Owlet(US:OWLT)2023-11-13 23:13PART I. FINANCIAL INFORMATION Financial Statements Owlet Inc. reported significant revenue decline and a weakened financial position, raising going concern doubts despite new financing Condensed Consolidated Balance Sheets Total assets decreased to $42.3 million, and stockholders' deficit worsened to $32.0 million due to operating losses Balance Sheet Comparison (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $15,165 | $11,231 | | Inventory | $11,038 | $18,515 | | Total current assets | $37,526 | $51,262 | | Total assets | $42,286 | $58,104 | | Total current liabilities | $41,102 | $66,602 | | Total liabilities | $67,326 | $68,739 | | Total stockholders' deficit | ($31,952) | ($10,635) | - In February 2023, the company issued 30,000 shares of Series A convertible preferred stock, which are recorded on the balance sheet with a liquidation preference of $30.0 million2184 Condensed Consolidated Statements of Operations and Comprehensive Loss Q3 2023 revenue declined to $9.2 million, but cost reductions significantly narrowed operating and net losses Statement of Operations Highlights (in thousands) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $9,182 | $17,359 | $33,006 | $57,246 | | Gross Profit | $3,329 | $4,613 | $12,715 | $19,992 | | Operating Loss | ($7,880) | ($21,821) | ($25,550) | ($63,880) | | Net Loss | ($5,641) | ($19,362) | ($25,975) | ($59,838) | | Net Loss Per Share | ($0.84) | ($2.42) | ($3.56) | ($7.55) | Condensed Consolidated Statements of Cash Flows Net cash used in operations significantly reduced to $22.0 million, offset by $25.9 million from financing activities Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($21,951) | ($71,555) | | Net cash used in investing activities | ($30) | ($1,403) | | Net cash provided by financing activities | $25,915 | $1,078 | | Net change in cash | $3,934 | ($71,880) | | Cash at end of period | $15,165 | $23,174 | Notes to Condensed Consolidated Financial Statements Notes highlight going concern doubt due to losses, mitigated by $30 million financing and a debt waiver, plus a reverse stock split - The company has concluded that recurring operating losses, negative cash flows, and a low cash balance raise substantial doubt about its ability to continue as a going concern within one year4041 - On July 7, 2023, the company effected a 1-for-14 reverse stock split of its common stock, with all share and per-share amounts retroactively adjusted3738 - In February 2023, the company raised gross proceeds of $30 million by selling Series A convertible preferred stock and warrants, with warrants classified as a liability valued at $26.1 million at issuance8488 - As of September 30, 2023, the company was in violation of its minimum adjusted EBITDA covenant with SVB, but a waiver and amendment to the loan agreement was executed on November 13, 202363 - The company is defending against Two class action complaints alleging violations of the Securities Exchange Act concerning disclosures about the FDA's classification of the Owlet Smart Sock7476 Management's Discussion and Analysis of Financial Condition and Results of Operations Q3 2023 revenue declined due to Amazon transition, but expense cuts narrowed losses; going concern doubt persists despite financing Results of Operations Q3 2023 revenue decreased by $8.2 million due to Amazon transition, but expense cuts reduced the operating loss Revenue Change (in millions) | Period | 2023 | 2022 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Q3 | $9.2 | $17.4 | ($8.2) | (47.1%) | | 9 Months | $33.0 | $57.2 | ($24.2) | (42.3%) | - The Q3 revenue decrease was primarily caused by the transition to a direct first-party seller relationship with Amazon, resulting in no revenue recognized from that channel during the quarter, with shipments under the new arrangement beginning in October 2023122 Gross Margin Change | Period | 2023 | 2022 | | :--- | :--- | :--- | | Q3 | 36.3% | 26.6% | | 9 Months | 38.5% | 34.9% | Operating Expense Reductions (Q3 2023 vs Q3 2022, in millions) | Expense Category | 2023 | 2022 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | General and administrative | $5.4 | $9.7 | ($4.2) | (43.7%) | | Sales and marketing | $3.3 | $9.7 | ($6.4) | (65.6%) | | Research and development | $2.4 | $7.1 | ($4.6) | (65.7%) | Liquidity and Capital Resources Substantial doubt exists about the company's going concern ability, with $15.2 million cash and $30 million financing - Management has evaluated conditions and events, including recurring operating losses and negative cash flows, and concluded they raise substantial doubt about the company's ability to continue as a going concern148149150 - In February 2023, the company raised $30.0 million in gross proceeds from a private placement of Series A convertible preferred stock and warrants140 - The company violated its minimum adjusted EBITDA requirement under its LSA with SVB for the three months ended September 30, 2023, but SVB waived this violation and amended future covenant requirements on November 13, 2023158 - The SVB credit facility includes a $10.0 million revolving line of credit, of which $5.1 million was available as of September 30, 2023, and an $8.5 million term loan with a $6.5 million balance, maturing in October 2024159161 Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Owlet is exempt from providing quantitative and qualitative disclosures about market risk - As a smaller reporting company, Owlet is not required to provide quantitative and qualitative disclosures about market risk171 Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in internal control over financial reporting - Based on an evaluation as of September 30, 2023, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were not effective175 - The company identified several material weaknesses, including insufficient personnel with adequate accounting and internal controls experience, lack of segregation of duties for journal entries, ineffective controls over accounting for inventory, accrued liabilities, convertible preferred stock, and warrants, and ineffective IT general controls related to program changes, user access, and computer operations178179 - A remediation plan has been initiated, which includes hiring additional accounting personnel and implementing new policies and controls, but the material weaknesses will not be considered remediated until the plan is fully implemented and tested for effectiveness over time181182 PART II. OTHER INFORMATION Legal Proceedings The company is defending against Two class action lawsuits alleging misleading statements about FDA Smart Sock classification - Two class action complaints, Butala v. Owlet, Inc. and Cherian v. Owlet, Inc., were filed in November 2021, alleging violations of the Securities Exchange Act of 1934188 - The complaints allege false and/or misleading statements regarding the FDA's likely classification of the Owlet Smart Sock as a medical device requiring marketing authorization, and the company plans to file motions to dismiss the cases188 Risk Factors This section incorporates by reference risk factors from the company's prior Form 10-K and Form 10-Q filings - The company directs investors to carefully consider the risk factors disclosed in its Form 10-K and prior Form 10-Q filings189 Other Information On November 13, 2023, the company amended its SVB loan, waiving a Q3 2023 EBITDA covenant violation - On November 13, 2023, the company amended its loan agreement with SVB to waive a violation of its minimum adjusted EBITDA requirement for Q3 2023194 - The amendment also revised the adjusted EBITDA requirements for future periods, starting with the quarter ending December 31, 2023194