Owlet, Inc. — Q1 2024 Form 10-Q Summary
Business Context and Reporting Period
Owlet is a digital parenting and baby-monitoring company whose products combine connected hardware, mobile applications, and related services. This unaudited Form 10-Q covers the three months ended March 31, 2024, compared with the same period in 2023. The company operates as a single reportable segment and generated most revenue from product sales.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $14.8 million | $10.7 million | Up 37.4% |
| Gross profit | $6.5 million | $4.2 million | Up 57.6% |
| Gross margin | 44.4% | 38.7% | Up 5.7 percentage points |
| Operating loss | $5.7 million | $11.0 million | Improved by $5.2 million |
| Net income (loss) | $3.3 million | $(11.9) million | Improved by $15.1 million |
| Net income (loss) attributable to common stockholders | $1.3 million | $(12.5) million | Improved by $13.8 million |
| Basic earnings (loss) per share | $0.15 | $(1.54) | Improved |
| Net cash used in operating activities | $(3.3) million | $(9.4) million | Improved by $6.0 million |
| Cash and cash equivalents at period end | $18.4 million | $24.8 million | Prior-year comparison |
Revenue growth was primarily attributed to increased consumer demand and sell-through of Owlet Sock products. U.S. revenue was $12.9 million and international revenue was $1.8 million. Cost of revenues increased 24.6%, below the rate of revenue growth, due to higher sales and lower direct product and fulfillment costs.
Operating expenses declined to $12.3 million from $15.1 million. General and administrative expense decreased 31.8% to $6.1 million, primarily due to lower outside consulting and corporate insurance costs. Research and development expense decreased 18.8% to $2.3 million due primarily to lower headcount. Sales and marketing expense increased 16.2% to $3.9 million due to higher compensation, headcount, and commissions.
The reported net income was significantly affected by a $9.2 million non-cash gain from the decrease in fair value of common stock warrant liabilities, compared with a $1.9 million gain in Q1 2023. The diluted loss per share of $0.51 reflects the treatment of convertible preferred stock and other participating or dilutive securities under the two-class method and is not directly comparable to basic earnings per share.
Liquidity, Cash Flow, Debt, and Capitalization
- Cash and cash equivalents were $18.4 million at March 31, 2024, including $17.9 million in money market funds.
- Operating cash burn was $3.3 million in Q1 2024. Financing activities provided $5.2 million, including net proceeds from the February 2024 preferred-stock financing.
- The company had $7.2 million outstanding under a $10.0 million asset-based revolving facility; borrowing-base availability was $7.3 million. The revolver matures December 31, 2024.
- Term debt outstanding was $3.5 million and matures October 1, 2024, with $0.5 million monthly principal installments. Financed insurance premiums had a remaining balance of $0.5 million.
- Total reported current borrowings, including the revolver, term debt, and financed insurance premiums, were approximately $11.7 million at March 31, 2024.
- Stockholders’ deficit was $32.9 million. The company had $25.5 million of common-stock warrant liabilities and $11.1 million of convertible preferred stock carrying value.
- On February 29, 2024, Owlet raised $9.25 million through Series B convertible preferred stock and warrants. The transaction included warrants to purchase approximately 1.8 million common shares.
Material Changes Versus the Prior Comparable Period
- Revenue increased 37.4%, while gross margin expanded from 38.7% to 44.4%.
- Operating loss narrowed by approximately 47%, reflecting stronger gross profit and lower general and administrative and research and development expenses.
- Operating cash outflow improved by approximately $6.0 million.
- Interest expense decreased from $2.8 million to $0.2 million, partly because a prior-period charge related to interest on past-due vendor payables did not recur.
- The company issued Series B preferred stock and warrants, increasing financing proceeds but also adding senior or pari passu securities and potential dilution.
- Accounts receivable declined to $11.6 million from $14.0 million at December 31, 2023, while inventory increased to $7.7 million from $6.5 million.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide numerical revenue, profitability, or cash-flow guidance. Management states that recurring operating losses, negative operating cash flow since inception, accumulated deficit of $252.4 million, and cash relative to current obligations raise substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements. Management expects it may need additional financing, cost reductions, or changes to planned development activities.
On March 8, 2024, the company amended its SVB financing arrangements to extend the revolver maturity to December 31, 2024, waive certain defaults, expand eligible collateral, and modify financial covenants. As of March 31, 2024, the company was in violation of an adjusted EBITDA covenant for the quarter ended December 31, 2023; SVB waived that violation on May 10, 2024.
Material risks include dependence on a limited number of retailers and single-source manufacturers, regulatory and FDA authorization requirements, product liability, cybersecurity and information-technology risks, international operations, customer and brand acceptance, potential future capital requirements, and substantial potential dilution from preferred stock and warrants. The company had approximately 11.0 million common shares issuable under outstanding warrants at March 31, 2024, in addition to potential shares from preferred-stock conversion and equity awards.
Two putative securities class actions relating to disclosures concerning the FDA’s likely classification of the Smart Sock remain pending. Owlet filed motions to dismiss in February 2024; plaintiffs filed oppositions in March 2024. Management intends to defend the claims and states that ordinary-course legal proceedings are not expected to have a material impact, although litigation outcomes remain uncertain.
Disclosure controls and procedures were ineffective as of March 31, 2024 because of material weaknesses in internal control over financial reporting. The weaknesses involve the control environment, journal-entry segregation of duties, inventory and accrued liabilities, preferred-stock and warrant accounting, sales returns and accrued sales tax, and IT general controls. Management has begun remediation, but the weaknesses will not be considered remediated until controls operate effectively for a sufficient period and testing is completed.
Important Facts for Investors to Verify
- Whether revenue growth and the 44.4% gross margin are sustained after the reported Q1 increase in Owlet Sock demand.
- How quickly the company can reduce its $3.3 million quarterly operating cash burn and whether additional financing will be required.
- The company’s ability to refinance or repay the revolver, term loan, and other obligations maturing in 2024.
- Whether the going-concern uncertainty is resolved and whether further equity or convertible financing causes material dilution.
- The status and valuation sensitivity of the $25.5 million warrant liability, which produced a substantial non-cash gain in Q1.
- Progress in remediating the disclosed material weaknesses in internal control over financial reporting.
- Developments in the pending securities litigation and any regulatory or FDA-related requirements affecting product sales.