Owlet, Inc. — Form 10-Q Summary
Business context and reporting period
Owlet develops connected parenting products and digital services, including smart baby-monitoring products and associated mobile applications. This filing covers the three and nine months ended September 30, 2023. The financial statements are unaudited and presented under U.S. GAAP.
During the quarter, Owlet transitioned its Amazon distribution model from third-party retailers to a direct first-party relationship with Amazon. Shipments under the new arrangement began in October 2023, and the transition caused no revenue from either channel during the third quarter.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $9.2 million | $17.4 million | $33.0 million | $57.2 million |
| Gross profit | $3.3 million | $4.6 million | $12.7 million | $20.0 million |
| Gross margin | 36.3% | 26.6% | 38.5% | 34.9% |
| Operating loss | $7.9 million | $21.8 million | $25.6 million | $63.9 million |
| Net loss | $5.6 million | $19.4 million | $26.0 million | $59.8 million |
| Net loss attributable to common stockholders | $7.0 million | $19.4 million | $29.3 million | $59.8 million |
| Loss per common share | $0.84 | $2.42 | $3.56 | $7.55 |
Revenue declined 47.1% in the third quarter and 42.3% for the first nine months. Management attributed the declines primarily to the Amazon channel transition, lower Owlet Sock sales, reduced retailer inventory levels, macroeconomic conditions, and the absence of the prior-year Dream Sock launch-related sell-in.
Gross margin improved because of lower product returns and lower direct product costs. Operating expenses declined substantially following 2022 restructuring actions: nine-month general and administrative expense fell 30.6%, sales and marketing expense fell 68.5%, and research and development expense fell 65.5%.
Q3 net loss included a $2.4 million gain from the decrease in the fair value of common stock warrant liabilities. Nine-month interest expense increased to $3.0 million, partly because Owlet recorded the present value of $3.0 million of interest payable over 36 months to a significant vendor for past-due payables.
Cash flow, liquidity, debt, and capital structure
- Cash and cash equivalents were $15.2 million at September 30, 2023, compared with $11.2 million at December 31, 2022.
- Cash used in operating activities was $22.0 million for the first nine months, versus $71.6 million in the prior-year period.
- Financing activities provided $25.9 million, primarily from the February 2023 preferred stock and warrant financing, partly offset by debt repayments.
- The company issued 30,000 Series A convertible preferred shares and warrants to purchase 7.9 million common shares for gross proceeds of $30.0 million. Net proceeds from preferred stock issuance were $28.5 million after paid transaction costs.
- The $10.0 million asset-based revolving facility had $4.9 million outstanding and $5.1 million of borrowing-base availability at September 30, 2023. The facility matures April 22, 2024.
- The term loan had $6.5 million outstanding, amortizes in $0.5 million monthly installments, and matures October 1, 2024. Total debt, including financed insurance premiums, was $7.3 million.
- Common stock warrant liabilities were $24.2 million at September 30, 2023, compared with $0.7 million at year-end 2022, primarily reflecting the February 2023 warrants.
- Total stockholders’ deficit was $32.0 million at September 30, 2023, compared with $10.6 million at December 31, 2022. The accumulated deficit was $248.7 million.
Material changes, outlook, risks, and unusual items
- Management stated that recurring losses, declining revenue, negative operating cash flow, and the $15.2 million cash balance raise substantial doubt about Owlet’s ability to continue as a going concern within one year after issuance of the financial statements. The statements were prepared on a going-concern basis.
- As of September 30, 2023, Owlet was in violation of the minimum adjusted EBITDA covenant under its loan agreement. On November 13, 2023, SVB waived the violation and revised future covenant requirements.
- Owlet continues to depend on additional financing, cost reductions, and improved operating cash flow. Management cautioned that additional financing may not be available on acceptable terms and could dilute existing stockholders or impose superior investor rights.
- The company continues to face regulatory and product risks related to the FDA’s prior Warning Letter concerning the Owlet Smart Sock and the classification of the product as a medical device requiring marketing authorization.
- Two consolidated putative securities class actions remain pending concerning alleged disclosures about the FDA’s likely product classification. An amended complaint was expected by November 21, 2023, and Owlet planned to seek dismissal by January 26, 2024. Management stated that it intends to defend the claims vigorously.
- Disclosure controls and procedures were ineffective as of September 30, 2023 because of material weaknesses in internal control over financial reporting. Issues include staffing and accounting expertise, segregation of journal-entry duties, inventory and accrued-liability controls, accounting for preferred stock and warrants, sales returns and accrued sales tax, and IT general controls.
- A one-for-14 reverse stock split became effective July 7, 2023. Historical share and per-share amounts were adjusted retrospectively.
Most important facts for investors to verify
- Whether the Amazon first-party arrangement produces the expected revenue recovery after shipments began in October 2023.
- Projected cash usage and financing needs relative to the $15.2 million cash balance and continuing operating losses.
- Compliance with revised debt covenants and the company’s ability to address the April 2024 revolver maturity and October 2024 term-loan maturity.
- The status and potential financial exposure of the FDA-related securities litigation and any related product or regulatory requirements.
- Progress in remediating the reported material weaknesses in internal control over financial reporting.
- The potential dilution and economic impact of 9.2 million outstanding common-stock warrant shares and the convertible preferred stock, including the preferred stock’s $30.0 million liquidation preference.