ROCKLEY PHOTONICS HOLDINGS LIMITED The following discussion and analysis of our financial condition and results of operations should be read together with the Company's condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our audited annual consolidated financial statements as of and for the year endedDecember 31, 2021 and the related notes thereto, contained in our Annual Report on Form 10-K. 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 post-Business Combination consolidated company,Rockley Photonics Holdings Limited , while "Legacy Rockley" and "SC Health " refers to the entities prior to the Business Combination. Overview We have developed a unique sensing platform that we believe can reshape the health & 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 and finished goods wearables targeted towards the consumer wearables and medtech markets. While all of our products are presently in the development stage, we have shipped early prototypes to multiple customers. 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 photonic integrated circuits ("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 wearables and medtech companies and, as of the date of this Quarterly Report on Form 10-Q, we have established strategic relationships with six of the world's 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 these relationships to develop new capabilities in consumer and medtech wearables in the near term, and to expand further 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 the consumer wearable, mobile device, and medical device markets to be over$50 billion by 2025, based on data sourced from the Yole Report, the IDTechEx Report, and the TrendForce Report. Further, our internal forecasts for smartphones, smart watches, and smart earbuds through 2025 (based on customer data), also suggests these markets are rapidly expanding as healthcare and consumer wearable devices continue to incorporate additional sensing capabilities. Our target biomarkers for consumer health and wellness include blood oxygen, core body temperature, hydration, blood pressure, alcohol, glucose (indicator), and lactate. 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 byRockley comparing theRockley 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 power efficient than existing solutions. We believe our platform will also be able to address existing applications in consumer and medtech wearables with significantly higher resolution, accuracy, and range. Further, we believe there are multiple additional markets and 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 29
--------------------------------------------------------------------------------
Table of Contents a full range of subscription services, including the deployment of our technology through a subscription and cloud-based software as a service.
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. From the date of our formation through September 30, 2022 we have raised
aggregate gross proceeds of approximately $371.5 million from the issuance of
convertible loan notes and ordinary shares. For the nine months ended
September 30, 2022 , we had net loss of $151.6 million and utilized $117.3
million in cash to fund our operations.
While we remain committed to being efficient in the use of cash in our operations, we have built a framework to enable a rapid move to commercial production by focusing our capital and operating expenditures on:
•investing in our technology and our silicon photonics solutions;
•developing innovative solutions and applications for our technology;
•commercializing our silicon photonics solutions;
•investing in our sales and marketing activities and distribution channels;
•improving our operational, financial, and management information systems;
•obtaining, maintaining and expanding our intellectual property portfolio; and
•enhancing our internal functions to support our operations as a public company.
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 inJuly 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 further discussion of the risks posed to our business from the COVID-19
pandemic, refer to Item 1A of our Annual Report on Form 10-K for the year ended
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 those discussed in Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as filed with theSEC onMarch 10, 2022 , and in Part II, Item 1A of this Quarterly Report on Form 10-Q. 30
--------------------------------------------------------------------------------
Table of Contents
Results of Operations for the Three and Nine Months Ended
The following table sets forth our historical operating results for the periods
indicated (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue $ 556 $ 1,839 $ 3,023 $ 5,805
Cost of revenue 2,066 3,459 7,753 11,742
Gross profit (1,510) (1,620) (4,730) (5,937)
Operating expenses:
Selling, general, and administrative
expenses 13,010 13,568 45,114 27,588
Research and development expenses 25,748 26,418 76,849 59,949
Total operating expenses 38,758 39,986 121,963 87,537
Loss from operations (40,268) (41,606) (126,693) (93,474)
Other income (expense):
Other (expense) income, net (180) - (349) 2,860
Interest expense, net (3,690) (1,587) (10,857) (1,913)
(Loss) gain on equity method investment (270) 40 (232) (720)
Change in fair value of debt instruments 27,227 (14,255) (20,352) (59,916)
Change in fair value of warrant liabilities 31,359 515 13,351 515
(Loss) gain on foreign currency (1,877) (481) (6,522) 150
Total other income (expense) 52,569 (15,768) (24,961) (59,024)
Income (loss) before income taxes 12,301 (57,374) (151,654) (152,498)
Provision for income tax (benefit) 270 598 (67) 808
Net income (loss) $ 12,031 $ (57,972) $ (151,587) $ (153,306) Discussion and Analysis of Results of Operations
Revenue (in thousands, except for percentages)
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
Revenue $ 556 $ 1,839 $ (1,283) (70) % $ 3,023 $ 5,805 $ (2,782) (48) %
Revenue decreased by $1.3 million , or 70%, to $0.6 million for the three months
ended September 30, 2022 from $1.8 million for the three months ended
September 30, 2021 . Revenue decreased by $2.8 million , or 48%, to $3.0 million
for the nine months ended September 30, 2022 from $5.8 million for the nine
months ended September 30, 2021 . This decrease is primarily driven by timing of
project milestones for our significant customers in fiscal 2022 when compared to
fiscal 2021.
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.
31--------------------------------------------------------------------------------
Table of Contents
Cost of Revenue and Gross Profit (in thousands, except for percentages)
Three Months Ended September Nine Months Ended
30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
Cost of revenue $ 2,066 $ 3,459 $ (1,393) (40) % $ 7,753 $ 11,742 $ (3,989) (34) %
Gross profit (1,510) (1,620) 110 (7) % (4,730) (5,937) 1,207 (20) %
Gross margin (272) % (88) % NM NM (156) % (102) % NM NM
NM - Not meaningful
Cost of revenue decreased by $1.4 million , or 40%, to $2.1 million for the three
months ended September 30, 2022 from $3.5 million for the three months ended
September 30, 2021 . Cost of revenue decreased by $4.0 million , or 34%, to $7.8
million for the nine months ended September 30, 2022 from $11.7 million for the
nine months ended September 30, 2021 . For both the three and nine-month periods
ended September 30, 2022 , the 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 comparing to the corresponding periods in the
prior year.
Gross profit remained relatively flat when comparing the three and nine-month
periods ended September 30, 2022 when comparing to the corresponding periods in
the prior year.
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)
Three Months Ended September Nine Months Ended September
30, Change 30, Change
2022 2021 $ % 2022 2021 $ %
Selling, general, and administrative
expenses $ 13,010 $ 13,568 $ (558) (4) % $ 45,114 $ 27,588 $ 17,526 64 %
Selling, general and administrative expenses decreased by $0.6 million , or 4%,
to $13.0 million for the three months ended September 30, 2022 from
$13.6 million for the three months ended September 30, 2021 . The decrease was
primarily due to a reduction in professional fees of $1.9 million from the prior
year quarter, and a decrease in human capital costs of $0.3 million offset by a
$0.6 million increase in stock-based compensation costs.
Selling, general and administrative expenses increased by $17.5 million , or 64%,
to $45.1 million for the nine months ended September 30, 2022 from $27.6 million
for the nine months ended September 30, 2021 . The increase was primarily due to
an increase in professional fees of $8.6 million from the prior year
corresponding period, mainly related to our financing activities in fiscal 2022.
Further, the increase in expense related to general corporate growth, of which
$3.7 million was due to an increase in insurance expense, $2.0 million and
$1.5 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;
32--------------------------------------------------------------------------------
Table of Contents
and other general corporate costs. Human capital expenses primarily include salaries, benefits, bonuses, and stock-based compensation. We proactively manage our selling, general and administrative expenses and we believe our current headcount is sufficient to support anticipated growth in our business, and to operate as a public company, including compliance with the rules and regulations of theSEC , legal, audit, additional general and director and officer insurance expenses, investor relations activities, and other administrative and professional services.
Research and Development Expenses (in thousands, except for percentages)
Three Months Ended September Nine Months Ended September
30, Change 30, Change
2022 2021 $ % 2022 2021 $ %
Research and development
expenses $ 25,748 $ 26,418 $ (670) (3) % $ 76,849 $ 59,949 $ 16,900 28 %
Research and development expenses decreased by $0.7 million , or 3%, to $25.7
million for the three months ended September 30, 2022 from $26.4 million for the
three months ended September 30, 2021 . The decrease was primarily attributable
to an decrease in human capital and third-party engineering costs of $3.1
million and $0.8 million , respectively, partially offset by an increase in IT
infrastructure costs of $1.1 million , a decrease in allocation of expenses of
$1.6 million to R&D, and increased stock-based compensation costs of $0.6
million .
Research and development expenses increased by $16.9 million , or 28%, to $76.8
million for the nine months ended September 30, 2022 from $59.9 million for the
nine months ended September 30, 2021 . The increase was primarily attributable to
an increase in human capital and stock-based compensation expenses of $3.8
million and $4.1 million , respectively. The increase was also attributable to
higher IT infrastructure costs of $4.1 million and a decrease in allocation of
expenses of $4.9 million to R&D.
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 (expense) income, net (in thousands, except for percentages)
Three Months Ended September Nine Months Ended September
30, Change 30, Change
2022 2021 $ % 2022 2021 $ %
Other (expense) income, net
100 %$ (349) $ 2,860 $ (3,209)
(112) %
In the three months endedSeptember 30, 2022 , other expense related to realized losses from the disposal of available-for-sale investments. In the nine months endedSeptember 30, 2022 , the decrease in other expense 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)
Three Months Ended September Nine Months Ended September
30, Change 30, Change
2022 2021 $ % 2022 2021
Interest expense, net $ 3,690 $ 1,587 $ 2,103 133 % $ 10,857 $ 1,913 $ 8,944 468 %
The increase in interest expense, net of $2.1 million or 133% for the three
months ended September 30, 2022 when compared to the same period in fiscal 2021
was due to the additional interest expense from the May Notes. The increase in
interest expense of $8.9 million or 468% for the nine months ended September 30,
2022 when compared to the same period in fiscal 2021 is due to the imputed
interest expense from the 2020 Term Facility Loan, and interest from the May
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 Notes.
33--------------------------------------------------------------------------------
Table of Contents
Gain/(Loss) onEquity Method Investment (in thousands, except for percentages) Three Months Ended Nine Months Ended September September 30, Change 30, Change 2022 2021 $ % 2022 2021 $ % Equity method investment (loss) gain$ (270) $ 40 $ (310) (775) %$ (232) $ (720) $ 488 (68) %
Change in equity method investment captures our share of gains (losses) of the investment in HRT according to our percentage of ownership.
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 (in thousands, except for percentages)
Three Months Ended September
30, Change Nine Months Ended September 30, Change
2022 2021 $ % 2022 2021 $ %
Change in fair value of debt
instruments $ 27,227 $ (14,255) $ 41,482 (291) % $ (20,352) $ (59,916) $ 39,564 (66) %
Change in fair value of debt instruments captures gains and losses from a change
in fair value estimates that use binomial lattice methodologies based upon a set
of valuation assumptions to value the debt instruments. In the three and nine
month periods ended September 30, 2022 , the change in fair value of the May
Notes was recorded in other income or expense.
All convertible debt instruments held by the Company prior to the Business
Combination in
Change in Fair Value of Warrant Liabilities (in thousands, except for
percentages)
Three Months Ended Nine Months Ended September
September 30, Change 30, Change
2022 2021 $ % 2022 2021 $ %
Change in fair value of
warrants $ 31,359 $ 515 $ 30,844 NM $ 13,351 $ 515 $ 12,836 NM
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 .
Provision for Income Tax (in thousands, except for percentages)
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %Provision for income tax$ 270 $ 598 $ (328) (55) %$ (67) $ 808 $ (875) (108) % Change in provision for income tax expense for the three months endedSeptember 30, 2022 is due to an overall decrease in expenditures. The effective income tax rate was less than 1.0% for the three and nine months endedSeptember 30, 2022 and 2021. Our effective tax rate differs from theU.S. 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 inthe United States , which operates on a cost-plus arrangement and minimum filing fees in the foreign jurisdictions where we have operations. We are subject to income taxes in theUnited Kingdom ,the United States ,Finland ,Ireland , andSwitzerland . 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 ourU.S. federal and foreign deferred tax assets. 34
--------------------------------------------------------------------------------
Table of Contents
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operational performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively and in context, may be helpful to investors in assessing our operating performance and trends and in comparing our financial measures with those of comparable companies which may present similar non-GAAP financial measures.
Limitations of Non-GAAP Measures
These non-GAAP financial measures are not prepared in accordance with GAAP, are supplemental in nature, and are not intended, and should not be construed, as the sole measure of our performance, and should not be considered in isolation from or as a substitute for comparable financial measures prepared in accordance with GAAP. There are a number of limitations related to EBITDA and Adjusted EBITDA, including the following: •EBITDA and Adjusted EBITDA exclude certain recurring, non-cash charges, such as depreciation of property and equipment and/or amortization of intangible assets. While these are non-cash charges, we may need to replace the assets being depreciated and amortized in the future and Adjusted EBITDA and Adjusted EBITDA Margin do not reflect cash requirements for these replacements or new capital expenditure requirements;
•EBITDA and Adjusted EBITDA do not reflect interest expense, net, which may constitute a significant recurring expense in the future;
•Adjusted EBITDA excludes stock-based compensation, which may constitute a significant recurring expense in the future, as equity awards are expected to continue to be an important component of our compensation strategy; and
•Future expenses may be similar to the non-recurring special items that are excluded from Adjusted EBITDA.
Because of these limitations, you should consider EBITDA and Adjusted EBITDA
alongside other financial performance measures, including net income (loss) and
our other GAAP results.
EBITDA and Adjusted EBITDA
We define "EBITDA" as net income (loss) before interest expense, net, income tax
expense, and depreciation and amortization. We define "Adjusted EBITDA" as
EBITDA adjusted for stock-based compensation, non-capitalized transaction costs,
and other non-recurring special items determined by management that are not
considered representative of our underlying operating performance. Adjusted
EBITDA is intended as a supplemental measure of our performance that is neither
required by, nor presented in accordance with, GAAP. Our presentation of these
measures should not be construed as an inference that our future results will be
unaffected by unusual or non-recurring items. Our computation of EBITDA and
Adjusted EBITDA may not be comparable to other similarly titled measures
computed by other companies, because all companies may not calculate EBITDA or
Adjusted EBITDA in the same fashion.
Because of these limitations, EBITDA and Adjusted EBITDA should not be
considered in isolation or as a substitute for performance measures calculated
in accordance with GAAP. We compensate for these limitations by relying
primarily on our GAAP results and using EBITDA and Adjusted EBITDA on a
supplemental basis. You should review the reconciliation of our net income
(loss) to EBITDA and Adjusted EBITDA below and not rely on any single financial
measure to evaluate our business.
35--------------------------------------------------------------------------------
Table of Contents
Reconciliation
The following table reconciles our net income (loss) (the most directly
comparable GAAP measure) to EBITDA and Adjusted EBITDA for the three and nine
months ended
Nine Months Ended
Three Months Ended September 30, September 30,
2022 2021 2022 2021
Net Income (Loss) $ 12,031
3,690 1,587 10,857 1,913
Provision for income tax (benefit) 270 598 (67) 808
Depreciation and amortization 1,638 1,229 4,723 3,228
EBITDA 17,629 (54,558) (136,074) (147,357)
Non-capitalized transaction costs* 1,511 3,214 11,499 4,254
Stock-based compensation 3,435 2,155 11,412 5,856
Change in equity-method investment 702 (145) 521 346
Change in fair value of debt instruments (27,227) 14,255 20,352 59,916
Change in fair value of warrants (31,359) (515) (13,351) (515)
Forgiveness of PPP Loan - - - (2,860)
Adjusted EBITDA $ (35,309) $ (35,594) $ (105,641) $ (80,360) * Non-capitalized transaction costs include non-recurring expense related to the issuance of convertible loan notes in 2022, 2021 and the Business Combination.
Liquidity and Capital Resources
Due to our history of recurring losses from operations, negative cash flows from operations, and a significant accumulated deficit, management concluded that there is substantial doubt about the Company'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 endedDecember 31, 2021 as to the substantial doubt about our ability to continue as a going concern. The Company has financed its operations primarily through Business Combination, the issuance and sale of convertible loan notes, ordinary shares, agreed-upon projects, and research and development tax credit receivables in accordance with the relevantU.K. tax legislation. As ofSeptember 30, 2022 andDecember 31, 2021 , the cash, cash equivalents and investments balance was$4.9 million and$81.4 million , respectively. The Company will need to raise additional capital in the short- and long-term in order to fund its operations and execute on its business strategy.
Liquidity Requirements
InOctober 2021 , the Company entered into an equity line of credit arrangement ("ELOC") withLincoln Park Capital Fund, LLC , anIllinois 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. OnMay 27, 2022 , the Company issued the May Notes in an aggregate principal amount of$81.5 million pursuant to the May Indenture, dated as ofMay 27, 2022 , among the Company, certain of its subsidiaries, as guarantors, andWilmington 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. 36 -------------------------------------------------------------------------------- Table of Contents As ofSeptember 30, 2022 , we have yet to generate any material revenue from our business operations. Management continues to explore a range of options to further address the Company's capitalization and liquidity. If we raise funds by issuing debt securities or incurring loans, this form of financing would have rights, preferences, and privileges senior to those of holders of our ordinary shares. The availability and the terms under which we can borrow additional capital could be disadvantageous, and the terms of debt securities or borrowings could impose significant restrictions on our operations. Macroeconomic conditions and credit markets could also impact the availability and cost of potential future debt financing. If we raise capital through the issuance of additional equity, such sales and issuance would dilute the ownership interests of the existing holders of the Company's ordinary shares. There can be no assurances that any additional debt or equity financing would be available to us or if available, that such financing would be on favorable terms to us. As of the date of this Quarterly Report on Form 10-Q, our anticipated cash needs are significant in order to fund the execution of our business strategy, including (1) investing in research and developments activities, including completion and commercialization of our wearables, smart phone and point-of-care technologies, (2) investing in backend processing, intellectual property protection, quality control and process, (3) expanding sales and marketing activities, and (4) pursuing strategic partnerships. However, our anticipated cash needs could vary materially as a result of a number of factors, including:
•Timing and the costs involved in bringing our products to market;
•Anticipated customer contracts and design wins may not materialize;
•Delay in launching our products due to technical challenges from our customers or our product development team;
•Pricing and the volume of sales of our products may be different from our forecast;
•Execution delays due to resources constraints;
•Assisting our fabless manufacturing partners with expansion of production capacity;
•The cost of maintaining, expanding and protecting our intellectual property portfolio, including litigation costs and liabilities;
•The cost of additional general and administrative talent, including accounting and finance, legal and human resources, as a result of becoming a public company;
•The costs associated with financing activities required to fund the execution of our business strategy, including our convertible senior notes; and
•Other risks discussed in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 and in this Quarterly Report on Form 10-Q. If adequate funds are not available, we will need to curb our expansion plans or limit our research and development activities, which would have a material adverse impact on our business prospects and results of 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.
© Edgar Online, source
