Owlet, Inc. — Q3 2022 Form 10-Q Summary
Business Context and Reporting Period
Owlet develops connected baby-monitoring products and a digital parenting platform, including the Smart Sock and Dream Sock. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods.
Financial Performance and Position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $17.4 million | $31.5 million | $57.2 million | $78.4 million |
| Gross profit | $4.6 million | $14.9 million | $20.0 million | $41.1 million |
| Gross margin | 26.6% | 47.2% | 34.9% | 52.4% |
| Operating loss | $21.8 million | $13.8 million | $63.9 million | $22.5 million |
| Net loss | $19.4 million | $34.5 million | $59.8 million | $47.6 million |
| Basic and diluted loss per share | $0.17 | $0.36 | $0.54 | $1.00 |
Revenue declined 44.9% year over year in Q3 and 26.9% for the first nine months, primarily due to lower sock-product sales, weaker consumer sell-through, and retailers maintaining lower inventory levels. Cost inflation, fulfillment costs, returns and chargeback provisions, and discounts reduced gross margins.
Operating expenses were $26.4 million in Q3 and $83.9 million for the nine months. Nine-month general and administrative expense increased 30.8% to $29.4 million, sales and marketing increased 16.0% to $31.0 million, and research and development increased 63.9% to $23.4 million. Q3 net loss benefited from the absence of the $26.1 million contingent beneficial conversion charge recorded in Q3 2021 and included a $2.9 million gain from the change in fair value of common stock warrant liabilities.
Net cash used in operating activities was $71.6 million for the first nine months of 2022, compared with $34.7 million in the prior-year period. Investing cash use was $1.4 million, while financing activities provided $1.1 million. Cash and cash equivalents declined to $23.2 million from $95.1 million at December 31, 2021.
At September 30, 2022, total assets were $80.7 million, total liabilities were $76.3 million, and stockholders’ equity was $4.4 million. Inventory was $23.8 million and accounts receivable were $20.5 million. Debt and financing obligations included a $9.5 million SVB term note, $5.0 million drawn on the SVB revolver, and a $2.5 million financed insurance premium; all $12.0 million of term debt and financed insurance obligations was classified as current because of covenant violations.
Material Changes Versus the Prior Comparable Period
- Q3 revenue fell $14.1 million, or 44.9%, and nine-month revenue fell $21.1 million, or 26.9%.
- Q3 gross margin declined 20.6 percentage points to 26.6%; nine-month gross margin declined 17.5 percentage points to 34.9%.
- Nine-month operating loss increased by $41.4 million to $63.9 million, despite lower Q3 sales and marketing expense.
- Operating cash burn more than doubled year over year, while cash declined by $71.9 million during the first nine months.
- The Company adopted lease accounting guidance in 2022 and recorded $2.6 million of right-of-use assets and $3.2 million of lease liabilities at September 30, 2022.
- Owlet recorded $1.3 million of net favorable out-of-period adjustments in Q3 to correct prior-period errors; the adjustments increased Q3 cost of revenues by $0.7 million and operating expenses by $0.7 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that restructuring actions, including a workforce reduction of approximately 74 employees, lower consulting and marketing spending, and prioritized research and development, are expected to reduce quarterly run-rate operating costs, excluding share-based and incentive compensation, to approximately $15 million to $19 million exiting Q4 2022.
- The Company disclosed substantial doubt about its ability to continue as a going concern within one year, citing recurring losses, $71.6 million of nine-month operating cash burn, declining revenue, limited cash, and debt-covenant noncompliance.
- Owlet violated its minimum net revenue covenant for Q3 2022 and did not expect compliance for Q3 or Q4. It was negotiating a further amendment with Silicon Valley Bank. If no amendment is reached and defaults continue, SVB may terminate the revolver and accelerate the term note and revolver borrowings.
- The FDA determined that pulse-rate and blood-oxygen display features of the Dream Sock require marketing authorization. Owlet planned to submit a de novo classification request by December 16, 2022. The FDA indicated it did not anticipate enforcement action pending review if the submission was timely, but could require modification, recall, or cessation of sales.
- A $6.8 million refund liability remained accrued at September 30, 2022 for Smart Sock-related returns associated with the FDA Warning Letter. The liability was reduced by $6.2 million during Q3 as major retailers offset amounts against invoices.
- Two consolidated putative securities class actions remain pending concerning alleged disclosures about FDA classification of the Smart Sock. The Company stated that a reasonable estimate of potential loss cannot currently be made.
- Management reported that disclosure controls were not effective as of September 30, 2022 because of continuing material weaknesses in financial reporting, including controls over inventory, accrued liabilities, journal-entry segregation, warrant and preferred-stock accounting, sales returns, IT general controls, and staffing and accounting expertise.
- Macroeconomic risks include inflation, reduced discretionary spending, supply-chain and fulfillment cost inflation, lower retail inventory levels, international conflict, and continuing COVID-19 effects.
Investor Verification Checklist
- Verify whether Owlet finalized an amended SVB financing agreement and whether covenant breaches, liquidity requirements, or debt acceleration risks were resolved.
- Assess the Company’s cash runway, operating cash burn, access to additional financing, and dilution risk.
- Confirm the timing and outcome of the Dream Sock de novo submission and any FDA restrictions, recalls, or required product changes.
- Evaluate the magnitude and remaining timing of Smart Sock returns, refunds, chargebacks, and related cash settlements.
- Review whether the reported material weaknesses and disclosure-control deficiencies were remediated.
- Monitor the consolidated securities litigation and any potential financial or reputational impact.
- Reconcile the Q3 out-of-period adjustments and assess whether additional accounting corrections may be required.