Owlet, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Owlet develops connected baby-monitoring products and a digital parenting platform, including the Dream Sock and Smart Sock. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Financial Performance and Liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $10.7 million | $21.5 million | Down 50.2% |
| Gross profit | $4.2 million | $8.8 million | Down 52.6% |
| Gross margin | 38.7% | 40.7% | Down 2.0 percentage points |
| Operating loss | $11.0 million | $21.7 million | Improved $10.7 million |
| Net loss | $11.9 million | $28.8 million | Improved $16.9 million |
| Net loss attributable to common stockholders | $12.5 million | $28.8 million | Improved $16.2 million |
| Net loss per share | $0.11 | $0.26 | Improved |
| Cash flow from operations | $(9.4) million | $(27.4) million | Use decreased $18.0 million |
| Cash flow from financing | $22.9 million | $1.8 million | Increased $21.1 million |
Cash and cash equivalents were $24.8 million at March 31, 2023, up from $11.2 million at December 31, 2022. Current assets were $59.9 million versus current liabilities of $50.7 million. Total debt was $8.3 million, including $7.0 million outstanding under the term loan and $1.3 million of financed insurance premiums. The company had no borrowings under its $10.0 million asset-based revolver, with borrowing-base availability of approximately $7.1 million.
Accumulated deficit was $234.6 million, and stockholders’ equity was negative $20.5 million at March 31, 2023. The company reported substantial doubt about its ability to continue as a going concern within one year after issuance of the financial statements.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower Owlet Sock sales, weaker consumer sell-through, retailer inventory reductions, and the absence of the significant Dream Sock launch-related sell-in recorded in Q1 2022. U.S. revenue declined to $9.5 million from $18.7 million; international revenue declined to $1.2 million from $2.8 million.
- Gross margin declined because of higher direct product costs related to inflation.
- Operating expenses declined to $15.1 million from $30.5 million, reflecting 2022 restructuring, lower headcount, reduced marketing, lower consulting spend, and prioritization of research and development projects.
- Interest expense increased to $2.8 million from $0.2 million, including the present-value expense associated with an agreement to pay $3.0 million of interest over 36 months on past-due vendor payables.
- The company recorded a $1.9 million gain from the change in fair value of warrant liabilities, compared with a $6.9 million loss in Q1 2022.
- On February 17, 2023, Owlet raised $30.0 million through the issuance of 30,000 Series A convertible preferred shares and warrants to purchase 110.2 million common shares. The preferred shares had a $30.0 million liquidation preference, and the warrants had an exercise price of $0.333 per share.
- In March 2023, the company amended its SVB financing arrangement, deferring certain term-loan principal payments until September 2023, revising financial covenants, and obtaining waivers of specified defaults. The amendment included warrants for 150,000 common shares.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide quantitative revenue, earnings, or cash-flow guidance. Management stated that additional financing may be required and that declining revenue, recurring losses, negative operating cash flow, reduced product demand, macroeconomic conditions, and potential FDA action could impair the company’s ability to fund operations.
- The FDA Warning Letter concerning the Smart Sock led to suspended U.S. distribution and continued uncertainty regarding required marketing authorization for medical-device features of the Dream Sock and Smart Sock.
- Management concluded that conditions raise substantial doubt about the company’s ability to continue as a going concern. The company is relying on cost reductions, the February financing, amended debt terms, and potential future financing.
- The February warrants are liability-classified and subject to fair-value changes, creating potentially material earnings volatility. The financing and preferred-stock conversion features may substantially dilute existing common stockholders.
- Substantially all cash was held at Silicon Valley Bank during the quarter. Following the bank’s receivership, the company reported that all deposits remained accessible through First Citizens Bank.
- Two consolidated putative securities class actions remain pending, alleging misleading statements concerning the FDA’s likely classification of the Smart Sock. Management intends to defend the claims and states that ordinary-course litigation is not expected to have a material impact, although the ultimate outcome is uncertain.
- In April 2023, the NYSE notified Owlet that it was not in compliance with continued-listing standards because average global market capitalization and reported stockholders’ equity were each below $50 million. The company planned to submit a remediation plan and had an applicable cure period of up to 18 months.
- Management reported material weaknesses in internal control over financial reporting, including weaknesses involving staffing and accounting expertise, journal-entry segregation, inventory, accrued liabilities, preferred stock and warrants, sales returns, accrued sales tax, and information-technology general controls. Remediation was underway but was not complete.
Most Important Facts for Investors to Verify
- Progress toward FDA marketing authorization and the commercial impact of the Smart Sock distribution restrictions.
- Actual cash burn, available borrowing-base capacity, debt amortization beginning in September 2023, and the need and terms of any additional financing.
- Potential dilution from the 110.2 million February 2023 warrants, convertible preferred stock, and other outstanding equity awards and warrants.
- Whether revenue and consumer sell-through stabilize after the 50.2% year-over-year decline.
- Resolution of the NYSE listing deficiency and the company’s ability to regain and maintain compliance.
- Remediation and independent testing of the disclosed material weaknesses in internal control.
- Developments in the consolidated securities litigation and any related financial exposure.