Owlet, Inc. 2021 Q3 Form 10-Q Summary
Business context and reporting period
Owlet, Inc. provides connected digital parenting products and services, including the Owlet Smart Sock, Owlet Monitor Duo, Owlet Cam, mobile applications and content. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021. On July 15, 2021, Sandbridge Acquisition Corporation completed its merger with Owlet Baby Care Inc.; Sandbridge was renamed Owlet, Inc., and Owlet began trading on the NYSE under OWLT and OWLT WS. The merger was accounted for as a reverse recapitalization.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $31.5 million, up 48.8% | $78.4 million, up 44.0% |
| Gross profit | $14.9 million | $41.1 million |
| Gross margin | 47.2%, versus 46.4% | 52.4%, versus 47.3% |
| Operating loss | $(13.8) million | $(22.5) million |
| Net loss | $(34.5) million | $(47.6) million |
| Net loss per share | $(0.36) | $(1.00) |
| Adjusted EBITDA | $(11.4) million | $(13.9) million |
| Adjusted EBITDA margin | (36.3)% | (17.7)% |
- Revenue growth was primarily driven by higher sales volume. Smart Sock sales increased 57% in the quarter and 54% year to date; Monitor Duo sales increased 29% and 30%, respectively.
- International revenue increased 170.4% in the quarter to $3.3 million and 160.2% year to date to $6.5 million.
- Operating expenses rose materially: general and administrative expense increased 191.5% in the quarter, sales and marketing expense increased 159.3%, and research and development expense increased 131.5%.
- The nine-month net loss included a one-time $26.1 million contingent beneficial conversion feature charge and a $5.6 million preferred warrant liability loss, partially offset by a $5.8 million common warrant liability gain and a $2.1 million PPP loan-forgiveness gain.
- Cash and cash equivalents were $114.9 million at September 30, 2021, compared with $17.0 million at December 31, 2020. Total assets were $160.3 million and stockholders’ equity was $77.0 million.
- Operating cash flow was $(34.7) million for the nine months, compared with positive operating cash flow of $4.7 million in the prior-year period. Investing cash flow was $(1.6) million.
- Financing cash flow was $134.2 million, including $133.7 million of net merger and PIPE proceeds. Management stated that cash on hand and expected customer receipts should fund working capital and capital requirements for at least the next twelve months.
- Debt included $11.1 million drawn under the SVB revolver, $15.0 million of term debt and $3.9 million of financed insurance premiums. Total debt was $18.9 million, with $9.4 million classified as current. The company reported compliance with applicable debt covenants at September 30, 2021.
Material changes versus the prior comparable period
- Revenue and gross profit grew substantially, while gross margin improved, particularly over the nine-month period due to lower manufacturing costs for the third-generation Smart Sock and improved freight and fulfillment logistics.
- Operating losses widened because the company significantly increased hiring, marketing, research and development, merger-related expenses and public-company costs.
- Cash flow shifted from positive to significantly negative operating cash flow as losses and working-capital needs increased.
- The merger and PIPE financing substantially strengthened liquidity and converted all outstanding redeemable convertible preferred stock and substantially all related-party convertible notes into common stock.
- The company became a public company and expects continuing increases in accounting, legal, insurance, compliance, investor-relations and other public-company expenses.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide clear formal numerical revenue, earnings or margin guidance. Management expects continued investment in product development, international expansion, sales and marketing, research and development, manufacturing capacity and public-company infrastructure. Management also expects additional operating losses and negative cash flows.
- FDA Warning Letter: On October 1, 2021, the FDA asserted that the U.S. marketing of the Owlet Smart Sock made it a medical device requiring premarket authorization. Owlet suspended U.S. distribution in October, and several national retailers suspended U.S. sales of the Smart Sock and Owlet Duo. The company plans to seek authorization for the Smart Sock’s regulated features and develop the Owlet Dream Sock as a consumer wellness product. The company cannot estimate the financial impact, which could be material.
- Application access: The Owlet Care App was scheduled to become unavailable for download by new users through Apple’s App Store in the U.S. and internationally beginning November 17, 2021. Existing users could continue using the app at that time.
- International regulatory exposure: UK regulators indicated that the Smart Sock requires medical-device certification and registration, while allowing continued marketing through the end of 2022 subject to stated conditions. Other foreign regulatory requirements may also affect sales.
- Liquidity and financing: Although management believes current liquidity covers at least twelve months, the company expects continuing losses and may require additional financing. Future financing may be unavailable or dilutive, particularly following the FDA action.
- Internal controls: Disclosure controls and procedures were ineffective as of September 30, 2021 because material weaknesses continued in the control environment, journal-entry segregation, accounting for preferred stock and warrants, sales returns and sales tax, and IT general controls. Remediation is ongoing and has not been completed.
- Concentration and supply chain: The top five retail customers represented 67.1% of nine-month revenue. The company relies on single or limited-source manufacturers and suppliers, including a single manufacturer for the Smart Sock and another for the Cam.
- Other commitments: The company reported $5.0 million of cloud-services purchase obligations, $1.6 million of component purchase obligations and $4.4 million of future operating lease payments as of September 30, 2021.
Important facts investors should verify
- Progress, timing and outcome of FDA authorization efforts for the Smart Sock and the launch and regulatory status of the Dream Sock.
- Actual effect of the U.S. distribution suspension, retailer actions and app-store restrictions on revenue, returns, inventory and customer acquisition.
- Operating cash burn, remaining cash runway and whether additional equity or debt financing will be required.
- Compliance with SVB covenants, required debt repayments beginning November 2021 and future amendments to the loan agreements.
- Remediation of the disclosed material weaknesses and whether future filings report effective internal controls.
- Customer concentration, manufacturer and component dependencies, inventory exposure and potential warranty, recall or product-liability costs.
- The dilution and potential share-price effects of approximately 18.1 million common stock warrants, outstanding options and 2.8 million contingent earnout shares.