Owlet, Inc. 10-Q Summary
Business context and reporting period
Owlet designs connected baby-monitoring products and operates as a single reportable segment. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023, with comparisons to the periods ended June 30, 2022. The company sells products and related mobile applications, primarily through product sales.
Financial performance and liquidity
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Revenue | $13.1 million | $18.3 million | $23.8 million | $39.9 million |
| Gross profit | $5.2 million | $6.6 million | $9.4 million | $15.4 million |
| Gross margin | 40.0% | 36.1% | 39.4% | 38.6% |
| Operating loss | $(6.7) million | $(20.4) million | $(17.7) million | $(42.1) million |
| Net loss | $(8.5) million | $(11.7) million | $(20.3) million | $(40.5) million |
| Net loss attributable to common stockholders | $(9.8) million | $(11.7) million | $(22.3) million | $(40.5) million |
| Basic and diluted loss per share | $(1.19) | $(1.48) | $(2.73) | $(5.12) |
- Second-quarter revenue declined 28.7% year over year; six-month revenue declined 40.3%. Management attributed the decrease mainly to lower Owlet Sock sales, retailer inventory reductions, macroeconomic conditions, and the absence of the prior-year Dream Sock launch sell-in.
- Gross margin improved to 40.0% in the quarter, primarily because of lower direct product costs. Six-month gross margin was broadly stable at 39.4%.
- Operating expenses fell substantially, including second-quarter reductions of 35.5% in general and administrative expense, 68.3% in sales and marketing expense, and 64.7% in research and development expense. The reductions primarily reflected 2022 restructuring, lower headcount, and lower marketing and consulting spend.
- Six-month interest expense increased to $2.9 million from $0.4 million, including the present value of $3.0 million of interest payable over 36 months under an agreement with a significant vendor concerning past-due payables.
- Cash and cash equivalents were $24.7 million at June 30, 2023, compared with $11.2 million at December 31, 2022. Cash included $20.6 million in money market funds.
- For the six months, operating activities used $16.8 million of cash, investing activities used $0.02 million, and financing activities provided $30.3 million, resulting in a $13.5 million increase in cash.
- At June 30, 2023, the company had $8.2 million outstanding under its asset-based revolving line, with reported borrowing-base availability of $8.4 million, and $7.0 million outstanding under its term loan. Total debt, including financed insurance premiums, was $7.2 million.
- The revolving facility terminates April 22, 2024, and the term loan matures October 1, 2024. The company stated that it was in compliance with applicable loan covenants as of the report date.
Material changes versus the prior comparable period
- Revenue and gross profit decreased materially, while operating losses narrowed because cost reductions more than offset the lower gross profit.
- The company completed a February 2023 private placement generating $30.0 million of gross proceeds through the issuance of 30,000 Series A convertible preferred shares and warrants to purchase 7,871,712 common shares. The preferred stock had a $30.0 million liquidation preference, and the warrants were recorded as liabilities with a June 30 fair value of $26.3 million.
- Preferred-stock accretion reduced net loss attributable to common stockholders by $1.3 million in the second quarter and $2.0 million for the six months.
- Common-stock warrant liabilities increased from $0.7 million at December 31, 2022 to $26.6 million at June 30, 2023, principally because of the February financing. Warrant fair-value changes produced a $1.6 million expense in the second quarter, compared with an $8.8 million gain in the prior-year quarter.
- Inventory declined to $12.4 million from $18.5 million at December 31, 2022, and accounts payable and accrued expenses also declined. Stockholders’ deficit increased to $27.3 million from $10.6 million.
- The company effected a one-for-14 reverse stock split on July 7, 2023. Share and per-share information in the filing has been retroactively adjusted.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide quantitative revenue or earnings guidance.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements. The filing cites recurring losses, negative operating cash flow, declining revenue, and a low cash balance. The statements were nevertheless prepared on a going-concern basis.
- Management’s mitigation actions include the February financing, amended SVB borrowing terms that deferred certain principal payments until September 2023, and continued cost reductions. Management stated that additional financing may be required, but availability and terms are uncertain and further equity or convertible financing could dilute existing stockholders.
- Regulatory matters remain significant. The FDA’s 2021 Warning Letter led to suspension of U.S. Smart Sock distribution, and the company’s ability to obtain required authorization for medical-device features remains important. In June 2023, the company received 510(k) clearance for BabySat, a prescription-only pediatric pulse oximeter, but must establish compliant medical-device operations and distribution channels.
- International regulatory uncertainty affects Smart Sock and Dream Sock sales. The filing describes unresolved matters involving Health Canada and the UK MHRA, including the need for potential authorizations or certifications and possible restrictions, recalls, or cessation of sales.
- The NYSE notified the company in April 2023 that it was not in compliance with continued-listing requirements relating to market capitalization and stockholders’ equity. The company submitted a remediation plan and has an 18-month cure period, but cannot assure compliance or continued listing.
- Disclosure controls and procedures were not effective as of June 30, 2023 because of material weaknesses involving staffing and accounting expertise, journal-entry segregation, inventory and accrued liabilities, preferred stock and warrants, sales returns and accrued sales tax, and IT general controls. Management has begun remediation, but the weaknesses had not been fully remediated.
- Two consolidated putative securities class actions remain pending concerning alleged omissions and misstatements related to the FDA’s likely classification of the Smart Sock. Management intends to defend the claims; the filing does not provide a probable loss amount.
- On August 11, 2023, the company adopted an executive change-in-control severance plan providing specified salary, bonus, healthcare, and equity-vesting benefits for eligible executives experiencing qualifying terminations.
Key facts investors should verify
- Whether cash generation, additional financing, or further cost reductions will be sufficient to address the disclosed going-concern uncertainty.
- The timing and terms of required debt repayments beginning in September 2023 and the April 2024 revolver termination and October 2024 term-loan maturity.
- The FDA and international regulatory status of Smart Sock, Dream Sock, and BabySat, including the UK and Canadian proceedings.
- Progress toward remediation of material weaknesses in internal control over financial reporting.
- Whether the company can satisfy NYSE continued-listing requirements during the cure period.
- The potential dilution and financial-statement volatility associated with 9.2 million outstanding common-share warrant equivalents and the Series A preferred stock’s conversion and redemption rights.