Owlet, Inc. 2022 Form 10-K Summary
Business Context and Reporting Period
Owlet develops connected digital parenting products, including the Dream Sock, Smart Sock, Owlet Cam and related software applications. The filing covers the fiscal year ended December 31, 2022; it is an annual filing rather than a standalone fourth-quarter report.
The U.S. FDA’s October 2021 Warning Letter resulted in suspension of U.S. Smart Sock distribution. Owlet launched the Dream Sock in January 2022 and submitted a de novo classification request in December 2022 for certain heart-rate and oxygen-display and notification features. The FDA accepted the submission for substantive review and indicated that it did not anticipate enforcement action while the application remained under review, subject to a possible change in approach.
Financial Performance and Liquidity
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $69.2 million | $75.8 million | Down 8.8% |
| Gross profit | $23.3 million | $35.1 million | Down 33.5% |
| Gross margin | 33.7% | 46.2% | Down 12.5 percentage points |
| Operating loss | $84.6 million | $55.8 million | Loss increased |
| Net loss | $79.3 million | $71.7 million | Loss increased |
| Net loss per share | $0.71 | $1.13 | Improved per share due primarily to higher share count |
| Cash used in operations | $81.4 million | $40.6 million | Cash burn increased |
| Capital expenditures and intangible purchases | $1.6 million | $2.0 million | Down |
| Cash and cash equivalents at year-end | $11.2 million | $95.1 million | Down $83.8 million |
Cost of revenues increased 12.5% to $45.9 million, primarily from higher material, transportation and hosting costs. Operating expenses rose to $107.9 million from $90.9 million, including general and administrative expense of $41.5 million, sales and marketing expense of $38.5 million and research and development expense of $27.9 million. Advertising and marketing expense was $26.2 million.
At December 31, 2022, accounts receivable were $16.0 million, inventory was $18.5 million and total assets were $58.1 million. Total liabilities were $68.7 million, producing a stockholders’ deficit of $10.6 million. The accumulated deficit was $222.8 million.
Debt included $8.0 million outstanding under the term loan, $4.7 million drawn on the revolving line of credit and $2.4 million of financed insurance premiums. The revolving facility had reduced maximum availability of $10.0 million at year-end, subject to borrowing-base limitations. The company was in violation of minimum liquidity and minimum net revenue covenants at December 31, 2022, causing debt to be classified as current.
Material Changes Versus the Prior Comparable Period
- Revenue declined $6.6 million, primarily because of lower Sock product sell-through and reduced retailer inventories. The prior year included a $23.2 million contra-revenue adjustment related to expected and actual Smart Sock and Monitor Duo returns following the FDA Warning Letter.
- Gross margin contracted materially because of cost inflation and increased transportation, material and hosting costs.
- Operating loss widened by $28.8 million, reflecting lower gross profit and higher operating expenses.
- Operating cash outflow more than doubled, partly due to payment of returns accrued in 2021 and changes in working capital.
- Headcount was reduced by 74 employees during a 2022 restructuring program; full-time employees declined to 106 at year-end from 200 at December 31, 2021.
- Restructuring charges were $1.4 million, primarily severance and related benefits. Management does not expect additional restructuring expense from that program.
- Common-stock warrant liability gains declined to $6.3 million from $15.7 million in 2021. The 2021 results also included a $26.1 million contingent beneficial conversion feature charge and a $2.1 million gain on PPP loan forgiveness, neither of which recurred in 2022.
Guidance, Outlook, Risks and Unusual Items
Management’s stated objective was to achieve adjusted EBITDA break-even by the end of 2023 through lower operating expenses, reduced variable marketing spend and customer-base growth. The filing does not provide formal revenue or earnings guidance.
Management and the auditor disclosed substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements. The company has recurring operating losses, negative operating cash flow, low cash balances, covenant violations and a need for additional financing. The financial statements were prepared on a going-concern basis without adjustments that could result from failure to continue operations.
After year-end, Owlet raised $30.0 million of gross proceeds in a February 2023 private placement of Series A convertible preferred stock and warrants. The preferred stock is convertible into approximately 61.2 million common shares, and the warrants cover 180% of the underlying conversion shares at an exercise price of $0.333 per share. This financing may materially dilute existing common stockholders.
In March 2023, the company amended its SVB loan arrangements to defer certain term-loan principal payments until September 2023, waive specified defaults, expand borrowing-base eligibility and revise financial covenants. The company’s cash was substantially held at Silicon Valley Bank at year-end; the filing states that all deposits remained accessible following the bank’s March 2023 resolution and sale process.
Key risks include FDA and foreign regulatory authorization requirements, potential product restrictions or recalls, dependence on a limited number of retailers and single-source manufacturers, supply-chain and inventory risks, competition, cybersecurity and privacy exposure, product liability, pending securities litigation, covenant compliance, continued cash burn and potential delisting from the NYSE. The NYSE notified Owlet in November 2022 that its average closing share price had fallen below $1.00; the company had a limited period to regain compliance.
Management identified material weaknesses in internal control over financial reporting, including weaknesses in the control environment, segregation of journal-entry duties, inventory and accrued liabilities, preferred-stock and warrant accounting, sales returns and accrued sales tax, and IT general controls. Disclosure controls were therefore considered ineffective at December 31, 2022. The independent auditor audited the financial statements but was not required to provide an internal-control attestation because Owlet is an emerging growth company.
Two consolidated putative securities class actions remain pending concerning alleged misleading disclosures about the FDA’s likely classification of the Smart Sock. Management intends to defend the claims; the filing states that the ultimate outcome is uncertain.
Important Facts for Investors to Verify
- Current FDA status, timing and outcome of the Dream Sock de novo request and the BabySat 510(k) submission.
- Whether the company can achieve positive adjusted EBITDA and reduce operating cash burn during 2023.
- Available borrowing capacity, compliance with revised SVB covenants and repayment requirements beginning September 2023.
- Post-year-end cash balance and the sufficiency of the $30.0 million preferred-stock financing to fund operations.
- Potential dilution from the preferred stock, private-placement warrants, public warrants, options, restricted stock units and earnout shares.
- Progress in remediating material weaknesses and whether future filings remain timely and reliable.
- Status and potential exposure from the securities class actions, product-return obligations and any regulatory or recall activity.
- NYSE listing compliance and the risk that delisting could impair liquidity and access to capital.