Owlet, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Owlet, Inc. develops connected parenting products, including the Owlet Smart Sock, Dream product line, Cam, mobile applications, and related content. This report covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
- Revenue: $21.5 million, down 1.7% from $21.9 million. U.S. revenue declined to $18.7 million from $20.5 million, while international revenue increased to $2.8 million from $1.4 million.
- Gross profit and margin: Gross profit was $8.8 million versus $12.7 million. Gross margin declined to 40.7% from 57.9%, reflecting cost inflation, higher return provisions, and rework of returned inventory.
- Operating expenses: General and administrative expense increased 71.8% to $10.3 million; sales and marketing increased 90.1% to $11.6 million; and research and development increased 149.0% to $8.5 million.
- Operating loss: $21.7 million versus $2.8 million.
- Net loss: $28.8 million, or $0.26 per diluted share, versus $7.9 million, or $0.35 per diluted share. The prior-year share count was substantially lower following the 2021 merger.
- Cash flow: Cash used in operating activities was $27.4 million versus $7.0 million. Cash used in investing activities was $0.7 million, and financing activities provided $1.8 million. Cash declined $26.3 million during the quarter to $68.7 million.
- Liquidity: Current assets were $116.7 million and current liabilities were $71.6 million. Management stated that available cash and expected customer receipts should satisfy working capital and capital requirements for at least the next twelve months, although the company expects continuing losses and substantial investment.
- Debt: Total debt was $13.6 million, including $12.5 million under the SVB term note and $1.1 million of financed insurance premiums. The SVB revolver had $4.6 million outstanding and borrowing capacity of $17.5 million. The company was in compliance with applicable debt covenants.
- Other liabilities: Common-stock warrant liability increased to $13.9 million from $7.1 million, producing a $6.9 million mark-to-market expense in the quarter.
- Accumulated deficit and equity: Accumulated deficit was $172.2 million and stockholders’ equity declined to $29.8 million from $55.2 million at December 31, 2021.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable, but higher estimated product returns, including returns associated with the FDA Warning Letter and the Dream product launch, reduced reported revenue.
- Cost of revenues increased 38.5%, causing gross profit to fall 31.0% and gross margin to decline 17.2 percentage points.
- Operating expenses increased substantially because of higher headcount, share-based compensation, digital advertising, retail marketing, consulting, and public-company costs.
- Operating cash burn increased by $20.4 million year over year, driven by the larger net loss and working-capital usage, including higher receivables and inventory.
- The company adopted the new lease standard on January 1, 2022, recording right-of-use assets and lease liabilities. The adoption did not have a material net cash-flow impact.
- The January 31, 2022 debt amendment changed interest rates, reduced certain borrowing-base advance rates, replaced the EBITDA covenant with a net-revenue covenant, and increased the minimum cash and availability threshold from $5.0 million to $30.0 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- FDA regulatory matter: Following the October 2021 FDA Warning Letter, the company suspended U.S. distribution of the Owlet Smart Sock and is seeking marketing authorization. The company’s ability to resume distribution or launch the Owlet Dream Sock depends on regulatory developments.
- Returns and refund liability: The company accrued $18.2 million for customer refunds as of March 31, 2022. It recorded $6.2 million of returned inventory and a $2.0 million asset for inventory expected to be returned. Management expects settlement of these returns to negatively affect 2022 operating cash flow.
- Outlook: No specific quantitative revenue or earnings guidance is provided. Management expects continued investment in product development, research and development, sales and marketing, production capabilities, and public-company infrastructure, and expects additional operating losses.
- Financing risk: The company has recurring losses, negative operating cash flow, and an accumulated deficit. Management believes current liquidity is adequate for at least twelve months, but additional financing may be required if revenue growth or cash generation is insufficient.
- Litigation: Two putative securities class actions allege misleading disclosures concerning the FDA’s likely classification of the Smart Sock. The cases were pending motions to consolidate and appoint a lead plaintiff; the company stated that a reasonable loss estimate could not be made.
- Internal controls: Management concluded that disclosure controls were not effective as of March 31, 2022 because previously identified material weaknesses in internal control over financial reporting remained. Remediation includes additional personnel, policies, procedures, and IT and accounting controls.
- Supply chain and geopolitical risks: The company relies on single manufacturers for key products and has no manufacturing capability of its own. COVID-19-related inflation and logistics risks continued, and the company was monitoring the Russia-Ukraine conflict for potential supply-chain and market effects.
Investor Verification Checklist
- Verify the FDA’s regulatory classification and authorization status for the Smart Sock and Dream Sock, including the timing and conditions for any U.S. relaunch.
- Assess the ultimate cash cost and timing of the $18.2 million FDA-related refund liability and the recoverability of returned inventory.
- Review cash burn, inventory and receivables trends, and whether $68.7 million of cash remains sufficient given projected losses and investment needs.
- Monitor compliance with the amended SVB net-revenue covenant, minimum cash and availability requirements, and the April 2024 debt maturities.
- Track remediation of the material weaknesses and assess whether future filings conclude that internal controls are effective.
- Follow the securities class actions and any resulting settlement, litigation expense, or disclosure obligations.
- Reconcile the reported common-warrant mark-to-market expense with subsequent warrant fair-value changes and potential dilution from approximately 18.1 million common-stock warrants and other equity awards.