UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________________________________________________________________
FORM 10-Q
____________________________________________________________________________
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2024
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from ____ to ____
Commission File Number: 001-39516
_____________________________________________
OWLET, INC.
(Exact Name of Registrant as Specified in its Charter)
_____________________________________________
| Delaware | 85-1615012 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
3300 North Ashton Boulevard, Suite 300 Lehi, Utah | 84043 | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
Registrant’s telephone number, including area code: (844) 334-5330
_____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Class A Common Stock, $0.0001 par value per share | OWLT | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o | ||||||||
| Non-accelerated filer | x | Smaller reporting company | x | ||||||||
| Emerging growth company | x | ||||||||||
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 11, 2024, the registrant had 16,036,085 shares of common stock, $0.0001 par value per share, outstanding.
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Table of Contents
| Page | ||||||||
| PART I. | ||||||||
| PART II. | ||||||||
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains certain statements that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). All statements other than statements of historical facts contained in this Report, including statements concerning possible or assumed future actions, business strategies, events or results of operations, and any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Report and are subject to a number of risks, uncertainties and assumptions described under the sections in this Report, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “Form 10-K”) entitled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 (the "Q2 Form 10-Q") and elsewhere in this Report, our Form 10-K, and our Q2 Form 10-Q. These forward-looking statements are subject to numerous risks, including, without limitation, the following:
•We have a limited operating history.
•We have not been profitable to date, and operating losses could continue, which could materially and adversely affect our business, financial condition and results of operations, including our ability to continue as a going concern.
•We have experienced fluctuations in the growth of our business and anticipate this will continue. If we fail to manage our growth effectively, our business could be materially and adversely affected.
•If any governmental authority or notified body were to require marketing authorization or similar certification for any product that we sell for which we have not obtained such marketing authorization or certification, we could be subject to regulatory enforcement action and/or required to cease selling or recall the product pending receipt of marketing authorization or similar certification from such other governmental authority or notified body, which can be a lengthy and time-consuming process, harm financial results and have long-term negative effects on our operations.
•Our products rely on mobile applications to function and we rely on Apple’s App Store and the Google Play Store for distribution of our mobile applications.
•A substantial portion of our sales comes through a limited number of retailers.
•We are required to obtain and maintain marketing authorizations or certifications from the FDA, foreign regulatory authorities or notified bodies for medical device products in the U.S. or in foreign jurisdictions, which can be a lengthy and time-consuming process, and a failure to do so on a timely basis, or at all, could severely harm our business.
•We currently rely on a single manufacturer for the assembly of our Smart Sock and Dream Sock products and a single manufacturer for the assembly of our Owlet Cam. We will likely rely on single manufacturers for future products we may develop. If we encounter manufacturing problems or delays, we may be unable to promptly transition to alternative manufacturers and our ability to generate revenue will be limited.
•If we are unable to obtain key materials and components from sole or limited source suppliers, we will not be able to deliver our products to customers.
•Our success depends in part on our proprietary technology, and if we are unable to obtain, maintain or successfully enforce our intellectual property rights, the commercial value of our products and services will be adversely affected, our competitive position may be harmed and we may be unable to operate our business profitably.
•Our business and operations may suffer in the event of IT system failures, cyberattacks or deficiencies in our cybersecurity.
•We are involved, and may become involved in the future, in disputes and other legal or regulatory proceedings that, if adversely decided or settled, could materially and adversely affect our business, financial condition and results of operations.
•We face the risk of product liability claims and the amount of insurance coverage held now or in the future may not be adequate to cover all liabilities we might incur.
•Operations in international markets will expose us to additional business, political, regulatory, operational, financial and economic risks.
•Our success depends substantially on our reputation and brand.
•Some of our products and services are in development or have been recently introduced into the market and may not achieve market acceptance, which could limit our growth and adversely affect our business, financial condition and results of operations.
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•We have identified material weaknesses in our internal control over financial reporting and we may identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, which may result in material misstatements of our consolidated financial statements, cause us to fail to meet our periodic reporting obligations or cause our access to the capital markets to be impaired.
•Our failure to maintain the NYSE’s continued listing requirements could result in a delisting of our common stock.
•We may need to raise additional capital in the future in order to execute our strategic plan, which may not be available on terms acceptable to us, or at all.
These risks and other important factors, including those discussed in this Report, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Moreover, we operate in an evolving environment. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included elsewhere in this Report are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements included elsewhere in this Report. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements included elsewhere in this Report, they may not be predictive of results or developments in future periods.
Any forward-looking statement that we make in this Report speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Report. For all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act.
As used in this Report, unless otherwise stated or the context otherwise requires: “we,” “us,” “our,” “Owlet,” the “Company,” and similar references refer to Owlet, Inc. and its subsidiaries, “common stock” refers to our Class A common stock.
Basis of Presentation for Reverse Stock Split
On July 7, 2023, we effected a 1-for-14 reverse stock split (the “Reverse Stock Split”) of our issued and outstanding common stock, by the filing of our Second Amended and Restated Certificate of Incorporation (the “Charter Amendment”) with the Secretary of State of the State of Delaware pursuant to the Delaware General Corporation Law. The Reverse Stock Split became effective at 5:00 p.m. Eastern Time on July 7, 2023. Our common stock began trading on the New York Stock Exchange on a split-adjusted basis on July 10, 2023. Where applicable, all information presented in this Report has been retrospectively adjusted to give effect to our 1-for-14 reverse split of our outstanding common stock and, unless otherwise indicated, all such amounts and corresponding conversion price and/or exercise price data set forth in this Report has been adjusted to give effect to such reverse stock split.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Owlet, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
| September 30, 2024 | December 31, 2023 | |||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 21,502 | $ | 16,557 | ||||||||||
Restricted cash | 300 | — | ||||||||||||
Accounts receivable, net of allowance for credit losses of $592 and $3,322, respectively | 17,153 | 13,973 | ||||||||||||
| Inventory | 10,597 | 6,493 | ||||||||||||
| Prepaid expenses and other current assets | 2,729 | 2,921 | ||||||||||||
| Total current assets | 52,281 | 39,944 | ||||||||||||
| Property and equipment, net | 152 | 377 | ||||||||||||
| Right of use assets, net | 67 | 937 | ||||||||||||
| Intangible assets, net | 870 | 2,210 | ||||||||||||
| Other assets | 2,760 | 655 | ||||||||||||
| Total assets | $ | 56,130 | $ | 44,123 | ||||||||||
Liabilities, Mezzanine Equity, and Stockholders’ Deficit | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 11,518 | $ | 13,679 | ||||||||||
| Accrued and other expenses | 12,430 | 15,051 | ||||||||||||
| Current portion of deferred revenues | 1,401 | 1,166 | ||||||||||||
| Line of credit | 9,875 | 9,250 | ||||||||||||
| Current portion of long-term and other debt | 466 | 5,944 | ||||||||||||
| Total current liabilities | 35,690 | 45,090 | ||||||||||||
| Long-term debt, net | 4,585 | — | ||||||||||||
| Common stock warrant liabilities | 25,102 | 27,781 | ||||||||||||
| Other long-term liabilities | 143 | 928 | ||||||||||||
| Total liabilities | 65,520 | 73,799 | ||||||||||||
Commitments and contingencies (Note 5) | ||||||||||||||
Mezzanine equity: | ||||||||||||||
Series A convertible preferred stock, $0.0001 par value, 11,479 and 28,628 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively | 4,652 | 7,855 | ||||||||||||
Series B convertible preferred stock, $0.0001 par value; 9,250 and 0 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively | 3,104 | — | ||||||||||||
Redeemable common stock, 750,000 and 0 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively | 4,313 | — | ||||||||||||
Total mezzanine equity | 12,069 | 7,855 | ||||||||||||
| Stockholders’ deficit: | ||||||||||||||
Common stock, $0.0001 par value, 107,142,857 shares authorized as of September 30, 2024 and December 31, 2023; 15,393,881 and 8,797,456 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively | 2 | 1 | ||||||||||||
| Additional paid-in capital | 237,682 | 218,127 | ||||||||||||
| Accumulated deficit | (259,143) | (255,659) | ||||||||||||
| Total stockholders’ deficit | (21,459) | (37,531) | ||||||||||||
Total liabilities, mezzanine equity, and stockholders’ deficit | $ | 56,130 | $ | 44,123 | ||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Owlet, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues | $ | 22,122 | $ | 9,182 | $ | 57,571 | $ | 33,006 | |||||||||||||||
| Cost of revenues | 10,576 | 5,853 | 29,226 | 20,291 | |||||||||||||||||||
| Gross profit | 11,546 | 3,329 | 28,345 | 12,715 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| General and administrative | 9,787 | 5,448 | 22,127 | 20,438 | |||||||||||||||||||
| Sales and marketing | 4,022 | 3,335 | 11,770 | 9,766 | |||||||||||||||||||
| Research and development | 2,559 | 2,426 | 7,260 | 8,061 | |||||||||||||||||||
| Total operating expenses | 16,368 | 11,209 | 41,157 | 38,265 | |||||||||||||||||||
| Operating loss | (4,822) | (7,880) | (12,812) | (25,550) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense, net (Notes 4 and 5) | (112) | (134) | (253) | (2,998) | |||||||||||||||||||
| Common stock warrant liability adjustment | (673) | 2,395 | 9,534 | 2,679 | |||||||||||||||||||
| Other income (expense), net | (4) | (22) | 69 | (101) | |||||||||||||||||||
| Total other income (expense), net | (789) | 2,239 | 9,350 | (420) | |||||||||||||||||||
| Loss before income tax provision | (5,611) | (5,641) | (3,462) | (25,970) | |||||||||||||||||||
| Income tax provision | — | — | (22) | (5) | |||||||||||||||||||
| Net loss and comprehensive loss | (5,611) | (5,641) | (3,484) | (25,975) | |||||||||||||||||||
| Accretion on convertible preferred stock | (1,215) | (1,319) | (4,078) | (3,298) | |||||||||||||||||||
| Accretion on redeemable common stock | (5) | — | (5) | — | |||||||||||||||||||
| Allocation of net loss attributable to redeemable common stockholders | 75 | — | 32 | — | |||||||||||||||||||
| Net loss attributable to redeemable common stockholders | (70) | — | (27) | — | |||||||||||||||||||
| Net loss attributable to common stockholders | $ | (6,756) | $ | (6,960) | $ | (7,535) | $ | (29,273) | |||||||||||||||
| Net loss per share attributable to common stockholders, basic and diluted | $ | (0.61) | $ | (0.84) | $ | (0.79) | $ | (3.56) | |||||||||||||||
| Weighted-average number of shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted | 11,042,602 | 8,310,965 | 9,555,467 | 8,212,268 | |||||||||||||||||||
| Net loss per share attributable to redeemable common stockholders, basic and diluted | $ | (0.57) | $ | — | $ | (0.66) | $ | — | |||||||||||||||
| Weighted-average number of shares outstanding used to compute net loss per share attributable to redeemable common stockholders, basic and diluted | 122,283 | — | 41,058 | — | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Owlet, Inc.
Condensed Consolidated Statements of Changes in Mezzanine Equity and Stockholders’ Deficit
(in thousands, except share and per share amounts)
(unaudited)
| Series A Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Deficit | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2022 | — | $ | — | 8,242,009 | $ | 1 | $ | 212,122 | $ | (222,758) | $ | (10,635) | |||||||||||||||||||||||||||||
| Issuance of preferred stock | 30,000 | 3,867 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Preferred stock issuance costs | — | (253) | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Accretion on convertible preferred stock | — | 653 | — | — | (653) | — | (653) | ||||||||||||||||||||||||||||||||||
Issuance of SVB Warrants | — | — | — | — | 43 | — | 43 | ||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | — | — | 18,054 | — | 55 | — | 55 | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for restricted stock units vesting | — | — | 115,257 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for employee stock purchase plan | — | — | 15,104 | — | 101 | — | 101 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 2,789 | — | 2,789 | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (11,867) | (11,867) | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | 30,000 | $ | 4,267 | 8,390,424 | $ | 1 | $ | 214,457 | $ | (234,625) | $ | (20,167) | |||||||||||||||||||||||||||||
| Accretion on convertible preferred stock | — | 1,326 | — | — | (1,326) | — | (1,326) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for restricted stock units vesting | — | — | 51,259 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 2,644 | — | 2,644 | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (8,467) | (8,467) | ||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | 30,000 | $ | 5,593 | 8,441,683 | $ | 1 | $ | 215,775 | $ | (243,092) | $ | (27,316) | |||||||||||||||||||||||||||||
Accretion on convertible preferred stock | — | 1,319 | — | — | (1,319) | — | (1,319) | ||||||||||||||||||||||||||||||||||
Issuance of common stock for restricted stock units vesting | — | — | 93,525 | — | — | — | — | ||||||||||||||||||||||||||||||||||
Issuance of common stock for employee stock purchase plan | — | — | 28,093 | — | 114 | — | 114 | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,210 | — | 2,210 | ||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | (5,641) | (5,641) | ||||||||||||||||||||||||||||||||||
Balance as of September 30, 2023 | 30,000 | $ | 6,912 | 8,563,301 | $ | 1 | $ | 216,780 | $ | (248,733) | $ | (31,952) | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Owlet, Inc.
Condensed Consolidated Statements of Changes in Mezzanine Equity and Stockholders’ Deficit (continued)
(in thousands, except shares)
(unaudited)
| Series A Convertible Preferred Stock | Series B Convertible Preferred Stock | Redeemable Common Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Deficit | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2023 | 28,628 | $ | 7,855 | — | $ | — | — | $ | — | 8,797,456 | $ | 1 | $ | 218,127 | $ | (255,659) | $ | (37,531) | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock | — | — | 9,250 | 2,394 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issuance costs | — | — | — | (102) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accretion on convertible preferred stock | — | 1,212 | — | 116 | — | — | — | — | (1,328) | — | (1,328) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock | (1,178) | (332) | — | — | — | — | 171,719 | — | 332 | — | 332 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for restricted stock units vesting | — | — | — | — | — | — | 22,437 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for employee stock purchase plan | — | — | — | — | — | — | 22,791 | — | 92 | — | 92 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | 2,227 | — | 2,227 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | — | 3,274 | 3,274 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2024 | 27,450 | $ | 8,735 | 9,250 | $ | 2,408 | — | $ | — | 9,014,403 | $ | 1 | $ | 219,450 | $ | (252,385) | $ | (32,934) | |||||||||||||||||||||||||||||||||||||||||||||||
| Accretion on convertible preferred stock | — | 1,187 | — | 348 | — | — | — | — | (1,535) | — | (1,535) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock | (250) | (83) | — | — | — | — | 36,443 | — | 83 | — | 83 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for restricted stock units vesting | — | — | — | — | — | — | 48,693 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | 2,104 | — | 2,104 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | (1,147) | (1,147) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2024 | 27,200 | $ | 9,839 | 9,250 | $ | 2,756 | — | $ | — | 9,099,539 | $ | 1 | $ | 220,102 | $ | (253,532) | $ | (33,429) | |||||||||||||||||||||||||||||||||||||||||||||||
| Accretion on convertible preferred stock | — | 867 | — | 348 | — | — | — | — | (1,215) | — | (1,215) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accretion on redeemable common stock | — | — | — | — | — | 5 | — | — | (5) | — | (5) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of preferred stock (Note 7) | (15,721) | (6,054) | — | — | — | — | 2,291,686 | — | 6,054 | — | 6,054 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock related to offering (Note 7) | — | — | — | — | — | — | 3,135,136 | 1 | 11,600 | — | 11,601 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issuance costs | — | — | — | — | — | — | — | — | (2,141) | — | (2,141) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of warrants to underwriter (Note 7) | — | — | — | — | — | — | — | — | 382 | — | 382 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RSU to RSA conversion (Note 6) | — | — | — | — | — | — | 387,309 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for restricted stock units vesting | — | — | — | — | — | — | 439,659 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of redeemable common stock (Note 7) | — | — | — | — | 750,000 | 4,308 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for employee stock purchase plan | — | — | — | — | — | — | 36,534 | — | 129 | — | 129 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of options | — | — | — | — | — | — | 4,018 | — | 17 | — | 17 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | 2,759 | — | 2,759 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | (5,611) | (5,611) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2024 | 11,479 | $ | 4,652 | 9,250 | $ | 3,104 | 750,000 | $ | 4,313 | 15,393,881 | $ | 2 | $ | 237,682 | $ | (259,143) | $ | (21,459) | |||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Owlet, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities | |||||||||||
Net loss | $ | (3,484) | $ | (25,975) | |||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 330 | 706 | |||||||||
| Stock-based compensation | 7,046 | 7,643 | |||||||||
| Provision for credit losses | (347) | (165) | |||||||||
| Common stock warrant liability adjustment | (9,534) | (2,679) | |||||||||
Impairment of intangible and other assets | 1,892 | — | |||||||||
| Amortization of right of use assets | 870 | 1,016 | |||||||||
| Other adjustments, net | (490) | 74 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | (2,715) | 6,705 | |||||||||
| Prepaid expenses and other assets | 323 | 4,093 | |||||||||
| Inventory | (4,243) | 7,573 | |||||||||
| Accounts payable and accrued and other expenses | (3,011) | (19,997) | |||||||||
| Lease liabilities | (1,130) | (1,797) | |||||||||
| Other, net | (37) | 852 | |||||||||
| Net cash used in operating activities | (14,530) | (21,951) | |||||||||
| Cash flows from investing activities | |||||||||||
| Purchase of property and equipment | (2) | (11) | |||||||||
| Purchase of intangible assets | (228) | (19) | |||||||||
Capitalized internal-use software development costs | (492) | — | |||||||||
| Net cash used in investing activities | (722) | (30) | |||||||||
| Cash flows from financing activities | |||||||||||
Proceeds from issuance of preferred stock and warrants, net of $394 and $1,513 of paid transaction costs, respectively | 8,856 | 28,487 | |||||||||
Proceeds from issuance of common stock, net of $1,041 of paid transaction costs | 10,559 | — | |||||||||
| Proceeds from short-term borrowings | 65,225 | 73,290 | |||||||||
| Payments of short-term borrowings | (65,078) | (74,631) | |||||||||
Proceeds from long-term borrowings and issuance of redeemable common stock (Note 4) | 7,500 | 500 | |||||||||
| Payments of long-term borrowings | (5,000) | (2,000) | |||||||||
Payments related to debt extinguishment costs | (761) | — | |||||||||
Employee taxes paid related to the net share settlement of stock-based awards | (723) | (358) | |||||||||
Proceeds related to the issuance of common stock under stock plans | 372 | 358 | |||||||||
| Other, net | (373) | 269 | |||||||||
| Net cash provided by financing activities | 20,577 | 25,915 | |||||||||
| Net change in cash, cash equivalents, and restricted cash | 5,325 | 3,934 | |||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 16,557 | 11,231 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 21,882 | $ | 15,165 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Owlet, Inc.
Condensed Consolidated Statements of Cash Flows (continued)
(in thousands)
(unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
Supplemental disclosure of non-cash investing and financing activities: | |||||||||||
| Conversion of preferred stock | $ | 6,469 | $ | — | |||||||
| Accretion on preferred stock and redeemable common stock | 4,083 | 3,298 | |||||||||
| Issuance of common stock warrants to underwriter | 382 | — | |||||||||
| Equity issuance costs included in accounts payable and accrued liabilities | 718 | — | |||||||||
| Debt issuance costs included in accounts payable and accrued liabilities | 209 | — | |||||||||
| Reclassification from long-term to current debt | — | 500 | |||||||||
| Purchases of property and equipment included in accounts payable and accrued liabilities | 33 | 22 | |||||||||
| Stock-based compensation for software development | 45 | — | |||||||||
| Right of use assets obtained | — | 46 | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
Owlet, Inc.
Notes to Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
(unaudited)
9
Note 1. Basis of Presentation
As used in these financial statements, unless otherwise stated or the context otherwise requires: “we,” “us,” “our,” “Owlet,” the “Company,” and similar references refer to Owlet, Inc. and its subsidiaries, “common stock” refers to our Class A common stock.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. The condensed consolidated balance sheet as of December 31, 2023, included herein, was derived from the audited consolidated financial statements as of that date, but does not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis. All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary for the fair statement of the Company’s financial position, results of operations, and cash flows for the interim periods presented. All dollar amounts, except per share amounts, in the notes are presented in thousands, unless otherwise specified.
Certain prior year amounts have been reclassified to conform to the current period presentation.
Reverse Stock Split
On July 7, 2023, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to its Second Amended and Restated Certificate of Incorporation (the “Charter Amendment”) to effect a one-for-14 reverse stock split (the “Reverse Stock Split”) of the Company’s common stock and a reduction in the number of authorized shares of common stock and authorized but unissued shares of the Company’s preferred stock. The number of authorized shares of common stock was reduced from 1,000,000,000 shares to 107,142,857 shares, which reflects a reduction to 1.5 times the then current number of authorized shares of common stock, divided by the Reverse Stock Split ratio. The Reverse Stock Split also reduced the number of authorized shares of preferred stock from 100,000,000 shares to 10,741,071 shares, which reflects a reduction to 1.5 times the then current number of authorized but unissued shares of preferred stock, divided by the Reverse Stock Split ratio. The Reverse Stock Split became effective on July 7, 2023.
There was no net effect on total stockholders' equity, and the par value per share of the Company's common stock remains unchanged at $0.0001 per share after the Reverse Stock Split. All references made to share or per share amounts in the accompanying condensed consolidated financial statements and applicable disclosures have been retroactively adjusted for all periods presented to reflect the applicable effects of the Reverse Stock Split and the reduction in the number of authorized shares of common stock and preferred stock effected by the Charter Amendment.
Risks and Uncertainties
In accordance with ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued.
Since inception, the Company has experienced recurring operating losses and generated negative cash flows from operations, resulting in an accumulated deficit of $259,143 as of September 30, 2024. During the nine months ended September 30, 2024 and 2023, the Company had negative cash flows from operations of $14,530 and $21,951, respectively. As of September 30, 2024, the Company had $21,502 of cash on hand.
As the Company continues to address these financial conditions, management has undertaken the following actions:
•As described further in Note 7, Common Stock Issuance, Redeemable Common Stock, Common Stock Warrants, and Convertible Preferred Stock, in September 2024, the Company issued 3,135,136 shares of its common stock and received net proceeds of $9,843 and in February 2024, the Company consummated a sale of preferred stock and warrants to purchase its common stock for aggregate net proceeds of $8,856.
•As described in Note 4, Debt and Other Financing Arrangements, in September 2024, the Company entered into a loan facility agreement with WTI Fund X, Inc. and WTI Fund XI, Inc. (collectively “WTI” or “Lenders”) for a term loan facility of up to $15,000 (the “WTI Loan Facility”) and on September 11, 2024, the Company entered into an asset-based revolving credit facility (the “ABL Line of Credit”) with ABL OPCO LLC, as the lender, with a maximum revolving commitment amount of up to $15,000, with an additional $5,000 revolving commitment available on September 11, 2025. In connection with these transactions, the Company used its then-existing cash to repay and extinguish all borrowings outstanding under the line of credit and term loan agreement with Silicon Valley Bank, now a division of First Citizens Bank and Trust Company
10
(“SVB”). As of September 30, 2024, the Company has borrowings of $7,500 under the WTI Loan Facility and $9,875 under the ABL Line of Credit.
Notwithstanding the above actions, the Company has experienced recurring operating losses, negative cash flows from operations since inception, and a low cash balance relative to current obligations raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the accompanying condensed consolidated financial statements are issued. The accompanying condensed consolidated financial statements have been prepared on a going concern basis and accordingly, do not include any adjustments relating to the recoverability and classification of asset carrying amounts, or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
The Company has not generated sufficient cash flows from operations to satisfy its capital requirements. There can be no assurance that the Company will generate sufficient future cash flows from operations due to potential factors, including but not limited to inflation, recession, or reduced demand for the Company’s products. If revenues decrease from current levels, the Company may be unable to further reduce costs, or such reductions may limit its ability to pursue strategic initiatives and grow revenues in the future.
There can be no assurance that the Company will be able to obtain additional financing on terms acceptable to it, if at all. Failure to secure additional funding may require the Company to modify, delay or abandon some of its planned future development, or to otherwise enact further operating cost reductions, which could have a material adverse effect on its business, operating results, financial condition and ability to achieve its intended business objectives.
If the Company raises additional funds through further issuances of equity or convertible debt securities, its existing stockholders could suffer significant dilution, and any new equity securities the Company issues could have rights, preferences, and privileges superior to those of holders of its common stock. If the Company is unable to obtain adequate financing or financing on terms satisfactory to the Company when it requires it, its ability to continue to pursue its business objectives and to respond to business opportunities, challenges, or unforeseen circumstances could be significantly limited, and its business, financial condition, and results of operations could be materially adversely affected. The Company also could be required to seek funds through arrangements with partners or others that may require the Company to relinquish rights or jointly own some aspects of its technologies, products, or services that the Company would otherwise pursue on its own.
The Company maintains its cash in bank deposit accounts which, at times, exceed federally insured limits. As of September 30, 2024, substantially all of the Company’s cash was held with Silicon Valley Bank and Citibank, and exceeded federally insured limits.
Although the Company’s sales and accounts receivable are derived from sales contracts with a large number of customers, its top several customers account for a significant amount of its total sales, and make up a correspondingly large portion of its accounts receivable. During the three months ended September 30, 2024 and 2023, the Company's three largest customers by total net revenue accounted for 65% and 52% of total net revenue, respectively. During the nine months ended September 30, 2024 and 2023, the Company's three largest customers by total net revenue accounted for 60% and 57% of total net revenue, respectively. As of September 30, 2024, the Company's three largest customers by total net accounts receivable accounted for 74% of total net accounts receivable. As of December 31, 2023, the Company's three largest customers by total net accounts receivable accounted for 81% of total net accounts receivable.
Recently Issued Accounting Guidance
In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. The amendments are effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024 and will be applied retrospectively to all prior periods presented. Early adoption is permitted. The Company does not anticipate the adoption to result in material changes in the results of operations, but is currently assessing the additional disclosures that will be included in its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires, among other things, additional disclosures primarily related to the income tax rate reconciliation and income taxes paid. The expanded annual disclosures are effective for our year ending December 31, 2025. The Company is currently evaluating the impact that ASU 2023-09 will have on its consolidated financial statements and whether the Company will apply the standard prospectively or retrospectively.
In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses. The standard is intended to require more detailed disclosures about specified categories of expenses (including employee compensation, depreciation, and amortization) included in certain expense captions presented on the face of the income statement. This ASU is effective for fiscal years beginning after December 15, 2026, and for interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The amendments may be applied either prospectively to financial statements issued for reporting periods after the effective date of this ASU or retrospectively to all prior periods presented in the financial statements. The Company is currently assessing the impact this standard will have on its consolidated financial statements.
11
Note 2. Certain Balance Sheet Accounts
Restricted Cash
The Company’s restricted cash consists of cash collateral that is held by the Company’s financial institutions to secure its financing arrangements. Specifically, restricted cash that is classified within current assets in the condensed consolidated balance sheet consists of cash collateral to secure its current credit card borrowings. Restricted cash included in Other assets in the condensed consolidated balance sheets consists of cash collateral to secure the Company's long-term term-loan facility. Cash as reported on the condensed consolidated statements of cash flows includes the aggregate amounts of cash, cash equivalents, and restricted cash as shown on the condensed consolidated balance sheets and consists of the following (in thousands):
| September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Reconciliation of cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheet: | |||||||||||
| Cash and cash equivalents | $ | 21,502 | $ | 15,165 | |||||||
| Restricted cash | 300 | — | |||||||||
| Restricted cash included in Other assets | 80 | — | |||||||||
| Total cash, cash equivalents, and restricted cash | $ | 21,882 | $ | 15,165 | |||||||
Allowance for Credit and Other Losses
The Company records its accounts receivable at sales value and maintains an allowance for its current estimate of expected credit losses from customers. Provisions for expected credit losses are estimated based on historical experience, assessment of specific risk, review of outstanding invoices, and forecasts about the future. The Company establishes specific reserves for customers in an adverse financial condition and adjusts for its expectations of changes in conditions that may impact the collectability of outstanding receivables.
Changes in the Company's allowance for credit and other losses were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Beginning balance | $ | 542 | $ | 2,898 | $ | 3,322 | $ | 3,013 | |||||||||||||||
| Charges to expense | 37 | (221) | (347) | (165) | |||||||||||||||||||
| Charges to revenue | 37 | (98) | 131 | (50) | |||||||||||||||||||
| Write-offs | (24) | (464) | (2,514) | (683) | |||||||||||||||||||
| Ending balance | $ | 592 | $ | 2,115 | $ | 592 | $ | 2,115 | |||||||||||||||
Write-offs for the nine months ended September 30, 2024 related to a settlement agreement with a former retailer for past due receivables which had previously been charged to the provision for credit losses in a prior period. A benefit was recognized to charges to expense during the nine months ended September 30, 2024, which represented a partial recovery of the past due receivables in connection with the settlement.
Inventory
Details of inventory were as follows (in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||
| Raw materials | $ | 199 | $ | 688 | |||||||
| Finished goods | 10,398 | 5,805 | |||||||||
| Total Inventory | $ | 10,597 | $ | 6,493 | |||||||
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Property and Equipment, net
Property and equipment consisted of the following (in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||
| Tooling and manufacturing equipment | $ | 2,618 | $ | 2,632 | |||||||
| Computer equipment | 322 | 348 | |||||||||
| Furniture and fixtures | 289 | 639 | |||||||||
| Software | 106 | 106 | |||||||||
| Leasehold improvements | 35 | 35 | |||||||||
| Total property and equipment | 3,370 | 3,760 | |||||||||
Less: accumulated depreciation and amortization | (3,218) | (3,383) | |||||||||
| Property and equipment, net | $ | 152 | $ | 377 | |||||||
Depreciation and amortization expense on property and equipment was $72 and $146 for the three months ended September 30, 2024 and September 30, 2023, respectively. For the three months ended September 30, 2024 and September 30, 2023, the Company allocated $67 and $58, respectively, of depreciation and amortization expense related to tooling and manufacturing equipment within cost of revenues on the condensed consolidated statements of operations. The remaining depreciation and amortization expense related to property and equipment was recorded within general and administrative expenses.
Depreciation and amortization expense on property and equipment was $256 and $645 for the nine months ended September 30, 2024 and September 30, 2023, respectively. For the nine months ended September 30, 2024 and September 30, 2023, the Company allocated $235 and $388, respectively, of depreciation and amortization expense related to tooling and manufacturing equipment within cost of revenues on the condensed consolidated statements of operations. The remaining depreciation and amortization expense related to property and equipment was recorded within general and administrative expenses.
Intangible Assets Subject to Amortization
Intangible assets were $870, net of accumulated amortization of $355 as of September 30, 2024, and $2,210, net of accumulated amortization of $280, as of December 31, 2023. Intangible assets as of September 30, 2024 consist of trademarks, patents, and internally developed software.
The Company capitalizes certain costs incurred in developing internal-use software when capitalization requirements have been met. Capitalization of such costs begins when the preliminary project stage is completed and it is probable that the project will be completed and the software will be used to perform the function intended. Any subsequent addition, modification, or upgrade to internal-use software is capitalized to the extent that it enhances the software’s functionality or extends its useful life. Costs related to design or maintenance are expensed as incurred. Capitalized costs are included in intangible assets, net, and amortized on a straight-line basis over the estimated useful life of three years.
The Company recorded $30 of amortization expense related to internal-use software in both the three and nine months ended September 30, 2024, which was recorded within cost of revenues on the condensed consolidated statements of operations. No amortization expense related to internal-use software was recorded in the three and nine months ended September 30, 2023.
In 2021, the Company began work on a software development project and during 2021 and 2022 total costs of $1,873 were capitalized within intangible assets on the balance sheet. Due to financial constraints the Company was experiencing in 2022, work on the project was paused and each subsequent period the Company reconsidered the probability that the project would be resumed when the Company’s financial condition allowed and whether any technological developments had changed the prospects for the project's eventual success and recovery of the carrying amount of the asset. Because the software was still in development and not ready for general release the Company did not recognize any amortization for the three or nine months ended September 30, 2024 or 2023 and did not recognize any impairment charges related to intangible assets during the three and nine months ended September 30, 2023. However, in September of 2024, the Company made the decision to extend the pause of this particular software development project indefinitely, indicating that the carrying amount of the asset was unlikely to be recoverable. The Company recognized $1,873 of impairment charges during the three and nine months ended September 30, 2024, to fully impair that particular internally developed software project, which was recorded within general and administrative expenses on the condensed consolidated statements of operations.
13
Accrued and Other Expenses
Accrued and other expenses consisted of the following (in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||
| Accrued payroll | $ | 2,419 | $ | 1,056 | |||||||
| Accrued sales discounts | 2,581 | 2,528 | |||||||||
| Accrued sales returns | 875 | 2,919 | |||||||||
| Other | 6,555 | 8,548 | |||||||||
| Total accrued and other expenses | $ | 12,430 | $ | 15,051 | |||||||
Changes in accrued warranty were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Accrued warranty, beginning of period | $ | 843 | $ | 591 | $ | 782 | $ | 712 | |||||||||||||||
| Settlements of warranty claims during the period | (189) | (135) | (660) | (372) | |||||||||||||||||||
| Provision for warranties issued during the period | 455 | 186 | 865 | 481 | |||||||||||||||||||
| Changes in provision for pre-existing warranties | (179) | (139) | (57) | (318) | |||||||||||||||||||
| Accrued warranty, end of period | $ | 930 | $ | 503 | $ | 930 | $ | 503 | |||||||||||||||
14
Note 3. Deferred Revenues
Deferred revenues relate to performance obligations for which payments are received from customers prior to the satisfaction of the Company’s obligations to its customers. Deferred revenues primarily consist of amounts allocated to the mobile application, unspecified upgrade rights, added features, bug fixes, and content, and are recognized over the service period of the performance obligations, which range from 10 to 27 months.
Changes in the total deferred revenues balance were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Beginning balance | $ | 1,390 | $ | 1,223 | $ | 1,302 | $ | 1,386 | |||||||||||||||
| Deferral of revenues | 846 | 326 | 2,082 | 1,146 | |||||||||||||||||||
| Recognition of deferred revenues | (692) | (533) | (1,840) | (1,516) | |||||||||||||||||||
| Ending balance | $ | 1,544 | $ | 1,016 | $ | 1,544 | $ | 1,016 | |||||||||||||||
The Company recognized $533 and $493 of revenue during the three months ended September 30, 2024 and 2023, respectively, that was included in the deferred revenue balance at the beginning of the respective period.
The Company recognized $1,540 and $1,061 of revenue during the nine months ended September 30, 2024 and 2023, respectively, that was included in the deferred revenue balance at the beginning of the respective period. Revenue for the nine months ended September 30, 2024 includes $330 relating to the correction of immaterial misstatements from previous periods.
15
Note 4. Debt and Other Financing Arrangements
The Company’s indebtedness consisted of the following (in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||
| Term note payable to SVB | $ | — | $ | 5,000 | |||||||
| Term loan facility payable to WTI, net | 4,585 | — | |||||||||
| Line of credit | 9,875 | 9,250 | |||||||||
| Financed insurance premium | 466 | 944 | |||||||||
| Total debt | 14,926 | 15,194 | |||||||||
| Less: current portion | (10,341) | (15,194) | |||||||||
| Total long-term debt, net | $ | 4,585 | $ | — | |||||||
SVB Revolver and Term Loan
On November 23, 2022, the Company entered into the Third Amended and Restated Loan and Security Agreement (as amended, the “LSA”) with SVB. The LSA provided for a $10,000 revolving line of credit (the “SVB Revolver”) and for a $8,500 term loan, which amortized with equal monthly installments of $500 that would have matured on October 1, 2024.
On September 11, 2024, the Company signed the refinancing of the LSA with SVB and used existing cash to repay and extinguish all borrowings outstanding under the line of credit and term loan agreements with SVB. In addition to normal principal and interest, the Company paid $761 of termination fees to extinguish the loan. Of the total termination fees recorded, during the three months ended September 30, 2024, $343 was recorded as interest expense, net on the condensed consolidated statements of operations; and $11 was recorded within general and administrative expense on the condensed consolidated statements of operations. The remaining $407 was accrued as interest expense, net, in prior periods.
WTI Loan Facility
On September 11, 2024 (the “Effective Date”), the Company entered into a Loan Facility Agreement (the “Loan Facility Agreement”) with WTI Fund X, Inc. and WTI Fund XI, Inc. (collectively “WTI” for a term loan facility of up to $15,000 (the “WTI Loan Facility”).
The WTI Loan Facility consists of two tranches. The first tranche of $10,000 was available at closing and through September 30, 2024, with $2,500 of the first tranche availability extendable until December 31, 2024 (the “First Tranche Commitment”). The second tranche of $5,000 is available through August 15, 2025 (the ‘Second Tranche Commitment,” or together with the First Tranche Commitment, the “Loan Commitments”) upon achievement of (a) at least $48,600 in revenue for the period commencing October 1, 2024 and ending June 30, 2025 (the “Second Tranche Condition Period”), (b) total cash burn during the Second Tranche Condition Period not to exceed $600 for such period, (c) receipt by the Company of at least $6,000 of net proceeds from an equity financing during a period commencing on the closing date and ending on the second tranche borrowing date, and (d) receipt by WTI of the Company’s then-current, board-approved operating and financing plan to WTI's satisfaction, as well as compliance with certain reporting conditions.
The Company initiated its first drawdown under the WTI Loan Facility of $7,500 (the “Initial Loan”) shortly after closing. The remaining $2,500 of the First Tranche Commitment is available until December 31, 2024. Once repaid, the Company cannot reborrow from the WTI Loan Facility.
Interest on the outstanding principal amounts of any borrowing under the WTI Loan Facility accrues at a rate per annum equal to the sum of the prime rate plus 3.5%, with a floor of 12.0%. The interest rate on the outstanding principal amounts of any borrowing under the WTI Loan Facility for the three months ended September 30, 2024 was 12.0%. Commencing on November 1, 2025 through maturity on January 1, 2028, the Company is required to make monthly interest and principal payments. Loans under the WTI Loan Facility also accrue 2.5% in payment-in-kind interest (“PIK Interest”) compounded monthly, and PIK Interest payments will be due and payable upon maturity of the loans. Accrued coupon interest and accrued PIK interest are recorded within accrued and other expenses and within long-term debt, net respectively on the condensed consolidated balance sheet. Accrued PIK interest was immaterial for the three months ended September 30, 2024.
The Company has the option to prepay the outstanding loans issued under the WTI Loan Facility in whole at any time by repaying all outstanding principal and accrued interest, as well as all scheduled unpaid interest on the loan, including PIK Interest, as if the loan continued to accrue interest through its stated maturity. Provided if the Company’s fully diluted market capitalization of the Company’s Class A common stock (“common stock”) is greater than or equal to $250,000 for 10 consecutive Trading Days, then so
16
long as such prepayment is made within 60 days thereafter, the redemption price will be discounted by 30% of the total amount of all scheduled but unpaid interest (but excluding any PIK Interest, which will not be discounted).
The WTI Loan Facility contains certain reporting and operational covenants that must be met by the Company to borrow funds under the Loan Commitments and not cause an event of default. Upon the occurrence of an event of default, WTI could elect to force redemption of the outstanding balances under the WTI Loan Facility, requiring the Company to pay all outstanding principal and accrued interest, as well as all scheduled unpaid interest on the loan, including PIK interest. Upon the occurrence of an event of default, the Company will also be required to pay default interest on any overdue balances at a rate of 5.0%. The WTI Loan Facility and any loans and obligations issued thereunder are collateralized by substantially all of the Company’s assets and are guaranteed by Owlet, Inc. As of September 30, 2024, the Company was in compliance with all financial covenants associated with the WTI Loan Facility.
As partial consideration for the availability and funding of the WTI Loan Facility, the Company and WTI Fund X, LLC (“Fund X”) and WTI Fund XI, LLC (“Fund XI”, and together with Fund X, the “WTI Funds”) entered into a Stock Issuance Agreement (the “WTI Stock Issuance Agreement”), dated as of the Effective Date. Pursuant to the WTI Stock Issuance Agreement, the Company issued to the WTI Funds an aggregate of 750,000 shares of redeemable common stock on the Effective Date, of which 187,500 are subject to forfeiture in the event that the Company does not draw on any portion of the remaining outstanding Loan Commitment. To the extent the Company does exercise its option under the Loan Commitments to issue additional debt, a number of forfeitable shares will 'vest' and no longer be subject to forfeiture based on the pro rata portion of the outstanding Loan Commitments drawn against.
The shares issued to WTI pursuant to the WTI Stock Issuance Agreement contain an embedded redemption option (the “Redemption Option”) such that WTI may elect to force the Company to redeem the shares that are no longer subject to forfeiture for a price of $8.40 per share. The Redemption Option may be exercised in whole or in part, at any time, from time to time, during the period commencing on the first trading day following the fifth anniversary of the Effective Date and continuing through the date which is 10 years after the Effective Date, subject to certain acceleration provisions set forth in the WTI Stock Issuance Agreement. Because the shares are redeemable at the option of the WTI Funds, the shares are recorded in mezzanine equity on the condensed consolidated balance sheet. The redeemable common shares were initially recorded at their fair value of $7.66 per share, which was an aggregate value of $4,308. The value of the redeemable common shares was determined using a combination of the value of the Company's stock on the date of issuance and the theoretic value of a stand-alone put option valued using a Black-Scholes put option model discounted by a present value factor that considers the credit spread between an estimated Company specific discount rate and the risk-free rate of return. Because the shares are required to be redeemed at the option of WTI, based solely on the passage of time, and provided WTI did not elect to otherwise sell or transfer the shares beforehand, the carrying value of the shares will accrete to their redemption value of $8.40 per share from the issuance date through September 11, 2029, the date the Redemption Option first becomes exercisable.
The Company allocated the lender fees (including the fair value of the vested shares) and third-party debt issuance costs between the Initial Loan and the remaining, undrawn Loan Commitments. The costs allocated to the Initial Loan are accounted for as a discount and will be amortized across the term of the Initial Loan using the effective interest method. The costs allocated to the remaining, undrawn Loan Commitments are accounted for as loan commitment assets, which are being amortized to interest expense using the straight-line method over the commitment periods, due to uncertainty about the Company's intent to access the Loan Commitment. The unamortized portion of the loan commitment assets of $1,385 as of September 30, 2024 are recorded within Other assets on the condensed consolidated balance sheet.
As of September 30, 2024, details of the WTI Loan Facility were as follows (in thousands):
| Amount | ||||||||
Principal outstanding | 7,500 | |||||||
Unamortized debt issuance costs | (2,915) | |||||||
Net carrying value | $ | 4,585 | ||||||
The Company recognized $43 of interest expense related to the amortization of debt issuance costs of the WTI Loan Facility and $136 of interest expense related to the amortization of the loan commitment assets during the three and nine months ended September 30, 2024.
ABL Line of Credit
On September 11, 2024 (the “Effective Date”), the Company entered into a Credit and Security Agreement (the “Credit Agreement”) with the financial institutions party thereto from time to time as lenders (collectively the “Lenders”) and ABL OPCO LLC, a Delaware limited liability company, in its capacity as administrative agent for the Lenders.
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The Credit Agreement provides for an asset-based revolving credit facility (the “ABL Line of Credit”) in a maximum principal amount of up to $15,000, which amount shall increase to $20,000 on September 11, 2025 (the “Revolving Commitment”). The ABL Line of Credit is collateralized by substantially all of the Company's assets. Loans and other obligations under the Credit Agreement bear interest at a rate per annum equal to the 1-month Secured Overnight Financing Rate (subject to a floor of 3.50%) plus a margin, which varies between 7.50% and 8.50% depending on the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”); provided that the interest rate shall not exceed the maximum rate permitted under applicable law.
The ABL Line of Credit matures on September 10, 2027 (the “Maturity Date”). If for any reason the Credit Agreement is terminated or all outstanding loans and other obligations are paid in full and the ABL Line of Credit is terminated before the Maturity Date, the Company will be obligated to pay a prepayment fee equal to a percentage of the then-current Revolving Commitment, which percentage decreases on certain anniversary of the closing date.
The Credit Agreement contains representations, warranties, covenants, and events of default customary for agreements of this type. The Company’s obligations under the Credit Agreement are: (i) fully and unconditionally guaranteed by Owlet, Inc.; and (ii) secured by a security interest in substantially all personal property assets of the Company, including the Owlet Inc.'s pledge of the outstanding capital stock of the Company. Among these financial covenants is a covenant requiring minimum amounts of trailing-twelve-months EBITDA. As of September 30, 2024, the Company was in compliance with all financial covenants associated with the Credit Agreement.
Debt issuance costs related to the Credit Agreement of $648 were recorded as a loan commitment asset within other assets on the condensed consolidated balance sheet. Issuance costs are amortized straight-line over the term of the Credit Agreement and recorded within interest income (expense), net on the condensed consolidated statement of operations.
On September 30, 2024, there was $9,875 of outstanding borrowings, which is recorded as a current liability on the condensed consolidated balance sheet based on the Company's intent and ability to repay the outstanding borrowings in the near term. The borrowing base availability under the Credit Agreement was $673 as of September 30, 2024. The outstanding borrowings as of September 30, 2024 were repaid to the lender in October 2024.
Financed Insurance Premiums
In July 2024, the Company renewed its corporate directors & officers and employment liability policies and entered into several new short-term commercial premium finance agreements with First Insurance Funding totaling $594 to be paid within one year, accruing interest at a weighted average rate of 8.6%. As of September 30, 2024, the remaining principal balance on the combined financed insurance premiums was $466.
Future Aggregate Maturities
As of September 30, 2024, future aggregate maturities of the WTI Loan Facility and Financed Insurance Premium payables were as follows (in thousands):
| Years Ending December 31, | Amount | |||||||
| 2024 | 197 | |||||||
| 2025 | 1,102 | |||||||
| Thereafter | 6,667 | |||||||
| Total | $ | 7,966 | ||||||
Note 5. Commitments and Contingencies
Purchase and Other Obligations
In February 2023, the Company entered into an agreement with a significant vendor to pay $3,000 of interest over 36 months with respect to past due payables. The present value of the future payments was expensed and included within interest expense, net. In January 2024, the agreement was amended and the schedule of interest payments was modified from 36 months to 28 months, but the amount of interest payable was unchanged. In September 2024, the agreement was amended again, allowing the Company to terminate the agreement with a final interest payment of $623, which was then fully settled in September 2024. The reduction in the total cumulative payments to $2,206 resulted in the Company recording a reduction of interest expense at termination of $508.
Litigation
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The Company is involved in legal proceedings from time to time arising in the normal course of business. While any outcome related to such legal proceedings cannot be predicted with certainty, the Company believes that the outcome of these proceedings will not have a material impact on the Company’s financial position, results of operations, or liquidity.
In November 2021, two putative class action complaints were filed against us in the U.S. District Court for the Central District of California, the first captioned Butala v. Owlet, Inc., Case No. 2:21-cv-09016, and the second captioned Cherian v. Owlet, Inc., Case No. 2:21-cv-09293. Both complaints alleged violations of the Securities Exchange Act of 1934 (“Exchange Act”) against the Company and certain of its officers and directors on behalf of a putative class of investors who: (a) purchased the Company’s common stock between March 31, 2021 and October 4, 2021 (“Section 10(b) Claims”); or (b) held common stock in Sandbridge Acquisition Corporation (“SBG”) as of June 1, 2021, and were eligible to vote at SBG's special meeting held on July 14, 2021 (“Section 14(a) Claims”). Both complaints allege, among other things, that the Company and certain of its officers and directors made false and/or misleading statements and failed to disclose certain information regarding the FDA’s likely classification of the Owlet Smart Sock as a medical device requiring marketing authorization.
On September 8, 2023, the Court ruled that while the Butala and Cherian cases were consolidated, there would be two distinct and separate classes to represent the Section 10(b) Claims and Section 14(a) Claims, respectively, and appointed lead plaintiffs and lead counsel for each class. Amended complaints were filed for each class on November 21, 2023, and then further amended in consolidated filings on December 22, 2023. The Company intends to vigorously defend itself against these claims and filed motions to dismiss the complaints on February 9, 2024 on behalf of itself and the named officers and directors. The plaintiffs filed oppositions to the motions to dismiss on March 24, 2024, and the Company filed replies in support of the motions to dismiss on May 10, 2024. On August 5, 2024, the Court denied Owlet’s and its officers’ motions to dismiss the Section 10(b) Claims and the Section 14(a) Claims. On September 24, 2024, the Court entered a scheduling order in the case, setting trial to begin on February 17, 2026. On September 26, 2024, the Court granted Owlet’s and its officers’ motion for reconsideration regarding the Section 10(b) Claims and dismissed all claims arising out of statements made prior to the merger.
Further, on August 26, 2024 and October 3, 2024, investors filed in the U.S. District Court for the Central District of California, derivatively on behalf of the Company, complaints asserting claims for violations of Section 14(a) of the Exchange Act, as well as state law claims, including breach of fiduciary duty, unjust enrichment and waste of corporate assets. One complaint (captioned Janet Vargas, Derivatively on Behalf of Nominal Defendant Owlet, Inc., Case No. 2:24-cv-07258-FLA-PVC) asserts claims against twelve of the Company’s current or former directors and officers and six current or former directors and officers of Sandbridge Acquisition Corporation. The other (captioned Nathan Capleton, Derivatively on Behalf of Nominal Defendant Owlet, Inc., Case No. 2:24-cv-08536-JAK-MAA) asserts claims against eleven of the Company’s current or former directors. Both complaints leverage the allegations made in one of the securities class action complaints. Neither complaint specifies the damages claimed in the action.
Indemnification
In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless, and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company currently has directors’ and officers’ insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is immaterial.
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Note 6. Stock-based Compensation
The Company has various stock compensation plans, which are more fully described in Part II, Item 8 “Financial Statements and Supplementary Data - Note 8 to the Consolidated Financial Statements - Share-based Compensation” in the 2023 Annual Report on Form 10-K.
Under the 2021 Incentive Award Plan, the Company has the ability to grant options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance stock units (“PSUs”), dividend equivalents, or other stock or cash-based awards to employees, directors, or consultants. Option awards are generally granted with an exercise price equal to the fair value of the Company’s common stock at the date of grant. Options, RSU, and PSU awards generally vest over a period of four years. RSAs generally vest over less than one year.
Stock-based Compensation Expense
Total stock-based compensation was recognized as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| General and administrative | $ | 1,859 | $ | 1,196 | $ | 4,376 | $ | 4,093 | |||||||||||||||
| Sales and marketing | 365 | 394 | 1,076 | 1,362 | |||||||||||||||||||
| Research and development | 490 | 620 | 1,594 | 2,188 | |||||||||||||||||||
| Total stock-based compensation | $ | 2,714 | $ | 2,210 | $ | 7,046 | $ | 7,643 | |||||||||||||||
During the three and nine months ended September 30, 2024, the Company capitalized $45 and $45, respectively, of stock-based compensation attributable to internally developed software. There was no stock-based compensation capitalized during the three or nine months ended September 30, 2023.
During the three months ended September 30, 2024, the Company modified certain RSU awards for 11 employees and exchanged the RSUs previously granted for RSAs that vest within six months of the date of modification. The RSAs are valued at the market value on the date of grant. As a result of the modification, the Company recognized $62 of incremental stock-based compensation expense during the three months ended September 30, 2024. As of September 30, 2024, the Company had $343 of incremental unrecognized stock-based compensation costs related to unvested RSAs that will be recognized over a weighted-average period of 0.4 years.
As of September 30, 2024, the Company had $109 of unrecognized stock-based compensation costs related to non-vested options that will be recognized over a weighted-average period of 0.2 years; $8,092 of unrecognized stock-based compensation costs related to unvested RSUs that will be recognized over a weighted-average period of 1.6 years; and $169 of unrecognized stock-based compensation costs related to unvested PSUs that will be recognized over a weighted-average period of 1.3 years.
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Note 7. Common Stock Issuance, Redeemable Common Stock, Common Stock Warrants, and Convertible Preferred Stock
September 2024 Offering
On September 11, 2024, the Company entered into an underwriting agreement and issued 3,135,136 shares of its common stock at a price to the public of $3.70 per share, less underwriting discounts and commissions. The net proceeds received by the Company at the closing of the offering on September 13, 2024 were $10,559. The shares were issued pursuant to the Company’s registration statement on Form S-3 (File No. 333-281556), filed by the Company with the SEC on August 14, 2024, which was declared effective on August 23, 2024. The Company provided the underwriter a discount of 7% off the offering price.
In addition to the underwriter discount, the offering expenses with third parties were $748, of which $718 in issuance costs that were unpaid as of September 30, 2024. The Company also reimbursed the underwriters for $198 in fees and expenses, including legal expenses, out-of-pocket expenses, and clearing expenses. The issuance costs associated with the September 2024 Offering were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheet.
Pursuant to the underwriting agreement, the Company also issued, as a portion of the underwriting compensation payable to the underwriter, a warrant to purchase up to 125,405 shares of common stock (which was subsequently transferred to certain affiliates of the underwriter, the “Titan Warrants”). The Titan Warrants are accounted as a nonemployee stock-based award as it represents compensation for underwriter services. The compensation cost associated with the Titan Warrants was $382, and was recorded as a direct and incremental issuance cost of the associated common stock offering that was earned upon the closing and issuance of the common stock. The Titan Warrants are classified as equity and included within additional paid-in capital on the condensed consolidated balance sheet.
The Titan Warrants are initially exercisable on March 13, 2025 at an exercise price of $4.63 and have a term of five years from such initial exercise date. None of the Titan Warrants have been exercised as of September 30, 2024.
Redeemable Common Stock
As discussed in Note 4, in September 2024 as partial consideration for the availability and funding of the WTI Loan Facility, the Company issued to the WTI Funds an aggregate of 750,000 shares of common stock. The Company also granted the WTI Funds the Put Option discussed in Note 4. The vested shares are recorded in mezzanine equity on the condensed consolidated balance sheet and are being accreted to the redemption value at the date the redemption feature first becomes exercisable.
August 2024 Exchange
On August 20, 2024, holders of the Series A convertible preferred stock (“Series A Preferred Stock”) of the Company elected to convert an aggregate of 15,721 shares of Series A Preferred Stock in exchange for an aggregate of 2,291,686 shares of the Company’s Class A common stock, all as in accordance with the terms of the Certificate of Designation relating to the Series A Preferred Stock. As of September 30, 2024, the redemption value for Series A convertible preferred stock is $11,479.
The converting holders of Series A Preferred Stock communicated to the Company that the election to convert a portion of shares of Series A Preferred Stock was due to the continued positive progress of the Company’s business and operating results, an initial step in simplifying the Company’s capital structure, and part of a coordinated effort by the Company to help ensure it regained compliance with the global market capitalization requirement under the NYSE Listed Company Manual.
February 2024 Offering
On February 25, 2024, the Company entered into a private placement investment agreement with certain investors, pursuant to which the Company issued and sold to the investors (i) an aggregate of 9,250 shares of the Company’s Series B convertible preferred stock, par value $0.0001 per share and (ii) warrants to purchase an aggregate of 1,799,021 shares of the Company's common stock, par value $0.0001 per share (the “Series B Warrants”), for an aggregate gross purchase price of $9,250.
The Series B convertible preferred stock is convertible into common stock at the option of the holder at any time after February 29, 2024 and ranks, with respect to dividend rights, rights of redemption and rights upon a liquidation event, (i) equal to the Company’s Series A convertible preferred stock, (ii) senior to the common stock and all other classes or series of equity securities of the Company established after February 29, 2024, unless such shares or equity securities expressly provide that they rank in parity with or senior to the Series B convertible preferred stock with respect to dividend rights, rights of redemption or rights upon a liquidation event, (iii) on parity with each class or series of equity securities of the Company established after the February 29, 2024, the terms of which expressly provide that it ranks on parity with the Series B convertible preferred stock with respect to dividend rights, rights of redemption and rights upon a liquidation event and (iv) junior to each class or series of equity securities of the Company established after February 29, 2024, the terms of which expressly provide that it ranks senior to the Series B convertible preferred stock with respect to dividend rights, rights of redemption and rights upon a liquidation event. Except as otherwise provided in the certificate of designation relating to the Series B convertible preferred stock or as required by law, holders of shares of Series B convertible preferred stock are entitled to vote with the holders of shares of common stock (and any other class or series that may similarly be
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entitled to vote with the holders of common stock) on an as-converted to common stock basis at any annual or special meeting of stockholders of the Company, and not as a separate class.
At any time from and after March 1, 2029, the holders of at least a majority of the then outstanding shares of Series B convertible preferred stock may specify a date and time or the occurrence of an event by vote or written consent that all, and not less than all, of the outstanding shares of Series B convertible preferred stock will automatically be: (i) converted into shares of common stock at a conversion rate of 129.6596 per share, (ii) subject to certain exceptions and limitations, redeemed for an amount per share of Series B preferred stock equal to the liquidation preference of one thousand dollars per share, plus all accrued or declared but unpaid dividends as of the redemption date and time or (iii) a combination of the foregoing.
Subject to certain exceptions, upon the occurrence of a fundamental change, voluntary or involuntary liquidation, dissolution or winding-up of the Company, the Company will be required to pay an amount per share of Series B convertible preferred stock equal to the greater of (i) one thousand dollars per share or (ii) the consideration per share of Series B convertible preferred stock as would have been payable had all such shares been converted to common stock immediately prior to the liquidation event, plus, in each case, the aggregate amount of all declared but unpaid dividends thereon to the date of final distribution to the holders of Series B convertible preferred stock. As of September 30, 2024, the redemption value for Series B convertible preferred stock is $9,250.
Each of the Series B Warrants sold in the private placement offering is exercisable for one share of common stock at an exercise price of $7.7125 per share, is immediately exercisable, and will expire on March 1, 2029. As the Series B Warrants could require cash settlement in certain scenarios, the warrants were classified as liabilities upon issuance and were initially recorded at an aggregate estimated fair value of $6,856. The total proceeds from the offering were first allocated to the liability classified warrants, based on their fair values, with the residual $2,394 allocated to the Series B convertible preferred stock. The Series B convertible stock will accrete to its redemption value, starting from the issuance date to the date at which the shares become redeemable on March 1, 2029. Accretion will be recorded as a deemed dividend. None of the Series B Warrants have been exercised as of September 30, 2024.
The Company incurred $394 of issuance costs related to the offering. Issuance costs allocated to the preferred stock of $102 were recorded as a reduction to the Series B convertible preferred stock. Issuance costs allocated to the liability classified warrants of $292 were recorded as an expense within general and administrative expenses on the condensed consolidated statements of operations.
SBG Common Stock Warrants
As a result of the merger completed with SBG on July 15, 2021 (the “Merger”), the Company continues to record liabilities for warrants issued by SBG prior to the Merger.
Pursuant to the SBG initial public offering, SBG sold warrants to purchase an aggregate of 821,428 shares of the Company’s common stock at a price of $161.00 per share (“SBG Public Warrants”). Following the closing of the Initial Public Offering on September 17, 2020, the Company completed the sale of warrants to purchase an aggregate of 471,428 shares of the Company’s common stock at a price of $161.00 per share in a private placement to Sandbridge Acquisition Holdings LLC (the “SBG Private Placement Warrants”). Together, the SBG Public Warrants and SBG Private Placement Warrants are referred to as the “SBG Common Stock Warrants.” The SBG Public Warrants became exercisable 12 months from the closing of the Initial Public Offering. The SBG Common Stock Warrants will expire five years after the completion of the Merger or earlier upon redemption or liquidation.
None of the SBG Common Stock Warrants have been exercised as of September 30, 2024.
See Part II, Item 8 “Financial Statements and Supplementary Data - Note 3 to the Consolidated Financial Statements - Merger” in the 2022 Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”) for more information.
SVB Warrants
In March 2023, in connection with the first amendment to the LSA with SVB, the Company granted SVB a warrant to purchase 10,714 shares of the Company's common stock at a price of $5.32 per share, expiring on March 27, 2035 (the “SVB Warrants”). The SVB Warrants, which were valued at $43, are classified as equity and included within additional paid-in capital on the condensed consolidated balance sheets. None of the SVB Warrants have been exercised as of September 30, 2024.
Common Stock Warrants
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The following table summarizes issuable shares of the Company’s common stock based on warrant activity for the nine months ended September 30, 2024:
| December 31, 2023 | Shares Issuable by New Warrants | Shares Purchased by Exercise | September 30, 2024 | ||||||||||||||||||||
| SBG Public Warrants | 821,428 | — | — | 821,428 | |||||||||||||||||||
| SBG Private Placement Warrants | 471,428 | — | — | 471,428 | |||||||||||||||||||
| Series A Warrants | 7,871,712 | — | — | 7,871,712 | |||||||||||||||||||
| Series B Warrants | — | 1,799,021 | — | 1,799,021 | |||||||||||||||||||
| SVB Warrant | 10,714 | — | — | 10,714 | |||||||||||||||||||
| Titan Warrants | — | 125,405 | — | 125,405 | |||||||||||||||||||
| Total | 9,175,282 | 1,924,426 | — | 11,099,708 | |||||||||||||||||||
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Note 8. Fair Value Measurements
The Company’s assets and liabilities measured and reported in the financial statements at fair value on a recurring basis were as follows (in thousands):
| September 30, 2024 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Balance | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | 3,469 | $ | — | $ | — | $ | 3,469 | |||||||||||||||
| Total assets | $ | 3,469 | $ | — | $ | — | $ | 3,469 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| SBG Public Warrants | $ | — | $ | — | $ | 6 | $ | 6 | |||||||||||||||
| SBG Private Placement Warrants | — | — | 3 | 3 | |||||||||||||||||||
| Series A Warrants | — | — | 20,616 | 20,616 | |||||||||||||||||||
| Series B Warrants | — | — | 4,477 | 4,477 | |||||||||||||||||||
| Total liabilities | $ | — | $ | — | $ | 25,102 | $ | 25,102 | |||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Balance | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | 16,489 | $ | — | $ | — | $ | 16,489 | |||||||||||||||
| Total assets | $ | 16,489 | $ | — | $ | — | $ | 16,489 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| SBG Public Warrants | $ | — | $ | — | $ | 61 | $ | 61 | |||||||||||||||
| SBG Private Placement Warrants | — | — | 35 | 35 | |||||||||||||||||||
| Series A Warrants | $ | — | $ | — | $ | 27,685 | $ | 27,685 | |||||||||||||||
| Total liabilities | $ | — | $ | — | $ | 27,781 | $ | 27,781 | |||||||||||||||
Money market funds are included within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
The SBG Public Warrants and SBG Private Placement Warrants as of September 30, 2024 and December 31, 2023 are presented in Level 3 of the fair value hierarchy. On June 15, 2023, the Company received notice from the New York Stock Exchange (the “NYSE”) that the NYSE had halted trading in the SBG Public Warrants due to the low trading price of those warrants. On June 16, 2023, the NYSE provided written notice to the Company and publicly announced that NYSE Regulation had determined to commence proceedings to delist the SBG Public Warrants and that such warrants were no longer suitable for listing based on “abnormally low” price levels, pursuant to Section 802.01D of the NYSE Listed Company Manual. As such, these instruments are no longer valued using quoted market prices and correspondingly, the SBG Private Placement Warrants can no longer be valued based on a quoted market price of the SBG Public Warrants. The Company measured the fair value of both the SBG Public Warrants and the SBG Private Placement Warrants as of September 30, 2024 and December 31, 2023 using the Black-Scholes option pricing model with the following assumptions:
The Series A Warrants are presented as Level 3 measurements, relying on unobservable inputs reflecting the Company’s own assumptions. Level 3 measurements, which are not based on quoted prices in active markets, introduce a higher degree of subjectivity and may be more sensitive to fluctuations in stock price, volatility rates, and U.S. Treasury Bond rates.
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The Company measured the fair value of the Series A Warrants as of September 30, 2024 and December 31, 2023, using the Black-Scholes option pricing model with the following assumptions:
The Series B Warrants are presented as Level 3 measurements, relying on unobservable inputs reflecting the Company’s own assumptions. The Company measured the fair value of the Series B Warrants at issuance and again as of September 30, 2024, using the Black-Scholes option pricing model with the following assumptions:
The following table presents a reconciliation of the Company’s SBG Public Warrants, SBG Private Placement Warrants, Series A Warrants, and Series B Warrants (together, the “Level 3 Warrants”) measured at fair value on a recurring basis as of September 30, 2024:
| Level 3 Warrants | |||||
| Balance as of December 31, 2023 | $ | 27,781 | |||
| Issuance of Series B Warrants | 6,855 | ||||
| Change in fair value included within common stock warrant liability adjustment | (9,534) | ||||
Balance as of September 30, 2024 | $ | 25,102 | |||
There were no transfers between Level 1 and Level 2 in the periods reported. The SBG Public Warrants and SBG Private Placement Warrants were transferred into Level 3 in 2023, as discussed above.
Equity-Classified Warrants
The fair value of the Titan Warrants on September 11, 2024 was $382. The Company measured the fair value of the Titan Warrants at issuance on September 11, 2024, using the Black-Scholes option pricing model with the following assumptions:
Titan Warrants - Black-Scholes Inputs | September 11, 2024 | ||||
| OWLT stock price | $ | 4.35 | |||
| Exercise price of warrants | $ | 4.63 | |||
| Term in years | 5.50 | ||||
| Risk-free interest rate | 3.47 | % | |||
| Volatility | 85.00 | % | |||
Mezzanine-Classified Redeemable Common Stock
As described in Note 4, the vested shares issued to WTI are contingently redeemable at the option of the holder during the put period and are recorded in mezzanine equity on the condensed consolidated balance sheet. The vested redeemable common shares were recorded at their fair value of $7.66 per share, which was an aggregate value of $4,308. The value of the redeemable common shares was determined using a combination of the value of the Company's stock on the date of issuance and the theoretic value of a stand-
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alone put option valued using a Black-Scholes put option model discounted by a present value factor that considers the credit spread between an estimated Company specific discount rate and the risk-free rate of return. The valuation model used the following assumptions:
| Redeemable Common Stock - Valuation Inputs | September 11, 2024 | ||||
| Common stock value per share | $ | 4.35 | |||
| Put price | $ | 8.40 | |||
| Term in years | 5.00 | ||||
| Risk-free interest rate | 3.42 | % | |||
| Volatility | 85.00 | % | |||
| Credit spread | 9.27 | % | |||
| Present value discount | 63.49 | % | |||
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Note 9. Net Loss Per Share
Basic and diluted net loss per share of common stock and redeemable common stock is presented in conformity with the two-class method required for participating securities. Under the two-class method, net income (loss) is allocated to each class of common stock and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.
The Company considers its convertible preferred stock to be participating securities. Under the two-class method, the net loss attributable to common stockholders is not allocated to the convertible preferred stock as the holders of the Company’s convertible preferred stock do not have a contractual obligation to share in the Company’s losses.
The following tables present the calculation of basic and diluted net loss per share (in thousands, except share and per share amounts):
| Three Months Ended September 30, | |||||||||||||||||
| 2024 | 2024 | 2023 | |||||||||||||||
| Redeemable Common Stock | Common Stock | Common Stock | |||||||||||||||
| Numerator: | |||||||||||||||||
| Allocation of net loss attributable to common stockholders | $ | (75) | $ | (6,751) | $ | (6,960) | |||||||||||
| Add: accretion on redeemable common stock | 5 | (5) | — | ||||||||||||||
| Allocated net loss attributable to common stockholders | $ | (70) | $ | (6,756) | $ | (6,960) | |||||||||||
| Denominator: | |||||||||||||||||
| Weighted-average common shares used in computed net loss per share attributable to common stockholders basic and diluted | 122,283 | 11,042,602 | 8,310,965 | ||||||||||||||
| Net loss per share attributable to common stockholders basic and diluted | $ | (0.57) | $ | (0.61) | $ | (0.84) | |||||||||||
| Nine Months Ended September 30, | |||||||||||||||||
| 2024 | 2024 | 2023 | |||||||||||||||
| Redeemable Common Stock | Common Stock | Common Stock | |||||||||||||||
| Numerator: | |||||||||||||||||
| Allocation of net loss attributable to common stockholders | $ | (32) | $ | (7,530) | $ | (29,273) | |||||||||||
| Add: accretion on redeemable common stock | 5 | (5) | — | ||||||||||||||
| Allocated net loss attributable to common stockholders | $ | (27) | $ | (7,535) | $ | (29,273) | |||||||||||
| Denominator: | |||||||||||||||||
| Weighted-average common shares used in computed net loss per share attributable to common stockholders basic and diluted | 41,058 | 9,555,467 | 8,212,268 | ||||||||||||||
| Net loss per share attributable to common stockholders basic and diluted | $ | (0.66) | $ | (0.79) | $ | (3.56) | |||||||||||
The following table summarizes the common stock equivalents of potentially dilutive outstanding securities excluded from the computation of diluted net loss per share due to their anti-dilutive effect:
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As of September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Stock options | 457,500 | 470,500 | |||||||||
| RSUs | 1,408,197 | 1,396,201 | |||||||||
| RSAs | 387,309 | — | |||||||||
| PSUs | 56,391 | 71,428 | |||||||||
| ESPP shares committed | 28,367 | 27,533 | |||||||||
| Common stock warrants | 11,099,708 | 9,175,282 | |||||||||
| Preferred stock | 2,872,668 | 4,373,178 | |||||||||
| Total | 16,310,140 | 15,514,122 | |||||||||
The Company’s 200,536 unvested earnout shares, described in Part II, Item 8 “Financial Statements and Supplementary Data - Note 9 to the Consolidated Financial Statements - Convertible Preferred Stock, Warrants, and Earnout Shares” in the 2023 Form 10-K, were excluded from the calculation of basic and diluted per share calculations as the vesting conditions have not yet been met as of September 30, 2024.
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Note 10. Segments
The Company operates as a single operating segment. The Company’s chief operating decision maker manages the Company’s operations on a consolidated basis for purposes of allocating resources, making operating decisions, and evaluating financial performance. All significant operating decisions are based upon analysis of the Company as one operating segment, which is the same as its reporting segment.
Revenue by geographic area is based on the delivery address of the customer and is summarized as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| United States | $ | 18,527 | $ | 7,347 | $ | 47,321 | $ | 28,724 | |||||||||||||||
| United Kingdom | 1,368 | 1,075 | 4,333 | 2,210 | |||||||||||||||||||
| Other | 2,227 | 760 | 5,917 | 2,072 | |||||||||||||||||||
| Total revenues | $ | 22,122 | $ | 9,182 | $ | 57,571 | $ | 33,006 | |||||||||||||||
Other than the United States and the United Kingdom, no individual country exceeded 10% of total revenues for the three or nine months ended September 30, 2024 and September 30, 2023.
The Company’s long-lived assets are composed of property and equipment and right of use assets, net, and are summarized by geographic area as follows (in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||
| United States | $ | 100 | $ | 998 | |||||||
| International | 119 | 316 | |||||||||
| Total long-lived assets, net | $ | 219 | $ | 1,314 | |||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Report and in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Reform Act. See “Cautionary Note Regarding Forward-Looking Statements” before Part I of this Report. You should consider our forward-looking statements in light of the risks discussed in our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this Report, the “Risk Factors” section of our Form 10–K and this Report, and our other filings with the SEC. Note that amounts within Item 2 are presented in millions and may not sum due to rounding.
Overview
Our mission is to empower parents with the right information at the right time, to give them more peace of mind and help them find more joy in the journey of parenting. Our digital parenting platform aims to give parents real-time data and insights to help parents feel calmer and more confident. We believe that every parent deserves peace of mind and the opportunity to feel their well-rested best. We also believe that every child deserves to live a long, happy, and healthy life, and we are working to develop products to help facilitate that belief.
Components of Operating Results
Revenues
We recognize revenue primarily from products and the associated mobile applications. Revenues are recognized when control of goods and services is transferred to customers in an amount that reflects the consideration expected to be received by us in exchange for those goods and services. Substantially all of our revenues were derived from product sales.
Cost of Revenues
Cost of revenues consists of product costs, including contract manufacturing, shipping and handling, depreciation and amortization relating to tooling and manufacturing equipment and software, warranty replacement, fulfillment costs, warehousing, hosting, and reserves for excess and obsolete inventory.
Operating Expenses
General and Administrative. General and administrative expenses consist primarily of salaries, benefits, stock-based compensation, and bonuses for finance and accounting, legal, human resources and administrative executives and employees, third-party legal, accounting, customer service, software, and other professional services, corporate travel and entertainment, depreciation and amortization of property and equipment, asset impairment charges, and facilities rent.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions, benefits, stock-based compensation, and bonuses for sales and marketing employees and contractors, third-party marketing expenses such as social media and search engine marketing, retail marketing, email marketing, and print marketing.
Research and Development. Research and development expenses consist primarily of salaries, benefits, stock-based compensation, and bonuses for employees and contractors engaged in the design, development, maintenance and testing of our products and platforms, including clinical testing.
Other Income (Expense)
Interest Income (Expense), Net. Interest income (expense), net consists of interest incurred on our outstanding borrowings, debt extinguishment costs, gain on interest for forgiveness of interest accrued related to an arrangement with a significant vendor, and amortization of the associated deferred financing costs. Interest income consists of interest earned on our money market account.
Common Stock Warrant Liability Adjustment. Mark to market adjustment to recognize the change in fair value of common stock warrant liabilities.
Other Income (Expense), Net. Other income (expense), net includes our net gain (loss) on foreign exchange transactions.
Income Tax Provision. Income tax provision consists primarily of U.S. federal and state income taxes related to the tax jurisdictions in which we conduct business.
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Results of Operations
The following table sets forth our results of operations for the periods, indicated in millions:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues | $ | 22.1 | $ | 9.2 | $ | 57.6 | $ | 33.0 | |||||||||||||||
| Cost of revenues | 10.6 | 5.9 | 29.2 | 20.3 | |||||||||||||||||||
| Gross profit | 11.5 | 3.3 | 28.3 | 12.7 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| General and administrative | 9.8 | 5.4 | 22.1 | 20.4 | |||||||||||||||||||
| Sales and marketing | 4.0 | 3.3 | 11.8 | 9.8 | |||||||||||||||||||
| Research and development | 2.6 | 2.4 | 7.3 | 8.1 | |||||||||||||||||||
| Total operating expenses | 16.4 | 11.2 | 41.2 | 38.3 | |||||||||||||||||||
| Operating loss | (4.8) | (7.9) | (12.8) | (25.6) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense, net | (0.1) | (0.1) | (0.3) | (3.0) | |||||||||||||||||||
| Common stock warrant liability adjustment | (0.7) | 2.4 | 9.5 | 2.7 | |||||||||||||||||||
| Other income (expense), net | — | — | 0.1 | (0.1) | |||||||||||||||||||
| Total other income (expense), net | (0.8) | 2.2 | 9.4 | (0.4) | |||||||||||||||||||
| Loss before income tax provision | (5.6) | (5.6) | (3.5) | (26.0) | |||||||||||||||||||
| Income tax provision | 0.0 | 0.0 | 0.0 | — | 0.0 | ||||||||||||||||||
| Net loss and comprehensive loss | (5.6) | (5.6) | (3.5) | (26.0) | |||||||||||||||||||
Revenues
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 22.1 | $ | 9.2 | $ | 12.9 | 140.9 | % | $ | 57.6 | $ | 33.0 | $ | 24.6 | 74.4 | % | |||||||||||||||||||||||||||||||
Revenues increased by $12.9 million, or 140.9%, from $9.2 million for the three months ended September 30, 2023 to $22.1 million for the three months ended September 30, 2024. The increase was primarily due to higher sales of Dream Sock products, reflecting an increase in consumer demand across all sales channels as compared to the same period in the prior year. During the three months ended September 30, 2023, we signed a new distribution agreement with a large retailer that offered more favorable terms. As a result, certain sales were delayed until the three months ended December 31, 2023, which reduced revenue for the three months ended September 30, 2023.
Revenues increased by $24.6 million, or 74.4%, from $33.0 million for the nine months ended September 30, 2023 to $57.6 million for the nine months ended September 30, 2024. The increase was primarily due to higher sales of Dream Sock products, reflecting an increase in consumer demand across all sales channels as compared to the same period in the prior year.
Cost of Revenues and Gross Profit
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||
| Cost of revenues | $ | 10.6 | $ | 5.9 | $ | 4.7 | 80.7 | % | $ | 29.2 | $ | 20.3 | $ | 8.9 | 44.0 | % | |||||||||||||||||||||||||||||||
| Gross profit | $ | 11.5 | $ | 3.3 | $ | 8.2 | 246.8 | % | $ | 28.3 | $ | 12.7 | $ | 15.6 | 122.9 | % | |||||||||||||||||||||||||||||||
| Gross margin | 52.2 | % | 36.3 | % | 49.2 | % | 38.5 | % | |||||||||||||||||||||||||||||||||||||||
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Cost of revenues increased by $4.7 million, or 80.7%, from $5.9 million for the three months ended September 30, 2023 to $10.6 million for the three months ended September 30, 2024. The increase was primarily due to the increase in product sales. Gross margin increased from 36.3% for the three months ended September 30, 2023 to 52.2% for the three months ended September 30, 2024 primarily due to higher revenue and lower direct product and fulfillment costs.
Cost of revenues increased by $8.9 million, or 44.0%, from $20.3 million for the nine months ended September 30, 2023 to $29.2 million for the nine months ended September 30, 2024. The increase was primarily due to the increase in product sales. Gross margin increased from 38.5% for the nine months ended September 30, 2023 to 49.2% for the nine months ended September 30, 2024 primarily due to higher revenue and lower direct product and fulfillment costs.
General and Administrative
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 9.8 | $ | 5.4 | $ | 4.3 | 79.6 | % | $ | 22.1 | $ | 20.4 | $ | 1.7 | 8.3 | % | |||||||||||||||||||||||||||||||
General and administrative expense increased by $4.3 million, or 79.6%, from $5.4 million for the three months ended September 30, 2023 to $9.8 million for the three months ended September 30, 2024. The increase was driven primarily by impairment charges related to intangible assets and higher compensation expense, including accrued bonuses, severance-related expenses, and stock-based compensation as compared to the same period in the prior year.
General and administrative expense increased by $1.7 million, or 8.3%, from $20.4 million for the nine months ended September 30, 2023 to $22.1 million for the nine months ended September 30, 2024. The increase was driven primarily by impairment charges related to intangible assets and higher compensation expense, including accrued bonuses, severance-related expenses, and stock-based compensation, partially offset by lower consulting and outside services spend related to transaction costs as compared to the same period in the prior year.
Sales and Marketing
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 4.0 | $ | 3.3 | $ | 0.7 | 20.6 | % | $ | 11.8 | $ | 9.8 | $ | 2.0 | 20.5 | % | |||||||||||||||||||||||||||||||
Sales and marketing expense increased by $0.7 million, or 20.6%, from $3.3 million for the three months ended September 30, 2023 to $4.0 million for the three months ended September 30, 2024. The increase was driven primarily by higher compensation expense due to accrued bonuses as well as higher spend on brand and content expenses as compared to the same period in the prior year.
Sales and marketing expense increased by $2.0 million, or 20.5%, from $9.8 million for the nine months ended September 30, 2023 to $11.8 million for the nine months ended September 30, 2024. The increase was driven primarily by higher compensation expense due to accrued bonuses and higher spend on social media marketing and public relations as compared to the same period in the prior year.
Research and Development
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 2.6 | $ | 2.4 | $ | 0.1 | 5.5 | % | $ | 7.3 | $ | 8.1 | $ | (0.8) | (9.9 | %) | |||||||||||||||||||||||||||||||
Research and development expense increased by $0.1 million, or 5.5%, from $2.4 million for the three months ended September 30, 2023 to $2.6 million for the three months ended September 30, 2024. The increase was driven primarily by higher compensation expense, including accrued bonuses and severance-related expenses, partially offset by costs capitalized related to internal-use software as compared to the same period in the prior year.
Research and development expense decreased by $0.8 million, or 9.9%, from $8.1 million for the nine months ended September 30, 2023 to $7.3 million for the nine months ended September 30, 2024. The decrease was driven primarily by lower stock-based compensation expense, lower regulatory testing, and costs capitalized related to internal-use software, partially offset by accrued bonuses and severance-related expenses as compared to the same period in the prior year.
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Other Income (Expense)
| Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||
| Interest expense, net | $ | (0.1) | $ | (0.1) | $ | — | 16.4 | % | $ | (0.3) | $ | (3.0) | $ | 2.7 | (91.6 | %) | |||||||||||||||||||||||||||||||
| Common stock warrant liability adjustment | $ | (0.7) | $ | 2.4 | $ | (3.1) | (128.1 | %) | $ | 9.5 | $ | 2.7 | $ | 6.9 | 255.9 | % | |||||||||||||||||||||||||||||||
| Other income (expense), net | $ | — | $ | — | $ | — | NM* | $ | 0.1 | $ | (0.1) | $ | 0.2 | NM* | |||||||||||||||||||||||||||||||||
*Not meaningful ("NM").
Interest expense, net for the three months ended September 30, 2024 was mostly flat as compared to the same period in the prior year. Interest expense, net for the three months ended September 30, 2024 included $0.3 million of termination fees related to the SVB term loan and $0.2 million of other interest expense, partially offset by a $0.5 million gain on interest for forgiveness of interest accrued related to an arrangement with a significant vendor that was fully settled in September 2024.
Interest expense decreased by $2.7 million, from $3.0 million for the nine months ended September 30, 2023 to $0.3 million for the nine months ended September 30, 2024. During the nine months ended September 30, 2023, we entered into an agreement with a significant vendor to pay $3.0 million of interest over 36 months with respect to past due payables. The present value of the future payments was expensed and included within interest expense, net on the condensed consolidated statements of operations in that period. In January 2024, the agreement was amended and the schedule of interest payments was modified from 36 months to 28 months, but the amount of interest payable was unchanged. In September 2024, the agreement was amended again, allowing us to terminate the agreement with a final interest payment of $0.6 million, which was then fully settled in September 2024. The reduction in the total cumulative interest payments to $2.2 million resulted in us recording a reduction of interest expense at termination of $0.5 million.
For the three months ended September 30, 2024, we recognized a loss of $0.7 million as compared to a gain of $2.4 million for the same period in the prior year, resulting from an increase in the fair value of common stock warrants outstanding. The loss recognized for the three months ended September 30, 2024 included the increase in fair value of the Series B Warrants that were issued in February 2024, which were not outstanding during the same period in the prior year. The gain of $2.4 million for the three months ended September 30, 2023 resulted from a decrease in the fair value of common stock warrants outstanding.
For the nine months ended September 30, 2024, we recognized a gain of $9.5 million as compared to a gain of $2.7 million for the same period in the prior year resulting from a larger decrease in the fair value of common stock warrants outstanding. Additionally, the gain recognized for the nine months ended September 30, 2024 included the decrease in fair value of the Series B Warrants that were issued in February 2024, which were not outstanding during the same period in the prior year.
Liquidity and Capital Resources
We have historically funded our operations primarily with proceeds from issuances of our convertible preferred stock, issuances of our common stock, borrowings under our loan facilities, issuances of convertible promissory notes, and sales of our products and services. As of September 30, 2024, we had cash and cash equivalents of $21.5 million.
September 2024 Offering
On September 11, 2024, we entered into the underwriting agreement and issued 3,135,136 shares of our common stock at a price to the public of $3.70 per share, less underwriting discounts and commissions. The net proceeds we received at the closing of the offering on September 13, 2024 were $10.6 million. In addition, we incurred $0.7 million in issuance costs that were unpaid as of September 30, 2024. We provided the underwriter a discount of 7% off the offering price. We also reimbursed the underwriters for $0.2 million in fees and expenses, including legal expenses, out-of-pocket expenses, and clearing expenses.
Pursuant to the underwriting agreement, we also issued, as a portion of the underwriting compensation payable to the underwriter, a warrant to purchase up to 125,405 shares of our common stock (which was subsequently transferred to certain affiliates of the underwriter, the “Titan Warrants”). The Titan Warrants are initially exercisable on March 13, 2025 at an exercise price of $4.63 and have a term of five years from such initial exercise date.
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February 2024 Offering
On February 25, 2024, we entered into a private placement investment agreement with certain investors, pursuant to which we issued and sold to the investors (i) an aggregate of 9,250 shares of our Series B convertible preferred stock, par value $0.0001 per share and (ii) warrants to purchase an aggregate of 1,799,021 shares of our common stock, par value $0.0001 per share (the “Series B Warrants”), for an aggregate gross purchase price of $9.3 million.
Each of the Series B Warrants sold in the private placement offering is exercisable for one share of common stock at an exercise price of $7.71 per share, is immediately exercisable, and will expire on March 1, 2029. As the Series B Warrants could require cash settlement in certain scenarios, the warrants were classified as liabilities upon issuance and were initially recorded at an aggregate estimated fair value of $6.9 million. The total proceeds from the offering were first allocated to the liability-classified warrants, based on their fair values, with the residual $2.4 million allocated to the Series B convertible preferred stock.
We incurred $0.4 million of issuance costs related to the offering. Issuance costs allocated to the preferred stock of $0.1 million were recorded as a reduction to the Series B convertible preferred stock.
Funding Requirements
In accordance with ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), we have evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the accompanying condensed consolidated financial statements included elsewhere in this Report are issued.
Since inception, we have experienced recurring operating losses and generated negative cash flows from operations, resulting in an accumulated deficit of $259.1 million as of September 30, 2024. During the nine months ended September 30, 2024 and 2023, we had negative cash flows from operations of $14.5 million and $22.0 million, respectively. As of September 30, 2024, we had $21.5 million of cash on hand.
Recurring operating losses, negative cash flows from operations since inception, and a low cash balance relative to current obligations raise substantial doubt about our ability to continue as a going concern within one year after the date that the accompanying condensed consolidated financial statements included elsewhere in this Report are issued. The condensed consolidated financial statements included elsewhere in this Report have been prepared on a going concern basis and accordingly, do not include any adjustments relating to the recoverability and classification of asset carrying amounts, or the amount and classification of liabilities that might result should we be unable to continue as a going concern.
As we continue to address these financial conditions, we have undertaken the following actions:
•As described above, in September 2024, we issued 3,135,136 shares of common stock for aggregate net proceeds of $9.8 million. In February 2024, we consummated a sale of preferred stock and warrants to purchase our common stock for aggregate net proceeds of $8.9 million.
•As described below and in Note 4, Debt and Other Financing Arrangements within the Notes to Condensed Consolidated Financial Statements, in September 2024, we entered into a loan facility agreement with WTI Fund X, Inc. and WTI Fund XI, Inc. (collectively “WTI”) for a term loan facility of up to $15.0 million (the “WTI Loan Facility”). On September 11, 2024, we entered into an asset-based revolving credit facility (the "ABL Line of Credit") with a maximum revolving commitment of up to $15.0 million. In connection with these transactions, we used our then-existing cash to repay and extinguish all borrowings outstanding under the line of credit and term loan agreements with SVB and initiated a drawdown of $7.5 million under the WTI Loan Facility.
We have not generated sufficient cash flows from operations to satisfy our capital requirements. There can be no assurance that we will generate sufficient future cash flows from operations due to potential factors, including but not limited to inflation, recession, or reduced demand for our products. If revenues decrease from current levels, we may be unable to further reduce costs, or such reductions may limit our ability to pursue strategic initiatives and grow revenues in the future.
There can be no assurance that we will be able to obtain additional financing on terms acceptable to us, if at all. Failure to secure additional funding may require us to modify, delay or abandon some of our planned future development, or to otherwise enact further operating cost reductions, which could have a material adverse effect on our business, operating results, financial condition and ability to achieve our intended business objectives.
If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges, or unforeseen circumstances could be significantly limited, and our business, financial condition and results of operations could be materially adversely affected.
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We also could be required to seek funds through arrangements with partners or others that may require us to relinquish rights or jointly own some aspects of our technologies, products or services that we would otherwise pursue on our own.
SVB Revolver and Term Loan
On November 23, 2022, we entered into the Third Amended and Restated Loan and Security Agreement (as amended, the “LSA”) with SVB. The LSA provided for a $10.0 million revolving line of credit (the “SVB Revolver”) and for a $8.5 million term loan, which amortized with equal monthly installments of $0.5 million that would have matured on October 1, 2024.
On September 11, 2024, we used existing cash to prepay and extinguish all borrowings outstanding under the LSA. In addition to normal principal and interest, we paid $0.8 million to extinguish this loan, $0.3 million of which was recorded as interest income (expense), net.
WTI Loan Facility
On September 11, 2024 (the “Effective Date”), we entered into the WTI Loan Facility with WTI. We initiated our first drawdown under the WTI Loan Facility of $7.5 million (the “Initial Loan”) shortly after closing.
The WTI Loan Facility consists of two tranches. The first tranche of $10.0 million was available at closing and through September 30, 2024, with $2.5 million of the first tranche availability extendable until December 31, 2024 (the “First Tranche Commitment”). The second tranche of $5.0 million is available through August 15, 2025 (the ‘Second Tranche Commitment”, or together with the First Tranche Commitment, the “Loan Commitments”) upon achievement of (a) at least $48.6 million in revenue for the period commencing October 1, 2024 and ending June 30, 2025 (the “Second Tranche Condition Period”), (b) total cash burn during the Second Tranche Condition Period not to exceed $0.6 million for such period, (c) receipt by us of at least $6.0 million of net proceeds from an equity financing during a period commencing on the closing date and ending on the second tranche borrowing date, and (d) receipt by WTI of our then-current, board-approved operating and financing plan to WTI's satisfaction, as well as compliance with certain reporting conditions. The remaining $2.5 million of the First Tranche Commitment is available until December 31, 2024. Once repaid, we cannot reborrow from the WTI Loan Facility.
We have the option to prepay the outstanding loans issued under the WTI Loan Facility in whole at any time by repaying all outstanding principal and accrued interest, as well as all scheduled unpaid interest on the loan, including payment-in-kind interest (“PIK Interest”), as if the loan continued to accrue interest through its stated maturity. Provided if the fully diluted market capitalization of our Class A common stock (“common stock”) is greater than or equal to $250.0 million for 10 consecutive Trading Days, then so long as such prepayment is made within 60 days thereafter, the redemption price will be discounted by 30% of the total amount of all scheduled but unpaid interest (but excluding any PIK Interest, which will not be discounted).
The WTI Loan Facility contains certain reporting and operational covenants that must be met for us to borrow funds under the Loan Commitments and not cause an event of default. Upon the occurrence of an event of default, WTI could elect to force redemption of the outstanding balances under the WTI Loan Facility, requiring us to pay all outstanding principal and accrued interest, as well as all scheduled unpaid interest on the loan, including PIK interest. Upon the occurrence of an event of default, we will also be required to pay default interest on any overdue balances at a rate of 5.0%. The WTI Loan Facility and any loans and obligations issued thereunder are collateralized by substantially all of our assets and are guaranteed by us. As of September 30, 2024, we were in compliance with all financial covenants associated with the WTI Loan Facility.
As partial consideration for the availability and funding of the WTI Loan Facility, we entered into a Stock Issuance Agreement (the “WTI Stock Issuance Agreement”) with WTI Fund X, LLC (“Fund X”) and WTI Fund XI, LLC (“Fund XI”, and together with Fund X, the “WTI Funds”), dated as of the Effective Date. Pursuant to the WTI Stock Issuance Agreement, we issued to the WTI Funds an aggregate of 750,000 shares of redeemable common stock on the Effective Date, of which 187,500 are subject to forfeiture in the event that we do not draw on any portion of the remaining outstanding Loan Commitment. To the extent we do exercise our option under the Loan Commitments to issue additional debt, a number of forfeitable shares will 'vest' and no longer be subject to forfeiture based on the pro rata portion of the outstanding Loan Commitments drawn against.
The shares issued to WTI pursuant to the WTI Stock Issuance Agreement contain an embedded redemption option (the"Redemption Option") such that WTI may elect to force us to redeem the shares that are no longer subject to forfeiture for a price of $8.40 per share. The Redemption Option may be exercised, with respect to any amount that is equal to or less than the entire balance of such shares, at any time during the period commencing on the first trading day following the fifth anniversary of the Effective Date and continuing through the date which is 10 years after the Effective Date, subject to certain acceleration provisions set forth in the WTI Stock Issuance Agreement. We have also granted the WTI Funds an option (the “Exchange Option”) to exchange all or any portion of the shares issued pursuant to the WTI Stock Issuance Agreement that are vested and held by the WTI Funds at the time of exercise of the Exchange Option for shares of capital stock in any successor entity under certain circumstances, subject to certain conditions set forth in the WTI Stock Issuance Agreement, as well as certain rights to participate in certain future offerings.
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ABL Line of Credit
On September 11, 2024 (the “Effective Date”), we entered into a Credit and Security Agreement (the “Credit Agreement”), which provides for an asset-based revolving credit facility (the “ABL Line of Credit”) with a maximum principal amount of up to $15.0 million. The maximum amount shall increase to $20.0 million on September 11, 2025. The ABL Line of Credit is collateralized by substantially all of our assets. Loans and other obligations under the Credit Agreement bear interest at a rate per annum equal to the 1-month Secured Overnight Financing Rate (subject to a floor of 3.50%) plus a margin, which varies between 7.50% and 8.50% depending on the our earnings before interest, taxes, depreciation and amortization (“EBITDA”); provided that the interest rate shall not exceed the maximum rate permitted under applicable law.
The ABL Line of Credit matures on September 10, 2027 (the “Maturity Date”). If for any reason the Credit Agreement is terminated or all outstanding loans and other obligations are paid in full and the ABL Line of Credit is terminated before the Maturity Date, we will be obligated to pay a prepayment fee equal to a percentage of the then-current Revolving Commitment, which percentage decreases on certain anniversary of the closing date.
The Credit Agreement contains representations, warranties, covenants, and events of default customary for agreements of this type. As of September 30, 2024, we were in compliance with all financial covenants associated with the Credit Agreement and there was $9.9 million of outstanding borrowings. As of September 30, 2024, the borrowing base availability under the Credit Agreement was $0.7 million.
Financed Insurance Premium
In July 2024, we renewed our corporate directors & officers and employment liability policies and entered into several new short-term commercial premium finance agreements with First Insurance Funding totaling $0.6 million to be paid within one year, accruing interest at a weighted average rate of 8.6%. As of September 30, 2024, the remaining principal balance on the combined financed insurance premiums was $0.5 million.
Cash Flows
The following table summarizes our cash flow (in millions):
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net cash used in operating activities | $ | (14.5) | $ | (22.0) | |||||||
| Net cash used in investing activities | (0.7) | — | |||||||||
| Net cash provided by financing activities | 20.6 | 25.9 | |||||||||
| Net change in cash and cash equivalents | $ | 5.3 | $ | 3.9 | |||||||
Operating Activities
For the nine months ended September 30, 2024, net cash used in operating activities was $14.5 million as compared to net cash used in operating activities of $22.0 million in the prior year. The change in operating cash flows was primarily driven by a lower operating loss, which was $12.8 million for the nine months ended September 30, 2024 as compared to an operating loss of $25.6 million for the same period in the prior year.
Investing Activities
For the nine months ended September 30, 2024, we used $0.7 million to invest in various projects, including the development of our new subscription app. For the nine months ended September 30, 2023, we used substantially no cash for investing activities due to the prioritization of research and development projects that supported seeking regulatory clearances for our products.
Financing Activities
For the nine months ended September 30, 2024 and 2023, net cash provided by financing activities was $20.6 million and $25.9 million, respectively. The decrease is primarily driven by the higher amount proceeds raised by the Series A preferred stock offering in February 2023 as compared to the combined proceeds raised by the common stock offering in September 2024 and the Series B preferred stock offering in February 2024. Additionally, in September 2024, we drew down $7.5 million under the WTI Loan Facility and we made payments on the Term Loan totaling $5.0 million during the nine months ended September 30, 2024, compared to payments totaling $2.0 million during the nine months ended September 30, 2023.
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Critical Accounting Policies and Estimates
There have been no material changes from the critical accounting policies and estimates disclosed in our Form 10-K, other than policies disclosed in this Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this Item.
Item 4. Controls and Procedures.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to provide reasonable assurance that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of September 30, 2024, the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2024 due to the material weaknesses in our internal control over financial reporting described below.
Material Weaknesses in Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses in our internal control over financial reporting exist as of September 30, 2024.
We did not design and maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we did not maintain a sufficient complement of personnel with an appropriate degree of internal controls and accounting knowledge, experience, and training commensurate with our accounting and financial reporting requirements. This material weakness contributed to the following additional material weaknesses:
•We did not design and maintain effective controls over the segregation of duties related to journal entries. Specifically, certain personnel have the ability to both create and post journal entries within the Company’s general ledger system. This material weakness did not result in any adjustments to the consolidated financial statements.
•We did not design and maintain effective controls over the accounting for the accuracy and existence of inventory, nor controls which verified the completeness and accuracy of accrued liabilities. Each of these material weaknesses resulted in immaterial adjustments that were recorded as out-of-period adjustments within the year ended December 31, 2022.
•We did not design and maintain effective controls over the accounting for convertible preferred stock and warrant arrangements. Further, we did not design and maintain effective controls to verify the completeness and accuracy of sales returns and accrued sales tax. Each of these material weaknesses resulted in material adjustments to several account balances and disclosures in the consolidated financial statements as of and for the year ended December 31, 2019. The sales returns material weakness also resulted in immaterial adjustments to revenue and accrued and other expenses as of and for the year ended December 31, 2022. The material weakness for accounting for convertible preferred stock and warrant arrangements also resulted in immaterial adjustments that were recorded as out-of-period adjustments within the three and nine-months ended September 30, 2024.
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•We did not design and maintain effective controls over IT general controls for information systems that are relevant to the preparation of our consolidated financial statements. Specifically, we did not design and maintain (i) program change management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately, (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate Company personnel, (iii) computer operations controls to ensure that critical batch jobs are monitored, and data backups are authorized and monitored, and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements. This material weakness did not result in any adjustments to the consolidated financial statements.
Additionally, each of the material weaknesses described above could result in a misstatement of one or more account balances or disclosures that would result in a material misstatement to the interim or annual consolidated financial statements that would not be prevented or detected.
Remediation Plan
We have initiated a plan to remediate these material weaknesses. The remediation measures will be ongoing, and although not all inclusive, remediation measures include hiring additional accounting and financial reporting personnel and implementing additional policies, procedures and controls, all of which will result in future costs for the Company.
We have taken actions to improve our IT general controls, segregation of duties over journal entries controls, inventory controls, accrued liabilities, and warrant arrangements. However, the material weaknesses will not be considered remediated until our remediation plan has been fully implemented, the applicable controls operate for a sufficient period of time, and we have concluded, through testing, that the newly implemented and enhanced controls are operating effectively.
During the three months ended September 30, 2024, we have taken actions to enhance the design of the controls we believe are necessary to remediate the material weaknesses related to the sales returns, accrued sales tax, and convertible preferred stock and warrant arrangements. While these enhancements to the design of the controls have been implemented as of September 30, 2024, we may determine the need to make further enhancements to the design of these controls. These material weaknesses will not be considered remediated until our remediation plan has been fully implemented, the applicable controls operate for a sufficient period of time, and we have concluded, through testing, that the newly implemented and enhanced controls are operating effectively.
Notwithstanding the above, our management believes that the consolidated financial statements included in this Report on Form 10-Q state fairly in all material respects our financial position, results of operations and cash flows for the periods presented.
Changes in Internal Control over Financial Reporting
Other than the remediation efforts described above, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2024 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Item 1. Legal Proceedings.
From time to time, we may become involved in various legal proceedings that arise in the ordinary course of business. We evaluate any claims and lawsuits with respect to their potential merits, our potential defenses and counterclaims, and the expected effect on us of defending the claims and a potential adverse result. However, the results of any litigation, investigations or other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, damage to our reputation, and divert significant resources. If any legal proceedings were to be determined adversely to us, or we were to enter into a settlement agreement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition and operating results. For a description of our legal proceedings, see Note 5, Commitments and Contingencies within the Notes to Condensed Consolidated Financial Statements included elsewhere in this Report, which is incorporated herein by reference.
Item 1A. Risk Factors.
Our business, financial condition and operating results can be affected by a number of factors, including but not limited to those described as risk factors, any one or more of which could, directly or indirectly, cause our actual operating results and financial condition to vary materially from past, or anticipated future, operating results and financial condition. For a discussion of these potential risks and uncertainties, see Part I, Item 1A. "Risk Factors" in our Form 10-K, as supplemented by the risk factors below. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results and the price of our common stock.
Risks Related to Our Business and Operations
If any governmental authority or notified body were to require marketing authorization or similar certification for any product that we sell for which we have not obtained such marketing authorization or certification, we could be subject to regulatory enforcement actions and/or be required to cease selling or recall the product pending receipt of marketing authorization or similar certification from such other governmental authority or notified body, which can be a lengthy and time-consuming process, harm financial results and have long-term negative effects on our operations.
We currently sell Smart Sock and Dream Sock in certain countries outside of the U.S., and we have not obtained medical device marketing authorizations, approvals, or certifications from any governmental authority or notified body, other than from the U.S. Food and Drug Administration ("FDA") for Dream Sock and BabySat and from the notified body BSI under European Union (“EU”) and United Kingdom (“UK”) EU Medical Devices Regulation (2017/745 or “MDR”) for Dream Sock. In response to inquiries from the FDA and regulatory authorities in other jurisdictions regarding the marketing of Smart Sock and Dream Sock (in the case of the FDA, prior to ceasing distribution of Smart Sock and prior to our recent marketing authorization for Dream Sock Health Notifications features), we had communicated our beliefs that such products are not medical devices that require medical device or similar marketing authorization or certification from such other regulatory authorities or notified bodies. However, certain regulatory authorities had expressed that they did not agree with that conclusion and in some instances required us to obtain marketing authorization, such as a clearance or approval, or other certification to continue to sell the product.
For example, Owlet has been corresponding with the Medical Devices Directorate, Canada's medical device regulatory authority within Health Canada, regarding the device classification requirements of Smart Sock and Dream Sock. As a result of these exchanges, Owlet ceased selling and advertising Smart Sock in Canada on December 10, 2021. We have, however, marketed and sold Dream Sock in Canada since January 2022. Health Canada, the regulatory authority responsible for the Canadian medical device market, initially asserted that Dream Sock was a medical device that can no longer be sold in Canada unless a relevant license has been issued. In the second half of 2022, we responded with our position that Dream Sock is not a medical device, and Health Canada has not affirmatively concluded that it agrees or disagrees with our position. If Health Canada does not agree with our position, we may be required to cease distribution of the product into the Canadian market and may be subject to enforcement action.
Obtaining and maintaining authorization or certification to sell any of our products as medical devices is a time-consuming and costly process and we may be precluded from selling such products if we are required to obtain marketing authorization, such as a clearance or approval, or other certification, and maintain such authorizations if received. The path to market varies among international jurisdictions and may require additional or different product testing than required to obtain FDA marketing authorization. Certifications or marketing authorizations from one foreign regulatory authority or notified body does not ensure certification or
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marketing authorization by any other foreign regulatory authority or notified body or by the FDA. If we fail to receive necessary certifications or marketing authorizations to commercialize our products in any jurisdictions on a timely basis, or at all, or if we later lose such certifications or marketing authorizations, our business, financial condition and results of operations could be adversely affected. Furthermore, regulatory requirements may change from time to time, which could adversely affect our ability to market new products and services, or continue to market existing products and services. Moreover, even if granted, a marketing authorization or certification could require conditions to sale, such as a prescription requirement. If regulatory authorities require such marketing authorization, including clearance or approval, or other certifications for the products that we sell, we could be subject to regulatory enforcement action, time-consuming and costly marketing authorization and certification application processes, or required to cease selling or to recall the product in the corresponding jurisdiction pending receipt of such marketing authorization or certification. We also could be required to modify the product’s functionality or limit our marketing claims for the product, whether or not we obtain such marketing authorization or other required certification. In any such event, our business could be substantially harmed.
We are involved, and may become involved in the future, in disputes and other legal or regulatory proceedings that, if adversely decided or settled, could materially and adversely affect our business, financial condition and results of operations.
We are, and may in the future become, party to litigation, regulatory proceedings or other disputes. In general, claims made by or against us in disputes and other legal or regulatory proceedings can be expensive and time-consuming to bring or defend against, requiring us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. These potential claims may include but are not limited to personal injury and class action lawsuits, intellectual property claims and regulatory investigations relating to the advertising and promotional claims about our products and services and employee claims against us based on, among other things, discrimination, harassment or wrongful termination. Any one of these claims, even those without merit, may divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. Any adverse determination against us in these proceedings, or even the allegations contained in the claims, regardless of whether they are ultimately found to be without merit, may also result in settlements, injunctions or damages that could have a material adverse effect on our business, financial condition and results of operations.
Additionally, in the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. In November 2021, two putative class action complaints were filed against us in the U.S. District Court for the Central District of California. Both complaints alleged violations of the Exchange Act against the Company and certain of our officers and directors on behalf of a putative class of investors who: (a) purchased the Company’s common stock between March 31, 2021 and October 4, 2021 (“Section 10(b) Claims”); or (b) held common stock in SBG as of June 1, 2021, and were eligible to vote at SBG's special meeting held on July 14, 2021 (“Section 14(a) Claims”). Both complaints allege, among other things, that we and certain of our officers and directors made false and/or misleading statements and failed to disclose certain information regarding the FDA’s likely classification of the Owlet Smart Sock as a medical device requiring marketing authorization. On September 8, 2023, the Court ruled that while the two cases were consolidated, there would be two distinct and separate classes to represent the Section 10(b) Claims and Section 14(a) Claims, respectively, and appointed lead plaintiffs and lead counsel. An amended complaint was filed for both classes on November 21, 2023, and then further amended and consolidated filings by the plaintiffs’ counsel on December 22, 2023. The Company intends to vigorously defend itself against these claims and filed on February 9, 2024 motions to dismiss the cases in response to these complaints, on behalf of itself and the named officers and directors. The plaintiffs filed oppositions to the motions to dismiss on March 24, 2024, and the Company filed replies in support of the motions to dismiss on May 10, 2024. On August 5, 2024, the Court denied Owlet’s and its officers’ motions to dismiss the Section 10(b) Claims and the Section 14(a) Claims. On September 24, 2024, the Court entered a scheduling order in the case, setting trial to begin on February 17, 2026. On September 26, 2024, the Court granted Owlet’s and its officers’ motion for reconsideration regarding the Section 10(b) Claims and dismissed all claims arising out of statements made prior to the merger.
Further, on August 26, 2024 and October 3, 2024, investors filed in the U.S. District Court for the Central District of California, derivatively on behalf of the Company, complaints asserting claims for violations of Section 14(a) of the Exchange Act, as well as state law claims, including breach of fiduciary duty, unjust enrichment and waste of corporate assets. One complaint (captioned Janet Vargas, Derivatively on Behalf of Nominal Defendant Owlet, Inc., Case No. 2:24-cv-07258-FLA-PVC) asserts claims against twelve of the Company’s current or former directors and officers and six current or former directors and officers of Sandbridge Acquisition Corporation. The other (captioned Nathan Capleton, Derivatively on Behalf of Nominal Defendant Owlet, Inc., Case No. 2:24-cv-08536-JAK-MAA) asserts claims against eleven of the Company’s current or former directors. Both complaints leverage the allegations made in one of the securities class action complaints. Neither complaint specifies the damages claimed in the action.
These lawsuits and any future lawsuits to which we may become a party are subject to inherent uncertainties and will likely be expensive and time-consuming to investigate, defend and resolve. Any litigation to which we are a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal, or in payments of substantial monetary damages or fines, or we may
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decide to settle this or other lawsuits on similarly unfavorable terms, which could have a material adverse effect on our business, financial condition, results of operations or stock price.
Risks Related to Regulation of Our Industry and Products
Marketing authorization for our prescription-required BabySat pediatric monitor does not ensure commercial success of this product. Successful commercialization of this product will require us to implement processes, procedures and operations necessary to market and sell medical devices. We may not be successful in implementing these conditions, which could subject us to new risks.
In June 2023, we received our first medical device marketing authorization with the 510(k) clearance from the FDA for BabySat, a prescription use-only pulse oximeter indicated for use in the home environment that measures and displays functional oxygen saturation of arterial hemoglobin and pulse rate and for spot-checking and/or continuous monitoring of well-perfused patients greater than one month old up to 18 months old and weighing between 6 and 30 pounds. In order to market and distribute BabySat or other similar medical devices, we will need to modify certain of our internal business operations so that they comply with medical device requirements and to enable distribution of the product in accordance with the limitations of use described in our marketing authorizations. For example, as the 510(k) clearance for BabySat limits distribution of this product to prescription use-only, we will be unable to utilize the direct-to-consumer model we use to distribute Dream Sock and Owlet Cam (as well as Smart Sock, in certain countries outside of the U.S.). Though we are currently exploring several new distribution channels, including working with durable medical equipment distributors, healthcare institutions, and other healthcare payor and provider channels, we may not be successful in identifying, or implementing with our current resources, an appropriate distribution channel for BabySat. Further, even though we have received FDA clearance for BabySat, we will still need to demonstrate the business and clinical rationale and justifications of this product in order for healthcare institutions and providers to be convinced of the need to prescribe it, and we may not be successful in these efforts.
We are required to maintain authorizations or certifications for our prescription-required BabySat pediatric monitor in the U.S. and for our Dream Sock with Health Notifications in the U.S., EU and UK in order to continue commercializing and selling these products in the named jurisdictions. Failure to maintain such authorizations or certifications on a timely basis, or at all, could severely harm our business.
In June 2023, we received 510(k) clearance from the FDA for BabySat, a prescription use-only pulse oximeter indicated for use in the home environment designed to measure and display functional oxygen saturation of arterial hemoglobin and pulse rate and for spot-checking and/or continuous monitoring of well-perfused patients greater than one month old up to 18 months old and weighing between 6 and 30 pounds. In November 2023, we obtained de novo classification from the FDA for Dream Sock with Health Notifications. As such, both of these products are regulated as medical devices by the FDA, and we must continue to maintain compliance with medical device requirements with respect to the manufacture, sale, marketing, and distribution of these products.
The FDA’s interpretations of its laws and regulations are subject to change. If the FDA changes its policy or concludes that the marketing of any of our products is not in accordance with current policies, regulations or statutory requirements, or if the FDA changes its applicable policies or if changes are introduced to applicable laws or regulations, we may be required to seek clearance or approval or other marketing authorization for these products. If we do not timely comply with updated policies or requirements, we may not be permitted to continue marketing these products until marketing authorization is obtained, or may be the subject of regulatory enforcement actions or recalls. In addition, if safety or effectiveness problems are later identified by the FDA with any of our medical device products, we may need to initiate a product recall.
In March 2024 we received EU MDR certification for Dream Sock in the EU, and in May 2024 we received UKCA MDR certification for Dream Sock in the UK. We are currently marketing and selling Dream Sock in these jurisdictions.
In order to continue to sell medical devices in the EU, products must comply with the general safety and performance requirements of the EU MDR. Continued compliance with these requirements is a prerequisite to be able to affix the European Conformity (“CE”) mark to medical devices, without which they cannot be sold or marketed in the EU. All medical devices placed on the market in the EU must meet the general safety and performance requirements laid down in Annex I to the MDR including the requirement that a medical device must be designed and manufactured in such a way that, during normal conditions of use, it is suitable for its intended purpose. Medical devices must be safe and effective and must not compromise the clinical condition or safety of patients, or the safety and health of users and – where applicable – other persons, provided that any risks which may be associated with their use constitute acceptable risks when weighed against the benefits to the patient and are compatible with a high level of protection of health and
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safety, taking into account the generally acknowledged state of the art. To demonstrate compliance with the general safety and performance requirements, we have undergone a conformity assessment in the form of a technical file review conducted by our notified body. Upon completion of the technical file review the notified body issued a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity. The aforementioned EU rules are generally applicable in the EEA. Non-compliance with the above requirements would also prevent us from continued sales of medical devices in these countries.
Following Brexit, EU laws no longer apply directly in Great Britain. The regulations on medical devices in the UK continue to be based largely on the three EU Directives which preceded the EU MDR, as implemented into national law. However, under the terms of the Protocol on Ireland/Northern Ireland, the EU MDR does apply to Northern Ireland. Consequently, there are currently different regulations in place in the UK as compared to both Northern Ireland and the EU, respectively. Ongoing compliance with both sets of regulatory requirements may result in increased costs for our business.
In addition, quality system certifications, both ISO 13485 and MDSAP requirements must be maintained as evidence of ongoing compliance for continued sales of medical devices in the US, EU and UK. We undergo an annual assessment by our notified body of the application of the quality system requirements regarding design and development, product risk profiles and post market surveillance. Failure to maintain the quality system certifications could result in regulatory enforcement action, and/or suspension of sales pending corrective action.
As we expand into international markets, we will be required to obtain and maintain regulatory authorizations, including clearances or approvals, or other certifications in order to commercialize certain of our products in certain international markets. Failure to obtain such regulatory authorizations or certifications in relevant foreign jurisdictions may prevent us from marketing medical device products abroad.
We currently market and intend to continue to market our products and services internationally. We expect certain of our pipeline products to be regulated as medical devices, and we have received communications from certain regulatory authorities inquiring as to the regulatory status of our Smart Sock, and whether such product is regulated as a medical device in such jurisdictions. In these communications, some regulatory authorities have asserted that Smart Sock is a medical device that must comply with medical device requirements in those jurisdictions. See our risk factor titled, “If any governmental authority or notified body were to require marketing authorization or similar certification for any product that we sell for which we have not obtained such marketing authorization or certification, we could be subject to regulatory enforcement actions and/or be required to cease selling or recall the product pending receipt of marketing authorization or similar certification from such other governmental authority or notified body, which can be a lengthy and time-consuming process, harm financial results and have long-term negative effects on our operations."
Risks Related to Our Common Stock and Warrants
Our failure to meet the NYSE’s continued listing requirements could result in a delisting of our common stock.
If we fail to satisfy the NYSE's continued listing requirements, the NYSE may take steps to delist our common stock. For example, in April 2023, we were notified by NYSE that we were not in compliance with Section 802.01B of the NYSE Listed Company Manual as the average global market capitalization of our common stock over a consecutive 30 trading-day period and, at the same time, our last reported stockholders’ equity were each less than $50 million. In May 2023, we submitted a business plan advising the NYSE of the definitive actions we had taken as of the date of that submission and were planning on taking in order to bring us into compliance with NYSE continued listing standards within 18 months of receipt of the NYSE Notification (the “Cure Period”). The plan was accepted by the NYSE in July 2023. On October 10, 2024, we received formal notice from the NYSE that we had regained compliance with the NYSE’s continued listing standards. As a result of our achievement of compliance with the NYSE’s minimum market capitalization requirement for the requisite period of time, the NYSE has advised us that we are no longer considered out of compliance with these continued listing standards, and the below compliance “BC” indicator has been removed from our Class A common stock. Additionally, we are no longer noted as being below continued listing standards on the NYSE’s website (www.nyse.com). In accordance with the NYSE’s Listed Company Manual, we will be subject to a 12-month follow-up period within which we will be reviewed to confirm that we do not once again fall below any of the NYSE’s continued listing standards. There can be no assurance that we will be able to maintain compliance with these or any other NYSE listing requirements during or after the 12-month follow-up period.
Delisting from the NYSE could make trading our common stock more difficult for investors, potentially leading to declines in our share price and liquidity. In addition, without a NYSE market listing, stockholders may have a difficult time getting a quote for the sale or purchase of our common stock, the sale or purchase of our common stock would likely be made more difficult and the trading
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volume and liquidity of our common stock could decline. Delisting from the NYSE could also result in negative publicity and could also make it more difficult for us to raise additional capital. The absence of such a listing may adversely affect the acceptance of our common stock as currency or the value accorded by other parties. If our common stock is delisted by the NYSE, our common stock may be eligible to trade on an over-the-counter quotation system, such as the OTCQB market, where an investor may find it more difficult to sell our common stock or obtain accurate quotations as to the market value of our common stock. We cannot assure you that our common stock, if delisted from the NYSE, would be eligible to be listed on another national securities exchange or quoted on an over-the counter quotation system.
Additionally, the National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” If our common stock were no longer listed on the NYSE or any other national exchange, our common stock would not qualify as covered securities under such statute, and we would be subject to regulation in each state in which we offer our securities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Except as previously disclosed in our Current Report on Form 8-K filed on September 11, 2024, there were no unregistered sales of equity securities for the three months ended September 30, 2024.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
(a) None.
(b) None.
(c) During the three months ended September 30, 2024, no directors or "officers" (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted, modified or terminated "Rule 10b5-1 trading arrangements" and/or "non-Rule 10b5-1 trading arrangements" (each as defined in Item 408 of Regulation S-K).
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Item 6. Exhibits
| Exhibit Number | Description | Form | File No. | Exhibit | Filing Date | ||||||||||||
| 2.1† | 8-K | 001-39516 | 2.1 | 2/16/2021 | |||||||||||||
| 3.1 | 10-K | 001-39516 | 3.1 | 3/8/2024 | |||||||||||||
| 3.2 | 8-K | 001-39516 | 3.1 | 2/21/2023 | |||||||||||||
| 3.3 | Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of Owlet, Inc. | 8-K | 001-39516 | 3.1 | 7/7/2023 | ||||||||||||
| 3.4 | S-4 | 333-254888 | 3.4 | 3/31/2021 | |||||||||||||
| 3.5 | 8-K | 001-39516 | 3.1 | 3/4/2024 | |||||||||||||
| 4.1 | 8-K | 001-39516 | 4.1 | 9/18/2020 | |||||||||||||
| 4.2 | S-1 | 333-24832 | 4.4 | 9/1/2020 | |||||||||||||
| 4.3 | 8-K | 001-39516 | 4.1 | 2/21/2023 | |||||||||||||
| 4.4 | 8-K | 001-39516 | 4.1 | 2/26/2024 | |||||||||||||
| 4.5 | 8-K | 001-39516 | 4.2 | 2/26/2024 | |||||||||||||
4.6 | 8-K | 001-39516 | 4.1 | 9/13/2024 | |||||||||||||
10.1† | 8-K | 001-39516 | 10.1 | 9/11/2024 | |||||||||||||
10.2 | 8-K | 001-39516 | 10.2 | 9/11/2024 | |||||||||||||
10.3† | 8-K | 001-39516 | 10.3 | 9/11/2024 | |||||||||||||
10.4 | 8-K | 001-39516 | 10.4 | 9/11/2024 | |||||||||||||
10.5 | S-8 | 333-281623 | 99.1 | 8/16/2024 | |||||||||||||
10.6 | S-8 | 333-281623 | 99.2 | 8/16/2024 | |||||||||||||
10.7* | |||||||||||||||||
10.8* | |||||||||||||||||
| 31.1* | |||||||||||||||||
| 31.2* | |||||||||||||||||
| 32.1** | |||||||||||||||||
| 101.INS* | Inline XBRL Instance Document-the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||||||||||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | ||||||||||||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||||||||||||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||||||||||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | ||||||||||||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||||||||||||||||
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | ||||||||||||||||
*Filed herewith
**Furnished herewith.
†The annexes, schedules, and certain exhibits to this Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant hereby agrees to furnish supplementally a copy of any omitted annex, schedule or exhibit to the SEC upon request.
#The Company has omitted schedules and exhibits pursuant to Item 601(a)(5) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of the omitted schedules and exhibits to the SEC upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Company Name | ||||||||
Date: November 14, 2024 | By: | /s/ Kurt Workman | ||||||
| Name: | Kurt Workman | |||||||
| Title: | Chief Executive Officer | |||||||
| (Principal Executive Officer) | ||||||||
Date: November 14, 2024 | By: | /s/ Amanda Crawford | ||||||
| Name: | Amanda Crawford | |||||||
| Title: | Chief Financial Officer | |||||||
| (Principal Financial Officer and Principal Accounting Officer) | ||||||||
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