RKLY.WS” were suspended from trading on the New York Stock Exchange (the “NYSE”). On February 21, 2023, the Company’s ordinary shares and its public warrants were delisted from the NYSE. Accordingly, the Company does not have any securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Exchange Act”).
On March 10, 2023, the Bankruptcy Court entered an order (i) approving the adequacy of the Company’s disclosure statement and (ii) confirming the Plan (the “Confirmation Order”), attached hereto as Exhibit 2.1. The Plan became effective on March 14, 2023 (the “Effective Date”). Upon the filing of this Annual Report on Form 10-K, the Company intends to file a Form 15 to suspend its periodic reporting obligations under Sections 12(g) and 15(d) of the Exchange Act.
On or about March 14, 2023, in connection with the Plan, the Registrant’s ordinary shares were cancelled and no ordinary shares are outstanding as of the date of this annual report on Form 10-K. Except as provided in the Plan, all other equity, debt, convertible equity, and convertible debt of any kind issued by the Company were cancelled and are no longer outstanding as of the date of this annual report on Form 10-K. It is anticipated that the Company will be dissolved following the closing of the bankruptcy case in accordance with the Plan and Cayman law.
Unless specifically noted or the context clearly requires otherwise, all information set forth in this annual report on Form 10-K relates to the Company as it existed as of December 31, 2022 and prior to the Company’s bankruptcy filing, and does not, and is not intended and should not be read to, reflect the business, financial condition, and results of operations of the Company after the bankruptcy filing, nor of any other entity, including any entity which may result from the bankruptcy proceedings.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding Rockley Photonics Holdings Limited’s (the “Company”) future expectations, beliefs, plans, prospects, objectives, and assumptions regarding future events or performance, as well as the Company’s strategies, future operations, financial position, and estimated future financial results and anticipated costs. The words “anticipate,” “believe,” “continue,” “could,” “enable,” “estimate,” “eventual,” “expect,” “future,” “intend,” “may,” “might,” “opportunity,” “outlook,” “plan,” “possible,” “position,” “potential,” “predict,” “project,” “revolutionize,” “seem,” “should,” “trend,” “will,” “would,” and other terms that predict or indicate future events, trends, or expectations, and similar expressions or the negative of such expressions may identify forward-looking statements, but the absence of these words or terms does not mean that a statement is not forward-looking.
The forward-looking statements contained in this Annual Report on Form 10-K are based on information available as of the date of this Annual Report on Form 10-K, and current expectations, forecasts, and assumptions, (whether or not identified herein), and involve a number of risks and uncertainties. Accordingly, forward-looking statements in this Annual Report on Form 10-K should not be relied upon as representing the Company’s views as of any subsequent date, and the Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Forward-looking statements in this report include, but are not limited to, statements regarding the following:
| • | Rockley’s bankruptcy proceedings and restructuring; |
| • | Rockley’s strategy, future operations, financial position, estimated revenue and losses, projected costs, prospects and plans; |
| • | the implementation, market acceptance, and success of Rockley’s business model; |
| • | developments and expectations relating to Rockley’s competitors, target markets, and industry; |
| • | Rockley’s future capital requirements and sources and uses of cash; |
| • | Rockley’s ability to obtain funding for its product development plans, execution of its business strategy, and its operations; |
| • | Rockley’s business, product development plans, and opportunities; |
| • | the outcome of any known and unknown litigation and regulatory proceedings; |
| • | Rockley’s anticipated financial outlook or information, anticipated growth rate, and market opportunities; |
| • | Rockley’s plans to commercialize its products and services, and anticipated timing thereof; |
ii
| • | Rockley’s expectations as to when it may generate sufficient revenue from the sale of its products and services to cover expansion plans, operating expenses, working capital, and capital expenditures; |
| • | the development status and anticipated timeline for commercial production of Rockley’s products; |
| • | Rockley’s plans for products under development and future products and anticipated features and benefits thereof; |
| • | the status and expectations regarding Rockley’s customer and strategic partner relationships, and potential customer and strategic partner relationships; |
| • | the total addressable markets for Rockley’s products and technology; |
| • | the ability of Rockley to increase market share in its existing markets or any new markets it may enter; |
| • | Rockley’s ability to obtain any required regulatory approvals, including any required Food and Drug Administration (���FDA”) approvals, in connection with its anticipated products and technology; |
| • | Rockley’s ability to maintain an effective system of internal control over financial reporting; |
| • | Rockley’s ability to maintain and protect its intellectual property; |
| • | Rockley’s success in retaining or recruiting, or changes required in, officers, key employees, or directors; the ability of Rockley to manage its growth effectively; |
| • | the ability of Rockley to achieve and maintain profitability in the future; and |
| • | the impact of the COVID-19 pandemic. |
Forward-looking statements are subject to several risks and uncertainties (many of which are beyond the Company’s control) or other assumptions that may cause actual results or performance to differ materially from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those discussed below under the headings “Risk Factor Summary” and Item 1.A. “Risk Factors”.
iii
Risk Factor Summary
Unless specifically noted or the context clearly requires otherwise, all information set forth in this annual report on Form 10-K relates to the Company as it existed as of December 31, 2022 and prior to the Company’s bankruptcy proceedings and does not, and is not intended and should not be read to, reflect the business, financial condition, and results of operations of any other entity, including any entity which may result from the bankruptcy proceedings.
The following risk factor summary should be read together with the more detailed discussion of risks and uncertainties set forth in the “Risk Factors” section of this report.
Risks Related to the Company’s Business and Industry; Customer-Related Risks
| • | If the Company does not fully develop or commercialize its products and services, or if such products and services experience significant delays, the Company’s business, financial condition, and results of operation will be materially and adversely affected; |
| • | If the end products into which the Company’s products are incorporated are not fully developed and commercialized or do not achieve widespread market acceptance, or if such products experience delays, cancellations, or reductions, or if the Company’s products are not selected for inclusion in its customers’ end products, are not adopted in other industry verticals or use cases, or are not adopted by leading consumer and medical device companies, the Company’s business will be materially and adversely affected; |
| • | Changes to our product offerings (cancellation of a product line or significant changes in requirements) |
| • | The Company’s forecasts and projections are based upon assumptions, analyses, and internal estimates developed by the Company’s management. If these assumptions, analyses, or estimates prove to be incorrect or inaccurate, the Company’s actual operating results may differ materially from those forecasted or projected; |
| • | If the Company is unable to manage its growth or scale its operations, its business and operating results could be materially and adversely affected; |
| • | Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates (for example on cost, volume, and ASP) that may not prove to be accurate; |
| • | The Company’s international operations expose it to operational, financial, and regulatory risks, which could harm the Company’s business; |
| • | The Company is susceptible to supply shortages, long lead times for components, and supply changes, any of which could disrupt its supply chain and could delay deliveries of its products to customers, which in turn could adversely affect the Company’s business, results of operations, and financial condition; |
| • | If the Company is unable to sell its products to its target customers, including large corporations with substantial negotiating power, or is unable to enter into agreements with customers and suppliers on satisfactory terms, its prospects and results of operations will be adversely affected; |
| • | The Company currently depends on a few large customers for a substantial portion of its revenue. The loss of, or a significant reduction in, orders from the Company’s customers, or the Company’s failure to diversify its customer base, could significantly reduce its revenue and adversely impact the Company’s operating results; |
| • | Because the Company does not anticipate long-term purchase commitments with its customers, orders may be cancelled, reduced, or rescheduled with little or no notice, which in turn exposes the Company to inventory risk, and may cause its business and results of operations to suffer; and |
Regulatory, Intellectual Property, Infrastructure, Cybersecurity and Privacy Risks
| • | The Company’s failure to comply with applicable governmental export and import control laws and regulations, including those related to the use, distribution, and sale of its products, U.S. Food and Drug Administration clearance or approval requirements, or privacy, data protection, and information security requirements in the jurisdictions in which the Company operates could materially harm its business and operating results; |
| • | The Company may not be able to adequately protect or enforce its intellectual property rights or prevent unauthorized parties from copying or reverse engineering its products or technology. Further, the Company’s intellectual property applications, including patent applications, may not be approved or granted; and |
| • | A network or data security incident or disruption or performance issues with the Company’s network infrastructure could harm its brand, reputation, and business, as well as its operating results. |
iv
PART I
Unless specifically noted or the context clearly requires otherwise, all information set forth in this annual report on Form 10-K relates to the Company as it existed as of December 31, 2022 and prior to the Company’s bankruptcy proceedings and does not, and is not intended and should not be read to, reflect the business, financial condition, and results of operations of any other entity, including any entity which may result from the bankruptcy proceedings.
Item 1. Business
INFORMATION ABOUT ROCKLEY
The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this section, the terms “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” “anticipate,” “seek,” “future,” “strategy,” “likely,” or the negative of these terms, and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these or any other forward-looking statements. These risks and uncertainties include, but are not limited to, those risks set forth under “Risk Factors.” Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on current expectations and reflect management’s opinions only as of the date hereof. These forward-looking statements speak only as of the date of hereof. Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.
Rockley®, RayDriver™, RPFabric™, RPStack™, Topanga™, LightDriver™, SpectraCloud™, SpectraSense™, VitalSpex™, Bioptx™, and clinic-on-the-wrist™ are among the trademarks, registered trademarks, or service marks owned by Rockley.
Company Overview
We have developed a comprehensive range of silicon photonics technologies that have both the power and the flexibility to support a wide range of potential applications. Our silicon-photonics platform will incorporate several key components to support these solutions, including photonic integrated circuits and associated modules, sensors, and end-to-end solutions. We expect that our immediate focus over the next two years will be on developing and commercializing our products for incorporation in consumer wearables, medical devices, and dedicated solutions for the healthcare market.
The summation of our technologies and manufacturing expertise is Rockley’s “cohesive end-to-end platform.” Our end-to-end platform encompasses photonic integrated circuits (“PICs”) in silicon with integrated III-V devices (devices incorporating certain conductor elements that offer superior electronic properties, such as lasers), application-specific electronic integrated circuits (“ASICs”), and photonic and electronic co-packaging, which are all supported by and coupled with biosensing algorithms, AI, cloud analytics, firmware/software, system architecture, and hardware design.
With this unique sensing platform, we believe we can reshape several important markets of the healthcare sector such as consumer wellness, long term health trend monitoring, patient monitoring, early disease detection, nutrition management and the treatment of certain chronic diseases. Our biosensing platform is designed to enable multiple applications using our non-invasive, continuous, multi-modal biomarker monitoring capabilities. Our target biomarkers for consumer healthcare include lactate, alcohol, glucose (indicator), hydration, blood pressure, blood oxygen and core body temperature, among others.
Our end-to-end solutions include hardware with the potential to detect multiple biomarkers, related algorithms, cloud-based analytics and artificial intelligence (“AI”). We have shipped early engineering samples to some of our customers to support research and development efforts.
Our platform has been built upon our silicon photonics technology, which enables highly advanced sensor performance, power, resolution, and formfactor. This technology has the potential to allow monitoring devices, currently the size of clinical laboratory machines, to be miniaturized to the size of a wearable device. We believe that this miniaturization capability has the potential to unlock additional applications in consumer electronics and medical devices. Our technology is built on over 260 patents and over nine years of product development.
We have established a manufacturing ecosystem based upon our wholly-owned, proprietary processes in several areas. We believe that this manufacturing ecosystem will support rapid scalability.
As we do not currently have any products in commercial production, our current customer relationships are in the following stages: (a) customers with whom we are “engaged,” or in discussions with, regarding potential product features for incorporation into such customer’s end products, or (b) customers with whom we are “contracted,” where we have non-binding MOUs or development and supply agreements. These MOUs and development and supply agreements provide a general framework for our transactions with the customer and typically provide that we will develop and deliver new products meeting the customer’s specifications. There are no binding purchase commitments under our MOUs and supply agreements. We currently anticipate that sales of our products will be primarily made pursuant to standard purchase orders, which orders may be cancelled, reduced, changed, or rescheduled with little or no notice or penalty.
1
Product Applications and Development Status
We believe that our innovative and differentiated silicon photonics platform positions us to make photonics-based solutions increasingly pervasive, while unlocking previously unaddressed applications. Consequently, we believe that the potential applications for our technology will be wide-ranging. Leveraging the flexibility and power of our innovative silicon photonics platform, we believe that we are positioned to become a leading supplier of end-to-end solutions (including integrated optical components, algorithms, data analytics, and AI) for dynamic, high-growth market sectors, including consumer sensors, medtech and healthcare.
Figure 1: Rockley end-to-end sensing platform
To date, we have been engaged in developing customer-specific designs of our silicon photonics chipsets and modules for incorporation into our consumer electronics customers’ end products. We are working with leading customers in the medtech market to deliver a standalone wrist-wearable product for targeted use cases. In parallel, we are shaping and developing our own standard offerings that could have different shapes and form factors. Currently, we do not have any of our own end products in commercial production.
Figure 2: Product development and commercial roadmap
Healthcare: Consumer Wearables
We believe the high-density optical integration capabilities of our platform can personalize healthcare monitoring of multiple biomarkers and can significantly improve how individuals track and monitor their health and well-being. Our VitalSpex™ biomarker sensing platform will address the consumer wearable market. Further, as part of our product offering, we believe that our cloud-based analytics and AI platform will offer further insight by leveraging data collected through our unique and broad sensing platform and will provide meaningful and actionable insights to end users. Our plans for the VitalSpex™ biomarker sensing platform include a Baseline module and a Pro module, each of which will have a wide array of current and potential applications, as shown in the figure below. Depending on the needs of each customer and market trends, multiple generations of products could be built on each of these platforms addressing different set of biomarkers, form factors, performance specifications, and potential use cases.
2
Figure 3: Targeted biomarker sensing capabilities
These products are intended to address the needs of the consumer market and will provide information about general health and wellness. (i.e., they do not require regulatory approval for offered applications and end uses.) As we move forward, we intend to monitor and comply with regulations to the extent they become applicable to us, including any requirements for clearance by the U.S. Food and Drug Administration (FDA) and/or other regulatory bodies.
Healthcare: Medical Devices
Our Bioptx™ healthcare sensing platform will address the medical and professional healthcare market. We plan to incorporate our biomarker sensing technology into existing devices (such as medical patches, wearable bands, and other monitoring devices) to provide additional biomarker sensing capabilities not currently available to consumers. Also, as part of the Bioptx product offering, we intend to deliver a complete standalone finished product with targeted use cases for healthcare and health monitoring.
We believe that these product offerings will enhance point-of-care and remote monitoring and will have the potential to ultimately transform and disrupt the delivery of patient monitoring and healthcare. In the medical device space, we currently anticipate that we will develop two types of devices: an advisory device that will not need regulatory clearance and a clinical device that will need regulatory clearance from the FDA or other regulatory bodies.
These products are still under development. Even though there can be no assurance that these product development efforts will succeed or that, even if developed, these products will be approved by regulators or achieve widespread market acceptance, we believe that there are significant market opportunities in addition to our consumer wearables applications.
Data Communications: Transceiver Chipsets and Co-Packaged Optics
Data centers, which are the nerve centers of the digital economy, require interconnected communications for which we believe our datacom chipset technology offers several advantages. Business, entertainment, vital medical research, and other aspects of daily life are in many ways connected to hyperscale data centers, which in turn rely on cost-effective, power-efficient optical communication links. Whether incorporated in pluggable optical transceiver modules or in co-packaged optics, we believe hyperscale data centers will benefit from the unique advantages that our silicon photonics platform has to offer. Furthermore, we believe our go-to-market approach of partnering with Transceiver manufacturers and Switch/Networking equipment OEM companies has economic benefits over participating directly in this margin-sensitive market. By selling/licensing our assets/technology, we offer the third party the opportunity to create an economically compelling solution without any margin stacking while Rockley can keep expenses low/minimal and benefit from upfront/ongoing fees. Note that given Jiangsu Hengtong Optic-Electric Co., Ltd. (a shareholder in our joint venture partner) was placed on the “Entity List” by the U.S. Bureau of Industry and Security (BIS) of the U.S. Department of Commerce in December 2021, we have widened our potential partner network significantly and are evaluating various options for this business.
Other Applications
We believe that our silicon photonic platform is suited for delivering the sensing capabilities needed for machine perception and interrogation at depth, which has become increasingly necessary in industrial automation, robotic vision (including surgical applications), safety, and other autonomous applications. Finely tuned light, delivered through a PIC via a free-space aperture or fiber optic interconnect with accompanying detection receiver capabilities, enables substantially better capabilities than previously available technology, such as frequency modulated continuous wave (“FMCW”) LiDAR for automotive safety solutions, as well as future autonomous vehicle offerings. Our team has extensive experience in the design of PICs for use in the LiDAR domain, and we have prototyped the key components of the system and demonstrated their superior performance. Although we believe the inflection point for LiDAR and the automotive market may be approaching, we plan to leverage our core technology readiness and economies of scale from our consumer business to position ourselves for this potential market opportunity.
3
Market Opportunity
Health and Wellness
There is growing demand for miniaturized, wearable solutions that offer an affordable way to provide key insights into a person’s health and well-being, outside the clinical environment. Delivering relevant insights will require non-invasive, continuous, real-time sensing and measurement of multiple biomarkers, coupled with advanced analytics to interpret the data. We believe that this demand is driven and will continue to be driven by two major market and secular trends:
| • | Consumer health and well-being awareness. While there is an existing market for athletes in training and for highly active and health-conscious users, there has been an increasing global consumer focus on preventative healthcare, with users desiring greater control and visibility over their own health and well-being. In parallel, amid the proliferation of wearable technologies with emerging health monitoring capabilities, there is greater demand for more sophisticated and comprehensive sensing technology that can measure and track a broad range of conditions and biomarkers. Generating a holistic view of the human body through access to multiple biomarkers will enable a more sophisticated ability to monitor and track general trends of changing health conditions. This has the potential to help physicians identify health conditions and possible disease states earlier and allow for more affordable prevention measures and effective patient treatment, perhaps long before requiring aggressive disease management. More recently, COVID-19 has had a profound impact on the way consumers perceive their need for “at-home” monitoring solutions. |
| • | Treatment of chronic conditions and disease care. With increased life expectancies, a growing number of chronic conditions and diseases has placed a strain on healthcare systems. Furthermore, non-invasive monitoring solutions for chronic conditions have historically been costly and available only in a medical facility. With our potential for delivering individual non-invasive wearable monitoring solutions, we believe that we have a great opportunity to impact patients’ compliance with healthcare guidance and subsequent efficient treatment of patients, which will lead to better quality of life and drastic reductions in the overall cost of healthcare. Non-invasive, continuous monitoring also has the potential to detect and possibly prevent chronic conditions and diseases at a much earlier stage, resulting in reduced overall healthcare cost. |
We believe that existing monitoring and sensing technologies are not capable of delivering on the needs of consumers and healthcare professionals. Meeting these needs require solutions that provide access to a broad range of biomarkers non-invasively; that can be miniaturized and operate with power low enough to be integrated into consumer wearables, medical patches, and other compact form factors; and that can scale cost effectively to high volumes. We believe that our silicon photonics-based platform is poised to serve at the confluence of the above two market and secular trends.
Beyond these opportunities, we believe there may be significant potential for us in the field of genomics. As the field of genomics grows, as shown in the development of personalized medicines and treatment, the value and effectiveness are enhanced when genomic information is combined and processed along with continuous biomarker monitoring for the users. We believe this emerging field could play to the strengths of our platform and potentially represents a high-value growth opportunity for the future.
Data Communications
Datacenter operators continue to build and upgrade their datacenter infrastructure to meet the continuing growth in public, private, and hybrid cloud capacity. As these datacenters rely heavily on fiber optics to interconnect compute, storage, accelerators and other resources, this trend is reflected with substantial growth in demand in the high-speed Ethernet optics. The market segment that we are primarily targeting comprises 400Gb/s and 800Gb/s. We believe our silicon photonics platform is well positioned to address this market with highly integrated Si PICs and class leading III-V technology to implement the optical functionality required for such transceiver modules. We believe that our platform will provide a substantial cost advantage over conventional discrete-optics-based solutions, as well as over competing integrated photonics solutions due to our platform’s inherent benefits.
Competitive Advantages
We believe our silicon photonics solutions and technology offer the following key healthcare monitoring benefits:
| • | Superior sensing performance. Our silicon photonics-based spectrometer chip provides up to one million times higher resolution, approximately one thousand times higher accuracy, and approximately one hundred times broader spectral range than existing LED-based solutions, based on product analysis undertaken by Rockley comparing the Rockley silicon photonics-based spectrometer chip to existing LED-based solutions. We believe that our unique silicon photonics technology and the entire product ecosystem we are developing will make our end-to-end offerings in the health and wellness domain difficult to replicate. Current optical-based sensing solutions rely on LED-based sensing (PPG signals for SpO2, heart rate, heart rate variability, breath rate, and blood pressure). However, there are many biomarkers present in the body (such as in blood or interstitial fluid) that are not detectable in the visible LED range. We believe that our silicon photonics technology delivers several ingredients that will be required to bring a powerful and meaningful product into the healthcare market: the accuracy and width of our wavelength span in the infrared spectrum, the capability of our silicon photonics solutions to integrate many wavelengths, and the high signal-to-noise ratio (“SNR”) generated by our chips. |
4
Figure 4: Enabling a new class of sensor by combining visible light and infrared
| • | Flexible platform architecture. We have designed our platform from the ground up and, leveraging our team’s extensive experience, have developed a highly flexible platform architecture. As a result, we believe our innovative platform architecture will allow us to easily configure core building blocks to produce a wide range of functional components and modules for high-volume applications across a broad range of market sectors. |
| • | Differentiated biomarker sensing algorithms and analytics. Our biomarker detection algorithms are optimized for our unique and optimized hardware technology platform. We believe that the data analytics and biomarker processing capabilities of our AI / cloud offering will further expand our ability to offer additional insights into a person’s health. |
| • | Deep understanding of market opportunity and customer priorities. We are developing many applications and systems with our silicon photonics solutions that are driven by industry leaders in the consumer sensors, healthcare, and data communications markets. Through our established relationships with industry leaders, we have consistently demonstrated our ability to address their technological challenges. As a result, we have signed memoranda of understanding and have contracted with several industry leaders in wearable consumer technology to establish product specifications and desirable features. We believe we are well-positioned to develop high-volume optical sensing modules and algorithms for their emerging architectures. We have ongoing, collaborative discussions with consumer wearables, healthcare, and communication companies and original equipment manufacturers (“OEM”) and module and component vendors to address their next-generation product offering to end users. |
| • | Fabless, scalable business model with manufacturing process expertise and ownership. We plan to operate in a fabless business model by using third-party foundries to manufacture and test our products. We believe that outsourcing our product manufacturing and test processes and procedures simplifies our operations, significantly reduces capital commitments, and provides greater flexibility to respond to new market opportunities and scale with our customer demand. We also believe this approach will allow us to invest and focus our resources on proprietary process development and sales and marketing efforts. |
| • | Highly differentiated manufacturing process. Our manufacturing processes in several key areas (PICs, III-V actives, Integration) are unique and well-suited to meeting our customers’ economic and performance needs for their applications. In particular, we believe our silicon PIC process on multi-micron thick Silicon-On-Insulator (“SOI”) is a key differentiator. Our manufacturing processes utilize standard semiconductor manufacturing equipment but are optimized for photonics performance through incorporating innovative features to facilitate easier integration and packaging. |
| • | Extensive intellectual property portfolio. We believe our extensive intellectual property provides us with a significant competitive advantage. Our know-how is based on over 30 years of leadership in the development and commercialization of silicon photonics, and we have established strong and deep technical foundations and expertise for high-volume product delivery that would be difficult for a competitor to replicate. |
| • | Established and committed foundry partner network. We have built a high-volume foundry network comprised of strategic partners who share our growth vision, and our engineering team continues to work to push new boundaries in photonic component manufacturing processes. |
Our high-performance optical sensing products and technology with broad biomarker detection capabilities, combined with the power of our algorithms and AI platform, enable us to target unmet needs and challenges in the health and wellness markets. We have ongoing formal and informal collaborative discussions with industry and technology leaders in consumer sensor, healthcare, and data communications companies, with original equipment manufacturer (“OEMs”), and with module and component vendors concerning the design of architectures and products to address existing and next-generation applications. Based on these interactions, we believe that we are one of a limited number of suppliers to these companies for the type of products we plan to sell, and in some cases, we may be the sole supplier for certain applications.
5
Our Strategy
Our strategy is to become the leading global provider of sensing products that incorporate integrated optical modules with supporting electronics, software, application algorithms, and cloud-based AI platforms for high-volume and high-margin applications in dynamic high-growth market sectors and for use-case specific opportunities with a focus on medtech and healthcare. Key elements of our strategy include:
| • | Extend our silicon photonics leadership. We intend, through continuous platform engineering and advanced research and development, to continue driving innovation in the silicon photonics market and to improve the performance of our current solutions across a variety of key metrics, including size, power, and signal quality. Such innovation will be a key to opening new market opportunities. |
| • | Identify and promote new and emerging applications for our technologies. We are actively engaged with our science and technology partners to explore new potential markets and applications for our technology. We intend to continue to collaborate with our partners to understand the challenges in their end-product roadmaps and to demonstrate how our technologies can help them design and enable innovative solutions. |
| • | Develop our product portfolio. Beginning with our first target products in the consumer and medtech domains and for on-the-wrist applications, we intend to develop and broaden our product portfolio by continuing to invest in research and development so we can expand our platform capabilities as well as enhance our existing product roadmap. We are actively conducting research and development on other form factors and domains. We believe our differentiated technology will play an important role in delivering products for remote patient monitoring needs and for other niche markets such as diet and weight management, women’s health, and early detection and monitoring of chronic diseases such as diabetes. |
| • | Continue forming strategic partnerships in products and applications: Working with our partners, we have developed many potential product application opportunities with our unique technology that can be researched and unlocked in the future. Our partners operate in various domains such as hardware development, algorithm development, AI, and clinical research. |
| • | Continue to attract and acquire new customers. We intend to expand our customer base beyond our 17 existing customers in consumer electronics and medtech by focusing on direct dialogue with large strategic accounts, as well as by partnering with large distributors and resellers, when necessary. We believe this multi-track strategy will allow us to provide differentiated solutions to a broad array of customers. |
| • | Sustain margin through expansion of our products into higher-end markets. We intend to use our technological expertise to deliver higher value and high product margins. In addition, we intend to continue to reduce our costs through operational improvements and supply-chain management initiatives. |
Our Technology Platform and Product Offerings
Our solutions leverage our developed knowledge of silicon photonics, application science, and our innovative platform architecture to address high-volume applications in the consumer sensors, medtech and healthcare. We believe our leadership position in developing silicon photonics-based sensing solutions is a result of the following core strengths:
| • | We have developed a unique and proprietary silicon photonics platform technology that addresses a broad set of requirements in the healthcare and wellness industries. |
| • | Our custom multi-micron-waveguide photonics-optimized process with integrated III-V semiconductor actives brings multiple competitive advantages in terms of performance and manufacturability, offering lower waveguide losses, higher waveguide power handling, polarization independence, ubiquitous integration of III-V actives in their native known-good-die form, ultra-broad-band performance, and lower sensitivity to manufacturing variations while enabling compact circuitry with high integration densities. |
6
Figure 5: Rockley spectrophotometer chip solution, as compared to conventional LED- and spectrometer-based solutions
Additional key points concerning the photonics technology include the following:
| • | The optical-loss-per-unit distance is much lower than for other technologies, enabling lower-power solutions and/or larger-scale PICs, which enables a high signal-to-noise ratio and hence high-fidelity signal detection and helps reduce overall power consumption; |
| • | The platform provides broadband performance and is suitable for the visible, short-wave, and mid-infrared bands. This is a key enabler for sensing applications that other platforms cannot serve. Broadband optical performance also enables sensing a large optical spectrum to cover a wide range of measurands; |
| • | The platform is well suited to power-efficient integration of III-V waveguide devices such as lasers and modulators that also have a multi-micron mode size. Low-loss coupling from III-V to Si waveguide drives down power consumption for long battery life; |
| • | A larger waveguide is much less sensitive to manufacturing variations that can affect its shape and hence its refractive index, thereby achieving much better center wavelength registration than small waveguides enabling accurate wavelength filters. The large waveguides also offer a much higher optical power handling capability than small waveguides; |
| • | Rockley’s waveguides exhibit low dispersion (low signal distortion) and low polarization dependent loss (simplifying receiver architectures in particular); |
| • | Strong optical confinement enables tight packing of waveguides and sharp waveguide bends, thereby yielding dense layout capability and compact PICs. Compact PIC layouts result in small chip sizes to fit within consumer device form factors and reduce product cost; |
| • | Accurate wavelength targeting enables using many finely-spaced wavelengths for accurate detection; |
| • | Known-good-die integration of active elements improved yields, which leads to cost-effective solutions. |
The following are the key components of our end-to-end (full-stack) platform model:
| • | Photonic integrated circuits in silicon with integrated III-V: The design and large-scale manufacturing of silicon photonic PICs and integration of active “III-V” elements onto these PICs are the foundational competencies of Rockley. These PICs are manufactured using our proprietary and highly differentiated process flow deployed at our foundry partners; |
| • | Application-specific integrated circuits (“ASICs”): The design of electronic ICs to complement our PICs and facilitate their integration into a specific end-product is the second key component of our platform offering. The ICs are designed in volume complementary metal-oxide-semiconductor (“CMOS”) or bipolar CMOS (“BiCMOS”) technology nodes using standard design flows and are manufactured at volume-scale foundries; |
| • | Photonic & electronic co-packaging: The next layer of the stack conjoins photonic and electronic ICs into opto-electronic engines through advanced co-packaging technologies, including 2.5D and 3D integration. Such dense integration is key and enables us to achieve the energy efficiency and physical size requirements for our core use cases. We partner with specialized packaging houses to provide the capacity required for serving consumer markets; |
| • | System architecture & hardware design: We have built deep expertise in architecting photonic systems for sensing solutions in healthcare and wellness, machine vision, and data communications. This enables us to go beyond making chips and allows us to deliver higher value-add photonic subsystems, modules, and chipsets that fit seamlessly into our end-product partners’ designs; |
7
| • | Firmware/software: Any system requires some degree of firmware and software to operate and inter-operate, and our photonic systems are no exception. We have in-house expertise to develop the necessary firmware and software to complement our hardware offerings and facilitate system integration, testing, and monitoring by our customers; and |
| • | Sensing algorithms, AI, and cloud analytics: At the highest level of the stack, we develop algorithms, AI models, and cloud-based infrastructure to gain deeper insights into health and wellness trends from the volume of sensor data collected by our wearable modules. |
Figure 6: Rockley cloud analytics and AI
We believe the key benefits that our solutions can provide to our customers are as follows:
| • | Broad set of biomarkers with data analytics. Leveraging our unique integrated solution, we enable the detection and monitoring of multiple biomarkers. Analyzing the underlying spectral data with our growing base of machine learning and AI models has the potential to provide further insights into a person’s health; |
| • | Low power and small footprint. In each of the markets that we expect to serve, the power budget of the overall system is a key consideration. Power consumption greatly impacts system operation cost, footprint, and cooling requirements and is increasingly becoming a point of focus for our current customers and for other market participants that we are targeting as future customers. We believe that our silicon photonics solutions enable our customers to implement system architectures that reduce overall system power consumption. Moreover, in many of our applications, we are able to design and deliver semiconductors that have a smaller footprint and therefore reduce the overall system size; and |
| • | Faster time to market. To meet our customers’ time-to-market requirements, we work closely with them early in their design cycles and are actively involved in their development processes. Our hardware, algorithm, data analytics, and AI roadmaps provide flexibility in meeting our customers’ schedules. |
Rockley’s Silicon Photonics Toolbox Elements
Rockley’s proprietary silicon photonics platform covers a unique end-to-end solution, including generation of the light, manipulation of the light (modulation, multiplexing), radiation out of the module, and collection and processing of the returned light. The following provides an overview of the key components of our platform:
| • | Lasers: Our lasers offer precise wavelength control and robust power efficiency. The waveguide platform allows efficient wafer-scale integration of laser-devices through a flip-chip process; |
| • | Modulators and detectors: We have developed optical modulators and detectors that are ultra-compact, power-efficient and high-speed, capable of handling high data rates and a broad range of wavelengths; |
| • | Combiners and splitters: Our platform is capable of wavelength division multiplexing (“WDM”) and demultiplexing, enabling in excess of 100 wavelengths on a single optical path; |
| • | Fiber optic coupling: Our PIC contains on-chip embedded interfaces to the optical fibers. These interfaces allow the fiber to be passively attached directly to the PIC without external light coupling elements; |
| • | Free-space optics: Our platform allows for efficient light coupling from free space into and out of the photonics circuits, with either edge or perpendicular coupling. This feature enables a broad range of sensing applications; |
| • | Photonic integrated circuits: Our development platform enables integration of light sources, active devices, passive devices, and optical coupling elements into a single compact silicon chip; |
8
| • | Wafer-scale processing: Our silicon photonics platform enables high throughput wafer-scale processing of monolithic and multi-die structures for chip-on-wafer integration; |
| • | Interface electronics: We have in-house design expertise for custom analog circuitry to translate high-speed data streams into signals that actuate the PICs (drivers) and receive signals from them (amplifiers). This is complemented by our digital design capability for device control, signal processing, and interfaces to our customers systems; and |
| • | Packaged assembly: The assembly of electrical ASICs, PICs, and fiber optics (if needed) into a single, highly integrated product requires a test and manufacturing flow that enables high-volume scale. |
Further application-based expertise is focused on the following:
| • | Tissue optics design: Our sensing module products will include probe and hardware design to optimize sensing through the skin; |
| • | Biomarker application: Our sensing algorithms are being developed through various levels of validation to provide state-of-the-art sensing capabilities, from proof of concept in the lab to clinical validation in human studies; and |
| • | Applied data science: Our AI and cloud analytics will aggregate, analyze, and assess spectral data from our sensing products to extract additional insights and algorithm improvements. |
Current Product Offerings
We have developed two separate product offerings to address our target markets: (i) VitalSpex (consume domain); and (ii) Bioptx (healthcare and medtech).
In respect of the VitalSpex biomarker sensing platform:
| • | We will target applications in the consumer health and wellness industry and expect strong customer engagement in the consumer electronics and wearables market. The VitalSpex platform represents a breakthrough that will empower consumer electronic devices, primarily personal wearables, smartphones and homecare devices, with the capacity for new powerful healthcare and wellness monitoring; |
| • | The VitalSpex line will include a range of hardware and software solutions that enable non-invasive, continuous, and real-time monitoring of multiple biomarkers, from modules and chipsets that can be integrated into a wearable form factor to cloud analytics and artificial intelligence (AI); |
| • | The VitalSpex line will include a Baseline module, which will target the measurement of core body temperature, body, hydration, blood pressure, and more, and a Pro module, which will add the measurement of alcohol, lactate, and glucose trends. Our first health monitoring product offering is expected to launch in the second half of 2022; and |
| • | The VitalSpex Baseline and Pro modules will each combine existing LED-based optical sensing with Rockley’s proprietary infrared optical sensing to expand the range of biomarkers that wearable devices can measure. Our VitalSpex modules will include the hardware and software capabilities to collect information available and relevant to the target biomarkers. |
| • | We also plan to offer additional cloud-based subscription services that enhance the capabilities of the VitalSpex platform. |
In respect of the Bioptx healthcare sensing platform:
| • | The Bioptx platform will target medical institutions, such as hospitals, research clinics, pharmaceutical companies, medical device manufacturers, and other healthcare providers, offering them the ability to monitor the general health and wellness of individuals. The measurement capabilities of the Bioptx platform the potential to transform healthcare by providing real-time insights into a variety of health conditions and by enabling early detection of multiple disease states; |
| • | The Bioptx platform will include a range of hardware and software solutions that enable non-invasive, continuous, and real-time monitoring of multiple biomarkers, from a stand-alone wearable wristband to cloud analytics and artificial intelligence (AI); |
| • | The Bioptx platform will include Baseline products (for core body temperature, body, hydration, blood pressure, and more) and Pro products (which will add the measurement of alcohol, lactate, and glucose trends). Our first health monitoring product offering is expected to ship in the second half of 2022; |
| • | We also plan to offer additional cloud-based subscription services that enhance the capabilities of the Bioptx platform; |
| • | The intended markets for Bioptx products, including our wristband, are markets in the medical professional healthcare domain (i.e., not consumer) that require an optimized and dedicated solution for health monitoring. tracking, and detection; and |
| • | We expect that our customers will initially use the Bioptx platform to monitor the general wellness of individuals under care or in studies. After products in the Bioptx line receive approval from the FDA or other regulatory bodies, we anticipate that customers will expand product use into preventive and diagnostic care, such as remote patient monitoring and diagnosis. |
9
Future Product Capabilities
We plan to incorporate our biomarker sensing technology into a range of existing devices, such as patches, wearable bands, and other monitoring devices, to provide additional biomarker measurement capabilities not currently available. We continuously research, evaluate, and prioritize the addition of new biomarkers into our product offerings, with the objective of providing more valuable information and improving health insights. Our broad range of addressable biomarkers are at various stage of validation and demonstration, from proven science to miniaturization. The chart below illustrates a few examples of biomarkers for which we have validated their addressability using its IR wavelengths.
Figure 7: Lab validation of Rockley’s sensing technology
These biomarkers along a few others we are investigating are key in early detection, prevention, and monitoring of major chronic illnesses, as illustrated in the table below:
Figure 8: Disease detection and management potential of Rockley’s biomarker sensing platform
These products are still under development, and there can be no assurance that these product development efforts will succeed or that, even if developed, that these products will achieve widespread market acceptance.
10
Customers
Our customers’ design cycle from initial engagement to volume shipment typically ranges from three to five years, with product life cycles of two years or more. For many of our products, which are technically complex, we must engage early with our customers’ technical staff. To ensure an adequate level of early engagement, our sales, marketing, and development engineers must work closely with our customers and channel partners to understand, identify, and propose solutions to meet their systems’ challenges. We work closely with our customers to anticipate end customer market needs. In some cases, we work with ecosystem partners to better understand market trends and new requirements that are being placed on our end customers.
We believe that our existing commercial relationships with leading consumer and medtech customers validate our unique technology and the business opportunity at hand. Our near-term commercial focus is on a robust pipeline in consumer devices, medical devices, and life sciences companies.
To date, we have generated revenue primarily from non-recurring engineering (“NRE”) and development services for customer-specific designs of silicon photonics chipsets for incorporation into customers’ end products.
We work closely with our end customers throughout their design cycles and will develop long-term relationships as our differentiated technology becomes embedded into their products. For example, we currently hold a development and supply agreement with one customer since 2017 and have successfully designed and delivered critical sample chips to them. As a result, we believe we are well-positioned to be designed into their product roadmaps and develop next-generation solutions for their future products. Because many of our target customers or their OEMs are located in North America and Asia Pacific, we anticipate that a majority of our future revenue will come from sales in these regions. Although a large percentage of our sales are made to customers in North America, we believe that a significant number of the systems and devices designed by these customers will incorporate our semiconductor products which are then sold to end-users globally. We expect that once our modules are commercially available, we will enter into standard supply agreements with each of these parties.
Manufacturing
Our Proprietary Production and Manufacturing Ecosystem
We have built, and plan to continue to develop, a global manufacturing ecosystem designed with the ability to scale in a rapid and efficient manner. Several key areas within this manufacturing ecosystem run on our proprietary process and manufacturing technologies and are protected by our intellectual property portfolio. We possess end-to-end control over design, manufacturing and packaging processes, algorithms, and software. Our disciplined and systematic documentation and protection of critical know-how, trade secrets, and proprietary information further underpins our manufacturing ecosystem. To the best of our knowledge, there are no other turnkey options with the components and technologies needed to put together our sensing product. In addition to the intellectual property arrangements, we also have commercial exclusivity agreements with some of the key manufacturing ecosystem partners to prevent replication of this capability.
In addition to providing what we believe to be unmatched capabilities at the product level, our platform and the associated technology have been designed from bottom up to consider the relative ease and cost of manufacturing and scaling. Elements like waveguide dimensions for ease of wafer fabrication and high yields, robust and position tolerant coupling strategies for III-V integration, wafer scale back-end activities for III-V manufacturing, and all known good die integration at the module are integral to the product and the process technology. These elements are covered by the intellectual property which we have licensed to partners in our manufacturing ecosystem.
Manufacturing Model Overview
We plan to operate a fabless business model and use third-party foundries and Outsource Assembly & Test (OSAT) contractors to produce our products. In several key areas, our third-party partners operate a proprietary process wholly owned by us and protected by our intellectual property portfolio. This outsourced manufacturing approach allows us to focus our resources on the design, sale, and marketing of our products. In addition, we believe that outsourcing many of our manufacturing and assembly activities provides us with the flexibility needed to respond to new market opportunities and scale for customer demand, simplifies our operations, and significantly reduces our capital commitments.
We believe our fabless model will allow us to scale in a capex efficient manner. We have contracted with global tier-1 foundries, including Skywater (“SW”) for silicon PICs and wafer-scale III-V device integration and testing. This US based foundry is qualified for health, consumer and defense applications and has the capacity to meet our production needs. Our high-volume III-V semiconductor foundry is consumer and telecom qualified, supports very high volumes, and runs fully automated processes at one of the largest wafer scale in III-V manufacturing globally. Finally, our global IC foundry supplier handles the manufacturing of the electronic integrated circuits for our sensing modules. The foundry is used by most major consumer OEMs and is qualified for the ultra-high volume process node that we have chosen.
| • | Raw Materials and Wafer Supply: The starting raw materials (SOI wafers) for our silicon photonics have been customized by world leading silicon providers for the Rockley proprietary specification. For the active III-V components, we have arrangements in place with the world’s leading epitaxial wafer supplier. We also have volume ready suppliers for commercial off-the shelf-components (“COTS”) that go into the visible sensing and the overall module. |
11
| • | Wafer Fabrication: Our SOI wafers are converted into fully processed silicon photonics PIC wafers at Skywater. The process used by SW is wholly owned by Rockley and licensed for use by SW only in Rockley products. The process design kit (“PDK”) for this process is developed and maintained by us and constitutes our intellectual property. |
For the III-V active components, epitaxial materials are processed into finished wafers at a world leading dedicated III-V foundry making detectors, lasers and LEDs using state-of-the-art wafer-scale levels of automation. We have adapted the base process technology from this foundry to incorporate the previously discussed elements that allow for ease of integration into our platform and ease of manufacturing. These elements are exclusively for use in Rockley products.
Finally, for ASIC manufacturing, we use a standard process node and PDK provided to us by Taiwan Semiconductor Manufacturing Company, Limited. While the manufacturing process is widely used in high volume (good for product economics), the design know-how belongs to Rockley. The custom ASIC matches our silicon photonics platform optimally for low noise, low power and high level of integration.
| • | Chipset and module integration: The chipset integration of the III-V active components into the silicon PICs is done at wafer scale and using passive alignment techniques that are uniquely enabled in our platform. Furthermore, we have ensured that the III-V components are in arrays of devices (reduces amount of alignment and integration activities) and on pretested known good die (“KGD”) which ensures very high compounded yields. The process intellectual property (“IP”) is developed and owned by Rockley and the integration is currently done in the UK at pilot production volumes, with plans to outsource higher volume in the future. |
We have development and supply agreements in place with our key suppliers. These agreements cover the development program, economic framework, IP licenses, exclusivity terms and other matters. Although we have commenced long-term supply agreement discussions in parallel with the detailed manufacturing ramp discussions, we do not currently have any long-term supply agreements in place and transact business with our third-party suppliers on a purchase-order basis with no minimum supply obligations on their part. We have designed our manufacturing partner network to be resilient by having multiple sources of supply for several key processes/components and we have plans for the appropriate inventory and stocking strategies to mitigate risks to our ramp plans.
Commitment to Quality
We are committed to excellence by creating class-leading silicon photonics-based products and services. We intend to meet or exceed our global customer expectations by executing the following:
| • | Creating long-lasting, trusting, and mutually beneficial relationships with customers and partners; |
| • | Establishing a full understanding of our customers’ requirements and ensuring our products and services meet their expectations; |
| • | Building a team of highly trained, empowered, and accountable employees; |
| • | Innovating in the creation of technology that drives our products and services; |
| • | Improving the effectiveness and efficiency of our quality management system through review of results, learning, and enhancement on a continual basis |
We achieved ISO 9001:2015 certification in January 2022. We subject our third-party manufacturing contractors to rigorous qualification requirements to meet the high quality and reliability standards required of our products. We carefully qualify each of our partners and their processes. Our engineers work closely with our foundries (we even have teams embedded at partners sites in some critical areas) and other contractors to perfect the in-house processes, increase yield, lower manufacturing costs, and improve product quality. See “Risk Factors – Risks Related to Rockley’s Business and Industry” for a discussion of risks related to the semiconductor industry and Rockley’s manufacturing processes and foundry relationships.
Research and Development
We believe that our future success depends on our ability to develop new products for both existing and new markets, development enhancements to our products once developed or if and when commercially launched, to stay ahead of our competition by being leaders in extending the boundaries of our technologies. As a result, a significant amount of our operating expenses has been allocated towards next-generation platform development. Our research and development efforts are focused primarily on extending the functionality and addressable markets of our integrated photonics platform, as well as continually increasing its performance, efficiency, and volume manufacturing competitiveness. We have assembled a core team of experienced engineers and systems designers with an extremely broad range of skill sets across different disciplines who conduct research and development activities in the United States and various European locations, and we are supported by partnerships with leading research institutions and consumer electronics and medical devices companies. As of December 31, 2022, we had 230 employees globally with over 80% of our workforce focused on research, product development, and engineering.
Competition
The global optical components and full-stack solution market in general, and the consumer sensor, healthcare, and data communications markets in particular are highly competitive. We expect competition to increase and intensify as additional companies enter our target markets. Our competitors range from large, international companies offering a wide range of services and
12
optical components, such as LEDs, lasers, detectors, or PICs, to smaller companies specializing in narrow vertical markets. We expect competition in our target markets to increase in the future as existing competitors improve or expand their product offerings and as new competitors enter these markets. However, we believe that we are currently the only provider with the capability to integrate the technologies, features, and performance required by customers in our target markets. We believe that our unique silicon-photonic-based platform and the entire product ecosystem that we have developed around it will make our end-to-end offerings in the health and wellness domain difficult to replicate and provide us with a significant competitive moat. We believe this will be particularly true as we incorporate our AI and cloud-based offerings, currently under development.
Intellectual Property
We rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, and contractual protections, to protect our core technology and intellectual property. As of December 31, 2022, we had 262 issued patents and 310 other patent applications pending worldwide. The 114 issued and allowed patents in the United States expire in the years beginning in 2022 through 2040. Many of our issued patents and pending patent applications relate to sensors and sensor chips, and we have extensive geographic coverage over numerous relevant technology domains.
In addition to our own intellectual property, we also use third-party licensors for certain technologies embedded in our silicon photonics solutions. These are typically non-exclusive contracts provided under paid-up licenses. These licenses are generally perpetual or automatically renewed for as long as we continue to pay any maintenance fees that may be due. To date, maintenance fees have not constituted a significant portion of our annual capital expenditures. We have entered into a number of licensing arrangements pursuant to which we license third-party technologies. We do not believe our business is dependent to any significant degree on any individual third-party license.
We generally control access to and use of our confidential information and trade secrets through the use of internal and external controls, including contractual protections with employees, contractors, and customers. We rely in part on the laws of the United States and international laws to protect our work. All employees and consultants are required to execute confidentiality agreements in connection with their employment and consulting relationships with us. We also require them to agree to disclose and assign to us all inventions conceived or made in connection with the employment or consulting relationship. However, we cannot guarantee that we have entered into such agreements with every such party, and we may not have adequate remedies in case of a breach of any such agreements. Our trade secrets could be disclosed to our competitors or others may independently develop substantially equivalent technologies or otherwise gain access to our trade secrets. Trade secrets can be difficult to protect and some courts inside and outside of the United States are less willing or unwilling to protect trade secrets.
Government Regulation
Healthcare-Related Regulation
Our solutions may be incorporated into multi-application, health-related sensing, and monitoring applications, including healthcare consumer wearables. Accordingly, the end products into which our solutions are incorporated may be subject to FDA and similar or related regulations, and demand for these end products or future regulated products could be adversely affected if such end products do not comply with applicable requirements. Although our target market is consumer wellness rather than medical, we intend to monitor and comply with regulations to the extent they become applicable to us, including any requirements for FDA clearance. Certain healthcare-related products may be regulated by the FDA and corresponding state regulatory agencies in the United States and separate governmental authorities outside of the United States. In the United States, the medical device industry is regulated by governmental authorities, principally the FDA and corresponding state regulatory agencies. Before a new regulated product or a significant modification to an existing medical device may be marketed or sold in the United States, it must comply with FDA Quality Management System regulations, and must obtain regulatory clearance or approval from the FDA, unless an exemption from pre-market review applies. In addition, certain future software functionality, whether standalone or embedded in existing or future devices, may be regulated as a medical device and require pre-market review and clearance or approval by the FDA. The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and our end customers may not be able to obtain these clearances or approvals on a timely basis, or at all, for future products. Any delay in, or failure to receive or maintain, clearance or approval for any medical device products under development could prevent us from generating revenue from our solutions incorporated into these products.
Medical devices are also subject to numerous ongoing compliance requirements under the regulations of the FDA and corresponding state regulatory agencies, which can be costly and time consuming. For example, under FDA regulations medical device manufacturers are required to, among other things: (i) establish a quality management system to help ensure that their products consistently meet applicable requirements and specifications; (ii) establish and maintain procedures for receiving, reviewing, and evaluating complaints; (iii) establish and maintain a corrective and preventive action procedure; (iv) report certain device-related adverse events and product problems to the FDA; and (v) report to the FDA the removal or correction of a distributed product. If our solutions are incorporated into any medical device products of our end customers and these customers experience any product problems requiring reporting to the FDA or otherwise fail to comply with applicable FDA regulations or the regulations of corresponding state regulatory agencies, it could harm our ability to sell our solutions. In addition, if our end customers in the healthcare market are subject to enforcement actions such as fines, civil penalties, injunctions, recalls of products, delays in the introduction of products into the market, and refusal of the FDA or other regulators to grant future clearances or approvals, it could harm our reputation, business, operating results, and financial condition. In addition, in the United States, the FDA has taken the position that device manufacturers are prohibited from promoting their products other than for the uses and indications set forth in the approved product labeling, and any failure to comply could subject our end customers to significant civil or criminal exposure, administrative obligations and costs, and/or other potential penalties from, and/or agreements with, the federal government.
13
Government regulations outside the United States have, and may continue to, become increasingly stringent and common. In the European Union, for example, the European Union Medical Device Regulation was published in 2017 and, when it entered into full force in 2020, included significant additional pre-market and post-market requirements. Penalties for regulatory non-compliance could be severe, including fines and revocation or suspension of a company’s business license, mandatory price reductions, and criminal sanctions. Future laws and regulations may have a material adverse effect on our end customers in the healthcare market, which in turn may negatively impact our ability to sell our solutions and otherwise harm our business and financial results.
Export Regulation
Our business activities are also subject to various restrictions under U.S. export and similar laws and regulations, as well as various economic and trade sanctions administered by the U.S. Treasury Department’s Office of Foreign Assets Control. Further, various countries regulate the import of certain technology and have enacted or could enact laws that could limit our ability to provide customers with our products in those countries.
We are also subject to various domestic and international anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, as well as other similar anti-bribery and anti-kickback laws and regulations. These laws and regulations generally prohibit companies, their employees, and their intermediaries from authorizing, offering, providing, and/or accepting improper payments or other benefits for improper purposes. Although we take precautions to prevent violations of these laws, our exposure for violating these laws increases as our international presence expands and as we increase sales and operations in foreign jurisdictions.
New legislation or regulation, the application of laws from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to technology in the wearables industry generally could result in significant additional compliance costs and responsibilities for our business.
Privacy
We are or may become subject to a variety of laws and regulations in the United States and abroad regarding privacy, data protection, and data security. These laws and regulations are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly with respect to foreign laws.
In particular, there are numerous U.S. federal, state, and local laws and regulations and foreign laws and regulations regarding privacy and the collection, sharing, use, processing, disclosure, and protection of personal data. Such laws and regulations often have changes in scope, may be subject to differing interpretations, and may be inconsistent among different jurisdictions. For example, the General Data Protection Regulation (the “GDPR”), which became effective in May 2018, includes operational requirements for companies that receive or process personal data of residents of the European Union that are broader and more stringent than those previously in place in the European Union. The GDPR includes significant penalties for non-compliance, including fines of up to €20 million or 4% of total worldwide revenue. Additionally, in June 2018, California enacted the California Consumer Privacy Act (the “CCPA”), which became effective in January 2020. The CCPA requires covered companies to provide California consumers with new disclosures and expands the rights afforded consumers regarding their data. Fines for noncompliance may be up to $7,500 per violation. We cannot currently estimate the potential impact of the CCPA on our business or operations.
Additionally, we rely on various legal mechanisms for transferring certain personal data outside of the European Economic Area, or EEA, including the EU-U.S. Privacy Shield Framework, or Privacy Shield, and EU Standard Contractual Clauses, or SCCs. If we fail or are perceived to fail to meet the Privacy Shield principles or our obligations under the SCCs, or if any of these legal mechanisms for transferring data from the EEA are invalidated by European courts or otherwise become defunct, European Union data protection authorities or the U.S. Federal Trade Commission, or FTC, could bring enforcement actions seeking to prohibit or suspend our data transfers or alleging unfair or deceptive practices. In such cases, we could be required to make potentially expensive changes to our information technology infrastructure and business operations, and we could face legal liability, fines, negative publicity, and resulting loss of business.
Certain health-related laws and regulations such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or HITECH, may also have an impact on our business. If we are unable to comply with the applicable privacy and security requirements under HIPAA, HITECH, or PCI DSS, or we fail to comply with BAAs that we enter into with covered entities, we could be subject to claims, legal liabilities, penalties, fines, and negative publicity, which could harm our operating results.
Governments are continuing to focus on privacy and data security, and it is possible that new privacy or data security laws will be passed, or existing laws will be amended in a way that is material to our business. Any significant change to applicable laws, regulations, or industry practices regarding our users’ data could require us to modify our services and features, possibly in a material manner, and may limit our ability to develop new products, services, and features. Although we have made efforts to design our policies, procedures, and systems to comply with the current requirements of applicable state, federal, and foreign laws, changes to applicable laws and regulations in this area could subject us to additional regulation and oversight, any of which could significantly increase our operating costs.
We strive to comply with all applicable laws, policies, legal obligations, and industry codes of conduct relating to privacy, data security, and data protection. The costs of compliance with, and other burdens imposed by, the GDPR, CCPA, HIPAA, and similar laws may limit the use and adoption of our products and services, and/or require us to incur substantial compliance costs, which could have
14
an adverse impact on our business. In addition, given that the scope, interpretation, and application of these laws and regulations are often uncertain and may be conflicting, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us, our end customers, or third-party service-providers to comply with our privacy or security policies or privacy-related legal obligations, the failure or perceived failure by our end customers to comply with their privacy policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personal data, may result in governmental enforcement actions, litigation, damages, penalties, and negative publicity, and could also have an adverse effect on our brand and operating results.
Cybersecurity
We have designed and implemented and continue to maintain a security program consisting of policies, procedures, and technology intended to maintain the privacy, security and integrity of our information, systems, and networks. Among other things, the program includes controls designed to limit and monitor access to authorized systems, networks, and data, prevent inappropriate access or modification, and monitor for threats or vulnerability.
Employees and Human Capital Resources
Our workforce represents a highly regarded team of silicon photonics and measurement science experts under the same organization. A significant number of our employees have advanced degrees, including a large percentage holding PhDs. As of December 31, 2022, we had 230 employees, a large percentage of whom are in technical roles, including engineering.
| • | The quality of our employees is well recognized in the industry and has a strong and positive impact on our ability to develop and capitalize on our strategic operating model and business plan; |
| • | Our leadership team is recognized for world-leading expertise in silicon photonics design and process, microelectronics design, packaging and test, software and algorithms including cloud and AI, and applications in data communications and medical sensing; and |
| • | We have strong relationship with our employees and have never experienced a work stoppage. |
Despite the significant challenges facing the world economy in light of the COVID-19 pandemic, we have remained focused on our business plan and priorities. We intend to continue to focus on:
| • | Protecting the well-being of our employees and keeping them healthy and engaged; |
| • | Making our physical workplaces safe and compliant; |
| • | Building out efficient global human resource information systems and processes; |
| • | Recruiting and staff retention for critical skills and competencies; |
| • | Investing in the development of current and future leadership; and |
| • | Creating sustainable operations, while building resilience, efficiency and flexibility into everything, from strategy to work design. |
Facilities
Our headquarters are currently located in the United Kingdom. We have premises in Pasadena, California under multiple leases for approximately 18,000 square feet, with most leases for these premises expiring around June 2023. The premises in Pasadena are predominantly used for engineering, finance, and general administration services. We lease a property in San Jose, California of approximately 4,600 square feet under a lease expiring in 2024, which is predominantly used for sales and marketing, finance, and general administration services. In Irvine, California we accommodate our sensor application facility and additional office space under multiple leases for approximately 12,000 square feet, all expiring in July 2027. We believe that our current facilities are sufficient to support our operations and growth plans and that additional space, if needed, will be available on commercially reasonably terms.
Website Access to Company’s Reports
Our website address is www.rockleyphotonics.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
Disclosure Information
In compliance with disclosure obligations under Regulation FD, we announce material information to the public through a variety of means, including filings with the Securities and Exchange Commission, press releases, company blog posts, public conference calls and webcasts, as well as our investor relations website.
15
Item 1A. Risk Factors
Unless specifically noted or the context clearly requires otherwise, all information set forth in this annual report on Form 10-K relates to the Company as it existed as of December 31, 2022 and prior to the Company’s bankruptcy proceedings and does not, and is not intended and should not be read to, reflect the business, financial condition, and results of operations of any other entity, including any entity which may result from the bankruptcy proceedings.
As used in the risks described in this subsection, references to “the Company,” “Rockley,” “we,” “us,” and “our,” are intended to refer to the business and operations of Rockley, unless the context clearly indicates otherwise.
Rockley may be unable to successfully implement the Plan of Reorganization and could therefore be required to cease operations.
On March 10, 2023, Rockley filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code in the Bankruptcy Court to implement the “Plan of Reorganization” in order to facilitate its restructuring. On March 10, 2023, the Bankruptcy Court entered its Order approving the Plan of Reorganization. Rockley’s ordinary shares and public warrants have been delisted from the New York Stock Exchange and Rockley intends to file to deregister as a public company shortly after the filing of this Form 10-K. Rockley may be unable to successfully implement the Plan of Reorganization and restructuring and could therefore fail to emerge from bankruptcy, in which case it would cease operations as an independent company or otherwise. The risk factors described below relate to Rockley’s business assuming it is able to continue its business operations.
Risks Related to Rockley’s Business and Industry; Customer-Related Risks
Rockley has incurred net losses since inception and expects to continue to incur losses for the foreseeable future. If Rockley does not fully develop or commercialize its products and services, including its silicon photonics chipsets, or if such products and services experience significant delays, Rockley’s business, financial condition, and results of operation will be materially and adversely affected and Rockley may never achieve or sustain profitability.
Rockley has to date generated revenue primarily from non-recurring engineering (“NRE”) and development services for customer-specific designs of silicon photonics chipsets for incorporation into its customers’ end products. Rockley has incurred net losses since inception and believes that it will continue to incur operating and net losses for the foreseeable future, including for a period of time after commercialization, if any, of its silicon photonics chipsets. Even if Rockley is able to successfully develop and sell its products, there can be no guarantee that it will do so within its anticipated timeframe or that its products will be commercially successful. Rockley’s potential future profitability is dependent upon the successful development, commercial introduction, and acceptance of its products and services, including its silicon photonics chipsets for the consumer wearables market and its module applications with biomarker detection capabilities for advanced health metrics. Because Rockley will incur costs to develop and commercialize its products and services, including its chipsets and module applications, before it receives any significant revenue from any sales of such products or services, Rockley’s losses in future periods may continue. Rockley may never achieve or sustain profitability.
Rockley may become subject to restrictive debt covenants that may limit its ability to finance its future operations and capital needs and to pursue business opportunities and activities.
Rockley’s financing agreements prior to the bankruptcy proceedings contained restrictive covenants, including a requirement to maintain at least $35 million cash on hand, that limit its ability to take certain actions. While these financing arrangements were extinguished in connection with the bankruptcy proceedings, Rockley may in the future need to enter into financing arrangements with similar restrictive covenants. These restrictions may limit Rockley’s ability to operate its businesses and may prohibit or limit its activity to enhance its operations or take advantage of potential business opportunities as they arise. All of these limitations are subject to significant exceptions and qualifications. These covenants could limit Rockley’s ability to finance its future operations and capital needs and its ability to pursue business opportunities and activities that may be in its interest. If Rockley breaches any such covenants it may be in default under its indebtedness, which may then become immediately due and payable. Rockley may not have, or be able to obtain, sufficient funds to make these accelerated payments. Rockley’s ability to comply with the provisions of its financing arrangements may be affected by changes in economic or business conditions or other events beyond its control.
If the end products into which Rockley’s products are incorporated are not fully developed and commercialized or do not achieve widespread market acceptance, or if such products experience delays, cancellations, or reductions, Rockley’s business, financial condition, and results of operations will be materially and adversely affected.
Rockley’s success in developing and commercializing its products depends in large part on its customers’ success in developing, commercializing, and achieving widespread market acceptance of their end products that incorporate Rockley’s products. Rockley’s customers may be unable to fully develop and commercialize, or achieve widespread market acceptance of, their end products that incorporate Rockley’s products. Further, these customers may not continue to incorporate Rockley’s products into their end products either in the short or long term. If such customers’ end products are not fully developed and commercialized, fail to achieve or maintain widespread market acceptance, experience delays, or if Rockley’s customers otherwise choose not incorporate Rockley’s products into their end products, Rockley’s business, financial condition, and results of operations will be materially and adversely affected.
16
If Rockley’s products are not selected for inclusion in its customers’ end products, including products for the consumer health and wellness market, or adopted in other industry verticals or use cases or are not adopted by leading consumer and medical device companies, life sciences companies, or their respective suppliers, Rockley’s business will be materially and adversely affected.
Rockley is currently developing products for use in its customers’ end products, which are in varying stages of development. Many of these products, including products for consumer device, medical device, and life sciences companies, require extensive testing or qualification processes, which involve testing of Rockley’s products in the customers’ end products and systems, as well as testing for reliability. These qualification processes may continue for several months or longer. However, qualification of any of Rockley’s products by a customer does not assure any sales of such product by Rockley to that customer. Even after successful qualification and sales by Rockley of a product to a customer, a subsequent revision in Rockley’s third-party contractors’ manufacturing process or Rockley’s selection of a new supplier may require a new qualification process with Rockley’s customers, which may result in delays in the sale of such product and could also result in Rockley holding excess or obsolete inventory. After Rockley’s products are qualified, it can take several months before the customer commences production of end products that incorporate Rockley’s products. Rockley spends significant time and resources to have its products selected for incorporation into these end products, which is known as a “design win.” If Rockley fails to win a significant number of design wins in its target markets, its business, results of operations, and financial condition will be materially and adversely affected.
Rockley’s limited operating history makes it difficult to evaluate its future prospects and the risks and challenges which may impact its business.
Rockley was founded in 2013, completed development of its advanced sensing platform in 2019, launched its healthcare module offering in 2020, and has not yet fully developed and commercialized any of its products. This relatively limited operating history makes it difficult to evaluate Rockley’s future prospects and the risks and challenges it may encounter. The risks and challenges which may impact Rockley’s future prospects and business include, but are not limited to, its ability to:
| • | successfully commercialize its products and services, including its silicon photonics chipsets, module applications, and analytics subscription service; |
| • | develop innovative applications for its silicon photonics and sensing technology; |
| • | expand its sales and marketing activities and distribution channels; |
| • | improve its operational, financial, and management information systems; |
| • | attract, hire, integrate, and retain qualified talent to support the growth of its business; |
| • | protect its intellectual property portfolio; |
| • | comply with existing and new or modified laws and regulations applicable to its business; |
| • | manage capital expenditures for its current and future products, as well as its supply chain and supplier relationships; |
| • | anticipate and respond to macroeconomic changes and changes in the markets in which it operates; |
| • | effectively manage its growth and business operations, including the impacts of the COVID-19 pandemic on its business; and |
| • | hire, integrate, and retain qualified talent to support the growth of its business. |
If Rockley fails to successfully manage the risks and difficulties that it faces, its business, financial condition, and results of operations could be materially and adversely affected. Further, because Rockley has a limited operating history and has not yet commercialized its products, it is difficult to accurately assess its future prospects or financial performance. Rockley has encountered in the past, and will encounter in the future, risks and uncertainties frequently experienced by growing companies with limited operating histories in rapidly changing industries. If Rockley’s assumptions regarding these risks and uncertainties, which it uses to plan and operate its business, are incorrect or change, or if it does not address these risks successfully, its results of operations could differ materially from its expectations and its business, financial condition, and results of operations could be materially and adversely affected.
The strategic initiatives Rockley may undertake in the future may be more costly than currently anticipated and Rockley may not generate sufficient revenue to offset the costs of these initiatives, which in turn would negatively impact Rockley’s ability to achieve and maintain profitability.
Rockley may in the future invest in initiatives designed to grow its business, including:
| • | partnering with customers and potential customers to develop and commercialize Rockley’s products; |
| • | investing in research and development; |
17
| • | investing in its workforce, including its engineering talent; |
| • | expanding its sales, marketing, and distribution efforts; |
| • | investing in new applications and markets for its products; and |
| • | partnering with third-parties to develop manufacturing processes. |
These initiatives may be more costly than anticipated and Rockley may not generate sufficient revenue to offset the costs of these initiatives. Certain of Rockley’s market opportunities, such as healthcare monitoring devices incorporating sensing capabilities for disease detection and management, are at an early stage of development, and it may be years before these end markets generate demand for Rockley’s products at scale, if at all. Rockley’s revenue may be adversely affected for a number of reasons, including the rate and degree of development or market acceptance of new technology that competes with its products, failure of Rockley’s customers to develop and commercialize their end products that incorporate Rockley’s products, Rockley’s inability to effectively manage production of its products to scale, Rockley’s inability to enter new markets or help its customers adopt Rockley’s products for new applications, and Rockley’s failure to attract new customers or expand orders from existing customers. Further, it is difficult to predict the size and growth rate of Rockley’s target markets, customer demand for its products, commercialization timelines, developments in silicon photonics technology, the entry of competitive products, or the success of existing competitive products and services. If Rockley’s revenue does not grow over the short or long term, its ability to achieve and maintain profitability will be adversely affected, and the value of its business may significantly decrease.
Rockley expects its results of operations to fluctuate on a quarterly and annual basis.
Rockley’s revenue and operating results have fluctuated in the past and may vary significantly in the future. Historical comparisons of its operating results may not be relevant, or indicative of future results. In particular, because Rockley’s revenue to date has been generated from NRE and development services for customer-specific designs of silicon photonics chipsets for testing in the customers’ end products, revenue in any given quarter or period can fluctuate based on the timing and success of its customers’ development projects. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Rockley’s quarterly and annual financial results may fluctuate as a result of a variety of factors, many of which are outside of its control and may not fully reflect the underlying performance of Rockley’s business.
Rockley’s target customer and product markets may not grow or develop as Rockley currently expects, and if Rockley fails to penetrate new markets and scale successfully within those markets, Rockley’s revenue and financial condition would be harmed.
Rockley’s target markets include the consumer wearables, mobile device, and medical device markets. Any deterioration in Rockley’s target customer or product markets or reduction in capital spending to support these markets could lead to a reduction in demand for Rockley’s products, which would adversely affect its revenue and results of operations. Further, if Rockley’s target customer markets do not grow or develop in ways that Rockley currently expects, demand for Rockley’s products may not materialize as expected, which would also negatively impact its business, financial condition, and results of operations. Rockley may be unable to predict the timing or development of trends in its target markets with any accuracy. If Rockley fails to accurately predict market requirements or market demand for these solutions, Rockley’s business may suffer.
Rockley’s future revenue growth, if any, will depend in part on Rockley’s ability to penetrate Rockley’s current target markets, and to enter emerging markets, such as the market for consumer healthcare monitoring devices and predictive analytics. Meeting the technical requirements and securing design wins in any of these new markets will require a substantial investment of Rockley’s time and resources. Rockley may not secure design wins from these or other new markets, or achieve meaningful revenue from sales in these markets. If any of these markets do not develop as Rockley currently anticipates or if Rockley is unable to penetrate and scale them successfully, it may adversely affect Rockley’s ability to grow its business.
Rockley’s target markets are characterized by rapid technological change, which requires Rockley to continue to develop new products and technology innovations and could adversely affect market adoption of its products.
Rapid technological changes in the markets for sensing technology, including the consumer wearables, mobile device, and medical device markets, could adversely affect adoption of Rockley’s products, either generally or for particular applications. Rockley’s future success will depend upon its ability to develop and introduce a variety of new capabilities and innovations to its products, as well as introduce new products, to address the changing needs of its target markets. Delays in delivering new products that meet customers’ requirements could damage Rockley’s relationships with its customers and lead them to seek alternative sources of supply. Further, the introduction of new products by Rockley’s competitors, the delay or cancellation of any of Rockley’s customers’ end products into which Rockley’s products are designed, the market acceptance of products based on new or alternative technologies, or the emergence of new industry standards could render Rockley’s existing or future products uncompetitive, obsolete, and/or otherwise unmarketable.
In addition, Rockley’s success to date has been based on the delivery of prototypes and services to research and development programs in which customers are investing substantial capital to develop new products. Delays in introducing products and innovations, the failure to choose correctly among technical alternatives, or the failure to offer innovative products at competitive
18
prices may cause existing and potential customers to purchase Rockley’s competitors’ products or turn to alternative sensing technology. If Rockley is unable to successfully develop products that meet changing customer or market requirements on a timely basis or that remain competitive with technological alternatives, its products may fail to achieve commercial adoption, its revenue will decline, it may experience operating losses, and its business and prospects will be adversely affected.
Rockley may be unable to make the substantial investments that are required to remain competitive.
The silicon photonics industry requires substantial and continuous investment in research and development in order to bring to market new and enhanced solutions. Rockley expects its research and development expenditures to increase in the future as part of its strategy to increase demand for Rockley’s solutions in Rockley’s current target markets and to expand into additional markets. Rockley may not have sufficient resources to maintain the level of investment in research and development required to remain competitive. In addition, Rockley cannot assure you that the technologies that are the focus of its research and development expenditures will become commercially successful or generate any revenue.
If Rockley fails to compete effectively, it may lose or fail to gain market share, which could negatively impact Rockley’s operating results and Rockley’s business.
The global optical components market in general, and the consumer sensor, healthcare, and data communications markets in particular, are highly competitive. Rockley expects competition to increase and intensify as additional companies enter Rockley’s target markets. Increased competition could result in price pressure, reduced gross margins, and difficulty achieving market penetration, any of which could harm Rockley’s business, financial condition, and results of operations. Rockley’s competitors range from large, international companies offering a wide range of services and optical components, such as LEDs, lasers, detectors, or photonic integrated circuit (“PICs”), to smaller companies specializing in narrow market verticals. Rockley expects competition in its target markets to increase in the future as existing competitors improve or expand their product offerings and as new competitors enter these markets. Rockley’s ability to compete successfully depends, in part, on factors that are outside of its control, including industry and general economic trends. Rockley’s competitors may also establish cooperative relationships among themselves or with third parties or may acquire companies that provide similar products to Rockley’s. As a result, new competitors or alliances may emerge that could capture significant market share. Any of these factors, alone or in combination with others, could harm Rockley’s business, financial condition, and results of operations and result in a loss of market share and an increase in pricing pressure.
Rockley’s international operations expose it to operational, financial, and regulatory risks, including possible unfavorable regulatory, political, tax, and labor conditions, which could harm Rockley’s business.
Rockley’s international operations are subject to a number of other risks, including:
| • | foreign currency fluctuations, which could result in increased operating expenses and reduced revenue; |
| • | political and economic instability, international terrorism, and anti-American or British sentiment, particularly in emerging markets; |
| • | disadvantages of competing against companies from countries that are not subject to U.S. and U.K. laws and regulations, including the Foreign Corrupt Practices Act, Office of Foreign Assets Control regulations, and U.S. anti-money laundering regulations, as well as exposure of Rockley’s foreign operations to liability under these regulatory regimes; |
| • | preference for locally branded products, and laws and business practices favoring local competition; |
| • | potential consequences of, and uncertainty related to, the “Brexit” process in the United Kingdom, which could lead to additional expense and complexity in doing business there; |
| • | less effective protection of intellectual property; |
| • | stringent regulation of the end products incorporating Rockley’s products and stringent consumer protection and product compliance regulations, including but not limited to General Data Protection Regulation in the European Union, European competition law, the Restriction of Hazardous Substances Directive, the Waste Electrical and Electronic Equipment Directive, and the European Ecodesign Directive that are costly to comply with and may vary from country to country; |
| • | difficulties and costs of staffing and managing foreign operations; |
| • | foreign taxes, including withholding of payroll taxes; and |
| • | the U.S. government’s and U.K. government’s restrictions on certain technology transfer to certain countries of concern. |
For example, Rockley has significant international operations that are denominated in foreign currencies, primarily the British Pound and Euro, subjecting us to foreign currency exchange risk that may adversely impact our financial results. The occurrence of any of these risks could negatively affect Rockley’s international business and consequently its business, operating results, and financial condition.
19
The average selling prices of Rockley’s products could decrease rapidly over the life of the product, which may negatively affect Rockley’s revenue and margins. In addition, the selling prices Rockley is able to ultimately charge in the future for the products it is currently developing or commercializing may be less than what Rockley currently anticipates, which may cause Rockley’s actual operating results to differ materially from its expectations.
The prices that Rockley is able to ultimately charge in the future for the products it is currently developing or commercializing may experience declines for a variety of reasons, many of which are outside of Rockley’s control. In order to sell products that have a falling average unit selling price and maintain margins at the same time, Rockley will need to continually reduce product and manufacturing costs. To manage manufacturing costs, Rockley must engineer the most cost-effective design for its products and collaborate with its manufacturing counterparties to reduce manufacturing costs. Rockley also needs to continually introduce new products with higher sales prices and gross margin in order to maintain its overall gross margin. If Rockley is unable to manage the cost of older products or successfully introduce new products with higher gross margin, its revenue and overall gross margin would likely decline. In addition, the selling prices Rockley is able to ultimately charge in the future for the products it is currently developing or commercializing may be less than what Rockley currently projects, which may cause Rockley’s actual operating results to differ materially from its estimates.
Rockley’s gross margins may fluctuate due to a variety of factors, which could negatively impact Rockley’s results of operations and Rockley’s financial condition.
Rockley’s gross margins may fluctuate due to a number of factors, including customer and product mix, market acceptance of Rockley’s new products, yield, wafer pricing, packaging and testing costs, competitive pricing dynamics, the impact of the COVID-19 pandemic, and geographic and market pricing strategies. To the extent Rockley may offer certain customers favorable prices, it would decrease Rockley’s average selling prices and likely impact gross margins. Further, Rockley may in the future offer pricing incentives to Rockley’s customers on earlier generations of products that inherently have a higher cost structure, which would negatively affect Rockley’s gross margins. In addition, in the event Rockley’s customers, including Rockley’s larger customers, exert more pressure with respect to pricing and other terms, it could put downward pressure on Rockley’s margins.
Because Rockley does not operate its own manufacturing, assembly, or testing facilities, it may not be able to reduce its costs as rapidly as companies that operate their own facilities, and Rockley’s costs may even increase, which could further reduce Rockley’s gross margins. Rockley relies primarily on obtaining yield improvements and volume-based cost reductions to drive cost reductions. To the extent that such cost reductions do not occur at a sufficient level and in a timely manner, Rockley’s business, financial condition, and results of operations could be adversely affected and may vary from Rockley’s estimates.
In addition, Rockley may in the future maintain an inventory of Rockley’s products at various stages of production and in finished goods inventory. Rockley will hold these inventories in anticipation of customer orders. If those customer orders do not materialize in a timely manner, Rockley may have excess or obsolete inventory which Rockley would have to reserve or write-down, and Rockley’s gross margins would be adversely affected.
Because some of the raw materials and key components in its products come from limited or single source suppliers, Rockley is susceptible to supply shortages, long lead times for components, and supply changes, including as a result of industry consolidation, any of which could disrupt its supply chain and could delay deliveries of its products to customers, which could adversely affect Rockley’s business, results of operations, and financial condition.
Some of the components used in the manufacturing of Rockley’s products are sourced from third-party suppliers. To date, Rockley has produced its products in relatively limited quantities for use in products. Rockley does not have extensive experience in managing its supply chain to manufacture and deliver its products at scale. Some of the key components used to manufacture Rockley’s products come from limited or single source suppliers. Rockley is therefore subject to the risk of shortages and long lead times in the supply of these components and the risk that its suppliers discontinue or modify components used in its products. Rockley has a global supply chain and the COVID-19 pandemic and other health epidemics and outbreaks may adversely affect its ability to source components in a timely or cost effective manner from its third-party suppliers due to, among other things, work stoppages or interruptions. For example, Rockley relies on third-party foundries to manufacture its silicon photonic integrated circuits and for wafer scale integration. Any disruptions to those foundries could materially and adversely affect Rockley’s ability to manufacture its products. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. Rockley has in the past experienced and may in the future experience component shortages and price fluctuations of certain key components and materials, and the predictability of the availability and pricing of these components may be limited. In the event of a component shortage, supply interruption or material pricing change from suppliers of these components, Rockley may not be able to develop alternate sources in a timely manner or at all in the case of sole or limited sources. These risks may be exacerbated if any of Rockley’s suppliers were to cease operations or be acquired by a third party. If this were to occur, Rockley may need to re-qualify the supplier and/or otherwise confirm that such an event would not cause concerns with Rockley’s end customers or otherwise negatively impact Rockley’s relationships with its end customers. Developing alternate sources of supply for these components may be time-consuming, difficult, and costly and Rockley may not be able to source these components on terms that are acceptable to it, or at all, which may undermine Rockley’s ability to meet its requirements or to fill customer orders in a timely manner. Any interruption or delay in the supply of any of these parts or components, or the inability to obtain these parts or
20
components from alternate sources at acceptable prices and within a reasonable amount of time, would adversely affect Rockley’s ability to meet its scheduled product deliveries to its customers. This could adversely affect Rockley’s relationships with its customers and channel partners and could cause delays in shipment of its products and adversely affect its operating results. In addition, increased component costs could result in lower gross margins. Even where Rockley is able to pass increased component costs along to its customers, there may be a lapse of time before it is able to do so such that Rockley must absorb the increased cost. If Rockley is unable to buy these components in quantities sufficient to meet its requirements on a timely basis, it will not be able to deliver products to its customers. This in turn could materially and adversely affect Rockley’s business, financial condition, and results of operations.
If the foundries with which Rockley contracts do not achieve satisfactory yields or quality, Rockley’s reputation and customer relationships could be harmed.
Rockley depends on satisfactory wafer foundry manufacturing capacity, wafer prices, and production yields, as well as timely wafer delivery, to meet customer demand and enable it to maintain gross margins. The fabrication of Rockley’s products is a complex and technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields and, in some cases, cause production to be suspended. Rockley’s foundry vendors may experience manufacturing defects and reduced manufacturing yields from time to time. Further, any new foundry vendors Rockley employs, whether due to industry consolidation, customer requirements, or otherwise, may present additional and unexpected manufacturing challenges that could require significant management time and focus. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by the foundries that Rockley employs could result in lower than anticipated production yields or unacceptable performance of Rockley’s products. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time-consuming and expensive to correct. Poor production yields from the foundries that Rockley employs, or defects, integration issues, or other performance problems in Rockley’s products could significantly harm Rockley’s customer relationships and financial results, and give rise to financial or other damages to Rockley’s customers. Any product liability claim brought against Rockley, even if unsuccessful, would likely be time-consuming and costly to defend.
Manufacturing yields for new products initially tend to be lower as Rockley completes product development and commence volume manufacturing, and typically increase as Rockley brings the product to full production. While Rockley’s business model includes this assumption of improving manufacturing yields its assumptions may be incorrect and, as a result, material variances between projected and actual manufacturing yields will have a direct effect on Rockley’s gross margin and profitability. The difficulty of accurately forecasting manufacturing yields and maintaining cost competitiveness through improving manufacturing yields will continue to be magnified by the increasing process complexity of manufacturing silicon photonics products.
Raw material price fluctuations can increase the cost of Rockley’s products, impact Rockley’s ability to meet customer commitments, and may adversely affect its results of operations.
The cost of raw materials is a key element in the cost of Rockley’s products. Rockley’s inability to offset material price inflation through increased prices to customers, suppliers, productivity actions, or through commodity hedges could adversely affect Rockley’s results of operations. Many major components, product equipment items, and raw materials are procured or subcontracted on a single or sole-source basis. Although Rockley maintains a qualification and performance surveillance process and Rockley believes that sources of supply for raw materials and components are generally adequate, it is difficult to predict what effects shortages or price increases may have in the future. Rockley’s inability to fill its supply needs would jeopardize its ability to fulfill its contractual obligations, which could, in turn, result in reduced revenue, contract penalties or terminations, and damage to Rockley’s customer relationships.
Furthermore, increases in the price of wafers, testing costs, and commodities, which may result in increased production costs, mainly assembly and packaging costs, may result in a decrease in Rockley’s gross margins. Moreover, Rockley’s suppliers may pass the increase in raw materials and commodity costs onto it which would further reduce the gross margin of Rockley’s products. In addition, as Rockley is a fabless company, global market trends such as a shortage of capacity to fulfill Rockley’s fabrication needs also may increase Rockley’s raw material costs and thus decrease its gross margin.
Rockley is subject to the cyclical nature of the semiconductor industry.
The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles, industry consolidation, and wide fluctuations in product supply and demand. The industry experienced significant downturns during past global recessions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels, and accelerated erosion of average selling prices. While these downturns have not directly impacted Rockley’s business to date, any prolonged or significant downturn in the semiconductor industry could adversely affect Rockley’s business and reduce demand for Rockley’s products. Any future downturns in the semiconductor industry could also harm Rockley’s business, financial condition, and results of operations. Furthermore, any significant upturn in the semiconductor industry could result in increased competition for access to third-party foundry and assembly capacity. Rockley is dependent on the availability of this capacity to manufacture and assemble Rockley’s products and Rockley can provide no assurance that adequate capacity will be available to it in the future.
21
If Rockley or its suppliers do not maintain sufficient inventory or if they do not adequately manage their respective inventory, Rockley could lose sales or incur higher inventory-related expenses, which could negatively affect Rockley’s operating results.
To ensure adequate inventory supply, Rockley and its suppliers must forecast inventory needs and expenses, place orders sufficiently in advance with their respective suppliers and manufacturing counterparties, and manufacture products based on its estimates of future demand for particular products. Changes in customer purchasing patterns may affect Rockley’s ability to forecast its future operating results, including revenue, gross margins, cash flows, and profitability. Rockley’s ability to accurately forecast demand for its products could be affected by many factors, including the growth rate, if any, in Rockley’s target markets or the market adoption of the end products into which Rockley’s products are incorporated, the emergence of new markets, an increase or decrease in customer demand for Rockley’s products or for products and services of its competitors, product introductions by competitors, the COVID-19 pandemic, other health epidemics and outbreaks, and any associated work stoppages or interruptions, unanticipated changes in general market conditions, and the weakening of economic conditions or consumer confidence in future economic conditions. If Rockley’s products are commercialized in markets that are quickly growing, including the consumer wearables, mobile device, and medical device markets, Rockley may face challenges acquiring adequate supplies to manufacture its products and/or Rockley and its manufacturing counterparties may not be able to manufacture its products at a rate necessary to satisfy the levels of demand, which would negatively affect Rockley’s revenue. This risk may be exacerbated by the fact that Rockley may not carry or be able to obtain for its manufacturers a significant amount of inventory to satisfy short-term demand increases. If it fails to accurately forecast customer demand, Rockley may experience excess inventory levels or a shortage of products available for sale.
Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would adversely affect Rockley’s financial results, including its gross margin, and have a negative effect on its brand. Conversely, if Rockley underestimates customer demand for its products, Rockley, or its manufacturing counterparties, may not be able to deliver products to meet its requirements, and this could result in damage to Rockley’s brand and customer relationships and adversely affect its revenue and operating results.
If Rockley’s products do not conform to, or are not compatible with, existing or emerging industry standards, demand for Rockley’s products may decrease, which in turn would harm Rockley’s business and operating results.
Rockley’s ability to compete in the future will depend on its ability to identify and ensure compliance with evolving industry standards in its target markets, as well as in the silicon photonics and sensing technology industry generally. The emergence of new industry standards could render Rockley’s products incompatible with products developed by third-party suppliers or make it difficult for Rockley’s products to meet the requirements of certain device manufacturers and their suppliers. If Rockley’s customers or Rockley’s third-party suppliers adopt new or competing industry standards with which Rockley’s solutions are not compatible, or if industry groups fail to adopt standards with which Rockley’s products are compatible, Rockley’s products would become less desirable to its current or prospective customers. As a result, Rockley’s sales would suffer and it could be required to make significant expenditures to develop new products. Although Rockley designs its products to be compliant with applicable industry standards, proprietary enhancements may not in the future result in conformance with existing industry standards under all circumstances. If Rockley’s products do not conform to, or are not compatible with, existing or emerging standards, it would harm its business, financial condition, and results of operations.
Rockley may be subject to warranty or product liability claims, which could result in unexpected expenses and loss of market share.
Rockley may be subject to warranty or product liability claims. These claims may require Rockley to make significant expenditures to defend those claims, replace Rockley’s solutions, refund payments, or pay damage awards. Rockley has not yet commercialized its products. Accordingly, the operation of Rockley’s products and technology has not been validated over longer periods. If a customer’s end product fails in use, the customer may incur significant monetary damages, including a product recall or associated replacement expenses as well as lost revenue. The customer may claim that a defect in Rockley’s product caused the product failure and assert a claim against Rockley to recover monetary damages. The cost of defending these claims and satisfying any arbitration award or judgment with respect to these claims would result in unexpected expenses, which could be substantial, and could harm Rockley’s business, financial condition, and results of operations. Although Rockley carries product liability insurance, this insurance is subject to significant deductibles and may not adequately cover Rockley’s costs arising from defects in its products or otherwise.
The complexity of Rockley’s products and its anticipated future product and service offerings could result in unforeseen delays or expenses from undetected defects, errors, or reliability issues in hardware or software that could reduce the market adoption of its new products, damage its reputation with current or prospective customers, and adversely affect its operating costs.
Rockley’s current and future products and service offerings are or are expected to be highly technical and very complex and require high standards to manufacture or distribute and have in the past and will likely in the future experience defects, errors, or reliability issues at various stages of development. Rockley may be unable to timely release new products, product updates, manufacture existing products, correct problems that have arisen, or correct such problems to its customers’ satisfaction. Additionally, undetected errors, defects, or security vulnerabilities, especially as new products or updates are introduced or as new versions are released, could result in inaccurate data to the end users of products incorporating Rockley’s products. Any of the foregoing could negatively impact Rockley’s ability to commercialize a product or service offering, result in litigation against Rockley, and damage
22
Rockley’s credibility. These risks may be heightened in the medical device industry, one of Rockley’s target markets, where the end user may act in reliance upon inaccurate data as a result of errors or defects, or where there may be a privacy or data breach of an end user’s personal health information. Some errors or defects in Rockley’s products and service offerings may only be discovered after they have been tested, commercialized, and deployed by customers. In these cases, Rockley may incur significant additional development costs and product recall, repair, or replacement costs. These problems may also result in claims, including class actions, against Rockley by its customers or others. Rockley’s reputation or brand may be damaged as a result of these problems and customers may be reluctant to buy its products, which could adversely affect its ability to retain existing customers and attract new customers and could adversely affect its financial results.
In addition to product liability claims, Rockley could face material legal claims for breach of contract, fraud, tort, or breach of warranty as a result of these problems. Defending a lawsuit, regardless of its merit, could be costly and may divert management’s attention and adversely affect the market’s perception of Rockley and its products. In addition, Rockley’s business liability insurance coverage could prove inadequate with respect to a claim and future coverage may be unavailable on acceptable terms or at all. These product-related issues could result in claims against Rockley and its business could be adversely affected.
Rockley currently expects to recognize subscription revenue from its future cloud-based analytics subscription offering ratably over the term of these subscriptions and, to a lesser extent, perpetual licenses ratably over an expected period of benefit and, as a result, downturns in sales may not be immediately reflected in its operating results.
If Rockley is able to commercially launch its cloud-based analytics subscription service, which is currently expected to occur as early as 2023, it expects to recognize revenue ratably over the terms of its subscriptions with customers. As a result, a substantial portion of the revenue that it will report in each period will be derived from the recognition of deferred revenue relating to agreements entered into during previous periods. Consequently, a decline in new sales or renewals in any one period may not be immediately reflected in its revenue results for that period. This decline, however, will negatively affect its revenue in future periods. Accordingly, the effect of significant downturns in sales and market acceptance of its subscription service and potential changes in the rate of renewals may not be fully reflected in its results of operations until future periods. This will also make it difficult for Rockley to rapidly increase revenue growth through additional sales in any period, as revenue from new customers generally will be recognized over the term of the applicable agreement. Rockley may be unable to commercially launch its subscription service offering in a timely manner or at all and such subscription offering may not achieve widespread customer adoption.
If Rockley’s future platform offerings do not interoperate with its customers’ network and security infrastructure or with third-party products, websites, or services, it would negatively impact its business and results of operations.
Rockley’s cloud-based analytics subscription offering, which is under development and is currently expected to be commercially launched as early as 2023, is expected to allow for the deployment of Rockley’s technology through a cloud-based software-as-a-service model. As a result, it must interoperate with Rockley’s customers’ existing network and security infrastructure. The components of Rockley’s customers’ infrastructure have different specifications, rapidly evolve, utilize multiple protocol standards, include multiple versions and generations of products, and may be highly customized. Rockley must be able to interoperate and provide its software service to customers with highly complex and customized networks, which requires careful planning and execution between its customers, its customer support teams, and its channel partners. Further, whenever there are new or updated elements of the customers’ infrastructure or new industry standards or protocols, Rockley may have to update or enhance its cloud platform to continue to provide service to customers. Rockley’s competitors or other vendors may refuse to work with Rockley to allow their products to interoperate with Rockley’s, which could make it difficult for Rockley’s cloud-based analytics subscription service to function properly in customer networks that include these third-party products.
Rockley may not deliver or maintain interoperability quickly or cost-effectively, or at all. If Rockley fails to maintain compatibility of its cloud-based analytics subscription service with its customers’ network and security infrastructures, its customers may not be able to fully utilize the service, and Rockley may, among other consequences, fail to achieve widespread customer adoption of this subscription service and experience reduced demand for its products and services, which would materially harm its business, operating results, and financial condition.
Rockley licenses technology from third parties, and its inability to maintain those licenses could harm its business.
Rockley incorporates technology that it licenses from third parties, including software, into its software subscriptions. Rockley cannot be certain that its licensors are not infringing the intellectual property rights of third parties or that its licensors have sufficient rights to the licensed intellectual property in all jurisdictions in which Rockley may sell its software subscriptions. In addition, some licenses may be non-exclusive, and therefore its competitors may have access to the same technology licensed to Rockley. Some of Rockley’s license agreements may be terminated for convenience by the licensors. Rockley may also be subject to additional fees or be required to obtain new licenses if any of its licensors allege that Rockley has not properly paid for such licenses or that it has improperly used the technologies under such licenses, and such licenses may not be available on terms acceptable to Rockley or at all. If Rockley is unable to continue to license any of this technology because of intellectual property infringement claims brought by third parties against its licensors or against it, or claims against Rockley by its licensors, or if Rockley is unable to continue its license agreements or enter into new licenses on commercially reasonable terms, its ability to develop and sell software
23
subscriptions containing such technology would be severely limited, and its business could be harmed. Additionally, if Rockley is unable to license necessary technology from third parties, it may be forced to acquire or develop alternative technology, which it may be unable to do in a commercially feasible manner or at all, and Rockley may be required to use alternative technology of lower quality or performance standards. This would limit and delay its ability to offer new or competitive software subscriptions and increase its costs of production. As a result, Rockley’s margins, market share, and operating results could be significantly harmed.
Portions of Rockley’s cloud-based analytics subscription offering utilize open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect its business.
Rockley’s cloud-based analytics subscription offering contains software made available by third parties under so-called “open source” licenses. From time to time, there have been claims against companies that distribute or use open source software in their products and services, asserting that such open source software infringes the claimants’ intellectual property rights. Rockley could be subject to suits by parties claiming that what Rockley believes to be licensed open source software infringes their intellectual property rights. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, certain open source licenses require that source code for software programs that are subject to the license be made available to the public and that any modifications or derivative works to such open source software continue to be licensed under the same terms. Further, certain open source licenses also include a provision that if Rockley enforces any patents against the software programs that are subject to the license, it will lose the license to such software. If Rockley were to fail to comply with the terms of such open source software licenses, such failures could result in costly litigation, lead to negative public relations, or require that it quickly find replacement software which may be difficult to accomplish in a timely manner.
Although Rockley monitors its use of open source software in an effort both to comply with the terms of the applicable open source licenses and to avoid subjecting its software to conditions it does not intend, the terms of many open source licenses have not been interpreted by U.S. or international courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on its ability to commercialize its product or operate its business. By the terms of certain open source licenses, Rockley could be required to release the source code of its software and to make its proprietary software available under open source licenses, if Rockley combines or distributes its software with open source software in a certain manner. In the event that portions of its software are determined to be subject to an open source license, Rockley could be required to publicly release the affected portions of its source code, re-engineer all, or a portion of, that software or otherwise be limited in the licensing of its software, each of which could reduce or eliminate the value of its product. Many of the risks associated with usage of open source software cannot be eliminated, and could negatively affect its business, results of operations, and financial condition.
Customer-Related Risks
Rockley currently has, and intends to target, customers and suppliers that are large corporations with substantial negotiating power, exacting product, quality, and warranty standards, and potentially competitive internal solutions. If Rockley is unable to sell its products to these customers or is unable to enter into agreements with customers and suppliers on satisfactory terms, its prospects and results of operations will be adversely affected.
Many of Rockley’s customers and suppliers, and potential customers, are large corporations with substantial negotiating power relative to it and, in some instances, may have internal solutions that are competitive to Rockley’s products. Many of these large corporations that are customers or potential customers also have significant development resources, which may allow them to acquire or develop independently, or in partnership with others, competitive technologies. Meeting the technical requirements and securing design wins with any of these companies will require a substantial investment of Rockley’s time and resources. Rockley cannot assure you that its products or technology will secure design wins from these or other companies or that it will generate meaningful revenue from the sales of its products to these key customers and potential customers. If Rockley’s products are not selected by these large corporations or if these corporations develop or acquire competitive technology, it will have an adverse effect on Rockley’s business.
Rockley currently depends on a few large customers for a substantial portion of its revenue. The loss of, or a significant reduction in, orders from Rockley’s customers, including its largest customer, could significantly reduce its revenue and adversely impact Rockley’s operating results.
Rockley believes that its operating results for the foreseeable future will continue to depend to a significant extent on revenue attributable to a few large customers. Revenue attributable to Rockley’s largest customer accounted for the majority of its revenue in 2022 and 2021, respectively. Rockley anticipates revenue attributable to this customer will fluctuate from period to period, although it expects to remain dependent on this customer for a significant portion of its revenue for the foreseeable future. Rockley has a master supply and development agreement with this customer, which provides a general framework for Rockley’s transactions with it. This agreement continues until either party terminates for material breach. Under this agreement, Rockley has agreed to develop and deliver new products to this customer at its request, provided it also meets Rockley’s business purposes, and has agreed to indemnify it for intellectual property infringement or any injury or damages caused by Rockley’s products. This customer does not have any minimum or binding purchase obligations to Rockley under this agreement and could elect to discontinue or reduce making purchases from Rockley with little or no notice.
24
In addition, customers may seek to enter into licensing arrangements in lieu of product purchases, which could negatively impact Rockley’s revenue, and, to a lesser extent, Rockley’s gross margins. If Rockley’s customers were to choose to work with other manufacturers or its relationships with its customers is disrupted for any reason, it could have a significant negative impact on Rockley’s business. Any reduction in sales attributable to Rockley’s larger customers would have a significant and disproportionate impact on Rockley’s business, financial condition, and results of operations. Rockley’s customers, or the distributors through which it sells to these customers, may choose to use products in addition to Rockley’s, use a different product altogether, or develop an in-house solution. Any of these events could significantly harm its business, financial condition, and results of operations. In addition, if Rockley’s distributors’ relationships with Rockley’s end customers, including its larger end customers, are disrupted for inability to deliver sufficient products or for any other reason, it could have a significant negative impact on Rockley’s business, financial condition, and results of operations.
Rockley is dependent in part upon its relationships and alliances with industry participants to generate revenue, which involves risks and uncertainties.
Rockley has, and in the future may, acquire interests in joint ventures, which may subject Rockley to risk because, among other things, Rockley cannot exercise sole decision-making power and its partners may have different economic interests than Rockley has. There are additional risks involved in joint venture transactions. For example, as a co-investor in a joint venture, Rockley may not be in a position to exercise sole decision-making authority relating to the joint venture or other entity. As a result, the operations of any joint venture are subject to the risk that third parties may make business, financial, or management decisions with which Rockley does not agree, or the management of the joint venture may take risks or otherwise act in a manner that does not serve Rockley’s interests. Further, there may be a potential risk of impasse in some business decisions because Rockley may not be in a position to exercise sole decision-making authority. In such situations, it is possible that Rockley may not be able to exit the relationship because it may not have the funds necessary to complete a buy-out of the other partner or it may be difficult to locate a third-party purchaser for its interest. Because Rockley may not have the ability to exercise control over such operations, it may not be able to realize some or all of the benefits that it believes will be created from its involvement. In addition, there is the potential that a joint venture partner may become bankrupt or have divergent, conflicting, or inconsistent economic or business interests from Rockley. This could result in, among other things, exposing Rockley to liabilities of the joint venture in excess of its proportionate share of these liabilities. If any of the foregoing were to occur, Rockley’s business, financial condition, and results of operations could suffer.
If Rockley is unable to expand or further diversify its customer base, its business, financial condition, and results of operations could suffer.
Rockley currently expects the composition of its largest customers to vary over time, and that revenue attributable to its largest customers in any given period may decline over time. Rockley’s relationships with existing customers may deter potential customers who compete with these customers from buying Rockley’s products. If Rockley is unable to expand or further diversify its customer base, it could harm its business, financial condition, and results of operations.
Rockley does not currently have any products in commercial production. Accordingly, Rockley views its current customer relationships in the following stages: (a) customers with whom it is “engaged”, or in discussions with, regarding potential product features for incorporation into such customer’s end products or (b) customers with whom it is “contracted” where Rockley has non-binding MOUs or development and supply agreements. These non-binding MOUs and development and supply agreements provide a general framework for Rockley’s transactions with the customer and typically provide that Rockley will develop and deliver new products meeting the customer’s specifications. These agreements do not contain any minimum or binding purchase obligations. If Rockley is unable to transition customers with whom it is engaged in discussions to contracted customers or if Rockley fails to otherwise attract new customers, it would negatively impact Rockley’s ability to grow its business and gain market share, which in turn would harm Rockley’s financial condition and results of operations.
Because Rockley does not anticipate long-term purchase commitments with its customers, orders may be cancelled, reduced, or rescheduled with little or no notice, which in turn exposes Rockley to inventory risk, and may cause its business and results of operations to suffer.
Rockley anticipates that its products will be sold directly to customers as well as through distributors and resellers, with, in certain cases, no long-term or minimum purchase commitments from them or their end customers. Rockley expects that sales of its products will be primarily made pursuant to standard purchase orders, which orders may be cancelled, reduced, changed, or rescheduled with little or no notice or penalty. Cancellations of orders could result in the loss of anticipated sales without allowing Rockley sufficient time to reduce its inventory and operating expenses. In addition, changes in forecasts or the timing of orders from its customers expose Rockley to the risks of inventory shortages or excess inventory. As a result, Rockley’s revenue and operating results could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of Rockley’s customers, including Rockley’s larger customers. In the future, Rockley’s customers or its distributors or their end customers may decide to purchase fewer units than expected, may alter their purchasing patterns at any time with limited or no notice, or may decide not to continue to purchase Rockley’s products at all, any of which could cause Rockley’s revenue to decline materially and materially harm Rockley’s business, financial condition, and results of operations.
25
Cancellations of, reductions in, or rescheduling of customer orders could also result in the loss of anticipated sales without allowing Rockley sufficient time to reduce its inventory and operating expenses, as a substantial portion of Rockley’s expenses are fixed at least in the short term. In addition, changes in forecasts or the timing of orders expose Rockley to the risks of inventory shortages or excess inventory. Any of the foregoing events could materially and adversely affect Rockley’s business, financial condition, and results of operations.
If Rockley is unable to establish and maintain confidence in its long-term business prospects among customers and analysts and within its industry or is subject to negative publicity, then Rockley’s financial condition, operating results, business prospects, and access to capital may suffer materially.
Rockley has not yet fully developed or commercialized its products or services and the successful commercialization of Rockley’s products depends in part on Rockley’s customers and potential customers committing to use Rockley’s products in their own products. Customers may be less likely to purchase Rockley’s products if they are not convinced that Rockley’s business will succeed or that its service and support and other operations will continue in the long term. Similarly, suppliers and other third parties will be less likely to invest time and resources in developing business relationships with Rockley if they are not convinced that Rockley’s business will succeed. If Rockley is unable to establish and maintain confidence in its long-term business prospects among customers, suppliers, analysts, ratings agencies, and within its industry or is subject to negative publicity, then Rockley’s financial condition, operating results, business prospects, and access to capital may suffer materially.
Rockley’s investments in educating its customers and potential customers about the advantages of Rockley’s silicon photonics and sensing technology and its applications will require significant financial and talent resources and may not result in sales of Rockley’s products.
Educating Rockley’s prospective customers, and to a lesser extent, its existing customers, about Rockley’s silicon photonics and sensing technology and its applications in health monitoring devices, its advantages over competitive technologies, and the potential application of Rockley’s products in different industries and use cases is an integral part of Rockley’s strategy to expand into additional markets. Rockley’s efforts to educate potential customers and the market generally will require significant financial and talent resources. These educational efforts may not be successful and Rockley may not offset the costs of such efforts with revenue from the new customers. If Rockley is unable to acquire new customers to offset these expenses, its financial condition will be adversely affected.
Legal and Regulatory Risks Related to Rockley’s Business
Rockley is subject to governmental export and import control laws and regulations. Rockley’s failure to comply with these laws and regulations could have an adverse effect on its business, prospects, financial condition, and results of operations.
Certain of Rockley’s products and services are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. U.S. export control laws and regulations and economic sanctions prohibit the shipment of certain products and services to U.S. embargoed or sanctioned countries, governments and persons. In addition, complying with export control and sanctions regulations for a particular sale may be time-consuming and result in the delay or loss of sales opportunities. Exports of Rockley’s products and technology must be made in compliance with these laws and regulations. If Rockley fails to comply with these laws and regulations, Rockley and certain of its employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on Rockley and responsible employees or managers, and, in extreme cases, the incarceration of responsible employees or managers.
Changes to trade policy, tariffs, and import/export regulations may have a material adverse effect on Rockley’s business, financial condition, and results of operations.
Changes in global political, regulatory, and economic conditions, or in laws and policies governing foreign trade, manufacturing, development, and investment in the territories or countries where Rockley may purchase its components, sell its products, or conduct its business, could adversely affect Rockley’s business. The United States has in the past instituted or proposed changes in trade policies that included the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the United States, economic sanctions on individuals, corporations, or countries, and other government regulations affecting trade between the United States and other countries where Rockley conducts its business. For instance, effective December 17, 2021, the U.S. Bureau of Industry and Security (“BIS”) of the U.S. Department of Commerce placed Hengtong and certain of its affiliates on the BIS “Entity List,” meaning that the U.S. Export Administration Regulations prohibit companies from providing products and
26
technologies to organizations on the “Entity List” without prior authorization. In response to this decision, the Company terminated a planned technical sale to the JV. A number of other nations have proposed or instituted similar measures directed at trade with the United States in response. As a result of these developments or any future similar developments, there may be greater restrictions and economic disincentives on international trade and economic cooperation that could adversely affect Rockley’s business. It may be time-consuming and expensive for Rockley to alter its business operations to adapt to or comply with any such changes, and any failure to do so could have a material adverse effect on its business, financial condition, and results of operations.
Rockley may become involved in legal and regulatory proceedings and commercial or contractual disputes, which could have an adverse effect on its profitability and financial position.
Rockley may be, from time to time, involved in litigation, regulatory proceedings, and commercial or contractual disputes that may be significant. These matters may include, without limitation, disputes with Rockley’s suppliers and customers, intellectual property claims, shareholder litigation, government investigations, class action lawsuits, personal injury claims, environmental issues, customs and value-added tax disputes, and employment and tax issues. In addition, Rockley could face in the future a variety of labor and employment claims against it, which could include but is not limited to general discrimination, wage and hour, privacy, ERISA, or disability claims. In such matters, government agencies or private parties may seek to recover from Rockley indeterminate amounts in penalties or monetary damages (including, in some cases, treble or punitive damages) or seek to limit Rockley’s operations in some way. These types of lawsuits could require significant management time and attention or could involve substantial legal liability, adverse regulatory outcomes, and/or substantial expenses to defend. Often these cases raise complex factual and legal issues and create risks and uncertainties. No assurances can be given that any proceedings and claims will not have a material adverse impact on Rockley’s operating results and financial position or that its established reserves or its available insurance will mitigate this impact.
Rockley is subject to, and must remain in compliance with, numerous laws and governmental regulations across various jurisdictions concerning the use, distribution, and sale of its products. Some of Rockley’s customers also require that it comply with their own unique requirements relating to these matters.
Rockley sells products that contain electronic components, and such components may contain materials that are subject to government regulation in locations where Rockley sells its products. For example, certain regulations limit the use of lead in electronic components. Since Rockley operates on a global basis, compliance with regulations is a complex process which requires continual monitoring of regulations and an ongoing compliance process to ensure that Rockley and its suppliers are in compliance with existing regulations in each market where it operates. If there is an unanticipated new regulation that significantly impacts Rockley’s use and sourcing of various components or requires more expensive components, that regulation could materially and adversely affect its business, results of operations, and financial condition. Rockley’s products may also be used in healthcare monitoring and other medical devices, which are subject to additional regulation. If Rockley fails to adhere to these new regulations or fails to continually monitor the updates, it may be subject to litigation, loss of customers, or negative publicity and its business, results of operations, and financial condition will be adversely affected.
Rockley may in the future become subject to additional regulations, including Food and Drug Administration (the “FDA”) clearance or approval, for health monitoring products in which Rockley’s products are incorporated. Achieving and maintaining compliance and approval under applicable regulations may be difficult to achieve.
Rockley’s products may be incorporated into end products in the health monitoring sector, including products which collect clinical data. Accordingly, it is possible that certain of Rockley’s products, or the end products which incorporate Rockley’s products will be subject to current and future regulation by the FDA, as well as by other federal, state, and local agencies. As Rockley’s target market is consumer wellness rather than medical, Rockley currently anticipates that FDA clearance will be unnecessary for its products targeting the consumer wearables market; however, Rockley intends to monitor and comply with regulations to the extent they become applicable to Rockley.
Manufacturers of medical devices are required to comply with applicable laws and regulations governing development, testing, manufacturing, labeling, marketing, and distribution of medical devices. Devices are generally subject to varying levels of regulatory control, based on the risk level of the device. Governmental regulations specific to medical devices are wide-ranging and govern, among other things:
| • | product design, development, and manufacture; |
| • | laboratory, pre-clinical and clinical testing, labeling, packaging, storage, and distribution; |
| • | premarketing clearance or approval; |
| • | record-keeping; |
| • | product marketing, promotion and advertising, sales, and distribution; and |
| • | post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals. |
27
Rockley or its customers may not be able to obtain the necessary clearances or approvals for their products or may be unduly delayed in doing so, which could harm Rockley’s business. Furthermore, even if Rockley is granted regulatory clearances or approvals, they may include significant limitations on the permitted uses for the product, which may limit the market potential for the product. Delays in obtaining clearance or approval could increase Rockley’s costs and harm Rockley’s revenue and growth.
Additionally, Rockley’s products may be subject to regulation by similar agencies in other states and foreign countries. While Rockley believes that it has complied with all applicable laws and regulations, continued compliance with such laws or regulations, including any new laws or regulations, might impose additional costs on Rockley which could adversely affect its financial performance and results of operations.
Rockley is subject to various environmental laws and regulations that could impose substantial costs upon Rockley.
Concerns over environmental pollution and climate change have produced significant legislative and regulatory efforts on a global basis, and Rockley believes this will continue both in scope and in the number of countries participating. In addition, as climate change issues become more prevalent, foreign, federal, state, and local governments and Rockley’s customers have been responding to these issues. The increased focus on environmental sustainability may result in new regulations and customer requirements, or changes in current regulations and customer requirements, which could materially and adversely impact Rockley’s business, results of operations, and financial condition. If Rockley is unable to effectively manage real or perceived issues, including concerns about environmental impacts or similar matters, sentiments toward Rockley or its products could be negatively impacted, and its business, results of operations, or financial condition could suffer.
Rockley’s operations are and will be subject to foreign, federal, state, and local environmental laws and regulations, and such laws and regulations could directly increase the cost of energy, which may have an effect on the way Rockley manufactures products or utilizes energy to produce its products. In addition, any new regulations or laws in the environmental area might increase the cost of raw materials or key components Rockley uses in its products. Environmental regulations require Rockley to reduce product energy usage, monitor and exclude an expanding list of restricted substances, and to participate in required recovery and recycling of its products. Environmental and health and safety laws and regulations can be complex, and Rockley has limited experience complying with them. Capital and operating expenses needed to comply with environmental laws and regulations can be significant, and violations may result in substantial fines and penalties, third-party damages, suspension of production, or a cessation of Rockley’s operations.
The costs of complying with environmental laws and regulations and any claims concerning noncompliance, or liability with respect to contamination in the future, could have a material adverse effect on Rockley’s financial condition or operating results. Rockley may face unexpected delays in obtaining the required permits and approvals in connection with its planned production facilities that could require significant time and financial resources and delay its ability to operate these facilities, which would adversely impact Rockley’s business, prospects, financial condition, and operating results.
Rockley is subject to U.S. and foreign anti-corruption and anti-money laundering laws and regulations. Rockley can face criminal liability and other serious consequences for violations, which can harm its business.
Rockley is subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K. Bribery Act of 2010, and possibly other anti-bribery and anti-money laundering laws in countries in which Rockley conducts activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, contractors, and other collaborators from authorizing, promising, offering, or providing, directly or indirectly, improper payments or anything else of value to recipients in the public or private sector. Rockley can be held liable for the corrupt or other illegal activities of its employees, agents, contractors, and other collaborators, even if Rockley does not explicitly authorize or have actual knowledge of such activities. Any violations of the laws and regulations described above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences.
Failures, or perceived failures, to comply with privacy, data protection, and information security requirements in the variety of jurisdictions in which Rockley operates may adversely impact its business, and such legal requirements are evolving, uncertain, and may require improvements in, or changes to, Rockley’s policies and operations.
Rockley’s current and potential future operations and sales are subject to laws and regulations addressing privacy and the collection, use, storage, disclosure, transfer, and protection of a variety of types of data. For example, the European Commission has adopted the General Data Protection Regulation and California recently enacted the California Consumer Privacy Act of 2018, both of which provide for potentially material penalties for non-compliance. These regimes may, among other things, impose data security requirements, disclosure requirements, and restrictions on data collection, uses, and sharing that may impact Rockley’s operations and the development of its business. Rockley has limited access to collect, store, process, or share certain information collected by its products, and Rockley’s products may evolve to collect additional information. Therefore, the full impact of these privacy regimes on Rockley’s business is rapidly evolving across jurisdictions and remains uncertain at this time.
28
Rockley may also be affected by cyber-attacks and other means of gaining unauthorized access to its products, systems, and data. For instance, cyber criminals or insiders may target Rockley or third parties with which it has business relationships to obtain data, or in a manner that disrupts Rockley’s operations or compromises its products or the systems into which its products are integrated. Due to the political uncertainty involving Russia and Ukraine, there is an increased likelihood that escalation of tensions could result in cyber-attacks that could either directly or indirectly impact our operations.
Rockley is assessing the continually evolving privacy and data security regimes and measures it believes are appropriate in response. Since these data security regimes are evolving, uncertain, and complex, especially for a global business like Rockley, Rockley may need to update or enhance its compliance measures and these updates or enhancements may require implementation costs. In addition, Rockley may not be able to monitor and react to all developments in a timely manner. The compliance measures Rockley does adopt may prove ineffective. Any failure, or perceived failure, by Rockley to comply with current and future regulatory or customer-driven privacy, data protection, and information security requirements, or to prevent or mitigate security breaches, cyber-attacks, or improper access to, use of, or disclosure of data, or any security issues or cyber-attacks affecting Rockley, could result in significant liability, costs (including the costs of mitigation and recovery), and a material loss of revenue resulting from the adverse impact on its reputation and brand, loss of proprietary information and data, disruption to its business and relationships, and diminished ability to retain or attract customers and business partners. Such events may result in governmental enforcement actions and prosecutions, private litigation, fines, and penalties or adverse publicity, and could cause customers and business partners to lose trust in Rockley, which could have an adverse effect on its reputation and business.
Further, in the event Rockley’s products, or the end products into which Rockley’s products are incorporated, involve the collection of personal medical or clinical data, Rockley would be subject to additional privacy regulations. For example, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) regulations apply U.S. national standards for some types of electronic health information transactions and the data elements used in those transactions to ensure the integrity, security, and confidentiality of health information and standards to protect the privacy of individually identifiable health information businesses receive, maintain or transmit. The Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH Act”) expanded the scope of the privacy and security requirements under HIPAA and increased penalties for violations. In addition, the HITECH Act enacted federal breach notification rules requiring notification to affected individuals and the Department of Health and Human Services (and in some cases, relevant media outlets) whenever a breach of protected health information occurs. Rockley’s failure to maintain confidentiality of sensitive protected health information or other personal information in accordance with the applicable regulatory requirements could damage its reputation and expose Rockley to claims, fines, and penalties. Rockley’s business, operating results, and financial condition could also be negatively impacted by a violation of the HIPAA privacy or security rules or any other applicable privacy or data security law.
Many U.S. states and international jurisdictions in which Rockley operates also have laws and regulations that protect the privacy and security of confidential, protected health information, or other personal information and have similar or even more protection than U.S. federal regulations. Furthermore, state data breach notification laws continue to expand the type of protected health information and other personal information they encompass, and in many cases are more burdensome than the HIPAA/HITECH breach reporting requirements.
Risks Related to Rockley’s Intellectual Property
Despite the actions Rockley is taking to defend and protect its intellectual property, Rockley may not be able to adequately protect or enforce its intellectual property rights or prevent unauthorized parties from copying or reverse engineering its products or technology. Rockley’s efforts to protect and enforce its intellectual property rights and prevent third parties from violating its rights may be costly.
The success of Rockley’s products and its business depend in part on Rockley’s ability to obtain patents and other intellectual property rights and maintain adequate legal protection for its products in the United States and other international jurisdictions. Rockley relies on a combination of patent, trademark, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect its proprietary rights, all of which provide only limited protection.
Rockley cannot assure you that any patents will be issued with respect to its currently pending patent applications or that any trademarks will be registered with respect to its currently pending applications in a manner that gives Rockley adequate defensive protection or competitive advantages, if at all, or that any patents issued to Rockley or any trademarks registered by it will not be challenged, invalidated, or circumvented. Rockley may file for patents and trademarks in the United States and in certain international jurisdictions, but such protections may not be available in all countries in which it operates or in which Rockley seeks to enforce its intellectual property rights, or may be difficult to enforce in practice. For example, the legal environment relating to intellectual property protection in certain emerging market countries where Rockley may operate in the future is relatively weaker, often making it difficult to create and enforce such rights. Rockley’s currently registered trademarks and any patents and trademarks that may be issued or registered, as applicable, in the future with respect to pending or future applications may not provide sufficiently broad protection or may not prove to be enforceable in actions against alleged infringers. Rockley cannot be certain that the steps it has taken will prevent unauthorized use of its technology or the reverse engineering of its technology. Moreover, others may independently develop technologies that are competitive to Rockley or infringe Rockley’s intellectual property.
29
Protecting against the unauthorized use of Rockley’s intellectual property, products, and other proprietary rights is expensive and difficult, particularly internationally. Unauthorized parties may attempt to copy or reverse engineer Rockley’s sensing technology or certain aspects of Rockley’s products or manufacturing processes that it considers proprietary. Litigation may be necessary in the future to enforce or defend Rockley’s intellectual property rights, to prevent unauthorized parties from copying or reverse engineering its products, or technology to determine the validity and scope of the proprietary rights of others or to block the importation of infringing products into the United States.
Any such litigation, whether initiated by Rockley or a third party, could result in substantial costs and diversion of management resources, either of which could adversely affect Rockley’s business, operating results, and financial condition. Even if it obtains favorable outcomes in litigation, Rockley may not be able to obtain adequate remedies, especially in the context of unauthorized parties copying or reverse engineering its products or technology.
Further, many of Rockley’s current and potential competitors have the ability to dedicate substantially greater resources to defending intellectual property infringement claims and to enforcing their intellectual property rights than Rockley has. Attempts to enforce its rights against third parties could also provoke these third parties to assert their own intellectual property or other rights against Rockley or result in a holding that invalidates or narrows the scope of Rockley’s rights, in whole or in part. Effective patent, trademark, service mark, copyright, and trade secret protection may not be available in every country in which Rockley’s products are available and competitors based in other countries may sell infringing products in one or more markets. Failure to adequately protect Rockley’s intellectual property rights could result in Rockley’s competitors offering similar products, potentially resulting in the loss of some of Rockley’s competitive advantage and a decrease in its revenue, which would adversely affect Rockley’s business, operating results, financial condition, and prospects.
Third-party claims that Rockley is infringing intellectual property, whether successful or not, could subject Rockley to costly and time-consuming litigation or expensive licenses, and its business could be adversely affected.
Although Rockley has applied for patents related to its products and technology, a number of companies hold patents covering aspects of sensing and photonic chip technologies. In addition to these patents, participants in this industry typically also protect their technology, especially embedded software, through copyrights and trade secrets. As a result, there is frequent litigation based on allegations of infringement, misappropriation, or other violations of intellectual property rights. Rockley may in the future receive inquiries from other intellectual property holders and may become subject to claims that it infringes their intellectual property rights, particularly as Rockley expands its presence in the market, expands to new use cases, and faces increasing competition. In addition, parties may claim that the names and branding of Rockley’s products infringe their trademark rights in certain countries or territories. If such a claim were to prevail, Rockley may have to change the names and branding of its products in the affected territories and it could incur other costs.
Rockley currently has a number of agreements in effect pursuant to which it has agreed to defend, indemnify, and hold harmless its customers, suppliers, and channel partners and other counterparties from damages and costs which may arise from the infringement by Rockley’s products of third-party patents or other intellectual property rights. The scope of these indemnity obligations varies, and, in some instances, include indemnification for damages and expenses, including attorneys’ fees. Rockley’s insurance may not cover all intellectual property infringement claims. A claim that its products infringe a third party’s intellectual property rights, even if untrue, could adversely affect Rockley’s relationships with its customers, may deter future customers from purchasing its products, and could expose Rockley to costly litigation and settlement expenses. Even if Rockley is not a party to any litigation between a customer and a third party relating to infringement by its products, an adverse outcome in any such litigation could make it more difficult for Rockley to defend its products against intellectual property infringement claims in any subsequent litigation in which it is a named party. Any of these results could adversely affect Rockley’s brand and operating results.
Rockley may in the future need to initiate infringement claims or litigation to try to protect its intellectual property rights. In addition to litigation where Rockley is a plaintiff, Rockley’s defense of intellectual property rights claims brought against it or its customers, suppliers, and channel partners, with or without merit, could be time-consuming, expensive to litigate or settle, divert management resources and attention, and force Rockley to acquire intellectual property rights and licenses, which may involve substantial royalty or other payments and may not be available on acceptable terms or at all. Further, a party making such a claim, if successful, could secure a judgment that requires Rockley to pay substantial damages or obtain an injunction and also Rockley may lose the opportunity to license its technology to others or to collect royalty payments. An adverse determination also could invalidate or narrow Rockley’s intellectual property rights and adversely affect its ability to offer its products to its customers and may require that Rockley procure or develop substitute products that do not infringe, which could require significant effort and expense. Any of these events could adversely affect Rockley’s business, reputation, operating results, financial condition, and prospects.
30
Rockley’s intellectual property applications, including patent applications, may not be approved or granted or may take longer than expected to result in approval or grant, which may have a material adverse effect on Rockley’s ability to prevent others from commercially exploiting products similar to Rockley’s.
Rockley cannot be certain that it is the first inventor of the subject matter to which it has filed a particular patent application, or if it is the first party to file such a patent application. If another party has filed a patent application to the same subject matter as Rockley has, Rockley may not be entitled to the protection sought by the patent application. Rockley also cannot be certain whether the claims included in a patent application will ultimately be allowed in the applicable issued patent or the timing of any approval or grant of a patent application. Further, the scope of protection of issued patent claims is often difficult to determine. As a result, Rockley cannot be certain that the patent applications that it files will issue, or that its issued patents will afford protection against competitors with similar technology. In addition, Rockley’s competitors may design around Rockley’s registered or issued intellectual property, which may adversely affect Rockley’s business, prospects, financial condition, and operating results.
In addition to patented technology, Rockley relies on its unpatented proprietary technology, trade secrets, designs, experiences, workflows, data, processes, software, and know-how.
Rockley relies on proprietary information (such as trade secrets, designs, experiences, workflows, data, know-how, and confidential information) to protect intellectual property that may not be patentable or subject to copyright, trademark, trade dress, or service mark protection, or that Rockley believes is best protected by means that do not require public disclosure. Rockley generally seeks to protect this proprietary information by entering into confidentiality agreements, or consulting, services, or employment agreements that contain non-disclosure and non-use provisions with its employees, consultants, contractors, and third parties. However, these agreements may be breached or may otherwise fail to prevent disclosure, third-party infringement, or misappropriation of its proprietary information, may be limited as to their term, and may not provide an adequate remedy in the event of unauthorized disclosure or use of proprietary information. Rockley has limited control over the protection of trade secrets used by its current or future manufacturing counterparties and suppliers and could lose future trade secret protection if any unauthorized disclosure of such information occurs. In addition, Rockley’s proprietary information may otherwise become known or be independently developed by its competitors or other third parties. To the extent that its employees, consultants, contractors, advisors, and other third parties use intellectual property owned by others in their work for Rockley, disputes may arise as to the rights in related or resulting know-how and inventions. Costly and time-consuming litigation could be necessary to enforce and determine the scope of Rockley’s proprietary rights, and failure to obtain or maintain protection for its proprietary information could adversely affect its competitive business position. Furthermore, laws regarding trade secret rights in certain markets where Rockley operates may afford little or no protection to its trade secrets.
Rockley also relies on physical and electronic security measures to protect its proprietary information, but it cannot provide assurance that these security measures will not be breached or provide adequate protection for its property. There is a risk that third parties may obtain and improperly utilize Rockley’s proprietary information to its competitive disadvantage. Rockley may not be able to detect or prevent the unauthorized use of such information or take appropriate and timely steps to enforce its intellectual property rights.
Rockley may be subject to damages resulting from claims that it or its current or former employees have wrongfully used or disclosed alleged trade secrets of its current or former employees’ former employers. Rockley may be subject to damages if its current or former employees wrongfully use or disclose Rockley’s trade secrets.
Rockley may be subject to claims that it or its current or former employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of a current or former employee’s former employers. Litigation may be necessary to defend against these claims. If Rockley fails to defend against such claims, in addition to paying monetary damages, it may lose valuable intellectual property rights or talent. A loss of key talent or their work product could hamper or prevent Rockley’s ability to commercialize its products, which could severely harm its business. Even if Rockley is successful in defending against these claims, litigation could result in substantial costs and demand on management resources.
Risks Related to Infrastructure, Cybersecurity and Privacy
A network or data security incident may allow unauthorized access to Rockley’s network or data, harm its reputation, create additional liability, and adversely impact its financial results.
Rockley and its third-party service providers may face security threats and attacks from a variety of sources. In addition to traditional computer “hackers,” malicious code (such as viruses and worms), phishing attempts, employee theft or misuse, and denial of service attacks, sophisticated nation-state and nation-state supported actors engage in attacks (including advanced persistent threat intrusions) and increase the risks to Rockley’s internal networks and customer facing environments and the information they store and process. These risks may increase due to COVID-19. A breach in Rockley’s data or an attack against its service availability, or that of its third-party service providers, could impact Rockley’s networks, creating system disruptions or slowdowns and exploiting security vulnerabilities of Rockley’s products, and the information stored on Rockley’s networks or those of its third-party service providers could be accessed, publicly disclosed, altered, lost, or stolen, which could subject Rockley to liability and cause it financial harm.
31
Unauthorized access by a third party to Rockley’s internal network, any actual or perceived breach of network security in its systems or networks, or any other actual or perceived data security incident Rockley or its third-party service providers suffer, could result in damage to its reputation, negative publicity, loss of channel partners, end-customers and sales, loss of competitive advantages over its competitors, increased costs to remedy any problems and otherwise respond to any incident, regulatory investigations and enforcement actions, costly litigation, and other liability. In addition, Rockley may incur significant costs to investigate and remediate any security breaches and other security incidents. Rockley’s data, corporate systems, third-party systems, and security measures may be breached due to the actions of outside parties, employee error, malfeasance, a combination of these, or otherwise, and, as a result, an unauthorized party may obtain access to its data. For example, in late 2020, Rockley was subject to phishing attacks, one involving a spoofed email whereby certain vendor account information was charged and payment was made to a fraudulent account and a second closely timed incident where a “forwarding” rule was applied to the spoofed email’s recipient. While no personal data was accessed and the issue was addressed, the incident resulted in a net loss of approximately $66,345, which loss has been accounted for in Rockley’s 2020 financial statements (which amount has been offset by a payout under our cybersecurity insurance policy in March 2021). While Rockley maintains cybersecurity insurance, such insurance may be insufficient to cover all liabilities incurred by these incidents, and any incidents may result in loss or increased costs of its cybersecurity insurance. Any of these negative outcomes could adversely impact the market perception of, and investor confidence in, Rockley.
Any disruption or performance issues with Rockley’s network infrastructure could harm its brand, reputation, and business.
Rockley has experienced, and may in the future experience, disruptions, outages, and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, capacity constraints, and fraud. Any disruptions or other performance problems with Rockley’s products or reliability or security of Rockley’s systems could harm its reputation, brand, and Rockley’s business and operating results. In addition, Rockley must continually improve its computer network and infrastructure to avoid service interruptions or slower system performance. Rockley will need to devote additional resources to improving its platform architecture and its infrastructure. Any failure or delays in Rockley’s computer systems could cause service interruptions or slower system performance. These performance issues could harm Rockley’s business operations and financial condition.
Rockley relies on third parties to maintain and operate certain elements of its network infrastructure.
Rockley relies on third parties to operate and maintain certain elements of its network infrastructure. Interruptions in Rockley’s systems or the third-party systems on which it relies, whether due to system failures, computer viruses, physical or electronic break-ins, or other factors, could affect the security or availability of Rockley’s network infrastructure and website. Rockley’s existing data center facilities and third-party hosting providers have no obligations to renew their agreements with Rockley on commercially reasonable terms or at all, and certain of the agreements governing these relationships may be terminated by either party at any time, with no or limited notice. If any of these arrangements with third parties are terminated, Rockley could experience interruptions, as well as downtime, delays, and additional expenses in arranging alternative cloud infrastructure services. Rockley may incur significant liability from those customers and from third parties with respect to any breach of security affecting third parties’ infrastructure.
General Risks
The recurrence or continued effects of a global economic downturn as a result of the COVID-19 pandemic, political instability, and geopolitical conflicts could have an adverse effect on Rockley’s business and operating results.
Rockley operates globally and as a result its business and revenue are impacted by global macroeconomic conditions. The multinational efforts to contain the spread of COVID-19 had a significant adverse effect on the global macroeconomic environment. In addition, the instability in the global credit markets, uncertainties regarding the effects of Brexit, uncertainties related to the timing of the lifting of governmental restrictions to mitigate the spread of COVID-19, uncertainties related to changes in public policies such as domestic and international regulations, taxes, or international trade agreements, international trade disputes, government shutdowns, geopolitical turmoil such as the conflict between Russian and Ukraine, and other disruptions to global and regional economies and markets could continue to add uncertainty to global economic conditions. These adverse conditions could result in longer sales, development, and production cycles, slower adoption of new technologies, and increased price competition. As a result, any continued or further uncertainty, weakness, or deterioration in global macroeconomic and market conditions may cause Rockley’s customers to modify spending priorities or delay purchasing decisions, and result in lengthened sales, development, and production cycles, any of which could harm its business and operating results.
Item 2. Properties
As at December 31, 2022, we held interest in 9 properties. All of our facilities are located on real estate that is leased from third parties. Our properties consisted of (1) 6 office and/or lab properties, (2) two corporate apartment properties, and (3) one clinical trials property. Our headquarters are currently located in the United Kingdom.
32
In the US, we have premises in Pasadena, California, US under multiple leases for approximately 18,000 square feet. The majority of the premises in Pasadena leased expire in June 2023 and are predominantly used for engineering and finance and general administration services. We also lease spaces in Irvine, California for approximately 12,800 square feet under multiple leases all expiring in 2027, predominantly used for engineering and general administration services; we lease a property in San Jose, California for approximately 4,600 square feet under a lease expiring in 2024, which is predominantly used for finance and general administration services; we lease separate small office spaces in Irvine, California and Bloomington, Minnesota and; we also lease two corporate apartments in Pasadena, California.
In the United Kingdom, we operate our administrative and support functions out of small leased office spaces in Wiltshire, UK and Oxford, UK.
Item 3. Legal Proceedings
We are from time to time subject to various claims, lawsuits and other legal and administrative proceedings arising in the ordinary course of business. Some of these claims, lawsuits and other proceedings may involve highly complex issues that are subject to substantial uncertainties, and could result in damages, fines, penalties, non-monetary sanctions or relief. However, we do not consider any such claims, lawsuits or proceedings that are currently pending, individually or in the aggregate, to be material to our business or likely to result in a material adverse effect on our future operating results, financial condition or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
33
PART II
Unless specifically noted or the context clearly requires otherwise, all information set forth in this annual report on Form 10-K relates to the Company as it existed as of December 31, 2022 and prior to the Company’s bankruptcy proceedings and does not, and is not intended and should not be read to, reflect the business, financial condition, and results of operations of any other entity, including any entity which may result from the bankruptcy proceedings.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our ordinary shares and public warrants previously traded on the NYSE under the symbol “RKLY” and “RKLY.WS.” As of February 21, 2023, our ordinary shares and public warrants were delisted from the NYSE.
Holders
As of March 10, 2023, there were approximately 116 holders of record of our ordinary shares.
Dividend Policy
We have not paid any cash dividends on our ordinary shares to date. We may retain future earnings, if any, for future operations, expansion and debt repayment and we have no current plans to pay cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur. We do not anticipate declaring any cash dividends to holders of the ordinary shares in the foreseeable future.
Recent Sales of Unregistered Equity Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchaser
None.
Item 6. Selected Financial Data
The Company is a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and is not required to provide this item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Unless specifically noted or the context clearly requires otherwise, all information set forth in this annual report on Form 10-K relates to the Company as it existed as of December 31, 2022 and prior to the Company’s bankruptcy proceedings and does not, and is not intended and should not be read to, reflect the business, financial condition, and results of operations of any other entity, including any entity which may result from the bankruptcy proceedings.
The following discussion and analysis provides information that Rockley’s management believes is relevant to an assessment and understanding of Rockley’s consolidated results of operations and financial condition. The discussion should be read together with the audited annual consolidated financial statements as of and for the years ended December 31, 2022 and 2021 and the related notes thereto, included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements. Unless the context otherwise requires, references in these notes to “Rockley”, the “Company”, “we”, “us”, or “our” and any related terms are intended to mean the Company, Rockley Photonics Holdings Limited, while “Legacy Rockley” and “SC Health” refers to the entities prior to the Business Combination.
34
Overview
We have developed a unique sensing platform that we believe can reshape the wellness and healthcare industries through multiple applications in non-invasive, multi-modal biomarker monitoring. We believe products based on our technology platform could have the potential to unlock and accelerate advancements in areas such as early disease detection, nutrition management, and preventative healthcare delivery through continuous health and wellness monitoring.
To date, we have been engaged in developing customer-specific designs of our silicon photonics chipsets for incorporation into our customers’ end products. Accordingly, all of our products are presently in the development stage and we do not currently have any of our own end products in commercial production and have not yet shipped any products commercially. Our unique sensing platform has been built upon our silicon photonics technology, which enables compelling sensor performance, power, resolution, and density. This technology has the potential to allow monitoring devices, currently the size of clinical machines, to be condensed to the size of a wearable device. We believe this in turn has the potential to unlock additional uses in consumer electronics and medical devices. The resulting combination of technologies and manufacturing know-how is the “full-stack Rockley Platform” which is made up of PICs in silicon with integrated III-V devices (devices incorporating certain conductor elements that offer superior electronic properties, such as lasers), ASICs, photonic and electronic co-packaging, together with biosensing algorithms and AI cloud analytics, firmware/software, system architecture, and hardware design.
As testament to the relevance of our product development, we have captured the attention of several consumer electronics companies and, as of the date of this Annual Report on Form 10-K, we have established strategic relationships with six of the world’s top-ten largest manufacturers of smart watches and wristbands (based on volume as reported by IDC) and two of the five largest medtech companies (based on Becker’s ASC Review). We plan to leverage this attention to develop new capabilities in consumer wearables in the near term, and to expand over time into medical devices and other industry applications.
Our vision is to address many pressing healthcare concerns using our technology and we believe that there exists a large market opportunity for our platform. We estimate that the TAM for the consumer wearables, mobile device, and medical device markets is projected to be over $50 billion by 2025, based on data sourced from the Yole Report, the IDtexEx Report, the TrendForce Report, and our internal volume forecasts for smartphone, smart watch, and smart earbuds through 2025 (based on customer data), as the universe of healthcare and consumer wearable devices incorporating additional sensing capabilities emerges. Our target biomarkers for consumer healthcare include lactate, alcohol, glucose (indicator), carbon monoxide, blood pressure, blood oxygen, and core body temperature, among others. Our high-performance lasers have up to 1,000,000 times higher resolution, 1,000 times higher accuracy and 100 times broader range in wavelengths compared with existing LED offerings in wearable solutions (based on product analysis undertaken by Rockley comparing the Rockley silicon photonics-based spectrometer chip to existing solutions). In addition, as opposed to LED-based solutions, our lasers can be turned on more intermittently, and we employ dynamic adaptive power control to optimize laser on-time and overall power consumption for each different biomarker measurement, thus our solution will be more efficient than existing solutions.
We believe our platform will also be able to address existing applications in consumer wearable devices with significantly higher resolution, accuracy, and range. Further, we believe there are multiple additional markets and concrete opportunities for our technology platform in areas such as data center connectivity (optical transceivers), machine vision (robotic and automotive LiDAR), and compute connectivity (co-packaged optics, or CPO).
Following the completion of our product development phase and introduction of our products to the consumer and medtech wearable markets, we expect our revenue to be derived from sales of both high-volume consumer wearable products and wearables targeting medical applications. In addition, we plan to offer advanced module applications with biomarker detection capabilities for advanced health metrics that can detect and classify data that could potentially alert patients and healthcare providers to take preemptive action to prevent disease. We also expect to offer a cloud analytics platform to provide a full range of subscription services, including the deployment of our technology through a subscription and cloud-based software as a service
35
To date, we have generated revenue primarily from non-recurring engineering (“NRE”) and development services for customer-specific designs of silicon photonics chipsets for incorporation into their customers’ end products and we have financed our operations primarily through the Business Combination, issuance of convertible loan notes, as well as private placements of ordinary shares. For the year ended December 31, 2022, we incurred a net loss of $224.0 million and utilized $126.2 million in cash to fund our operations.
We expect both our capital and operating expenditures will increase significantly in connection with our ongoing activities, as we:
| • | continue to invest in our technology and our silicon photonics solutions; |
| • | continue to develop innovative solutions and applications for our technology; |
| • | commercialize our silicon photonics solutions; |
| • | continue to invest in our sales and marketing activities and distribution channels; |
| • | invest and improve our operational, financial, and management information systems; |
| • | retain key talent and increase our headcount; |
| • | maintain and expand our intellectual property portfolio |
Impact of COVID-19
The COVID-19 pandemic has nearly reached the three-year mark and our priority continues to be the health and safety of our employees. The overall recovery from the COVID-19 pandemic has been uneven and has presented many challenges and risks from general economic uncertainty, changes in consumer demand, disruption of supply chains, challenges with hiring, and labor and supply cost inflation. However, as we implemented our phased return to office plan starting in July 2021, we were able to provide greater levels of work flexibility to employees and maintain health and safety standards for employees meeting all regulatory requirements.
We continually evaluate the nature and extent of changes to the market and economic conditions related to the COVID-19 pandemic and assess the potential impact on our business and financial position. Despite the emergence of vaccines and vaccine boosters, the end of the COVID-19 pandemic is still uncertain. As such, we expect that the pandemic may continue to have an effect on our results, although the magnitude, duration, and full effects of the pandemic on our future results of operations or cash flows remain difficult to predict at this time.
For more information on risks associated with the COVID-19 pandemic and regulatory actions, see “Risk Factors — General Risks.”
Business Combination and Public Company Costs
As described in “Note 1 – Description of Business and Significant Accounting Policies” and “Note 2 – Note 2 – Business Combination” of the notes to the consolidated financial statements, we completed the Business Combination on August 11, 2021, with Legacy Rockley surviving the Business Combination as a wholly owned subsidiary of the Company.
Prior to the Business Combination, Legacy Rockley financed its operations primarily from the issuance of convertible loan notes and private placements of ordinary shares.
36
Upon the consummation of the Business Combination, we issued 104.0 million shares of ordinary shares for all the issued and outstanding equity interests of Legacy Rockley inclusive of ordinary shares issued in exchange for the issued and outstanding convertible loan notes (inclusive of interest accrued thereon) and warrants, as if each had converted into the Company’s ordinary shares immediately prior to the Business Combination. In addition, certain accredited investors (including entities affiliated with the SC Health Sponsor) purchased an aggregate of 15.0 million ordinary shares for a purchase price of $10.00 per share, or an aggregate purchase price of $150.0 million. The net cash received from the Business Combination after underwriter and transaction costs was $122.5 million.
The Business Combination was accounted for as a forward recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. Under this method of accounting, SC Health was treated as the acquired company and Rockley was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the evaluation of the following facts and circumstances:
| • | Legacy Rockley’s existing shareholders hold a majority voting interest in the combined company, and as such, have the power to appoint a majority of the members of the Company’s Board; |
| • | Legacy Rockley’s senior management team comprise the majority of the senior management of the combined company; |
| • | Legacy Rockley is the larger of the companies based on historical operating activity and employee base; and |
| • | Legacy Rockley’s operations comprise the ongoing operations of the combined entity. |
Accordingly, for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of Legacy Rockley with the acquisition being treated as the equivalent of Rockley issuing stock for the net assets of SC Health, accompanied by a recapitalization.
As a consequence of the Business Combination, the Company became an SEC-registered and NYSE-listed company, which requires us to hire additional talent and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur incremental annual expenses as a public company for, among other things, increased directors’ and officers’ liability insurance; director fees; and additional internal and external accounting, legal, and administrative resources.
Key Factors Affecting Operating Results
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including, without limitation, the following:
Resource Constraints
Our products are currently under development and we do not have any products in commercial production. Our ability to achieve our product roadmaps and development timelines, including our ability to commence commercial production of our products, may be impacted by resource constraints, including the need for additional capital. We have a history of losses and our determination of substantial doubt as a going concern could materially limit our ability to raise additional funds through the issuance of equity securities or otherwise. Further, our products must also meet certain technical standards and customer requirements, which in turn require additional funds and other resources. Additional financing and resources may not be available to us when needed or on commercially reasonable terms.
Ability to Achieve Design Wins or Long-Term Production Contracts
We may engage in discussions with customers and co-develop products but we may not be able to convert the relationship into a design win or a long-term production contract due to resource constraints, delays, or technical challenges. We work closely with our customers and potential customers to understand their product roadmaps and strategies. Our customers also continuously develop new products in existing and new application areas. We believe achieving design wins and the ability to secure long-term
37
production contracts will be critical to our future success. The selection process is typically lengthy and may require us to incur significant design and development expenditures in pursuit of a design win with no assurance that our products will be selected. The failure to secure a design win or long-term production contract could adversely affect our business.
Customer Orders and Forecasts
We currently anticipate that sales of our future products will be made pursuant to standard purchase orders, which may be cancelled, reduced, or rescheduled with little or no notice and without penalty. Cancellations of orders could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses. In addition, changes in forecasts or the timing of orders from customers, including if and when we commence commercial production of our products, could expose us to the risks of inventory shortages or excess inventory.
Pricing and Customer Demand
We expect our operating results, including if and when we commence commercial production of our products, will be impacted by the pricing of our products, our average selling prices, and fluctuations in customer purchasing volumes. If and when we begin commercial production of our products, we may not be able to fulfill customer demand in a timely manner or at all. We monitor and work to reduce our product manufacturing costs and improve the potential value our products can provide to our customers’ end products. The cost of raw materials and components critical for the manufacture of our anticipated products is largely out of our control and may fluctuate significantly. Since we rely on third-party wafer foundries and assembly and test contractors to manufacture, assemble, and test our products, we maintain a close relationship with our suppliers to improve quality, increase yields, and lower manufacturing costs.
New Markets and Applications
As we evaluate potential markets and applications for the products we are developing, we analyze forecasts by industry analysts, the adoption curve of technology, and potential competing forces that could hinder such adoption. If we fail to anticipate or respond to technological shifts or market demands, or to timely develop products or technologies in response to the same, it could result in our inability to achieve revenue growth and could harm our business and operations.
Cyclical Nature of the Semiconductor Industry
The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles, and wide fluctuations in product supply and demand. Downturns in the semiconductor industry have been characterized by diminished product demand, production overcapacity, high inventory levels, and accelerated erosion of average selling prices. Any prolonged or significant downturn in the semiconductor industry generally could adversely affect our business and reduce demand for our products and otherwise harm our financial condition and results of operations.
See the “Risk Factors” section of this annual report on Form 10-K for additional discussion of the risks and challenges facing our business.
Basis of Presentation
Currently, we conduct business through one operating and reportable segment. All long-lived assets are maintained in, and all losses are attributable to the one segment. See Note 1 in our accompanying audited consolidated financial statements for more information about our operating segment.
38
Components of Results of Operations
The following discusses certain line items in our consolidated statements of operations.
Revenue
To date, we have primarily generated revenue from development services, which entail developing customer-specific designs of silicon photonics chipsets. Our contracts with customers include specific achievement of agreed-upon projects and a substantive acceptance criteria for each agreed-upon project. In the event an agreed-upon project is successful and the customer provides acceptance, we allocate the contract consideration related to the performance obligations that are satisfied during the period and recognize the revenue at that point in time.
Following the completion of our product development phase and introduction of our spectra-sense chipsets to the wearable devices market, we expect the majority of our revenue to be derived from sales of high-volume consumer wearable products. In addition, we plan to offer advanced module applications with biomarker detection capabilities for advanced health metrics that can detect, classify, and potentially prevent disease. We also expect to offer a cloud analytics platform to provide a full range of subscription services, including the deployment of our technology through a subscription and cloud-based software as a service.
Cost of Revenue
To date, our cost of revenue has included cost related to our development services, which include cost of materials, cost associated with packaging and assembly, testing and shipping, cost of talent, including stock-based compensation, and equipment associated with manufacturing support, logistics, and quality assurance, overhead, and occupancy costs. Once we commence commercial production of our silicon photonics chipsets, cost of revenues will include direct parts, material, and labor costs, manufacturing overhead, including amortized tooling costs, shipping and logistics costs, and reserves for estimated warranty expenses.
Gross Profit and Gross Margin
Gross profit is calculated based on the difference between our revenue and cost of revenue. Gross margin is the percentage obtained by dividing gross profit by our revenue. As we approach commercial production of spectra-sense chipsets, advanced module applications, and Rockley Photonics Cloud Analytics technology, we expect our gross profit and gross margin to vary.
Selling, General, and Administrative Expense
Selling, general, and administrative expenses consist of human capital related expenses for employees involved in general corporate functions, including executive management and administration, accounting, finance, tax, legal, information technology, marketing, and human resources; depreciation expense and rent relating to facilities; travel costs; professional fees; and other general corporate costs. Human capital expenses primarily include salaries, benefits, bonuses, and stock-based compensation.
Research and Development Expense
Research and development expense consists primarily of talent costs for engineers and third parties engaged in the design and development of products, software, and technologies, including salary, bonus, and stock-based compensation expense, project material costs, services, and depreciation of our research and development facilities and equipment. We expense research and development costs as they are incurred. Research and development expense also includes the research and development tax credits that we are able to claim in accordance with the relevant U.K. tax legislation. These tax credits are payable to us in cash and are carried on the consolidated balance sheets at the amount claimed and expected to be received from the U.K. government within the next 12 months. We expect research and development expense to increase in absolute dollars as we continue to invest in the development of our products and technology.
39
Other Income (Expense)
Other income consists of miscellaneous non-operating items, such as forgiveness of debt and related accrued interest.
Interest Income (Expense)
Interest income consists primarily of interest received or earned on our cash, cash equivalents, and investment balances held in interest-bearing deposit accounts. Interest expense consists of interest paid on our convertible loan notes and capital lease obligations.
Equity Method Investment
Equity method investments consist of entities over which we have significant influence but not control or joint control. Under the equity method of accounting, all of our investments are initially recognized at cost and adjusted thereafter to recognize our share of the post-acquisition profits or losses of the investee in our consolidated statements of operations.
Change in Fair Value of Debt Instruments
Gains or losses from the change in fair value of debt instruments are recorded from the remeasurement of the fair value of our convertible loan notes using a discounted cash flow methodology based upon certain valuation assumptions.
Change in Fair Value of Warrant Liabilities
Gains or losses from the change in fair value of warrants are recorded from the remeasurement of the fair value of our private placement warrants, public warrants and warrants issued in connection with certain convertible notes based upon certain valuation assumptions.
Gain (Loss) on Foreign Currency
We have significant international operations that are denominated in foreign currencies, primarily the British Pound and Euro, subjecting us to foreign currency exchange risk that may adversely impact our financial results. We calculate the year-over-year impact of foreign currency movement on our business using foreign currency exchange rates that are applied to transactional currency amounts.
Provision for Income Tax
We are subject to income taxes in the United Kingdom, the United States, Finland, Ireland, and Switzerland. Our income tax provision consists of an estimate of federal, state, and foreign income taxes based on enacted federal, state, and foreign tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. Due to cumulative losses, we maintain a valuation allowance against our U.S. federal and foreign deferred tax assets.
40
Results of Operations for the Years Ended December 31, 2022 and 2021
The following table sets forth our historical operating results for the periods indicated (in thousands):
| Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
Revenue | $ | 3,248 | $ | 8,213 | ||||
Cost of revenue | 8,461 | 11,416 | ||||||
Gross profit | (5,213 | ) | (3,203 | ) | ||||
Operating expenses: | ||||||||
Selling, general, and administrative expenses | 61,532 | 39,976 | ||||||
Research and development expenses | 103,095 | 72,573 | ||||||
|
|
|
| |||||
Total operating expenses | 164,627 | 112,549 | ||||||
|
|
|
| |||||
Loss from operations | (169,840 | ) | (115,752 | ) | ||||
Other income (expense): | ||||||||
Forgiveness of PPP loan | — | 2,860 | ||||||
Other income | (348 | ) | — | |||||
Interest expense, net | (14,697 | ) | (4,781 | ) | ||||
Equity method investment loss | (523 | ) | (703 | ) | ||||
Change in fair value of debt instruments | (73,361 | ) | (59,916 | ) | ||||
Change in fair value of warrant liabilities | 44,138 | 10,827 | ||||||
Gain (loss) on foreign currency | (5,905 | ) | 119 | |||||
|
|
|
| |||||
Total other income (expense) | (50,696 | ) | (51,594 | ) | ||||
|
|
|
| |||||
Loss before income taxes | (220,536 | ) | (167,346 | ) | ||||
Provision for income tax | 3,504 | 667 | ||||||
|
|
|
| |||||
Net loss | $ | (224,040 | ) | $ | (168,013 | ) | ||
|
|
|
| |||||
Discussion and Analysis of Results of Operations
Revenue (in thousands, except for percentages)
| Years Ended December 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
Revenue | $ | 3,248 | $ | 8,213 | $ | (4,965 | ) | (60 | )% | |||||||
Revenue decreased by $5.0 million, or 60% to $3.2 million for the year ended December 31, 2022 from $8.2 million for the year ended December 31, 2021. This decrease is primarily driven by timing of project milestones for our significant customers in fiscal 2022 when compared to fiscal 2021.
Cost of Revenue and Gross Profit (in thousands, except for percentages)
| Years Ended December 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
Cost of revenue | $ | 8,461 | $ | 11,416 | $ | (2,955 | ) | (26 | )% | |||||||
Gross Profit | $ | (5,213 | ) | $ | (3,203 | ) | $ | (2,010 | ) | NM | ||||||
Gross Margin | (62 | )% | (28 | )% | NM | NM | ||||||||||
41
NM – Not meaningful
Cost of revenue decreased by $3.0 million, or 26%, to $8.5 million for the year ended December 31, 2022 from $11.4 million for the year ended December 31, 2021. This decrease in cost of revenue was primarily driven by an overall decrease in revenue and decrease in allocation of costs related to revenue generating activities when compared to the prior year.
Gross profit decreased by $2.0 million to $(5.2) million for the year ended December 31, 2022 from $(3.2) million for the year ended December 31, 2021. The decrease in gross profit was primarily driven by a decrease in revenue for the year ended December 31, 2022.
Our gross margin has fluctuated and may fluctuate from period to period based on a number of factors, including the timing of completion of project milestones, with each project requiring differing levels of time and costs. The projects we undertake are determined by our customer commitments and our long-term strategy goals.
To date, our cost of revenue has included cost related to our development services which include cost of materials, cost associated with packaging and assembly, testing and shipping, cost of talent, including stock-based compensation, and equipment associated with manufacturing support, logistics, and quality assurance, overhead, and occupancy costs. Once we commence commercial production of our silicon photonics chipsets, cost of revenues will include direct parts, material, and labor costs, manufacturing overhead, including amortized tooling costs, shipping and logistics costs, and reserves for estimated warranty expenses.
Gross profit is calculated based on the difference between our revenue and cost of revenue. Gross margin is the percentage obtained by dividing gross profit by our revenue. As we approach commercial production of spectra-sense chipsets, advanced module applications, and Rockley Photonics Cloud Analytics technology, we expect our gross profit and gross margin to vary.
Selling, General and Administrative Expenses (in thousands, except for percentages)
| Years Ended December 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
Selling, general and administrative expenses | $ | 61,532 | $ | 39,976 | $ | 21,556 | 54 | % | ||||||||
Selling, general and administrative expenses increased by $21.6 million, or 54%, to $61.5 million for the year ended December 31, 2022 from $40.0 million for the year ended December 31, 2021. The increase was primarily due to an increase in professional fees of $16 million related to our financing activities in fiscal 2022. Further, the increase relates general corporate growth, of which $2.9 million was due to an increase in insurance expense, $1.6 million and $0.6 million were due to increased human capital and stock-based compensation costs, respectively.
Selling, general, and administrative expenses consist of human capital related expenses for employees involved in general corporate functions, including executive management and administration, accounting, finance, tax, legal, information technology, marketing, and human resources; depreciation expense and rent relating to facilities; travel costs; professional fees; and other general corporate costs. Human capital expenses primarily include salaries, benefits, bonuses, and stock-based compensation.
Research and Development Expenses (in thousands, except for percentages)
| Years Ended December 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
Research and development expenses | $ | 103,095 | $ | 72,573 | $ | 30,522 | 42 | % | ||||||||
Research and development expenses increased by $30.5 million, or 42%, to $103.1 million for the year December 31, 2022 from $72.6 million for the year ended December 31, 2021. The increase was primarily attributable to an increase in stock-based compensation expenses of $1.7 million, higher IT infrastructure costs of $1.4 million, higher third party engineering costs of $5.1 million and a decrease in allocation of expenses of $7.9 million to R&D and a decrease in the R&D tax credit of $16.6 million.
42
Research and development expense consists primarily of talent costs for engineers and third parties engaged in the design and development of products, software, and technologies, including salary, bonus, and stock-based compensation expense, project material costs, services, and depreciation of our research and development facilities and equipment. We expense research and development costs as they are incurred. Research and development expense also includes the research and development tax credits that we are able to claim in accordance with the relevant U.K. tax legislation. These tax credits are payable to us in cash and are carried on the consolidated balance sheets at the amount claimed and expected to be received from the U.K. government within the next 12 months. We proactively manage research and development expense whilst remaining focused in the development of our products and technology.
Other income, net (in thousands, except for percentages)
| Years Ended December 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
Other income, net | $ | (348 | ) | $ | 2,860 | $ | (3,208 | ) | (112 | )% | ||||||
The decrease in other income, net, for the year ending December 31, 2022 compared to the year ending December 31, 2021, is attributable to the absence of the forgiveness of Paycheck Protection Program debt and related accrued interest which only occurred in fiscal 2021.
Interest Expense, net (in thousands, except for percentages)
| Years Ended December 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
Interest expense, net | $ | (14,697 | ) | $ | (4,781 | ) | $ | (9,916 | ) | 207 | % | |||||
The change in interest expense, net by $9.9 million, or 207%, for the years ended December 31, 2022 and December 31, 2021, respectively was primarily due to the interest expense recorded in fiscal 2022 due to the imputed interest expense from the 2020 Term Facility Loan and interest on the May and October Notes.
Interest income consists primarily of interest received or earned on our cash, cash equivalents, and investment balances held in interest-bearing deposit accounts. Interest expense consists of interest paid or accrued on our Term Facility Loan and May and October Notes.
Equity Method Investment Loss (in thousands, except for percentages)
| Years Ended December 31, | Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
Equity method investment loss | $ | (523 | ) | $ | (703 | ) | $ | 180 | (26 | )% | ||||||
Change in equity method investment captures our share of losses of the investment in HRT according to our percentage of ownership.
Change in Fair Value of Debt Instruments (in thousands, except for percentages)
| Years Ended December 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
Change in fair value of debt instruments | $ | (73,361 | ) | $ | (59,916 | ) | $ | (13,445 | ) | 22 | % | |||||
43
Change in fair value of debt instruments captures losses from a change in fair value estimates using discounted cash flow and binomial lattice methodologies that are based upon a set of valuation assumptions to value the May and October Notes.
All convertible debt instruments held by the Company prior to the Business Combination in August 2021 were converted to ordinary shares in the Company as part of the close of the Business Combination in August 2021.
Change in Fair Value of Warrant Liabilities (in thousands, except for percentages)
| Years Ended December 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
Change in fair value of warrant liabilities | 44,138 | $ | 10,827 | $ | 33,311 | 308 | % | |||||||||
Change in fair value of warrant liabilities captures activity from a change in fair value estimates based upon a set of Black-Scholes valuation assumptions or binomial lattice methodologies. The warrant liabilities include the Private Placement Warrants assumed from SC Health as part of the Business Combination in August 2021 and the May 144A Warrants issued by the Company in May 2022 and the October 144A Warrants issued by the Company in October 2022.
Gain (Loss) on Foreign Currency (in thousands, except for percentages)
| Years Ended December 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
Gain (loss) on foreign currency | $ | (5,905 | ) | $ | 119 | $ | (6,024 | ) | (5,062 | )% | ||||||
Change in gain (loss) on foreign currency captures losses from the impact of foreign currency exchange rates as a result of the translation of foreign functional currencies into our reporting currency and the re-measurement of foreign currency transactions and balances. For the years ended December 31, 2022 and 2021, most of our balances are held in the reporting currency, which decrease the impact of foreign currency fluctuations on the results of our operations.
Provision for Income Tax (in thousands, except for percentages)
| Years Ended December 31, | Change | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
Provision for income tax | $ | 3,504 | $ | 667 | $ | 2,837 | 425 | % | ||||||||
Change in provision for income tax expense for the years ended December 31, 2022 and 2021 is due primarily to changes in U.S. tax laws which required capitalization of certain research and development expenditures for tax purposes. Our effective tax rate differs from the U.K. statutory rate primarily due to a substantially full valuation allowance against our net deferred tax assets where it is more likely than not that some or all of the deferred tax assets will not be realized. The income tax expenses shown above are primarily related to corporate income taxes in the United States, which operates on a cost-plus arrangement and minimum filing fees in the foreign jurisdictions where we have operations.
Liquidity and Capital Resources
Due to Rockley’s history of recurring losses from operations, negative cash flows from operations, and a significant accumulated deficit, and the Chapter 11 bankruptcy petition filed in January 2023, management concluded that there is substantial doubt about Rockley’s ability to continue as a going concern. In addition, our independent registered public accounting firm has included an explanatory paragraph in their opinion for the year ended December 31, 2022 as to the substantial doubt about our ability to continue as a going concern. Since inception, Rockley has financed its operations primarily through the issuance and sale of convertible loan notes, ordinary shares and agreed-upon projects. As of December 31, 2022, the Company had cash, cash equivalents and investments of approximately $23.0 million.
44
Short-Term and Long-Term Liquidity Requirements
In October 2021, the Company entered into an equity line of credit arrangement (“ELOC”) with Lincoln Park Capital Fund, LLC, an Illinois limited liability company (“LPCF”). The ELOC is a private placement with registration rights, providing LPCF the ability to purchase up to 7.8 million of the Company’s ordinary shares for up to $50.0 million over 24 months. Proceeds from the sale of shares will go towards the Company to be used for working capital.
On May 27, 2022, the Company issued the May Notes in an aggregate principal amount of $81.5 million pursuant to the May Indenture, dated as of May 27, 2022, among the Company, certain of its subsidiaries, as guarantors, and Wilmington Savings Fund Society, FSB, as trustee and as collateral agent in a private placement financing and in connection therewith agreed to comply with the affirmative and negative covenants contained in the May Indenture, including a covenant that requires the Company to pledge at all time at least $20.0 million of cash and cash equivalents to secure the May Notes. This minimum cash and cash equivalents requirement potentially limits the Company’s liquidity position. See “Risk Factors — We are subject to restrictive debt covenants that limit our ability to finance our future operations and capital needs and to pursue business opportunities and activities.” for a discussion of risks related to restrictive covenants in the May Indenture.
On October 25, 2022, the Company issued the May Notes in an aggregate principal amount of $90.6 million pursuant to the October Indenture, dated as of October 25, 2022, among the Company, certain of its subsidiaries, as guarantors, and Wilmington Savings Fund Society, FSB, as trustee and as collateral agent in a private placement financing and in connection therewith agreed to comply with the affirmative and negative covenants contained in the October Indenture, including a covenant that requires the Company to have a minimum amount of cash and cash equivalents of $5.0 million (including amounts in escrow) through December 29, 2022 and $20.0 million thereafter to secure the October Notes. This minimum cash and cash equivalents requirement potentially limits the Company’s liquidity position. See “Risk Factors — We are subject to restrictive debt covenants that limit our ability to finance our future operations and capital needs and to pursue business opportunities and activities.” for a discussion of risks related to restrictive covenants in the October Indenture.
As of the date of this Annual Report on Form 10-K, we have yet to generate any material revenue from our business operations. In addition, we have substantial debt obligations and limited liquidity. If we are unable to pay our obligations as they become due, our creditors could exercise their remedies under our debt agreements, which could include seizing control of our bank accounts, which in turn could require us to initiate bankruptcy proceedings. These actions could have the effect of substantially reducing or completely eliminating the value of our ordinary shares. You should not invest in our ordinary shares unless you are willing and able to withstand the complete loss of your investment.
On January 23, 2023, the Company filed a voluntary petition for relief under chapter 11 of title 11 (the “Chapter 11 Case”) of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The Company filed motions with the Bankruptcy Court seeking authorization to continue operating its business as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The Company filed a series of first day motions with the Bankruptcy Court that sought authorization to continue conducting its business without interruption. These motions were designed primarily to minimize the effect of bankruptcy on the Company’s operations and were subsequently approved by the Bankruptcy Court. None of Rockley’s subsidiaries have filed voluntary petitions for relief under the Bankruptcy Code. The Company also filed the Prepackaged Chapter 11 Plan of Reorganization of Rockley Photonics Holdings Limited (as amended, supplemented, or modified from time to time, the “Plan”) and a related disclosure statement (the “Disclosure Statement”).. The Company sought expedited approval of the Plan as part of a comprehensive restructuring to de-lever the Company’s consolidated balance sheet by eliminating existing debt and introducing a new capital structure that would provide approximately $35 million of cash for ongoing operations. On January 24, 2023, the Company filed a petition with the Grand Court of the Cayman Islands seeking the appointment of joint restructuring officers to advise the Company and facilitate the restructuring transactions to be effectuated in connection with the Chapter 11 Case.
45
The filing of the Chapter 11 Case described above constituted an event of default or otherwise triggered repayment obligations under a number of instruments and agreements relating to direct financial obligations of the Company and certain of its subsidiaries. The May Notes and the October Notes each provide that, as a result of the Chapter 11 Case, the principal, accrued and unpaid interest and certain other amounts due thereunder, including certain prepayment premiums payable, shall be immediately due and payable. Any efforts to enforce such payment obligations under the Debt Instruments as to the Company were automatically stayed as a result of the Chapter 11 Case, and the Company’s creditors’ rights of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code and the Bankruptcy Court’s orders.
On March 10, 2023, the Bankruptcy Court approved the adequacy of the Disclosure Statement and confirmed the Plan. The Plan became effective March 14, 2023 (the “Effective Date”).
Pursuant to the Plan, after the Effective Date, the Company will liquidate pursuant to Cayman Islands law. Holders of existing equity interests in the Company will not receive or retain any distribution or property on account of such equity interests. In connection with the liquidation, the Company expects to file a Form 15 with the Securities and Exchange Commission to terminate the registration of its ordinary shares. Thereafter, the Company’s reporting obligations under the Securities Exchange Act of 1934, as amended shall be terminated.
Historical Cash flows
For the Years Ended December 31, 2022 and 2021
| Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
Net cash used in operating activities | $ | (126,197 | ) | $ | (126,001 | ) | ||
Net cash used in investing activities | 40,645 | (52,842 | ) | |||||
Net cash provided by financing activities | 71,752 | 196,401 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | (13,800 | ) | $ | 17,558 | |||
Cash Flows from Operating Activities
During the year ended December 31, 2022, net cash used in operating activities was $126.2 million, primarily consisting of net losses of $224.0 million, adjusted by non-cash depreciation and amortization of $6.4 million, bad debt expense and allowance for doubtful accounts of $(0.1) million, stock-based compensation of $14.3 million, equity-method investment loss of $1.2 million, and changes in fair value of debt instruments and warrants of $73.4 million and $(44.1) million, respectively. Changes in assets and liabilities for the year ended December 31, 2022 included the following: decreases in accounts receivable, other receivables, and accrued expenses offset by an increase in trade payables.
During the year ended December 31, 2021, net cash used in operating activities was $126.0 million, primarily consisting of net losses of $168.0 million, adjusted by non-cash depreciation and amortization of $4.6 million, bad debt expense and allowance for doubtful accounts of $0.8 million, stock-based compensation of $12.0 million, equity-method investment loss of $0.3 million, and change in fair value of debt instruments and warrants of $59.9 million and $(10.8) million, respectively. Changes in assets and liabilities for the year ended December 31, 2021 included the following: decreases in accounts receivable, offset by increases in other receivables, trade payables and accrued expenses.
46
Cash Flows from Investing Activities
Net cash used in investing activities was $40.6 million for the year ended December 31, 2022, primarily related to the sale of marketable securities of $45.1 million, and also from the purchases of property and equipment to be used in the ordinary course of business. Net cash used in investing activities was $52.8 million for the year ended December 31, 2021, primarily related to the purchase and the sale of marketable securities of $54.7 million and $10.0 million, respectively, and also from the purchases of property and equipment to be used in the ordinary course of business.
Cash Flows from Financing Activities
Net cash provided by financing activities was $71.8 million for the year ended December 31, 2022, primarily related to the proceeds received from the May and October Notes, partially offset by the principal payments we have made on the 2020 Term Facility Loan and payment of transaction costs. Net cash provided by financing activities was $196.4 million for the year ended December 31, 2021, primarily related to the proceeds received from the Business Combination and convertible loan notes.
Contractual Obligations and Commitments
Purchase obligations include commitments to third-party suppliers for various research and development activities. As of December 31, 2022 and December 31, 2021, we had $8.3 million and $13.6 million, respectively in contractual obligations for which we have not yet received services.
Off-Balance Sheet Arrangements
Since the date of our incorporation, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Recent Accounting Pronouncements
Please refer to Note 1—Description of Business and Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and our results of operations.
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board’s Accounting Standards Codification, and we consider the various staff accounting bulletins and other applicable guidance issued by the SEC. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
See Note 1—Description of Business and Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of our significant accounting policies and the effect on our financial statements.
47
Revenue Recognition
We generate revenue principally from development services, which entails developing customer-specific designs of photonics chipsets. Our contracts with customers include specific achievement milestones and a substantive acceptance criteria for each milestone. In the event a milestone is achieved and the customer provides acceptance, the Company allocates the contract consideration related to the performance obligations that are satisfied during the period and recognizes the revenue at that point in time.
Stock-based Compensation
We recognize the cost of stock-based awards granted to our employees and directors based on the estimated grant-date fair value of the awards. Cost is recognized on a straight-line basis over the service period, which is generally the vesting period of the award. We have elected to recognize the effect of forfeitures in the period they occur. We determine the fair value of stock options using the Black-Scholes option pricing model, which is impacted by the following assumptions:
| • | Expected Term—This is the period that the awards that have been granted are expected to remain unexercised. The Company employs the average period the awards are expected to remain outstanding; |
| • | Volatility—Our stock was not publicly traded prior to August 11, 2021. The volatility used in stock grants made prior to that date was based on a benchmark of comparable companies within the silicon photonics industries; |
| • | Risk-Free Interest Rate—The interest rates used are based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award; and |
| • | Dividend Yield—The dividend rate used is zero as we have never paid any cash dividends on our ordinary shares and do not anticipate doing so in the foreseeable future. |
Following the Business Combination, the fair value of our ordinary shares is now determined based on the quoted market price. Prior to the Business Combination, our management and board of directors considered various objectives and subjective factors to determine the fair value of Legacy’s Rockley ordinary shares as of each grant date, including the value determined by a third-party valuation firm. These factors included, among other things, financial performance, capital structure, forecasted operating results and market performance analyses of similar companies in our industry.
Convertible Debt
The fair value of the May Notes and October Notes was measured using a binomial lattice model based on assumptions as to when the May and October Notes would be converted or redeemed at each decision point. The lattice model uses the stock price, maturity date, risk-free rate, estimated stock volatility and estimated credit spread as significant assumptions used to estimate fair value. The May Notes and October Notes are re-measured to fair value at each subsequent reporting date. We will continue to adjust the liability for changes in fair value for the May Notes and October until they mature or are converted to Company stock and present the changes in fair value in the consolidated statement of operations at each reporting period.
Warrants
We classify the Private Placement Warrants as a long-term liability on our consolidated balance sheets as of December 31, 2022 and 2021. The Private Placement Warrants were traded on the NYSE prior to their redemption and recorded at fair value using a Black-Scholes option-pricing model. The Private Placement Warrants are re-measured to fair value at each subsequent reporting date. We will continue to adjust the liability for changes in fair value for the Private Placement Warrants until the warrants are exercised, redeemed or cancelled and present the changes in fair value in the consolidated statement of operations at each reporting period.
We classify the Public Warrants as equity and present within Additional Paid-In Capital on our consolidated balance sheets as of December 31, 2022 and 2021. Although an event such as a qualifying cash tender offer could occur outside of the company’s control that would require net cash settlement, equity classification for the Public Warrants is not precluded per ASC 815-40-25. The Public Warrants were initially recorded using the closing stock price as of the measurement date, with no subsequent measurement.
48
We classified the May 144A Warrants and October 144A Warrants as long-term liabilities on our consolidated balance sheet as of December 31, 2022. The May 144A and October 144A Warrants were recorded at fair value using the Monte Carlo simulation method. The May 144A Warrants and October 144A Warrants are re-measured to fair value at each subsequent reporting date. We will continue to adjust the liability for changes in fair value for the May 144A Warrants and October 144A Warrants until the warrants are exercised, redeemed or cancelled and present the changes in fair value in the consolidated statement of operations at each reporting period.
Income Taxes
We record income tax expense for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of asset and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record valuation allowances to reduce its deferred tax assets to the net amount that it believes is more likely than not to be realized. Its assessment considers the realization of deferred tax assets on a jurisdictional basis. We recognize the income tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by taxing authorities, based on the technical merits of the position. The income tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and is not required to provide this item.
49
Item 8. | Financial Statements and Supplementary Data |
Page | ||||
| 51 | ||||
| 52 | ||||
| 53 | ||||
| 54 | ||||
| 55 | ||||
| 56 | ||||
| 56 | ||||
| 63 | ||||
| 65 | ||||
| 65 | ||||
| 66 | ||||
| 71 | ||||
| 73 | ||||
| 83 | ||||
| 85 | ||||
| 88 | ||||
| 89 | ||||
| 89 | ||||
| 93 | ||||
| 93 | ||||
| 94 | ||||
| 95 | ||||
| 95 | ||||
December 31, | ||||||||
2022 | 2021 | |||||||
Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 22,986 | $ | 36,786 | ||||
| Short-term investments, at fair value | — | 26,965 | ||||||
| Accounts receivable, net of allowance of $0 and $302 | 122 | 1,359 | ||||||
| Other receivables, net of allowance of $0 and $141 | 32,244 | 47,462 | ||||||
| Prepaid expenses | 7,091 | 6,795 | ||||||
| Other current assets | 6 | 7 | ||||||
| Total current assets | 62,449 | 119,374 | ||||||
| Long-term investments, at fair value | — | 17,659 | ||||||
| Property, equipment, net | 9,956 | 10,187 | ||||||
| Equity method investment | 3,653 | 4,879 | ||||||
| Intangible assets | 2,963 | 3,048 | ||||||
Other non-current assets | 4,565 | 7,683 | ||||||
| Total assets | $ | 83,586 | $ | 162,830 | ||||
Liabilities and Shareholders’ Equity (Deficit) | ||||||||
| Current liabilities | ||||||||
| Trade payables | $ | 19,788 | $ | 6,882 | ||||
| Accrued expenses | 12,818 | 17,360 | ||||||
| Debt, current portion | 113,274 | 26,312 | ||||||
| Warrant liabilities | 31,419 | — | ||||||
| Other current liabilities | 1,544 | 1,238 | ||||||
| Total current liabilities | 178,843 | 51,792 | ||||||
| Long-term debt, net of current portion | — | — | ||||||
| Warrant liabilities | — | 3,477 | ||||||
| Other long-term liabilities | 4,097 | 3,743 | ||||||
| Total liabilities | 182,940 | 59,012 | ||||||
| Commitments and contingencies (Note 15) | ||||||||
| Shareholders’ equity (deficit) | ||||||||
| Ordinary shares, $0.000004 par value; 12,443,961,038 and 12,417,500,000 authorized as of December 31, 2022 and December 31, 2021; 132,923,224 and 127,860,639 issued and outstanding as of December 31, 2022 and December 31, 2021, respectively | — | — | ||||||
Additional paid-in-capital | 525,582 | 504,714 | ||||||
| Accumulated deficit | (624,936 | ) | (400,896 | ) | ||||
| Total shareholders’ equity (deficit) | (99,354 | ) | 103,818 | |||||
| Total liabilities and shareholders’ equity deficit | $ | 83,586 | $ | 162,830 | ||||
Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
| Revenue | $ | 3,248 | $ | 8,213 | ||||
| Cost of revenue | 8,461 | 11,416 | ||||||
| Gross profit | (5,213 | ) | (3,203 | ) | ||||
| Operating expenses: | ||||||||
| Selling, general, and administrative expenses | 61,532 | 39,976 | ||||||
| Research and development expenses | 103,095 | 72,573 | ||||||
| Total operating expenses | 164,627 | 112,549 | ||||||
Loss from operations | (169,840 | ) | (115,752 | ) | ||||
| Other income (expense): | ||||||||
| Forgiveness of PPP loan | — | 2,860 | ||||||
| Other income | (348 | ) | — | |||||
| Interest expense, net | (14,697 | ) | (4,781 | ) | ||||
| Equity method investment loss | (523 | ) | (703 | ) | ||||
| Change in fair value of debt instruments | (73,361 | ) | (59,916 | ) | ||||
| Change in fair value of warrant liabilities | 44,138 | 10,827 | ||||||
| Gain (loss) on foreign currency | (5,905 | ) | 119 | |||||
| Total other income (expense) | (50,696 | ) | (51,594 | ) | ||||
Loss before income taxes | (220,536 | ) | (167,346 | ) | ||||
| Provision for income tax | 3,504 | 667 | ||||||
Net loss | $ | (224,040 | ) | $ | (168,013 | ) | ||
Net loss per share: | ||||||||
| Basic and diluted | $ | (1.72 | ) | $ | (1.66 | ) | ||
Weighted-average shares outstanding: | ||||||||
| Basic and diluted | 130,348,047 | 100,917,939 | ||||||
Number of Ordinary Shares | Ordinary Shares and Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity (Deficit) | |||||||||||||
Balance, December 31, 2020 | $ | 83,539,382 | $ | 201,576,000 | $ | (232,883,000 | ) | $ | (31,307,000 | ) | ||||||
| Net loss | — | — | (168,013 | ) | (168,013 | ) | ||||||||||
| Exercise of stock options | 1,557,218 | 932 | — | 932 | ||||||||||||
| Exercise of warrants | 4,115,118 | 379 | — | 379 | ||||||||||||
| Issuance of warrants | — | 263 | — | 263 | ||||||||||||
| Conversion of convertible notes to ordinary shares | 15,896,210 | 181,404 | — | 181,404 | ||||||||||||
| Equity consideration issued to SC Health | 1,777,031 | 17,966 | — | 17,966 | ||||||||||||
| Equity consideration issued to PIPE | 10,000,000 | 100,000 | — | 100,000 | ||||||||||||
| Equity consideration issued to SC Health Sponsor | 10,562,500 | 50,000 | — | 50,000 | ||||||||||||
| Vesting of restricted stock units | 24,668 | — | — | — | ||||||||||||
| Stock-based compensation | — | 12,013 | — | 12,013 | ||||||||||||
| Transaction costs | — | (45,515 | ) | — | (45,515 | ) | ||||||||||
| Private warrants | — | (14,304 | ) | — | (14,304 | ) | ||||||||||
| Ordinary share issuance, net of issuance costs | 388,512 | — | — | — | ||||||||||||
Balance, December 31, 2021 | 127,860,639 | 504,714 | (400,896 | ) | 103,818 | |||||||||||
| Net loss | — | — | (224,040 | ) | (224,040 | ) | ||||||||||
| Exercise of stock options | 2,129,267 | 1,389 | — | 1,389 | ||||||||||||
| Vesting of restricted stock units, net of withholding taxes | 998,603 | (359 | ) | — | (359 | ) | ||||||||||
| Conversion of convertible notes to ordinary shares | 1,542,206 | 5,548 | — | 5,548 | ||||||||||||
| Issuance or ordinary shares under employee stock purchase plan, net of taxes | 392,509 | 1,045 | — | 1,045 | ||||||||||||
| Stock-based compensation | — | 14,325 | — | 14,325 | ||||||||||||
| Transaction costs | — | (1,080 | ) | — | (1,080 | ) | ||||||||||
Balance, December 31, 2022 | 132,923,224 | $ | 525,582 | $ | (624,936 | ) | $ | (99,354 | ) | |||||||
Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
Cash flows from operating activities: | ||||||||
| Net loss | $ | (224,040 | ) | $ | (168,013 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation of property and equipment | 6,394 | 4,640 | ||||||
Non-cash operating lease cost | 1,364 | 917 | ||||||
| Loss on disposal of property and equipment | 42 | — | ||||||
| Bad debt expense and allowance for doubtful accounts | (141 | ) | 820 | |||||
| Accretion of marketable securities to redemption value | (131 | ) | (122 | ) | ||||
| Net realized loss on sale of marketable securities | (347 | ) | — | |||||
| Stock-based compensation | 14,333 | 12,013 | ||||||
| Change in equity-method investment | 1,226 | 323 | ||||||
| Change in fair value of debt instrument | 73,361 | 59,916 | ||||||
| Change in fair value of warrant liabilities | (44,138 | ) | (10,827 | ) | ||||
| Forgiveness of Paycheck Protection Program loan | — | (2,860 | ) | |||||
Non-cash interest on convertible notes | 5,536 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 1,237 | 2,887 | ||||||
| Other receivables | 15,359 | (29,579 | ) | |||||
| Prepaid expenses and other current assets | (295 | ) | (4,868 | ) | ||||
Other non-current assets | 2,967 | (6,712 | ) | |||||
| Trade payables | 10,698 | 1,663 | ||||||
| Accrued expenses | 11,644 | 10,946 | ||||||
| Other current and long-term liabilities | (1,266 | ) | 2,855 | |||||
| Net cash used in operating activities | (126,197 | ) | (126,001 | ) | ||||
Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (4,457 | ) | (7,840 | ) | ||||
| Purchase of marketable securities | — | (54,688 | ) | |||||
| Proceeds from sale and maturity of marketable securities | 45,102 | 10,186 | ||||||
| Payment for asset acquisition | — | (500 | ) | |||||
| Net cash provided by (used in) investing activities | 40,645 | (52,842 | ) | |||||
Cash flows from financing activities: | ||||||||
| Proceeds from convertible loan notes | 106,154 | 76,723 | ||||||
| Principal payments on long-term debt | (26,311 | ) | (5,000 | ) | ||||
| Proceeds from issuance of ordinary shares | — | 167,966 | ||||||
| Proceeds from exercise of options | 1,391 | 932 | ||||||
| Proceeds from the exercise of warrants | — | 379 | ||||||
| Proceeds from issuance of warrants | — | 263 | ||||||
| Debt issuance costs incurred | (383 | ) | ||||||
| Transaction costs | (17,940 | ) | (44,479 | ) | ||||
| Withheld taxes paid on behalf of employees on net settled stock-based awards | (368 | ) | — | |||||
| Proceeds from bridge notes | 8,826 | — | ||||||
| Net cash provided by financing activities | 71,752 | 196,401 | ||||||
Net increase (decrease) in cash and cash equivalents | (13,800 | ) | 17,558 | |||||
Cash and cash equivalents: | ||||||||
| Beginning of period | 36,786 | 19,228 | ||||||
| End of period | $ | 22,986 | $ | 36,786 | ||||
1. | Description of Business and Significant Accounting Policies |
| Computer equipment | 3 years | |
| Lab equipment | 3 years | |
| Furnitures and fixtures | 4 years | |
| Leasehold improvements | Shorter of the lease term and the useful life |
| • | Identification of the contract with a customer— |
| • | Identification of the performance obligations in the contract |
| • | Determination of the transaction price |
| • | Allocation of the transaction price to the performance obligations in the contract |
| • | Recognition of revenue when or as performance obligations are satisfied |
2. | Business Combination |
Recapitalization | ||||
| Cash inflow from SC Health’s trust account, net of redemptions | $ | 17,966 | ||
| Cash inflow from PIPE | 100,000 | |||
| Cash inflow from SC Health Sponsor | 50,000 | |||
| Less: Transaction Costs | (45,515 | ) | ||
| Net cash received from the Business Combination | $ | 122,451 | ||
Number of Shares | ||||
| Current Rockley’s shareholders prior to the Business Combination | 104,016 | |||
| SC Health Shareholders | 1,777 | |||
| Sponsor Shareholders | 10,563 | |||
| PIPE Investors | 10,000 | |||
Other Shareholders 1 | 319 | |||
| Total number of shares | 126,675 | |||
| 1 | The Company issued 319,000 ordinary shares at a value of $10.0 per share to Cowen and Company LLC (“Cowen”) and BCW Securities LLC in lieu of cash payment for a portion of the fees payable $3.2 million to Cowen as part of the transaction costs. |
3. | Segment, Geographic, and Significant Customer Information |
December 31, | ||||||||
2022 | 2021 | |||||||
| United States | $ | 3,248 | $ | 6,778 | ||||
| Rest of World | — | 1,435 | ||||||
| Total revenue | $ | 3,248 | $ | 8,213 | ||||
Revenue | Accounts receivable | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
| Customer A | 91 | % | 82 | % | — | % | 72 | % | ||||||||
| Customer B | — | % | 4 | % | — | % | — | % | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| United States | $ | 7,917 | $ | 8,442 | ||||
| Rest of World | 4,229 | 3,031 | ||||||
| Total property, equipment and intangible assets | $ | 12,146 | $ | 11,473 | ||||
4. | Equity Method Investment |
December 31, | ||||||||
2022 | 2021 | |||||||
| Balance at the beginning of the year | $ | 4,879 | $ | 5,202 | ||||
| Remeasurement gain on HRT | (703 | ) | 380 | |||||
| Share of loss of HRT | (523 | ) | (703 | ) | ||||
| Balance at the end of the year | $ | 3,653 | $ | 4,879 | ||||
5. | Fair Value Measurements |
As of | ||||||||
December 31, 2022 | December 31, 2021 | |||||||
| Corporate bonds and commercial paper | $ | — | $ | 20,042 | ||||
| U.S. Treasury securities | — | 24,587 | ||||||
| Total investments | $ | — | $ | 44,629 | ||||
Amortized Cost | Fair Value | |||||||
| Due in one year or less | $ | 26,945 | $ | 26,961 | ||||
| Due after one year through five years | 17,684 | 17,663 | ||||||
| $ | 44,629 | $ | 44,624 | |||||
December 31, 2022 | ||||||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||
Total | Level 1 | Level 2 | ||||||||||
| Cash and cash equivalents | $ | 22,986 | $ | 22,986 | $ | — | ||||||
| Total cash and cash equivalents | $ | 22,986 | $ | 22,986 | $ | — | ||||||
December 31, 2021 | ||||||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||
Total | Level 1 | Level 2 | ||||||||||
| Cash and cash equivalents | $ | 36,786 | $ | 36,786 | $ | — | ||||||
| Corporate bonds and commercial paper | 20,037 | — | 20,037 | |||||||||
| U.S. Treasury securities | 24,587 | 24,587 | ||||||||||
| Total cash, cash equivalents and investments | $ | 81,410 | $ | 61,373 | $ | 20,037 | ||||||
| As of | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Financial Liabilities | ||||||||
| Private Placement warrants | $ | 18 | $ | 3,477 | ||||
| 2026 Convertible Notes (May Notes) | 23,501 | — | ||||||
| 2026 Convertible Notes (Oct Notes) | 89,773 | — | ||||||
| Warrants issued in connection with the 2026 Convertible Notes (May 144A Warrants) | 4,662 | — | ||||||
| Warrants issued in connection with the 2026 Convertible Notes (Oct 144A Warrants) | 26,739 | — | ||||||
| Total financial liabilities | $ | 144,693 | $ | 3,477 | ||||
| Initial measurement, August 11, 2021 | $ | 14,304 | ||
Mark-to-market | (10,827 | ) | ||
| Warrant Liabilities balance, December 31, 2021 | 3,477 | |||
Mark-to-market | (3,459 | ) | ||
| Warrant Liabilities balance, December 31, 2022 | $ | 18 | ||
| Fair value per share of ordinary shares, net of 4.0% discount for lack of marketability | $ | 0.14 | ||
| Risk-free interest rate | 4.18 | % | ||
| Expected volatility | 107.5 | % | ||
| Expected term, in years | 3.37 | |||
| Credit spread (bps) | 1,558 | |||
| Coupon rate (all cash) | 9.5 | % | ||
Coupon rate (cash & payment-in-kind) | ||||
| Cash | 5.75 | % | ||
Payment-in-kind | 6.25 | % |
| Fair value at May 27, 2022 | $ | 50,487 | ||
| Less: issuance discount | (505 | ) | ||
| Less: conversion of May notes to equity | (4,750 | ) | ||
| Less: payoff of principal of May Notes with proceeds from October Notes | (51,965 | ) | ||
| Add: Accrued interest converted to principal | 2,020 | |||
Add: issuance in-kind of May Notes for interest make-whole provision | 1,706 | |||
| Add: Change in fair value | 26,508 | |||
| Fair value at December 31, 2022 | $ | 23,501 | ||
| Fair value per share of ordinary shares, net of 4.0% discount for lack of marketability | $ | 0.14 | ||
| Interest rate | 3.8 | % | ||
| Expected volatility | 107.5 | % | ||
| Initial exercise price | $ | 5.00 | ||
| Exercise floor price | $ | 2.80 |
| Fair value at May 27, 2022 | $ | 31,013 | ||
| Less: Issuance discount | (309 | ) | ||
| Add: Change in fair value | (26,042 | ) | ||
| Fair value at December 31, 2022 | $ | 4,662 |
| Fair value per share of ordinary shares, net of 4.0% discount for lack of marketability | $ | 0.14 | ||
| Risk-free interest rate | 4.18 | % | ||
| Expected volatility | 107.5 | % | ||
| Expected term, in years | 3.37 | |||
| Credit spread (bps) | 1,158 | |||
| Coupon rate (all cash) | 12.5 | % | ||
Coupon rate (cash & payment-in-kind) | ||||
| Cash | 5.75 | % | ||
Payment-in-kind | 9.25 | % |
| Fair value at October 25, 2022 | $ | 48,683 | ||
| Less: issuance discount | (685 | ) | ||
| Funds in escrow at December 31, 2022 | (5,078 | ) | ||
| Add: Change in fair value | 46,853 | |||
| Fair value at December 31, 2022 | $ | 89,773 | ||
| Fair value per share of ordinary shares, net of 4.0% discount for lack of marketability | $ | 0.14 | ||
| Interest rate | 3.8 | % | ||
| Expected volatility | 107.5 | % | ||
| Initial exercise price | $ | 1.12 | ||
| Exercise floor price | $ | 0.63 |
| Fair value at October 25, 2022 | $ | 41,967 | ||
| Less: Issuance discount | (591 | ) | ||
| Add: Change in fair value | (14,637 | ) | ||
| Fair value at December 31, 2022 | $ | 26,739 | ||
6. | Balance Sheet Components |
December 31, | ||||||||
2022 | 2021 | |||||||
| United Kingdom | 95 | % | 97 | % | ||||
| United States | 5 | % | 3 | % | ||||
| Other | — | % | — | % | ||||
December 31, | ||||||||
2022 | 2021 | |||||||
| R&D tax credit receivable | $ | 31,580 | $ | 45,632 | ||||
| Grants receivable | 308 | 753 | ||||||
| VAT receivable | 345 | 1,073 | ||||||
| Other receivable, net | 11 | 4 | ||||||
| Total other receivables | $ | 32,244 | $ | 47,462 | ||||
December 31, | ||||||||
2022 | 2021 | |||||||
| Computer equipment | $ | 2,361 | $ | 1,998 | ||||
| Lab equipment | 16,960 | 13,940 | ||||||
| Motor vehicles | 31 | 31 | ||||||
| Furniture and fixtures | 347 | 315 | ||||||
| Leasehold improvements | 1,230 | 1,230 | ||||||
| Assets under construction | 913 | — | ||||||
| Total property and equipment | $ | 21,842 | $ | 17,514 | ||||
| Less: accumulated depreciation | (12,659 | ) | (9,088 | ) | ||||
| Total property and equipment, net | $ | 9,183 | $ | 8,426 | ||||
December 31, | ||||||||
2022 | 2021 | |||||||
Finance lease right-of-use | $ | 843 | $ | 2,966 | ||||
| Less: accumulated amortization | (70 | ) | (1,205 | ) | ||||
Total finance lease right-of-use | $ | 773 | $ | 1,761 | ||||
December 31, | ||||||||
2022 | 2021 | |||||||
In-process research and development | $ | 3,048 | $ | 3,048 | ||||
| Less: accumulated amortization | (85 | ) | — | |||||
| Total intangible asset, net | $ | 2,963 | $ | 3,048 | ||||
December 31, | ||||||||
2022 | 2021 | |||||||
| Security deposits | $ | 223 | $ | 280 | ||||
Operating right of use assets | 4,340 | 4,577 | ||||||
| Prepaid asset, net of current portion | 2 | 2,826 | ||||||
Total other non-current assets | $ | 4,565 | $ | 7,683 | ||||
December 31, | ||||||||
2022 | 2021 | |||||||
| Accrued bonus | $ | 473 | $ | 7,546 | ||||
| Accrued payroll and benefits | 1,776 | 2,750 | ||||||
| Accrued taxes | 3,376 | 439 | ||||||
| Accrued fabrication costs | 2,548 | 3,110 | ||||||
| Accrued interest expense | 2,948 | — | ||||||
| Accrued transaction costs | — | 1,004 | ||||||
| Accrued restructuring charges | 113 | — | ||||||
| Other accrued expenses | 1,584 | 2,511 | ||||||
| Total accrued expenses | $ | 12,818 | $ | 17,360 | ||||
7. | Debt |
December 31, 2022 | ||||||||||||||||||||||||||||||||
Principal | Fair Value Adjustment | Conversion of Debt Adjustment | Interest (1) | Debt Extinguishment | Funds in Escrow | Cash Payment | Net | |||||||||||||||||||||||||
| 2020 Term Facility Loan | $ | 33,949 | $ | 6,234 | $ | (13,003 | ) | $ | 10,123 | $ | — | $ | — | $ | (37,303 | ) | $ | — | ||||||||||||||
| 2026 Convertible Notes (May Notes) | 81,500 | (5,808 | ) | (4,750 | ) | 3,726 | (51,167 | ) | — | — | 23,501 | |||||||||||||||||||||
| 2026 Convertible Notes (October Notes) | 90,649 | 4,202 | — | — | — | (5,078 | ) | — | 89,773 | |||||||||||||||||||||||
| Total Long-term debt | $ | 206,098 | $ | 4,628 | $ | (17,753 | ) | $ | 13,849 | $ | (51,167 | ) | $ | (5,078 | ) | $ | (37,303 | ) | $ | 113,274 | ||||||||||||
| Less: current portion of long-term debt | (113,274 | ) | ||||||||||||||||||||||||||||||
| Long-term debt, net of current portion | $ | — | ||||||||||||||||||||||||||||||
| 1 | Interest from the May Notes relates to the issuance in-kind of May Notes for the interest make-whole provision upon conversion of May Notes to equity in August 2022.. Interest from the 2020 Term Facility relates to the imputed interest of the payment arrangement in place upon the close of the Business Combination in August 2021. |
December 31, 2021 | ||||||||||||||||||||||||
Principal | Fair Value Adjustment | Conversion of Debt Adjustment | Accreted Interest | Cash Payment | Net | |||||||||||||||||||
| 3.0% – 2020 Convertible Notes | $ | 21,281 | $ | 16,811 | $ | (38,092 | ) | $ | — | $ | — | $ | — | |||||||||||
| 8.00% – 2020 Convertible Notes | 8,000 | 22,897 | (30,897 | ) | — | — | — | |||||||||||||||||
| 2020 Term Facility | 33,949 | 6,234 | (13,003 | ) | 4,132 | (5,000 | ) | 26,312 | ||||||||||||||||
| 5.00% - $50.0 | 10,274 | 2,310 | (12,584 | ) | — | — | — | |||||||||||||||||
| 5.00% - $25.0 | 25,000 | 17,569 | (42,569 | ) | — | — | — | |||||||||||||||||
| 5.00% - $30.0 | 30,000 | 14,258 | (44,258 | ) | — | — | — | |||||||||||||||||
| Long-term debt, net of current portion | $ | 128,504 | $ | 80,079 | $ | (181,403 | ) | $ | 4,132 | $ | (5,000 | ) | $ | 26,312 | ||||||||||
| Less: current portion of long-term debt | $ | (26,312 | ) | |||||||||||||||||||||
| Long-term debt, net of current portion | $ | — | ||||||||||||||||||||||
| (a) | If in an equity financing raised total proceeds for the Company of not less than $10.0 million then the outstanding principal amount of all notes and any unpaid accrued interest shall automatically convert into the most senior class of equity share at a conversion price of $14.298 per share; or |
| (b) | if an equity financing is not raised for the Company, then the outstanding principal amount of all notes and any unpaid accrued interest may convert into the most senior class of share at a conversion price of $14.298 per share. |
| (c) | At an exit event, redeem the outstanding notes for an amount equal to the outstanding principal plus accrued interests or convert the outstanding principal amount of all notes and any unpaid accrued interest thereon into the most senior class of share of the Company, at a conversion price equal to the issuance price of $14.298 per share. |
| (d) | At the maturity date, convert into the most senior class of shares at a conversion price equal to the issuance price of $14.298 per share. |
| (a) | In the event of an equity financing, the outstanding principal amount of all notes and any unpaid accrued interest shall automatically convert into the most senior class of share at a conversion price being the lower of $14.298 per share or a discounted subscription price of the equity shares; or |
| (b) | At an exit event, convert the outstanding principal amount of all notes and any unpaid accrued interest thereon into the most senior class of share of the Company, at a conversion price, equal to a 25% discount to the Series E issuance price of $14.298 per share. |
| (c) | At the maturity date, convert into the most senior class of equity share at a conversion price of $14.298. |
| (a) | In the event of a qualified financing even with total proceeds raised not less than $ 25.0 million, the outstanding principal amount and any unpaid accrued interest automatically convert into the most senior class of share at a conversion price being lower of15 % discount to the per share subscription price of the equity shares or the price obtained by diving $1,500.0 million by fully diluted share capital of the Company at the date of conversion; |
| (b) | At an exit event, redeem the outstanding principal amount and any unpaid accrued interest on the original principal or convert the outstanding principal amount of all notes and any unpaid accrued interest into the most senior class of share of the Company at a conversion price equal to the lower of 15 % discount to the price per share and the price obtained by dividing $1,500.0 million by fully diluted share capital of the Company at the date of conversion; |
| (c) | At the maturity date, convert into the most senior class of shares at a conversion price by dividing $ 1,500.0 million by fully diluted share capital of the Company at the date of conversion. |
| (a) | In an equity qualified financing event with total proceeds raised not less than $25.0 million, the outstanding principal amount and any unpaid accrued interest automatically convert into the most senior class of share at a conversion price being lower of 25% discount to the per share subscription price of the equity shares or the price obtained by diving $800.0 million by fully diluted share capital of the Company at the date of conversion; |
| (b) | At an exit event, redeem the outstanding notes for an amount equal to 100 % of the outstanding principal plus accrued interest or convert the outstanding principal amount into the most senior class of share of the Company, at a conversion price equal to the lower of 25% discount to the price per share and the price obtained by dividing $800.0 million by fully diluted share capital of the Company at the date of conversion; or |
| (c) | At the maturity date, convert into the most senior class of shares at a conversion price by dividing $675.0 million by the number of issued shares in the capital of the Company on a fully diluted basis or repay the amount equal to 100% of the outstanding principal amount plus any accrued interest. |
| (a) | In an equity qualified financing event with total proceeds raised not less than $ 25.0 million, the outstanding principal amount and any unpaid accrued interest automatically convert into the most senior class of share at a conversion price being lower of25 % discount to the per share subscription price of the equity shares or the price obtained by diving $800.0 million by fully diluted share capital of the Company at the date of conversion; |
| (b) | At an exit event, redeem the outstanding notes for an amount equal to the outstanding principal plus any unpaid accrued interest or convert the outstanding principal amount of all notes and any unpaid accrued interest into the most senior class of share of the Company, at a conversion price equal to the lower of a 25 % discount to the price per share and the price obtained by dividing $800.0 million by fully diluted share capital of the Company at the date of conversion; or |
| (c) | At the maturity date, convert into the most senior class of shares at a conversion price by dividing $ 800.0 million by fully diluted share capital of the Company at the date of conversion. |
8. | Warrants |
9. | Income Taxes |
Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
| U.K. operations | $ | (230,308 | ) | $ | (174,298 | ) | ||
| Foreign operations | 9,772 | 6,952 | ||||||
| Loss before income taxes | $ | (220,536 | ) | $ | (167,346 | ) | ||
Current | Deferred | Total | ||||||||||
| Year ended December 31, 2022 | ||||||||||||
| U.K. operations | $ | — | $ | — | $ | — | ||||||
| Foreign jurisdictions | 3,504 | — | 3,504 | |||||||||
| $ | 3,504 | $ | — | $ | 3,504 | |||||||
Current | Deferred | Total | ||||||||||
| Year ended December 31, 2021 | ||||||||||||
| U.K. operations | $ | — | $ | — | $ | — | ||||||
| Foreign jurisdictions | 667 | — | 667 | |||||||||
| $ | 667 | $ | — | $ | 667 | |||||||
December 31, | ||||||||||||||||
2022 | 2021 | |||||||||||||||
| U.K. statutory rate | $ | (41,983 | ) | 19.0 | % | $ | (31,796 | ) | 19.0 | % | ||||||
| Foreign income tax | 1 | — | % | 8 | — | % | ||||||||||
| Research & development credit | (4,492 | ) | 2.0 | % | (2,061 | ) | 1.2 | % | ||||||||
| Stock-based compensation | 1,357 | (0.6 | )% | 34 | — | % | ||||||||||
| Permanent differences | 13 | — | % | (156 | ) | 0.1 | % | |||||||||
| Change in valuation allowance | 69,227 | (31.3 | )% | 32,402 | (19.4 | )% | ||||||||||
| Rate change on deferred taxes | (13,662 | ) | 6.2 | % | (11,197 | ) | 6.7 | % | ||||||||
| Uncertain tax liabilities | 3,059 | (1.4 | )% | 64 | — | % | ||||||||||
| Losses not benefited | (5,684 | ) | 2.6 | % | 12,625 | (7.5 | )% | |||||||||
| U.K. tax return provision | (4,103 | ) | 1.9 | % | — | — | % | |||||||||
Others, ne t | (229 | ) | 0.1 | % | 744 | (0.4 | )% | |||||||||
| Total | $ | 3,504 | (1.59 | )% | $ | 667 | (0.40 | )% | ||||||||
December 31, | ||||||||
2022 | 2021 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 83,174 | $ | 33,068 | ||||
| Research and development credits | 2,141 | 549 | ||||||
| Stock-based compensation | 4,204 | 4,859 | ||||||
| Lease liabilities | 925 | 1,394 | ||||||
| Interest limitation | 29,446 | 10,202 | ||||||
| Accounts and other receivables | 115 | — | ||||||
| Accrued liabilities | 183 | 1,765 | ||||||
| Section 174 | 10,053 | — | ||||||
| Other | — | 64 | ||||||
| Total gross deferred tax assets | 130,241 | 51,900 | ||||||
| Less valuation allowance | (129,421 | ) | (50,139 | ) | ||||
| Net deferred tax assets | 820 | 1,761 | ||||||
| Deferred tax liabilities: | ||||||||
Right-of-use | $ | (820 | ) | $ | (1,281 | ) | ||
| Property and equipment, principally due to differences in depreciation | — | (480 | ) | |||||
| Other | — | — | ||||||
| Total gross deferred tax liabilities | (820 | ) | (1,761 | ) | ||||
| Net deferred tax assets | $ | — | $ | — | ||||
| Amount | Expiration Years | |||||||
| NOLs, Federal | $ | 332,616 | carried forward indefinitely | |||||
| NOLs, State | $ | — | — | |||||
| Tax credits, Federal | $ | 6,468 | begin to expire in 2034 | |||||
| Tax credits, State | $ | — | — | |||||
Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
| Balance at beginning of the year | $ | 3,217 | $ | 2,236 | ||||
| Increases based on tax positions related to current year | 4,458 | 1,061 | ||||||
| Increases based on tax positions related to prior years | — | 165 | ||||||
| Decreases based on tax positions related to prior years | (250 | ) | (245 | ) | ||||
| Balance at end of year | $ | 7,425 | $ | 3,217 | ||||
10. | Shareholders’ Equity (Deficit) |
11. | Net Loss per Share |
Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
| Basic and diluted: | ||||||||
| Net loss | $ | (224,040 | ) | $ | (168,013 | ) | ||
| Weighted average ordinary shares outstanding | 130,348,047 | 100,917,939 | ||||||
| Basic and diluted net loss per share | $ | (1.72 | ) | $ | (1.66 | ) | ||
12. | Stock-Based Compensation |
Number of Options Outstanding | Average Exercise Price Per Share | Remaining Contractual Life (Years) | Intrinsic Value 4 | |||||||||||||
(In thousands) | ||||||||||||||||
Options outstanding at December 31, 2019 | 17,898,619 | $ | 4.94 | 6.75 | $ | 110,552 | ||||||||||
| Granted | — | $ | — | |||||||||||||
| Exercised | (1,557,214 | ) | $ | 0.60 | ||||||||||||
| Forfeited | (912,912 | ) | $ | 4.07 | ||||||||||||
| Expired | (46,757 | ) | $ | 3.08 | ||||||||||||
Options outstanding at December 31, 2021 | 15,381,736 | $ | 2.00 | 5.83 | $ | 36,093 | ||||||||||
| Granted | — | $ | — | |||||||||||||
| Exercised | (2,129,267 | ) | $ | 0.65 | ||||||||||||
| Forfeited | (810,713 | ) | $ | 3.52 | ||||||||||||
| Expired | (1,693,564 | ) | $ | 2.96 | ||||||||||||
Options outstanding at December 31, 2022 | 10,748,192 | $ | 2.01 | 3.71 | $ | 20,033 | ||||||||||
Options exercisable at December 31, 2022 | 9,983,098 | $ | 1.89 | 3.42 | $ | 17,465 | ||||||||||
| 4 | The aggregated intrinsic value represents the difference between the exercise price and the closing stock price of $0.1471 and $4.35 for the Company’s ordinary shares on December 31, 2022 and 2021, respectively. |
Number of Options Outstanding | Average Exercise Price Per Share | Remaining Contractual Life (Years) | Intrinsic Value | |||||||||||||
(In thousands) | ||||||||||||||||
Options outstanding at December 31, 2020 | — | $ | — | $ | — | $ | — | |||||||||
| Granted | 1,013,480 | $ | 15.84 | |||||||||||||
| Exercised | — | $ | — | |||||||||||||
| Forfeited | — | $ | — | |||||||||||||
| Expired | — | $ | — | |||||||||||||
Options outstanding at December 31, 2021 | 1,013,480 | $ | 15.84 | 9.61 | $ | 11,645 | ||||||||||
| Granted | — | $ | — | |||||||||||||
| Exercised | — | $ | — | |||||||||||||
| Forfeited | (350,225 | ) | $ | 15.84 | ||||||||||||
| Expired | (87,579 | ) | $ | 15.84 | ||||||||||||
Options outstanding at December 31, 2022 | 575,676 | $ | 15.84 | 8.61 | $ | 9,035 | ||||||||||
Options exercisable at December 31, 2022 | 191,858 | $ | 15.84 | 8.61 | $ | 3,012 | ||||||||||
Number of RSUs Outstanding | Weighted Average Grant Date Fair Value | Remaining Contractual Life (Years) | Intrinsic Value | |||||||||||||
(In thousands) | ||||||||||||||||
Outstanding at December 31, 2020 | — | $ | — | — | — | |||||||||||
| Granted | 4,181,607 | $ | 6.71 | |||||||||||||
| Exercised | (24,668 | ) | $ | 7.07 | ||||||||||||
| Forfeited | (2,431 | ) | $ | 7.07 | ||||||||||||
| Expired | — | $ | — | |||||||||||||
Outstanding at December 31, 2021 | 4,154,508 | $ | 6.71 | 1.76 | $ | 18,072 | ||||||||||
| Granted | 8,887,674 | $ | 0.92 | |||||||||||||
| Exercised | (1,091,312 | ) | $ | 6.93 | ||||||||||||
| Forfeited | (1,272,756 | ) | $ | 5.76 | ||||||||||||
Expired | — | $ | — | |||||||||||||
Outstanding at December 31, 2022 | 10,678,114 | $ | 1.98 | 1.80 | $ | 1,517 | ||||||||||
Years Ended December 31, 2022 | Years Ended December 31, 2021 | |||
| Expected term (in years) | 0.5 - 1.0 | 0.5 - 1.0 | ||
| Expected volatility (%) | 51 - 54% | 54% | ||
| Risk-free interest rate (%) | 1.63 - 2.16 | 0.10 - 0.25 | ||
| Dividend yield | — | — |
Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
| Cost of revenue | $ | 925 | $ | 1,825 | ||||
| Research and development | 9,610 | 7,182 | ||||||
| Selling, general, and administrative | 3,798 | 3,006 | ||||||
| Total stock-based compensation expense | $ | 14,333 | $ | 12,013 | ||||
Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
| Expected term (in years) | Not applicable | 6.05 | ||||||
| Expected volatility (%) | Not applicable | 0.53 | ||||||
| Risk-free interest rate (%) | Not applicable | 0.96 | ||||||
| Dividend yield | Not applicable | — | ||||||
13. | Related Party Transactions |
14. | Leases |
Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
Operating Lease Cost: | ||||||||
| Fixed lease cost | $ | 1,692 | $ | 1,103 | ||||
| Variable lease cost | 290 | 354 | ||||||
| Total operating lease cost | $ | 1,982 | $ | 1,457 | ||||
Finance Lease Cost: | ||||||||
Amortization of right-of-use | $ | 489 | $ | — | ||||
| Interest on lease liabilities | 80 | — | ||||||
| Total finance lease cost | $ | 569 | $ | — | ||||
Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
Supplemental Cash Flow Information: | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows for operating leases | $ | 1,576 | $ | 936 | ||||
| Operating cash flows for finance leases | $ | 77 | $ | — | ||||
| Financing cash flows for finance leases | $ | 80 | $ | — | ||||
Right-of-use | ||||||||
Right-of-use | $ | 1,127 | $ | 4,008 | ||||
Right-of-use | $ | 843 | $ | — | ||||
Operating Leases | Finance Leases | |||||||
Year Ending December 31, | ||||||||
| 2023 | $ | 1,653 | $ | 339 | ||||
| 2024 | 1,179 | 313 | ||||||
| 2025 | 1,089 | 130 | ||||||
| 2026 | 1,120 | — | ||||||
| 2027 | 413 | — | ||||||
| Total lease obligation | $ | 5,454 | $ | 782 | ||||
| Less: Imputed interest | (612 | ) | (352 | ) | ||||
| Total lease liabilities | $ | 4,842 | $ | 430 | ||||
| Less: Current lease liabilities | (1,400 | ) | (144 | ) | ||||
| Total non-current lease liabilities | $ | 3,442 | $ | 286 | ||||
15. | Commitments and Contingencies |
16. | Defined Contribution Plan |
17. | Supplemental Cash Flow Information |
Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
Supplemental Cash Flow Information: | ||||||||
| Cash payments for: | ||||||||
| Interest paid | $ | 12,291 | $ | 658 | ||||
| Income tax paid | $ | 384 | $ | 978 | ||||
Non-cash Operating Activities: | ||||||||
Right-of-use | $ | 1,127 | $ | 4,008 | ||||
Right-of-use | $ | 843 | $ | — | ||||
| Interest paid in kind on May and October Notes | $ | 5,536 | $ | — | ||||
| $ | 1,970 | $ | 4,008 | |||||
Non-cash Investing Activities: | ||||||||
| Unpaid property and equipment received | $ | 2,168 | $ | 805 | ||||
Non-cash Financing Activities: | ||||||||
| Conversion of convertible debt and accrued interest to ordinary shares | $ | 5,548 | $ | 181,404 | ||||
| Conversion of Legacy Rockley ordinary shares to Rockley ordinary shares | 1,706 | 206,888 | ||||||
Refinancing from May Notes and Bridge Notes to October Note s | 58,826 | — | ||||||
| Paid in kind interest converted to principal on May Notes | 446 | — | ||||||
| Private Placement Warrants | — | 14,304 | ||||||
| Public Warrants | — | 28,031 | ||||||
| Issuance of ordinary shares in lieu of cash payment of transaction costs | — | 3,190 | ||||||
| Forgiveness of Paycheck Protection Program loan | — | 2,860 | ||||||
| Unpaid deferred transaction costs | — | 1,034 | ||||||
| Issuance of ordinary shares related to ELOC | — | 472 | ||||||
| $ | 66,256 | $ | 438,183 | |||||
18. | Subsequent Events |
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer and principal accounting officer), as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures under the Exchange Act as of and for the year ended December 31, 2022. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and internal control over financial reporting were effective at the reasonable level.
Management’s Report on Internal Controls Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
No Attestation Report of Registered Public Accounting Firm
This Annual Report on Form 10-K does not contain an attestation report of our registered public accounting firm regarding internal control over financial reporting since the Company, as an “emerging growth company,” is not required to provide such report pursuant to Section 404 until we are no longer an ‘emerging growth company” as defined by the JOBS Act.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the year ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including Rockley’s, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
Item 9B. Other Information
On May 10, 2023, Dr. Andrew Rickman, OBE, executive chair of Rockley Photonics Holdings Limited (the “Company”) succeeded Richard A. Meier as the Company’s Chief Executive Officer effective immediately. Dr. Rickman, 62, founded Rockley in 2013 and has served as a director since that time. Dr. Rickman previously served as Rockley’s chief executive officer until December 2022 and has served as executive chair since December 2022. Dr. Rickman previously founded Bookham, Inc. (“Bookham”), now part of Lumentum (NASDAQ:LITE) (after its 2018 acquisition of Oclaro Inc. (NASDAQ:OCLR) which was formed in 2009 after Bookham’s merger with Avanex Inc.), one of the world’s largest photonics and fiber optics telecom component producers in 1998 and served as its chief executive officer and chairman until 2004. From 2007 to 2013, he was chairman of Kotura Inc., a leader in the field of silicon photonics for fiber optic communications, high performance computing, and sensing applications, through to its development and sale to Mellanox Technologies, Ltd (NASDAQ: MLNX) in 2013. In 2000, Dr. Rickman was named U.K.’s Technology and Communications Entrepreneur of the Year by Ernst and Young. In 2011, Dr. Rickman was awarded an Honorary Professorship at SIMIT, Chinese Academy of Sciences. From 2003 to 2013, he was a trustee of the Oxford Trust and from 2001 to 2004 was a council member of the U.K. Government’s Engineering and Physical Sciences Research Council. Dr. Rickman holds a mechanical engineering degree from Imperial College, London, a Ph.D. in silicon photonics from Surrey University, an MBA from Cranfield University, and honorary doctorates from Surrey, Edinburgh Napier, and Kingston Universities. He is a chartered engineer and a Fellow of the Royal Academy of Engineering and the Institute of Physics. He was awarded an OBE in the Queen’s Millennium Honors list for services to the telecommunications industry and is a winner of the prestigious Royal Academy of Engineering Silver medal for his outstanding contribution to British Engineering. There are no arrangements or understandings between Dr. Rickman and any other person pursuant to which he was to be selected as an officer . There are no family relationships between Dr. Rickman and any director or executive officer of the Company nor, except as disclosed elsewhere in this annual report, are there any transactions between Dr. Rickman or any of his immediate family members and the Company or any of its subsidiaries that would be reportable as a related party transaction under the rules of the Securities and Exchange Commission. Effective May 10, 2023, Richard Meier resigned as Chief Executive Officer and director of the Company. Mr. Meier’s resignation was not in connection with any known disagreement with the Company on any matter. There were no changes made at this time to either Dr. Rickman’s or Mr. Meier’s previously disclosed compensation and contract of employment with the Company in connection with this transition.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
97
PART III
Unless specifically noted or the context clearly requires otherwise, all information set forth in this annual report on Form 10-K relates to the Company as it existed as of December 31, 2022 and prior to the Company’s bankruptcy proceedings and does not, and is not intended and should not be read to, reflect the business, financial condition, and results of operations of any other entity, including any entity which may result from the bankruptcy proceedings.
Item 10. Directors, Executive Officers and Corporate Governance
As disclosed below, in connection with the Plan of Reorganization, the terms of each member of our Board expired on March 14, 2023, after the Effective Date. As a result of the Plan of Reorganization, after the Effective Date, our sole executive officer was Richard Meier. Effective May 10, 2023, Dr. Andrew Rickman succeeded Mr. Meier as our Chief Executive Officer and sole executive officer.
MANAGEMENT
Executive Officers
The names of our executive officers and other corporate officers, and their ages as of March 15, 2023, are as follows:
Name | Age | Position | ||
Andrew Rickman, OBE | 62 | Chief Executive Officer, Executive Chair |
Certain biographical information of our executive officers are set forth below:
Andrew Rickman OBE
Dr. Andrew Rickman, OBE, serves as Rockley’s executive chair and director and was designated as Rockley’s chief executive officer in May 2023. Dr. Rickman founded Rockley in 2013 and has served as a director since that time. Dr. Rickman previously served as Rockley’s chief executive officer until December 2022 and has served as executive chair since December 2022. Dr. Rickman previously founded Bookham, Inc. (“Bookham”), now part of Lumentum (NASDAQ:LITE) (after its 2018 acquisition of Oclaro Inc. (NASDAQ:OCLR) which was formed in 2009 after Bookham’s merger with Avanex Inc.), one of the world’s largest photonics and fiber optics telecom component producers in 1998 and served as its chief executive officer and chairman until 2004. From 2007 to 2013, he was chairman of Kotura Inc., a leader in the field of silicon photonics for fiber optic communications, high performance computing, and sensing applications, through to its development and sale to Mellanox Technologies, Ltd (NASDAQ: MLNX) in 2013. In 2000, Dr. Rickman was named U.K.’s Technology and Communications Entrepreneur of the Year by Ernst and Young. In 2011, Dr. Rickman was awarded an Honorary Professorship at SIMIT, Chinese Academy of Sciences. From 2003 to 2013, he was a trustee of the Oxford Trust and from 2001 to 2004 was a council member of the U.K. Government’s Engineering and Physical Sciences Research Council. Dr. Rickman holds a mechanical engineering degree from Imperial College, London, a Ph.D. in silicon photonics from Surrey University, an MBA from Cranfield University, and honorary doctorates from Surrey, Edinburgh Napier, and Kingston Universities. He is a chartered engineer and a Fellow of the Royal Academy of Engineering and the Institute of Physics. He was awarded an OBE in the Queen’s Millennium Honors list for services to the telecommunications industry and is a winner of the prestigious Royal Academy of Engineering Silver medal for his outstanding contribution to British Engineering.
Prior to the bankruptcy proceedings, our Amended and Restated Memorandum and Articles of Association (the “Articles”) provided that our Board shall consist of not less than one and no more than nine directors. The authorized number of directors may be changed by the shareholders of the Company by a resolution passed in a general meeting. Vacancies on our Board can be filled by resolution of our Board. Our Board was divided into three classes, each serving staggered, three-year terms:
| • | Our Class I directors were Brian Blaser and Pamela Puryear, and their terms would have expired at the 2025 Annual Meeting of shareholders; |
| • | Our Class II directors were Nicolaus Henke, Karim Karti and Michele Klein and their terms were to expire at the 2023 Annual Meeting of shareholders; and |
| • | Our Class III directors were Andrew Rickman, William Huyett and Caroline Brown, and their terms were to expire at the 2024 Annual Meeting of shareholders. |
As a result of the bankruptcy proceedings, the terms of each member of our Board expired on March 14, 2023 (the “Effective Date”).
Director Independence
Prior to the Effective Date, our Board determined that six out of eight directors on our Board qualified as independent directors, as defined under the listing rules of the NYSE: Brian Blaser, Caroline Brown, Nicolaus Henke, William Huyett, Michele Klein and Pamela Puryear. There were no family relationships among any of our directors or executive officers.
Compensation Committee Interlocks and Insider Participation
The members of our Compensation Committee during 2022 were Pamela Puryear, William Huyett and Michele Klein, none of whom has ever been an executive officer or employee of ours. None of our executive officers currently serve, or have served during the last completed fiscal year, on the Compensation Committee or Board of any other entity that had one or more executive officers serving as a member of our Board or Compensation Committee.
98
Board Meetings
Our Board held fifteen meetings during 2022. Each director attended at least 75% of the aggregate meetings held by our Board and the committees on which such director served, during the time such director was a director. We do not have a policy that requires the attendance of directors at the Annual Meeting.
Meeting of Non-Management and Independent Directors and Communications with Directors
The independent directors met in an executive session in connection with each regularly scheduled board meeting, during which the independent directors had the opportunity to discuss, among other matters, management performance. The purpose of these executive sessions was to promote open and candid discussion among the non-management directors.
Board Committees
Prior to the bankruptcy proceedings, we had established an Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, each of which operated under a charter approved by our Board. We believe that the composition of these committees met the criteria for independence under, and the functioning of these committees complied with the applicable requirements of the Sarbanes-Oxley Act, and the applicable rules and regulations of the SEC and the NYSE. Each committee had the composition and responsibilities described below.
Audit Committee
Members:
Brian Blaser (Chair)
William Huyett
Nicolaus Henke
Number of meetings in 2022: 8
The functions of this committee included, among other things:
| • | evaluating the performance, independence, and qualifications of our independent auditors and determining whether to retain our existing independent auditors or engage new independent auditors; |
| • | reviewing our financial reporting processes and disclosure controls; |
| • | reviewing and approving the engagement of our independent auditors to perform audit services and any permissible non-audit services; |
| • | reviewing the adequacy and effectiveness of our internal control policies and procedures, including the responsibilities, budget, staffing, and effectiveness of our internal audit function; |
| • | reviewing with the independent auditors the annual audit plan, including the scope of audit activities and all critical accounting policies and practices to be used by us; |
| • | obtaining and reviewing at least annually a report by our independent auditors describing the independent auditors’ internal quality control procedures and any material issues raised by the most recent internal quality-control review; |
| • | monitoring the rotation of partners of our independent auditors on our engagement team as required by law; |
| • | prior to engagement of any independent auditors, and at least annually thereafter, reviewing relationships that may reasonably be thought to bear on their independence, and assessing and otherwise taking the appropriate action to oversee the independence of our independent auditors; |
| • | reviewing our annual and quarterly financial statements and reports, including the disclosures contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and discussing the statements and reports with our independent auditors and management; |
| • | reviewing with our independent auditors and management significant issues that arise regarding accounting principles and financial statement presentation and matters concerning the scope, adequacy, and effectiveness of our financial controls and critical accounting policies; |
| • | reviewing with management and our auditors any earnings announcements and other public announcements regarding material developments; |
| • | establishing procedures for the receipt, retention, and treatment of complaints received by us regarding financial controls, accounting, auditing, or other matters; |
99
| • | preparing the report that the SEC requires in our annual proxy statement; |
| • | reviewing and providing oversight of any related person transactions in accordance with our related person transaction policy and reviewing and monitoring compliance with legal and regulatory responsibilities, including our code of ethics; |
| • | reviewing our major financial risk exposures, including the guidelines and policies to govern the process by which risk assessment and risk management is implemented; and |
| • | reviewing and evaluating on an annual basis the performance of the Audit Committee and the Audit Committee Charter. |
Our Board determined that each of the members of our Audit Committee satisfied the independence requirements of the NYSE and Rule 10A-3 under the Exchange Act. Each member of our Audit Committee was able to read and understand fundamental financial statements in accordance with NYSE audit committee requirements. In arriving at this determination, our Board examined each Audit Committee member’s scope of experience and the nature of their prior and current employment.
Our Board determined that Dr. Brown qualifies as an audit committee financial expert within the meaning of SEC regulations and meets the financial sophistication requirements of the NYSE listing rules. In making this determination, our Board considered Dr. Brown’s formal education and previous experience in financial roles. Both our independent registered public accounting firm and management periodically met privately with our Audit Committee.
Compensation Committee
Members:
Pamela Puryear (Chair)
William Huyett
Michele Klein
Number of meetings in 2022: 8
The functions of this committee included, among other things:
| • | reviewing and recommending for approval by the Board the corporate objectives that pertain to CEO executive compensation and evaluating performance in light of such goals; |
| • | reviewing and approving the corporate objectives that pertain to the determination of non-CEO executive compensation and evaluating performance in light of such goals; |
| • | reviewing and recommending for approval by the Board the compensation levels and other terms of employment of our CEO, including employment, severance and change in control agreements and arrangements; |
| • | reviewing and approving the compensation levels and other terms of employment of our non-CEO executive officers, including employment, severance and change in control agreements and arrangements; |
| • | approving equity compensation plans and granting equity awards not subject to shareholder approval under applicable listing standards; |
| • | reviewing and assessing the independence of compensation consultants, legal counsel, and other advisors as required by Section 10C of the Exchange Act; |
| • | administering our equity incentive, ESPP, and executive compensation plans; |
| • | reviewing and making recommendations to our Board regarding the type and amount of compensation to be paid or awarded to our non-employee board members; |
| • | reviewing with management our disclosures under the caption “Compensation Discussion and Analysis” in our periodic reports or proxy statements to be filed with the SEC; |
| • | preparing the annual report on executive compensation that the SEC requires in our annual proxy statement; |
| • | reviewing and evaluating on an annual basis the performance of the Compensation Committee and its charter and recommending such changes as deemed necessary with our Board; and |
| • | oversee the development and implementation of the Company’s human capital management, including those policies and strategies regarding recruiting, retention, career development, opportunity, and advancement, as well as succession, diversity, equity and inclusion, organization structure updates and employment practices. This includes discussion of any significant trends or regulatory events or risks. |
Our Board determined that each of the members of the Compensation Committee was a non-employee director, as defined in Rule 16b-3 promulgated under the Exchange Act, and satisfied the independence requirements of the NYSE.
The Compensation Committee had the authority, in its sole discretion, to select, retain and obtain the advice of a compensation consultant and outside legal counsel as necessary to assist with the execution of its duties and responsibilities. In 2022, the Compensation Committee retained Semler Brossy Consulting Group, LLC (“Semler Brossy”) to provide advice and counsel. Semler Brossy provided compensation advice to the Committee on our Chief Executive Officer, Chief Financial Officer and the next three highest-paid executives.
100
The Compensation Committee assessed the independence of Semler Brossy pursuant to SEC and NYSE rules and determined that no conflict of interest existed that would prevent Semler Brossy from independently representing the Committee. In making this assessment, the Committee considered each of the factors set forth by the SEC and the NYSE with respect to the Semler Brossy’s independence, including that Semler Brossy provided no services for the Company other than pursuant to its engagement by the Committee. The Committee also determined there were no other factors the Committee should consider in connection with the assessment or that were otherwise relevant to the Committee’s engagement of Semler Brossy.
Nominating and Corporate Governance Committee
Members:
Michele Klein (Chair)
Nicolaus Henke
Pamela Puryear
Number of meetings in 2022: 5
The functions of this committee included, among other things:
| • | identifying, reviewing, and making recommendations of candidates to serve on our Board; |
| • | evaluating the performance of our Board, committees of our Board, and individual directors and determining whether continued service on our Board is appropriate; |
| • | evaluating nominations by shareholders of candidates for election to our Board; |
| • | evaluating the current size, composition, and organization of our Board and its committees and making recommendations to our Board for approvals; |
| • | developing a set of corporate governance policies and principles and recommending to our Board any changes to such policies and principles; |
| • | reviewing and making recommendations to our Board regarding the stock ownership guidelines applicable to our non-employee board members and officers; |
| • | reviewing issues and developments related to corporate governance and identifying and bringing to the attention of our Board current and emerging corporate governance trends; |
| • | developing and reviewing periodically with the Chairman of the Board and the Chief Executive Officer the succession plan relating to the Chief Executive Officer and make recommendations to the Board with respect to such plan; |
| • | reviewing the policies, programs, practices and reports concerning environmental, social and governance (“ESG”), including sustainability, environmental protection, community and social responsibility, diversity, equity and inclusion, and human rights; and |
| • | reviewing periodically the Nominating and Corporate Governance Committee Charter, structure, and membership requirements and recommending any proposed changes to our Board, including undertaking an annual review of its own performance. |
Our Board determined that each of the members of our Nominating and Corporate Governance Committee satisfied the independence requirements of the NYSE.
Corporate Governance Guidelines
Our Board adopted written corporate governance guidelines (the “Corporate Governance Guidelines”) to ensure that the Board had the necessary authority and practices in place to review and evaluate our business operations as needed and to make decisions independent of our management. The guidelines were also intended to align the interests of directors and management with those of our shareholders. The Corporate Governance Guidelines set forth the practices the Board followed with respect to board composition and selection, board meetings and involvement of senior management, Chief Executive Officer performance evaluations and succession planning, and board committees and compensation. The Nominating and Corporate Governance Committee assisted our Board in implementing and adhering to the Corporate Governance Guidelines. The Corporate Governance Guidelines had been reviewed at least annually by the Nominating and Corporate Governance Committee, and changes were recommended to our Board as warranted.
101
Role in Risk Oversight
One of the key functions of our Board was informed oversight of our risk management process. Our Board did not have a standing risk management committee, but rather administered this oversight function directly through our Board as a whole, as well as through various standing committees of our Board that addressed risks inherent in their respective areas of oversight. In particular, our Board was responsible for monitoring and assessing strategic risk exposure and our Audit Committee had the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management was undertaken. The Audit Committee also monitored compliance with legal and regulatory requirements. Our Compensation Committee assessed and monitored whether our compensation plans, policies, and programs comply with applicable legal and regulatory requirements. The Nominating and Corporate Governance Committee also periodically evaluated our risk management process in light of the nature of the material risks we faced and the adequacy of our governance policies and procedures designed to address risk.
Code of Business Conduct and Ethics
We believe that our corporate governance initiatives complied with the Sarbanes-Oxley Act and the rules and regulations of the SEC adopted thereunder. In addition, we believe our corporate governance initiatives complied with the rules of the NYSE.
Our Board adopted a Code of Business Conduct and Ethics that applied to each of our directors, officers and employees. The code addressed various topics, including:
| • | compliance with laws, rules and regulations; |
| • | confidentiality; |
| • | conflicts of interest; |
| • | corporate opportunities; |
| • | competition and fair dealing; |
| • | payments or gifts from others; |
| • | health and safety; |
| • | insider trading; |
| • | protection and proper use of company assets; and |
| • | record keeping. |
Our Board also adopted a Code of Ethics for Senior Financial Officers applicable to our Chief Executive Officer and Chief Financial Officer as well as other key management employees. The Code of Business Conduct and Ethics and the Code of Ethics for Senior Financial Officers are each posted on our website investors.rockleyphotonics.com. The Code of Business Conduct and Ethics and the Code of Ethics for Senior Financial Officers could only be amended by the approval of a majority of our Board. Any waiver to the Code of Business Conduct and Ethics for an executive officer or director or any waiver of the Code of Ethics for Senior Financial Officers could only be granted by our Board or our Nominating and Corporate Governance Committee and had to be timely disclosed as required by applicable law. We implemented a whistleblower policy that established formal protocols for receiving and handling complaints from employees through an independent third-party reporting company.
To date, there have been no waivers under our Code of Business Conduct and Ethics or Code of Ethics for Senior Financial Officers.
Anti-Hedging Policy
Under our insider trading policy, our directors, officers, employees, consultants and contractors were prohibited from engaging in short sales of our securities, purchases of our securities on margin, hedging or monetization transactions through the use of financial instruments, and options and derivatives trading on any of the stock exchanges or futures exchanges, without prior written pre-clearance from our General Counsel.
Availability of Corporate Governance Documents
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Senior Financial Officers, charters for each of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee and other corporate governance documents, are posted on the investor relations section of our website at www.rockleyphotonics.com under the heading “Governance — Governance Documents.”
102
Director Compensation
The following table shows certain information with respect to the compensation of our non-employee directors during the fiscal year ended December 31, 2022:
Name | Fees earned or paid in cash ($) | Option awards ($) | Stock awards ($)(1) | Non-equity incentive plan compensation ($) | Change in Pension Value and Non- qualified Deferred Compensation Earnings ($) | All other compensation ($) | Total ($) | |||||||||||||||||||||
William Huyett | 85,500 | — | 153,041 | — | — | — | 238,541 | |||||||||||||||||||||
Brian Blaser | 55,000 | — | 153,041 | — | — | — | 208,041 | |||||||||||||||||||||
Caroline Brown | 70,000 | — | 200,440 | — | — | — | 270,440 | |||||||||||||||||||||
Nicolaus Henke | 50,000 | — | 165,085 | — | — | — | 215,085 | |||||||||||||||||||||
Karim Karti | 45,000 | — | 153,041 | — | — | 198,041 | ||||||||||||||||||||||
Michele Klein | 62,500 | — | 153,041 | — | — | — | 215,041 | |||||||||||||||||||||
Pamela Puryear | 65,000 | — | 153,041 | — | — | — | 218,041 | |||||||||||||||||||||
Richard Kuntz | 45,000 | — | 107,038 | — | — | — | 152,038 | |||||||||||||||||||||
| (1) | The amounts in this column represent the aggregate fair value of the restricted stock unit awards computed as of the grant date of each award in accordance with ASC 718, which was determined using the closing price of our common stock on the date of grant. For grants made prior to our initial public offering, the fair value of the stock awards was determined using a third-party valuation firm. |
The following table sets forth the aggregate number of shares of common stock underlying option awards and restricted stock unit awards outstanding as of December 31, 2022:
Name | Number of Shares | |||
William Huyett | 87,322 | |||
Brian Blaser | 87.322 | |||
Caroline Brown | 149,407 | |||
Karim Karti | 87,322 | |||
Michele Klein | 87,322 | |||
Pamela Puryear | 87,322 | |||
Richard Kuntz | 168,154 | |||
Other Compensation Arrangements
Employee directors did not receive any compensation for service as a member of our Board. We reimbursed our non-employee directors for their reasonable out-of-pocket costs and travel expenses in connection with their attendance at board and committee meetings. We have also, from time to time, granted stock options or restricted stock units (“RSUs”) to our non-employee directors as compensation under our equity incentive plans.
We adopted a non-employee director compensation policy that includes the following cash compensation for non-employee directors, which was based on a review of director compensation at comparable companies in our industry, consisting of a $45,000 annual retainer, an additional $23,000 annual retainer for the Lead Independent Director and the following additional annual retainers for committee service:
Committee | Chair | Member | ||||||
Compensation | $ | 15,000 | $ | 7,500 | ||||
Nominating and Corporate Governance | 10,000 | 5,000 | ||||||
Audit | 20,000 | 10,000 | ||||||
103
The non-employee director compensation policy also provided for the annual grant of RSUs under our 2021 Stock Incentive Plan (the “2021 Plan”) following the conclusion of each regular annual meeting of our shareholders, commencing with the 2022 Annual Meeting, to each non-employee director who will continue serving as a member of the Board. The annual RSU award was with respect to a number of ordinary shares having an aggregate fair market value equal to $162,000 calculated on the date of grant.
Each annual RSU award became fully vested, subject to continued service as a director, on the earliest of the twelve (12) month anniversary of the date of grant, the next annual meeting of shareholders following the date of grant, or the consummation of a change in control as defined in the 2021 Plan.
Our board of directors adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers, and directors, including our Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The full text of our code of conduct is posted on the investor relations section on our website, which is located at https://investors.rockleyphotonics.com. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics by posting such information in the investor relations section of our website.
104
Item 11. Executive Compensation
EXECUTIVE COMPENSATION
The following table sets forth information concerning the total compensation of the following persons, whom we refer to as our named executive officers: (i) our Chief Executive Officer, (ii) our next two most highly compensated executive officers on December 31, 2022 and (iii) two individuals who would have been included in this table but for the fact that such individuals were not serving as an executive officer as of December 31, 2022.
Summary Compensation Table
Name and Principal Position | Fiscal Year | Salary ($) | Stock Awards ($)(1) | Option Awards ($)(1)(2) | Non-Equity Incentive Plan Compensation ($)(3) | All Other Compensation ($)(8) | Total ($) | |||||||||||||||||||||
Richard Meier (4) | 2022 | 80,769 | 1,191,658 | 1,185,097 | 0 | 1,622 | 2,459,146 | |||||||||||||||||||||
Former President and Chief Executive Officer | ||||||||||||||||||||||||||||
Dr. Andrew Rickman | 2022 | 500,075 | — | — | 355,350 | 25,439 | 880,865 | |||||||||||||||||||||
Chief | 2021 | 430,806 | 5,500,003 | 4,561,612 | 1,666,947 | 14,409 | 12,173,777 | |||||||||||||||||||||
Executive Officer | 2020 | 366,200 | — | — | 165,275 | 10,679 | 542,154 | |||||||||||||||||||||
Chad Becker (5) | 2022 | 253,231 | — | — | — | 17,176 | 270,407 | |||||||||||||||||||||
Former Interim-Chief | ||||||||||||||||||||||||||||
Financial Officer | ||||||||||||||||||||||||||||
Mahesh Karanth(6) | 2022 | 216,346 | — | — | — | 290,750 | 507,096 | |||||||||||||||||||||
Former Chief | 2021 | 358,658 | 1,272,383 | 1,824,650 | 913,006 | 3,484 | 4,372,181 | |||||||||||||||||||||
Financial Officer | 2020 | 300,012 | — | 586,814 | 138,006 | 3,072 | 1,027,904 | |||||||||||||||||||||
Dr. Amit Nagra (7) | 2022 | 147,115 | — | — | — | 371,494 | 518,609 | |||||||||||||||||||||
Former Chief | 2021 | 384,711 | 954,283 | 1,368,485 | 186,494 | 3,543 | 2,897,516 | |||||||||||||||||||||
Operating Officer | 2020 | 337,851 | — | — | 311,494 | 3,081 | 652,426 | |||||||||||||||||||||
| (1) | The amounts in this column represent the aggregate grant-date fair value of awards granted to each named executive officer under our equity incentive plans, computed in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 718. |
| (2) | Includes the value of options granted to our named executive officers upon the consummation of the Business Combination in 2020, which is calculated using $15.84, the last trading price of our SPAC partner and the exercise price of the options, as the fair market value of the option’s underlying shares on the date of grant. The number of shares underlying each stock option award was calculated based on a target grant date fair value determined using $10 (i.e., the purchase price for one of our shares under the Business Combination agreement) as both the per share fair market value of our stock on the date of grant and the option exercise price. For more information, see “Non-Equity and Incentive Awards Grant in 2021 to Our Named Executive Officers”. |
| (3) | The amounts in this column represent the applicable named executive officer’s total annual performance-based cash bonus for the years ending on December 31 of 2020, 2021, 2022. |
| (4) | Mr. Meier was hired as our President and Chief Financial Officer on October 20, 2022 and appointed as President and Chief Executive Officer effective December 12, 2022. Effective May 10, 2023, Dr. Rickman succeeded Mr. Meier as our Chief Executive Officer and assumed the duties of the Company’s principal executive officer, principal financial officer and principal accounting officer. Mr. Meier’s 2022 bonus amount, if any, has not been determined by the Board. |
| (5) | Mr. Becker resigned effective March 17, 2023. Mr. Becker’s resignation was not in connection with any known disagreement with the Company on any matter. Richard Meier, our then-Chief Executive Officer, assumed the duties of the Company’s principal accounting officer and principal financial officer upon the effectiveness of Mr. Becker’s resignation. |
| (6) | Mr. Karanth resigned effective June 13, 2022. |
| (7) | Mr. Nagra employment was terminated effective April 15, 2022. |
| (8) | All other compensation in 2022 consisted of the following: |
105
Named Executive Officer | Employer Retirement Contribution ($) | Life Insurance & AD&D Premium ($) | Severance ($) | |||||||||
Richard Meier | 192.31 | 1,430 | — | |||||||||
Andrew Rickman | 15,002 | 10,437 | — | |||||||||
Chad Becker | 3,000 | 14,176 | — | |||||||||
Mahesh Karanth | 3,000 | 9,332 | 278,418 | |||||||||
Amit Nagra | 3,000 | 8,494 | 360,000 | |||||||||
106
Compensation Table
We review compensation annually for all employees, including our named executive officers. In setting our named executive officers’ base salaries and bonuses and granting equity incentive awards, we seek to align pay for performance and consider, among other factors, compensation for comparable positions in the market, the historical compensation levels of our named executive officers, individual performance as compared to our expectations and objectives, our desire to motivate our named executive officers to achieve short- and long-term results that are in the best interests of our shareholders, and a long-term commitment to our company.
Base Salaries
In 2022, each of the named executive officers of Rockley received an annual base salary to compensate them for services rendered to Rockley. The base salary payable to each named executive officer was intended to provide a fixed component of compensation reflecting such executive’s skill set, experience, role, and responsibilities.
Annual Cash Bonuses
In 2022, Mr. Meier was eligible to earn a bonus of up $400,000 and Mr. Becker was eligible to earn a bonus targeted at 60% of his base salary. Each named executive officer was eligible to earn his bonus based on the attainment of company and individual performance metrics, as determined by the Board, in its discretion. The actual annual cash bonuses awarded to each named executive officer for 2022 performance are set forth above in the Summary Compensation Table in the column titled “Nonequity Incentive Plan Compensation”. Dr. Rickman and Messrs. Karanth and Nagra did not receive any bonus in 2022.
Non-Equity and Incentive Awards Granted in 2022 to Our Named Executive Officers
Pursuant to Mr. Meier employment agreement, on October 21, 2022, Mr. Meier was granted restricted stock units with respect to 1,891,521 ordinary shares and a stock option to purchase 1,891,521 ordinary shares at a price equal to the fair market value of such shares on the grant date, with both equity awards vesting over four years, with 25% of each award vesting on the first anniversary of that award’s date of grant and the remaining portion vesting in quarterly installments over the remaining three years, subject to Mr. Meier’s continued service. In addition, in the event Mr. Meier’s employment is terminated by the Company without cause or by Mr. Meier for good reason on or within 12 months following a change in control of the Company, subject to Mr. Meier’s executing a release, these equity grants will vest in full.
Retirement Plans
In 2022, Dr. Rickman participated in the Rockley U.K. pension (“U.K. Pension”) and our other executives participated in the ADP TotalSource Retirement Savings Plan, a multiple employer defined contribution plan in which Rockley participates (“401(k) Plan”). The U.K. Pension and the 401(k) Plan are designed to take advantage of certain provisions of Her Majesty’s Revenue and Customs and the Internal Revenue Code, respectively, which allow eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis to the U.K. Pension or the 401(k) Plan, as applicable. In 2022, contributions made by participants in the U.K. Pension and the 401(k) Plan were matched up to a specified percentage of the employee contributions on behalf of the named executive officers. These matching contributions are fully vested as of the date on which the contribution is made.
Employment Agreements with Our Named Executive Officers
Below are descriptions of the material terms of the offer letter agreements with our named executive officers. These agreements generally provide for at-will employment and set forth the named executive officer’s initial base salary and eligibility for employee benefits.
Employment Agreement with Richard Meier
We entered into an amended employment agreement with Mr. Meier in 2022 pursuant to which he will receive a base salary of $500,000 with a target bonus opportunity equal to 80% of his annual base salary, including a $400,000 bonus opportunity for 2022. Under his employment agreement, Mr. Meier also received an initial equity grant consisting of RSUs and stock options. In the event Mr. Meier’s employment is terminated by the Company without cause or by Mr. Meier for good reason, subject to his execution of a release, Mr. Meier will be eligible to receive (i) a lump sum equal to his annual salary and target bonus, plus any earned but unpaid annual bonus for the prior completed calendar year, and (ii) 12 months of Company paid COBRA premiums. If such a termination occurs on or within 12 months following a change in control of the Company, subject to Mr. Meier’s executing a release, Mr. Meier’s initial equity grants will vest in full.
Employment Agreement with Andrew Rickman
We entered into an amended employment agreement with Dr. Rickman in 2021 in connection with the Business Combination, pursuant to which Dr. Rickman served as the chief executive officer of Rockley. The terms of Dr. Rickman’s employment did not change in connection with his becoming executive chair and stepping down as the Company’s CEO in December of 2022. Effective May 10, 2023, Dr. Rickman succeeded Mr. Meier as the Company’s CEO.
Under the amended employment agreement, among other terms, Dr. Rickman is entitled to receive an annual base salary of $500,000 and is eligible to receive an annual performance bonus targeted at 100% of Dr. Rickman’s annual base salary. The actual amount of any such bonus will be determined by reference to the attainment of applicable Rockley and/or individual performance objectives, as determined by the Board or the Compensation Committee.
107
Dr. Rickman will also be eligible to participate in the customary health, welfare, and fringe benefit plans we provided to our employees.
In addition, we entered into a side letter pursuant to which Dr. Rickman became eligible to receive equity awards with a fair value of $5.0 million in connection with the Business Combination, to be split between stock options and RSUs, which awards were granted in 2021 and are described in “Equity and Incentive Awards Granted in 2021 to Our Named Executive Officers” above and the “Outstanding Equity Awards at Fiscal Year-End Table”, below.
Under his amended employment agreement, we must provide Dr. Rickman at least 12 months’ notice, or pay in lieu of notice, prior to any termination of his employment unless that termination is for “cause” (as defined under his amended employment agreement). Dr. Rickman must provide us with at least 12 months’ notice prior to his resignation, unless we reasonably determine that such resignation is for “good reason” (as defined in his amended employment agreement).
If Dr. Rickman’s employment is terminated by us without “cause,” or by Dr. Rickman for “good reason,” subject to his execution and non-revocation of a release of claims and continued compliance with his confidentiality and non-solicitation requirements, then, in addition to any accrued amounts, Dr. Rickman will be entitled to receive the following severance payments and benefits: (i) an amount equal to the sum of (a) his annual base salary then in effect and (b) 100% of his target annual bonus amount, payable in equal instalments over one year and reduced by any basic salary paid in lieu of notice; and (ii) continuation of all benefits for a period of 12 months.
The amended employment agreement contains non-competition and non-solicitation and confidentiality provisions which, among other restrictions, and except in the case of an involuntary termination, restrict Dr. Rickman’s ability to be engaged or employed by, undertake duties for or be otherwise interested in our competitors, customers or suppliers, for a period of 12 months following his termination (reduced by any portion of Dr. Rickman’s pre-termination notice period during which time he is not providing services, or “garden leave”).
Employment Agreement with Chad Becker
In connection with Mr. Becker’s appointment as our interim chief financial officer, we entered into an amended employment agreement pursuant to which Mr. Becker would receive a base salary of $370,000 and was eligible for annual performance bonus targeted at 60% of Mr. Becker’s then-current annual base salary.
Employment Agreement with Mahesh Karanth
We entered into an amended employment agreement with Mr. Karanth, pursuant to which Mr. Karanth would serve as the chief financial officer of Rockley and would report directly to our chief executive officer. Under the amended employment agreement, Mr. Karanth received a base salary of $450,000 and was eligible for an annual performance bonus targeted at 60% of Mr. Karanth’s then-current annual base salary. Pursuant to his amended employment agreement, Mr. Karanth was also eligible to participate in the customary health, welfare, and fringe benefit plans we provide to our employees.
In connection with Mr. Karanth’s resignation effective June 13, 2022, Mr. Karanth also received the severance contemplated under his employment agreement, namely, in exchange for his execution and non-revocation of a general release of claims in our favor and continued compliance with customary confidentiality and non-solicitation requirements, Mr. Karanth received, in addition to any accrued amounts, (i) an amount equal to the sum of (a) 6 months of his annual base salary then in effect and (b) 50% of his target annual bonus amount, payable in equal installments over six months; and (ii) payment of premiums for continued healthcare coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) for up to 6 months after the termination date.
Employment Agreement with Amit Nagra
We entered into an amended employment agreement with Mr. Nagra pursuant to which Mr. Nagra would serve as the chief operating officer of Rockley and would report directly to our chief executive officer. On January 19, 2022, the Compensation Committee approved an amendment (the “First Amendment”) to Mr. Nagra’s employment agreement, pursuant to which Mr. Nagra’s employment would be terminated on or around March 31, 2022 in connection with the intended monetization of the Company’s ultra-high-speed fiber optic communication solutions (as discussed below and previously in our December 22, 2021 press release), which date could be extended upon mutual agreement. Under the First Amendment, Dr. Nagra was to receive an annual base salary of $450,000 and would be eligible to receive an annual performance bonus targeted at 60% of Dr. Nagra’s then-current annual base salary. Pursuant to his Employment Agreement, Dr. Nagra was also eligible to participate in the customary health, welfare, and fringe benefit plans, provided by us to our employees.
Mr. Nagra’s employment was ultimately terminated on April 15, 2022. In connection with Mr. Nagra’s termination, Mr. Nagra received the severance contemplated under his employment agreement, as amended, namely, in exchange for his execution and non-revocation of a general release of claims in our favor and continued compliance with customary confidentiality and non-solicitation requirements, Mr. Nagra received, in addition to any accrued amounts, (i) an amount equal to the sum of (a) 6 months of his annual base salary then in effect and (b) 50% of his target annual bonus amount, payable in equal installments over six months; and (ii) payment of premiums for continued healthcare coverage under the COBRA for up to 6 months after the termination date.
108
Outstanding Equity Awards at Fiscal Year-End Table
The following table sets forth information regarding outstanding equity awards for each of our named executive officers as of December 31, 2022:
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||
Name | Date Granted | Number of Securities Underlying Unexercised Options Exercisable (#) | Number of Securities Unexercised Options Unexercisable (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock that have not Vested (#) | Market Value of Shares or Units of Stock that have not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested (#) | Equity Incentive Plan Awards: Market Payout Value of Unearned Shares, Units or Other Rights that have not Vested ($) | |||||||||||||||||||||||||
Richard Meier | 10/21/21(1) | — | 1,891,521 | 0.63 | 10/20/31 | — | — | — | — | |||||||||||||||||||||||||
| 10/21/21(1) | — | — | — | — | — | 1,891,521 | — | — | ||||||||||||||||||||||||||
Andrew Rickman | 12/16/21(2) | — | — | — | — | 243,105 | 34,034 | — | — | |||||||||||||||||||||||||
| 10/25/21(3) | — | — | — | — | 383,142 | 56,639 | — | — | ||||||||||||||||||||||||||
| 8/11/21(4) | 203,849 | 371,727 | 15.84 | 8/10/31 | — | — | — | — | ||||||||||||||||||||||||||
Chad Becker | 4/15/2022(5) | — | — | — | — | 16,816 | ||||||||||||||||||||||||||||
| 11/22/2022(6) | — | — | — | — | 46,251 | |||||||||||||||||||||||||||||
| 11/22/2022(7) | — | — | — | — | 3,083 | |||||||||||||||||||||||||||||
| (1) | RSUs and options vest over 48-months with 25% vesting on the first anniversary of the grant date and the remaining 75% vesting ratably on each quarterly anniversary thereafter subject to continued service. |
| (2) | RSUs vest annually over three years following the date of grant. |
| (3) | RSUs vest quarterly over a 48-month period following August 11, 2021, subject to continued service. All unvested RSUs will vest upon an involuntary termination on or within 12 months following a Change in Control as defined in the 2021 Plan. |
| (4) | Option vests monthly over a 48-month period following the grant date, subject to continued service. All unvested options will vest upon an involuntary termination on or within 12 months following a Change in Control as defined in the 2021 Plan. |
| (5) | RSUs vested April 2, 2023. |
| (6) | RSUs vest quarterly over a 48-month period following May 17, 2023, subject to continued service. |
| (7) | RSUs vested February 17, 2023. |
Equity Compensation Plan Information
For equity compensation plan information, see Note 12 to the Consolidated Notes to Financial Statements.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of March 10, 2023, the most recent practicable date for which such information was available, as to our ordinary shares beneficially owned by: (1) each person who is known by us to own beneficially more than 5% of our ordinary shares, (2) each of our named executive officers and directors, and (3) all of our current directors and executive officers as a group.
Beneficial ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or exercisable within 60 days.
109
The beneficial ownership percentages set forth in the table below are based on approximately 132,747,605 ordinary shares outstanding as of March 10, 2023.
In computing the number of ordinary shares beneficially owned by a person and the percentage ownership of that person, we deemed outstanding ordinary shares subject to options held by that person that are currently exercisable, or RSUs that vest, in each case, within 60 days of March 10, 2023. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.
Except as otherwise set forth in footnotes to the table below, the address of each of the persons listed below is 3rd Floor 1 Ashley Road, Altrincham, Cheshire, WA14 2DT, United Kingdom.
Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | Percentage of Shares Beneficially Owned | ||||||
Named Executive Officers and Directors: | ||||||||
Richard A. Meier | — | — | ||||||
Andrew Rickman (1) | 17,636,953 | 13.4 | % | |||||
Chad Becker | 3,166 | * | ||||||
Mahesh Karanth (2) | 1,189,836 | * | ||||||
Amit Nagra (3) | 1,824,373 | * | ||||||
William Huyett | 25,000 | * | ||||||
Brian Blaser | — | * | ||||||
Caroline Brown (4) | 43,670 | * | ||||||
Nicolaus Henke | — | * | ||||||
Karim Karti | 24,000 | * | ||||||
Michele Klein | — | * | ||||||
Pamela Puryear | — | * | ||||||
|
|
|
| |||||
All executive officers and directors as a group as of March 10, 2023(5) | 17,755,589 | 13.7 | % | |||||
5% Shareholders: | ||||||||
Hengtong Optic-Electric International Co. (8) | 6,949,317 | 5.3 | % | |||||
| * | Represents beneficial ownership of less than 1%. |
| (1) | Includes 17,462,734 ordinary shares and 68,183 ordinary shares subject to options and restricted stock units held by Dr. Rickman exercisable (with respect to options) or which will vest (with respect to restricted stock units) within 60 days of March 10, 2023, respectively. Dr. Rickman has pledged up to 6.0 million of his Rockley ordinary shares to facilitate the Sponsor’s financing of its PIPE subscription commitment, which, if forfeited in their entirety, would reduce his estimated beneficial ownership by approximately 4%. The lender may have dispositive power over such pledged shares but would not have voting power unless and until such shares are forfeited to the lender. In addition, Sponsor-affiliated entities have agreed to transfer shares held by such entities to Dr. Rickman in exchange for Dr. Rickman’s making available up to 6.0 million of his Rockley ordinary shares to facilitate the Sponsor’s financing of its PIPE subscription commitment, with the number of shares to be transferred to be based on the price performance of Rockley ordinary shares. |
| (2) | Includes 29,435 ordinary shares and 1,158,553 ordinary shares subject to options and restricted stock units held by Mr. Karanth exercisable (with respect to options) or which will vest (with respect to restricted stock units) within 60 days of March 10, 2023, respectively. |
| (3) | Includes 755,367 ordinary shares and 1,053,584 ordinary shares subject to options and restricted stock units held by Dr. Nagra exercisable (with respect to options) or which will vest (with respect to restricted stock units) within 60 days of March 10, 2023, respectively. |
| (4) | Represents 7,333 ordinary shares and 48,177 ordinary shares subject to options and restricted stock units held by Dr. Brown exercisable (with respect to options) or which will vest (with respect to restricted stock units) within 60 days of March 10, 2023, respectively. |
| (5) | Includes 116,360 ordinary shares subject to options and restricted stock units held by our current directors and executive officers exercisable within 60 days of March 10, 2023, respectively. |
110
Item 13. Certain Relationships and Related Transactions, and Director Independence
In addition to the compensation arrangements of our directors and named executive officers discussed elsewhere in this Annual Report, the following includes a summary of transactions since January 1, 2022 to which we have been or will be a party, and in which the amount involved exceeded or will exceed $120,000 and in which any of our directors, executive officers, beneficial holders of more than 5% of our capital stock, or entities affiliated with, or immediate family members of, any of the foregoing, had or will have a direct or indirect material interest.
Consultancy Agreements
Rockley engages two affiliate entities of certain of Rockley’s directors for consulting and administrative services, Rockley Ventures Limited and Rockley Management (HK) Limited. For the years ended December 31, 2022 and 2021, Rockley incurred $0.4 million and $0.8 million in fees for these services, respectively. On March 14, 2021, Rockley Photonics, Inc., a subsidiary of Rockley, entered into a consulting agreement with HealthKapital LLC, a California limited liability company wholly owned by Karim Karti, a former director of Rockley. Pursuant to the terms of the consulting agreement, Mr. Karti is entitled to cash compensation at the rate of $600 per hour, estimated at up to 20 hours per week, and fully vested 4,000 RSUs for every 30 days of service during the consultation period, up to a maximum of 24,000 RSUs, subject to the terms and conditions of the consulting agreement.
Intra Group Loans
On January 24, 2022, Rockley (as lender) entered into two separate Intra Group Loan Agreements with RPL (as borrower): (i) one for an amount of $110,000,000; and (ii) one for an amount of $35,000,000 (the “RPL Loans”). The purpose of the RPL Loans is to: (i) cover working capital requirements; and (ii) provide for long term cash investment funds. The interest is the Bank of England base rate from time to time. The amount of the loans will be repayable by RPL on September 1, 2022 or such later date agreed between the parties.
On February 24, 2022, Rockley entered into an Intra Group Loan Agreement with Rockley Photonics Oy as borrower, for an amount of €928,794 (the “Finland Loan”). The Finland Loan will be drawn down in full on or before February 28, 2023 and be repayable immediately by the borrower to Rockley following the final claim submission to a grant funded project with Business Finland (the Finnish funding agency for innovation) scheduled for June 30, 2023.
Indemnification Agreements
We have entered into separate indemnification agreements with our directors and executive officers, in addition to the indemnification provided for in our Articles. These agreements, among other things, require us to indemnify our directors and executive officers for certain expenses, including attorneys’ fees, judgments, fines, and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of our directors or executive officers or as a director or executive officer of any other company or enterprise to which the person provides services at our request. We believe that these provisions in our Articles and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
Policies and Procedures for Transactions with Related Persons
We adopted a written Related Person Transactions Policy that sets forth our policies and procedures regarding the identification, review, consideration, and oversight of “related person transactions.” For purposes of our policy only, a “related person transaction” is a transaction, arrangement, or relationship (or any series of similar transactions, arrangements or relationships, including any indebtedness or guarantee of indebtedness) in which we or any of our subsidiaries are participants, in which any “related person” has a material interest.
Transactions involving compensation for services provided to us as an employee, consultant, or director are not considered related person transactions under this policy. A related person is any executive officer, director, nominee to become a director, or a holder of more than 5% of any class of our voting securities (including our ordinary shares), including any of their immediate family members and affiliates, including entities owned or controlled by such persons.
Under the policy, the related person in question or, in the case of transactions with a holder of more than 5% of any class of our voting securities, an executive officer with knowledge of the proposed transaction, must present information regarding the proposed related person transaction to our Audit Committee (or, where review by our Audit Committee would be inappropriate, to another independent body of our Board) for review. To identify related person transactions in advance, we rely on information supplied by our executive officers, directors, and certain significant shareholders. In considering related person transactions, our Audit Committee takes into account the relevant available facts and circumstances, which may include, but are not limited to:
| • | the risks, costs, and benefits to us; |
| • | the impact on a director’s independence in the event the related person is a director, immediate family member of a director or an entity with which a director is affiliated; |
| • | the terms of the transaction; |
| • | the availability of other sources for comparable services or products; and |
| • | the terms available to or from, as the case may be, unrelated third parties. |
111
Our Audit Committee will approve only those transactions that it determines are fair to us and in our best interests. All of the transactions described above were entered into prior to the adoption of such policy.
Item 14. Principal Accounting Fees and Services
AUDIT COMMITTEE REPORT
The Audit Committee operates under a written charter adopted by the Board. A link to the Audit Committee charter is available on our website at www.rockleyphotonics.com.
In performing its functions, the Audit Committee acts in an oversight capacity and necessarily relies on the work and assurances of the Company’s management, which has the primary responsibility for financial statements and reports, and of the independent registered public accounting firm, who, in their report, express an opinion on the conformity of the Company’s annual financial statements with accounting principles generally accepted in the United States. It is not the duty of the Audit Committee to plan or conduct audits, to determine that the Company’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles, or to assess or determine the effectiveness of the Company’s internal control over financial reporting.
Within this framework, the Audit Committee has reviewed and discussed with management the Company’s audited financial statements as of and for the year ended December 31, 2022. The Audit Committee has also discussed with the independent registered public accounting firm, Ernst & Young LLP, the matters required to be discussed by Auditing Standard No. 1301, Communications with Audit Committees, issued by the Public Company Accounting Oversight Board and the SEC. In addition, the Audit Committee has received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm’s communications with the Audit Committee concerning independence and has discussed with the independent registered public accounting firm the independent registered public accounting firm’s independence.
Based upon these reviews and discussions, the Audit Committee recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
| Audit Committee | ||||
 |  | |||
| Nicolaus Henke, Ph.D. | William Huyett | Brian Blaser (Chair) |
Principal Accountant Fees and Services
The following table sets forth the fees billed by Ernst & Young LLP for audit and other services rendered:
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| (In thousands) | ||||||||
Audit Fees(1) | $ | 1,386 | $ | 2,293 | ||||
Audit-related Fees(2) | — | — | ||||||
Tax Fees(3) | — | 1,527 | ||||||
Other(4) | 373 | 8 | ||||||
| $ | 1,759 | $ | 3,828 | |||||
| (1) | Audit Fees consisted of fees incurred for services rendered for the annual audit and quarterly reviews of the Company’s consolidated financial statements, audits required by public company regulation, professional consultations with respect to accounting issues, registration statement filings, including our Registration Statements on Form S-1, Form S-4 and Form S-8 related to the Business Combination, shares registration, stock incentive plan registration and issuance of consents and similar matters. |
| (2) | Audit-related fees consist of fees incurred for consultation regarding financial accounting and reporting matters. |
| (3) | Tax fees consist of tax structuring fees incurred for consultation regarding the Business Combination. |
| (4) | All other fees consist of the cost of our subscription to an accounting research tool provided by Ernst & Young LLP. |
112
Pre-approval Policies and Procedures
Our Audit Committee implemented a policy to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm. All of the services provided were pre-approved to the extent required. During the approval process, the Audit Committee considered the impact of the types of services and the related fees on the independence of the independent registered public accounting firm. The services and fees had to be deemed compatible with the maintenance of that firm’s independence, including compliance with rules and regulations of the SEC.
113
PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | Documents filed as part of this report |
1. All Financial Statements
See index to Consolidated Financial Statements, Item 8 of this Form 10-K.
2. Financial Statement Schedules
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Form 10-K.
3. Exhibits required by Item 601 of Regulation S-K
The information required by this Section (a)(3) of Item 15 is as follows:
114
| + | Indicates management contract or compensatory plan. |
| † | Certain exhibits and schedules to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant hereby agrees to furnish a copy of any omitted exhibits or schedules to the SEC upon request. |
| # | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34 - 47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10 Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933 except to the extent that the Company specifically incorporates it by reference. |
Item 16. Form 10-K Summary
None.
115
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ROCKLEY PHOTONICS HOLDINGS LIMITED | ||
| By: | /s/ Dr. Andrew Rickman, OBE | |
| Name: Dr. Andrew Rickman, OBE | ||
| Title: Chief Executive Officer and Executive Chair | ||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Dr. Andrew Rickman, OBE and Tom Adams, and each of them, his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name | Title | Date | ||
/s/ Dr. Andrew Rickman, OBE Dr. Andrew Rickman, OBE | Chief Executive Officer, Director, Executive Chair (Principal Executive, Financial and Accounting Officer) | May 15, 2023 |
116
