Owlet, Inc. Form 10-Q Summary
Business context and reporting period
Owlet, Inc. designs connected baby-monitoring products and related digital services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022, compared with the corresponding 2021 periods. Substantially all revenue was from product sales, and the company operates as one segment.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $18.3 million | $24.9 million | $39.9 million | $46.8 million |
| Gross profit | $6.6 million | $13.5 million | $15.4 million | $26.2 million |
| Gross margin | 36.1% | 54.2% | 38.6% | 55.9% |
| Operating loss | $20.4 million | $5.9 million | $42.1 million | $8.7 million |
| Net loss | $11.7 million | $5.3 million | $40.5 million | $13.2 million |
| Net loss per share | $0.11 | $0.24 | $0.37 | $0.59 |
| Cash used in operations | Not separately provided | Not separately provided | $55.7 million | $15.6 million |
At June 30, 2022, cash and cash equivalents were $37.3 million, down from $95.1 million at December 31, 2021. Accounts receivable were $24.0 million and inventory was $29.4 million. Total assets were $101.9 million and stockholders’ equity was $21.5 million.
Debt included an $11.0 million SVB term note and $4.3 million drawn under the SVB revolving line. Both were classified as current because of expected future covenant noncompliance. The company also reported a $5.1 million common-stock warrant liability.
Material changes versus the prior comparable period
- Q2 revenue declined 26.4%, and first-half revenue declined 14.9%, primarily because of lower sock-product sales, reduced consumer sell-through and lower retailer inventory targets amid macroeconomic conditions.
- Gross margin fell 18.1 percentage points in Q2 and 17.3 percentage points for the first half. Management cited material and transportation cost inflation, customer returns, discounts and, for the first half, inventory rework associated with FDA-related returns.
- First-half operating expenses increased 64.6% to $57.4 million. General and administrative, sales and marketing, and research and development expenses increased 49.0%, 56.0% and 105.2%, respectively.
- Operating cash usage increased substantially, driven by the larger loss and working-capital investment in receivables and inventory, together with lower accounts payable and accrued expenses.
- Common-stock warrant fair-value adjustments produced $8.8 million of other income in Q2 and $1.9 million in the first half. These noncash gains materially reduced reported net loss but did not improve operating cash flow.
- Share-based compensation increased to $6.6 million for the first half from $1.6 million in the prior-year period.
Outlook, commentary, risks and unusual items
- Going concern: Management stated that recurring losses, negative operating cash flow, declining revenue, limited cash and covenant noncompliance raise substantial doubt about the company’s ability to continue as a going concern within one year. The financial statements were prepared on a going-concern basis without adjustments that might result from an inability to continue operations.
- FDA matter: Following the FDA Warning Letter concerning the Owlet Smart Sock, the company accrued a $13.0 million refund liability at June 30, 2022. The Smart Sock was replaced in the U.S. market by the Owlet Dream Sock, and the company’s ability to obtain authorization for medical-device functionality remains a key uncertainty.
- Debt covenant and liquidity: On August 10, 2022, SVB waived the second-quarter net-revenue covenant violation, reduced the minimum liquidity covenant from $30.0 million to $22.5 million and reduced revolver capacity from $17.5 million to $5.0 million. The company did not expect to meet the third- or fourth-quarter 2022 revenue covenants. A future default could allow SVB to terminate the revolver and accelerate the term note and revolver borrowings.
- Restructuring: On July 21, 2022, the company began a restructuring that included an approximately 74-employee workforce reduction, lower consulting and marketing spending, and reprioritized research and development. Estimated third-quarter restructuring costs were approximately $1.1 million, primarily cash severance and termination costs.
- Cost outlook: Management expects quarterly run-rate operating costs, excluding share-based and incentive compensation, to be approximately $15 million to $19 million exiting the fourth quarter of 2022. No specific revenue or profitability guidance was provided.
- Litigation: Two putative securities class actions allege that the company and certain officers and directors made misleading statements regarding the FDA’s likely classification of the Smart Sock. The company cannot reasonably estimate any potential loss.
- Controls: Disclosure controls were not effective as of June 30, 2022 because previously identified material weaknesses in internal control over financial reporting remained outstanding, including weaknesses in staffing and accounting expertise, journal-entry segregation, accounting for preferred stock and warrants, sales returns and IT general controls.
- Substantially all cash was held at Silicon Valley Bank and exceeded federally insured limits. The company reported no loss of access as of the filing date.
Important facts for investors to verify
- Whether Owlet secured a further amendment or restructuring of its SVB facilities and whether it satisfied third- and fourth-quarter 2022 covenants.
- Cash burn, collections of receivables, inventory levels and the timing of payments related to the $13.0 million FDA-related refund liability.
- Actual revenue, sell-through and returns for the Dream Sock and any regulatory authorization for medical-device functionality.
- Whether the restructuring delivered the projected $15 million to $19 million quarterly operating-cost run rate and whether additional reductions or financing were required.
- Progress in remediating material weaknesses in internal control over financial reporting.
- Potential exposure from the securities litigation and any other FDA, product-liability, privacy or regulatory proceedings.