Owlet, Inc. 2021 Form 10-K Summary
Business context and reporting period
Owlet develops connected digital parenting products, including the Owlet Smart Sock, Dream Sock, Cam, monitoring accessories, mobile applications and related services. The filing covers the fiscal year ended December 31, 2021, with comparative results for 2020. Owlet completed its reverse-merger transaction with Sandbridge Acquisition Corporation on July 15, 2021 and began trading on the NYSE under OWLT and OWLT WS.
The business was materially affected in the fourth quarter by the FDA’s October 1, 2021 Warning Letter concerning the U.S. marketing of the Smart Sock. Owlet suspended U.S. distribution in October, accepted or anticipated substantial customer and retailer returns, and began initial Dream Sock shipments in December 2021 ahead of its January 2022 U.S. consumer launch.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $75.8 million | $75.4 million | 0.6% increase |
| Gross profit | $35.1 million | $35.9 million | 2.3% decrease |
| Gross margin | 46.2% | 47.6% | Down 1.4 percentage points |
| Operating loss | $55.8 million | $7.0 million | Significantly higher loss |
| Net loss | $71.7 million | $10.5 million | Significantly higher loss |
| Net loss per share | $1.13 | $0.48 | Higher loss per share |
| Cash used in operations | $40.6 million | $0.1 million | Higher cash burn |
| Cash and cash equivalents | $95.1 million | $17.0 million | Increase primarily from financing |
| Total debt | $16.5 million | $12.4 million | Increase |
Operating expenses increased substantially: general and administrative expense rose to $32.3 million from $13.1 million, sales and marketing expense rose to $37.1 million from $19.3 million, and research and development expense rose to $21.4 million from $10.5 million. The increases reflected higher headcount, stock-based compensation, marketing investment, Merger-related costs and the costs of operating as a public company.
Other expense included a $26.1 million charge for the contingent beneficial conversion feature of convertible notes, a $5.6 million preferred stock warrant liability loss and a $15.7 million common stock warrant liability gain. Owlet also recognized a $2.1 million gain from forgiveness of its PPP loan.
Material changes versus the prior comparable period
- Revenue increased only slightly for the full year because a $23.2 million contra-revenue adjustment for received and anticipated Smart Sock and Monitor Duo returns substantially offset $23.9 million of revenue growth during the first nine months.
- Gross margin declined because of customer returns, higher material, transportation and hosting costs, and supply-chain cost inflation.
- Operating losses expanded due to rapid growth in operating expenses and public-company costs.
- Net cash used in operating activities increased to $40.6 million, while financing activities provided $120.6 million, primarily from the Merger and $129.7 million PIPE financing. Net proceeds from the Merger and PIPE were approximately $133.9 million after transaction costs.
- U.S. revenue declined to $65.4 million from $71.1 million, while international revenue increased to $10.4 million from $4.3 million.
- Three retail customers represented approximately 50% of 2021 revenue, compared with 51% in 2020, indicating continued customer concentration.
Liquidity, debt and unusual items
Owlet reported $95.1 million of cash and cash equivalents at December 31, 2021 and stated that available cash, together with expected customer receipts, should fund projected operating requirements for at least twelve months from the financial statement issuance date. However, management expects continuing operating losses, investments in product development, sales and marketing, and additional public-company costs, and may require additional financing.
The company had $14.0 million of principal outstanding under its Silicon Valley Bank term loan and $2.5 million of financed insurance premiums. The SVB revolver had $17.5 million of borrowing capacity, with no outstanding balance at year-end. Debt maturities and financed insurance obligations totaled $8.5 million in 2022, $6.0 million in 2023 and $2.0 million in 2024. The debt is secured by substantially all of the company’s assets and is subject to financial covenants. A January 2022 amendment replaced the EBITDA covenant with a net revenue covenant and increased the minimum cash and cash-availability threshold to $30.0 million.
At year-end, inventory was $18.0 million, including $1.5 million of returned inventory. Owlet also recorded a $6.7 million current asset for inventory expected to be returned and a $20.1 million refund liability for returns not received by year-end.
Guidance, outlook, management commentary and risks
- Management expects continued losses and substantial investment in research and development, product expansion, sales and marketing, international growth and public-company infrastructure.
- Owlet intends to pursue FDA marketing authorization for Smart Sock notification features involving heart rate and oxygen levels. There is no assurance that the FDA will accept or grant the application, or that authorization will be obtained on a timely basis.
- The company believes the Dream Sock is a consumer wellness product, but the FDA could determine that it is a medical device requiring authorization, potentially resulting in distribution restrictions, recalls, product modifications or enforcement action.
- Health Canada determined that the Smart Sock requires medical-device authorization, and Owlet ceased Canadian sales and advertising in December 2021. The U.K. MHRA indicated that the company could continue marketing the Smart Sock through the end of 2022 without required certification or registration, subject to applicable conditions.
- The Owlet Care App was no longer available for download to new U.S. users through Apple’s App Store. Owlet launched the Dream App for Dream Sock users, but Apple or Google could remove applications if regulatory concerns arise.
- Two putative securities class actions were filed in November 2021 alleging misleading statements and omissions regarding the likely FDA classification of the Smart Sock. The company intends to defend the claims; a reasonable loss estimate was not available.
- Owlet relies on single or limited-source manufacturers and component suppliers, primarily in Asia, and does not have internal manufacturing capabilities. COVID-19, logistics constraints, cost inflation and supply interruptions remain risks.
- The company identified continuing material weaknesses in internal control over financial reporting, including weaknesses in the control environment, journal-entry segregation, accounting for preferred stock and warrant arrangements, sales returns, accrued sales tax and IT general controls. Management concluded disclosure controls were not effective at December 31, 2021.
Important facts for investors to verify
- Progress, timing and potential outcome of FDA marketing authorization for the Smart Sock notification features and the regulatory status of the Dream Sock.
- Actual Smart Sock and Monitor Duo returns, refund settlements, inventory recoveries and any additional revenue or inventory adjustments.
- U.S. demand, retail distribution and customer acceptance of the Dream Sock following the January 2022 launch.
- Cash burn, available liquidity, compliance with revised SVB covenants and the timing of debt maturities.
- Remediation of the material weaknesses in internal control over financial reporting.
- Status, potential costs and insurance coverage relating to the securities class actions and other regulatory or product-liability matters.
- Exposure to retail concentration, single-source manufacturing, supply-chain inflation and mobile-app distribution decisions by Apple and Google.