Notes to Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
(unaudited)
Note 1. Basis of Presentation
Organization
Owlet Baby Care Inc. was incorporated on February 24, 2014 as a Delaware corporation. On February 15, 2021, Owlet Baby Care Inc. ("Old Owlet") entered into a Merger Agreement with Sandbridge Acquisition Corporation ("SBG") and Project Olympus Merger Sub, Inc. (“Merger Sub”), whereby on July 15, 2021 Merger Sub merged with and into Old Owlet, with Old Owlet surviving as a wholly owned subsidiary of SBG (the "Merger"). Following the Merger, SBG was renamed Owlet, Inc. ("Owlet", "OWLT", or the "Company"). See Note 2 for further details of the Merger.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements of Owlet, Inc. (together with its subsidiaries, the "Company," "Owlet," "we," "us" or "our") 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, 2021, 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.
As a result of the merger completed with Sandbridge Acquisition Corporation on July 15, 2021 (the "Merger"), prior period share and per share amounts presented in the accompanying consolidated financial statements and these related notes have been retrospectively adjusted (see Note 2).
The Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) on January 1, 2022 using the modified retrospective transition method. Prior periods were not retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods, as further discussed in Note 4.
Certain prior year amounts have been reclassified to conform to the current period presentation.
U.S. Food and Drug Administration Letter
On October 1, 2021, the Company received a warning letter, later corrected in an amendment to the letter dated October 5, 2021 (the letter and amendment collectively, the “Warning Letter”), from the U.S. Food and Drug Administration (the “FDA”) regarding the Owlet Smart Sock (the "Smart Sock"). During the fourth quarter of 2021, the Company agreed with certain customers and retailers to accept returns of the Smart Sock and Owlet Monitor Duo.
A refund liability of $6,843 and $20,145 has been accrued as of September 30, 2022 and December 31, 2021, respectively, in accrued and other expenses and represents the amount due to customers.
During the three months ended September 30, 2022, the FDA informed the Company that certain features of the Dream Sock – namely its display of pulse rate and blood oxygen saturation are medical device features requiring marketing authorization. The Company has advised the FDA of our plan to submit a de novo classification request for marketing. The FDA has indicated that it does not anticipate the need for enforcement action pending a decision on the marketing application. If the FDA changes its enforcement approach to the Dream Sock pending the submission of the marketing application or the FDA’s review and decision on the application, or if the Company fails to timely submit such application, we may be required to recall product or otherwise be restricted from selling the product as currently designed with these specific display features until after FDA marketing authorization has been received.
Risks and Uncertainties; Going Concern
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 unaudited 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 $203,260 as of September 30, 2022. During the year ended December 31, 2021 and the nine months ended September 30, 2022, we had negative cash flows from operations of $40,556 and $71,555, respectively. As of September 30, 2022, we had $23,174 of cash on hand.
Year over year declines in revenue, the current cash balance, recurring operating losses, and negative cash flows from operations since inception, in addition to the noncompliance with its debt covenant (see Note 6), 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.
As the Company continues to address these financial conditions, management has undertaken the following actions:
•As described further in Note 6, the Company entered into a waiver agreement with Silicon Valley Bank ("SVB") related to the covenant violations for the three months ended June 30, 2022. The Company was also in violation of its financial covenant for the three months ended September 30, 2022. The Company is actively engaged with SVB to come to terms on an amended financing agreement, including revised financial and liquidity covenants for future periods. The Company expects to finalize an amended agreement with SVB prior to the end of the fiscal year.
•During the three months ended September 30, 2022, the Company undertook restructuring actions, which significantly reduced employee headcount and will reduce operating spend. This includes the reduction of consulting and outside services, the reduction of marketing programs, and the prioritization of and sequencing of research and development projects. The Company recognized $1,204 of restructuring charges within operating expenses on the condensed consolidated statements of operations related to our July 2022 restructuring. The restructuring charges consisted primarily of severance expense and related employee benefits, most of which was paid during the three months ended September 30, 2022. The Company does not expect to incur any additional expense related to the restructuring.
We have not generated sufficient cash flows from operations to satisfy our 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 or recession or reduced demand for the Company’s products. If revenues further decrease from current levels, the Company 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. 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.
The Company maintains its cash in bank deposit accounts which, at times, exceed federally insured limits. As of September 30, 2022, substantially all of the Company's cash was held with Silicon Valley Bank and exceeded federally insured limits. To date, the Company has not experienced a loss or lack of access to its invested cash; however, no assurance can be provided that access to the Company’s invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets.
Out-of-Period Adjustments
During the three months ended September 30, 2022, the Company recorded out-of-period adjustments totaling a net income impact of $1,290 to correct errors identified relating to the three months ended March 31, 2022, as well as the three and six months ended June 30, 2022. These adjustments increased costs of revenues by $665 and operating expenses by $675 for the three months ended September 30, 2022. Management has evaluated the impact of these adjustments and concluded that the adjustments are not material to the previously issued or current period consolidated financial statements, and as a result, recorded the correction as an out-of-period adjustment.
Note 2. Merger
On July 15, 2021, the Company consummated the Merger (the "Closing"). In connection with the Closing, SBG changed its name from Sandbridge Acquisition Corporation to Owlet, Inc.
Prior to the Merger, Old Owlet and SBG filed separate standalone federal, state and local income tax returns. As a result of the Merger, structured as a reverse acquisition for tax purposes, SBG was renamed Owlet, Inc., and became the parent of the consolidated filing group, with Old Owlet as a subsidiary.
Immediately prior to the Closing:
(1)All 30,104,000 outstanding shares of Old Owlet redeemable convertible preferred stock were converted into an equivalent number of shares of Old Owlet common stock on a one-to-one basis.
(2)The $7,122 of principal and accrued interest related to the Old Owlet related party convertible notes payable were converted into shares of Old Owlet preferred stock at a conversion price of $3.1546 per share resulting in the recognition of interest expense from the contingent beneficial conversion feature. The preferred stock was immediately converted into an equivalent number of shares of Old Owlet common stock on a one-to-one basis. The remaining $2 of related party convertible notes was redeemed for cash.
(3)All 429,314 Old Owlet common stock warrants were exercised on a cashless basis and settled in Old Owlet common stock on a net basis.
(4)All 433,356 Old Owlet Series A preferred stock warrants were exercised on a cashless basis and settled in an equivalent number of shares of Old Owlet preferred stock. The preferred stock was immediately converted into an equivalent number of shares of Old Owlet common stock on a one-to-one basis.
Pursuant to the Merger Agreement, at the Closing:
•Each share of Old Owlet’s common stock outstanding prior to the Merger, including shares of Old Owlet common stock issued pursuant to the conversion of the Old Owlet preferred stock, convertible notes and warrants, was converted into the right to receive approximately 2.053 shares of Owlet's common stock. Accordingly, Old Owlet common stock exchanged into 90,824,573 shares of Owlet common stock.
•Certain option holders elected to cash out an aggregate of 496,717 vested options to purchase shares of Old Owlet common stock at a value of approximately $20.53 per share for an aggregate value of $9,890, net of exercise price. All remaining outstanding Old Owlet Options were converted into options exercisable for shares of Owlet common stock with the same terms except for the number of shares exercisable and the exercise price, each of which were adjusted using the exchange ratio of approximately 2.053.
•Holders of 19,758,773 shares of Sandbridge Class A common stock exercised their right to have such shares redeemed for a full pro rata portion of the trust account holding the proceeds from SBG’s initial public offering, calculated as of two business days prior to the consummation of the Merger, which was $10.00 per share, or $197,588 in the aggregate. All remaining 3,241,227 shares of Sandbridge Class A common stock converted into 3,241,227 shares of Owlet common stock.
•All shares of SBG's Class B common stock which were held by Sandbridge Acquisition Holdings LLC, the independent directors, and an advisor of Sandbridge (“Founder Shares”) automatically converted to 5,750,000 shares of Owlet common stock, of which 2,807,500 shares are subject to vesting and forfeiture (the “earnout shares") (see Part II, Item 8 "Financial Statements and Supplementary Data - Note 10 to the Consolidated Financial Statements - Common Stock Warrants and Earnout Shares" in the Form 10-K for more information on the earnout shares).
•Pursuant to subscription agreements entered into in connection with the Merger (collectively, the “Subscription Agreements”), certain investors purchased an aggregate of 12,968,000 newly-issued
shares of Owlet common stock at a purchase price of $10.00 per share for an aggregate purchase price of $129,680 (the "PIPE Investment" or “PIPE”).
The following summarizes the shares of Common Stock issued and outstanding immediately after the Merger:
| | | | | | | | | | | |
Owlet equity holders (1) | 90,824,573 | | 81 | % |
SBG public stockholders (3) | 3,241,227 | | 3 | % |
Founder Shares (2) (3) | 5,750,000 | | 5 | % |
PIPE investors (3) | 12,968,000 | | 11 | % |
| Owlet common stock immediately after Merger | 112,783,800 | | 100 | % |
1.Excludes 3,150,463 shares of Common Stock underlying outstanding Owlet option awards.
2.Includes 2,807,500 Earnout Shares which were outstanding but remained subject to price-based performance vesting.
3.The SBG public stockholders, Founder Shares and PIPE investors are presented combined in the condensed consolidated statements of redeemable convertible preferred stock and stockholders’ equity (deficit) on the line item Reverse recapitalization transaction, net of fees.
The Merger is accounted for as a reverse recapitalization in accordance with U.S. GAAP. This determination is primarily based on Old Owlet stockholders comprising a relative majority of the voting power of Owlet and having the ability to nominate the members of the board, Old Owlet operations prior to the Merger comprising only the ongoing operations of Owlet, and Old Owlet senior management comprising a majority of the senior management of Owlet. Under this method of accounting, SBG was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the financial statements of Owlet represent a continuation of the financial statements of Old Owlet with the Merger being treated as the equivalent of Owlet issuing stock for the net assets of SBG, accompanied by a recapitalization. The net assets of SBG are stated at historical costs, with no goodwill or other intangible assets recorded. Operations prior to the Merger are presented as those of Owlet. All periods prior to the Merger have been retrospectively adjusted using the Exchange Ratio for the equivalent number of shares outstanding immediately after the Merger to effect the reverse recapitalization.
In connection with the Merger, the Company raised $145,499 of gross proceeds including the contribution of $213,407 of cash held in SBG’s trust account from its initial public offering, net of redemptions of SBG public stockholders of $197,588, and $129,680 of cash received in connection with the PIPE financing. The amount recorded to additional paid-in-capital was $101,259, comprised of $133,889 net proceeds less $22,806 recognized for the warrant liabilities, $9,890 cash payout of options, plus $66 of assumed current assets and liabilities. The Company incurred $16,980 of transaction costs, consisting of banking, legal, and other professional fees, of which $11,610 was recorded as a reduction of proceeds to additional paid-in capital. The remaining $5,370 was expensed as general and administrative expense recognized in the consolidated statements of operations and comprehensive loss during the year ended December 31, 2021.
Note 3. Certain Balance Sheet Accounts
Inventory
Substantially all of the Company's inventory consisted of finished goods as of September 30, 2022 and December 31, 2021.
Property and Equipment, net
Property and equipment consisted of the following as of:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Tooling and manufacturing equipment | $ | 2,694 | | | $ | 2,333 | |
| Furniture and fixtures | 639 | | | 579 | |
| Computer equipment | 667 | | | 625 | |
| Software | 213 | | | 213 | |
| Leasehold improvements | 29 | | | 26 | |
| Total property and equipment | 4,242 | | | 3,776 | |
| Less accumulated depreciation and amortization | (2,867) | | | (1,906) | |
| Property and equipment, net | $ | 1,375 | | | $ | 1,870 | |
Depreciation and amortization expense on property and equipment was $332 and $253 for the three months ended September 30, 2022 and September 30, 2021, respectively. For the three months ended September 30, 2022 and September 30, 2021, the Company allocated $210 and $160, respectively, of depreciation expense related to tooling and manufacturing equipment to cost of revenues.
Depreciation and amortization expense on property and equipment was $966 and $691 for the nine months ended September 30, 2022 and September 30, 2021, respectively. For the nine months ended September 30, 2022 and September 30, 2021, the Company allocated $608 and $457, respectively, of depreciation expense related to tooling and manufacturing equipment to cost of revenues.
Intangible Assets Subject to Amortization
Intangible assets were $2,325, net of accumulated amortization of $473 as of September 30, 2022 and $1,696, net of accumulated amortization of $329, as of December 31, 2021.
Capitalized software development costs were $1,873 and $1,101 as of September 30, 2022 and December 31, 2021, respectively. The Company's internally developed software capitalized within intangible assets on the balance sheet is still in development and not ready for general release. As such, the Company has not recognized any amortization for the nine months ended September 30, 2022.
The Company recognized $41 of impairment charges during the three and nine months ended September 30, 2022 to fully impair content-related intangible assets no longer in use. The Company did not recognize any impairment charges related to intangible assets during the three and nine months ended September 30, 2021.
Accrued and Other Expenses
Accrued and other expenses, among other things, included accrued sales returns of $8,897 and $21,179 as of September 30, 2022 and December 31, 2021, respectively. As described in Note 1, $6,843 and $20,145 of the accrued sales returns as of September 30, 2022 and December 31, 2021, respectively, was attributable to returns resulting from the Warning Letter.
Changes in accrued warranty were as follows:
| | | | | | | | | | | |
| For the Three Months Ended September 30, |
| 2022 | | 2021 |
| Accrued warranty, beginning of period | $ | 775 | | | $ | 992 | |
| Provision for warranties issued during the period | 157 | | | 485 | |
| Settlements of warranty claims during the period | (118) | | | (287) | |
| Accrued warranty, end of period | $ | 814 | | | $ | 1,190 | |
| | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2022 | | 2021 |
| Accrued warranty, beginning of period | $ | 661 | | | $ | 924 | |
| Provision for warranties issued during the period | 550 | | | 708 | |
| Settlements of warranty claims during the period | (397) | | | (442) | |
| Accrued warranty, end of period | $ | 814 | | | $ | 1,190 | |
Stockholders' Equity
The Company is authorized to issue up to 100,000,000 shares of $0.0001 par value preferred stock, of which none is currently outstanding.
Note 4. Leases
The new lease standard was adopted on January 1, 2022 using the modified retrospective transition method. Prior periods were not retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods. The Company elected the package of practical expedients permitted under the transition guidance and did not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The Company also elected the practical expedients to exclude right-of-use ("ROU") assets and lease liabilities for leases with an initial term of 12 months or less from the balance sheet, and to combine lease and non-lease components for property leases, which primarily relate to ancillary expenses such as common area maintenance charges and management fees.
Leases are determined at inception by assessing whether the arrangement conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Owlet's leases consist of leases for corporate offices and office equipment, and have remaining lease terms of 2 to 5 years, with options for renewal. Renewal and termination options have not been included in the lease terms, as it is not reasonably certain that such options will be exercised. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Leases typically contain rent escalations over the lease term. The Company recognizes expense for these leases on a straight-line basis over the lease term. Certain leases require the Company to pay taxes, insurance, maintenance and other operating expenses associated with the leased asset. Such amounts are not included in the measurement of the ROU assets and lease liabilities to the extent they are variable in nature. These variable lease costs are recognized as a variable lease expense when incurred.
ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Owlet uses its incremental borrowing rate, based on the information available at the lease commencement date, to determine the present value of lease payments. Upon adoption, Owlet recorded lease assets and lease liabilities of approximately $3,003 and $3,764, respectively, which did not have a net impact on the condensed consolidated statements of cash flows. The lease assets were adjusted for deferred rent, lease incentives, and prepaid rent, which were recorded as a decrease to accrued and other expenses and other long-term liabilities for the amounts of $234 and $527, respectively. There were no finance leases as of adoption or during the nine months ended September 30, 2022.
Income from subleased properties is recognized on a straight-line basis and presented as a reduction of costs, allocated among operating expense line items in the Company’s Consolidated Statements of Operations and
Comprehensive Loss. In addition to sublease rent, variable non-lease costs such as common area maintenance and utilities are charged to subtenants over the duration of the lease for their proportionate share of these costs. These variable non-lease income receipts are recognized in operating expenses as a reduction to costs incurred by the Company in relation to the head lease.
The impact of the new lease standard on the September 30, 2022 consolidated balance sheet was as follows:
| | | | | |
| September 30, 2022 |
| Right of use assets, net | $ | 2,583 |
| |
| Accrued and other expenses | $ | 1,629 |
| Noncurrent lease liabilities | 1,589 |
| Total lease liabilities, net | $ | 3,218 |
| |
| Weighted average remaining lease term | 1.9 years |
| |
| Weighted average discount rate | 6.3% |
Operating lease costs are recognized on a straight-line basis over the lease term. Total operating lease costs were $390 for the three months ended September 30, 2022, which included an immaterial offset related to short-term and variable lease costs. Total operating lease costs were $1,089 for the nine months ended September 30, 2022, which included an immaterial offset related to short-term and variable lease costs.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| Cash paid for amounts included in the measurement of lease liabilities | $ | 437 | | $ | 1,231 |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | — | | $ | 530 |
The following table shows the future maturities of lease liabilities for leases in effect as of September 30, 2022:
| | | | | |
| Years Ending December 31, | Lease Liabilities |
| 2022 (excluding the nine months ended September 30, 2022) | $ | 437 |
| 2023 | 1,798 |
| 2024 | 1,170 |
| 2025 | 18 |
| Total lease payments | 3,423 |
| Less: imputed interest | (205) |
| Total | $ | 3,218 |
As of September 30, 2022, the Company had three sublease arrangements which are noncancellable and have remaining lease terms of 1.7 to 1.8 years. These subleases do not contain any options to renew or terminate the sublease agreement. The following table shows the expected future sublease receipts as of September 30, 2022:
| | | | | |
| Years Ending December 31, | Sublease Receipts |
| 2022 (excluding the nine months ended September 30, 2022) | $ | 288 |
| 2023 | 1,178 |
| 2024 | 679 |
| Total expected sublease receipts | $ | 2,145 |
The Company recognized sublease income of $287 and $62 for the three months ended September 30, 2022 and September 30, 2021, respectively. The Company recognized sublease income of $687 and $85 for the nine months ended September 30, 2022 and September 30, 2021, respectively.
As previously disclosed in our 2021 Annual Report on Form 10-K and under the previous lease standard (Topic ASC 840), future minimum lease payments under non-cancelable operating leases at December 31, 2021 were as follows:
| | | | | |
| Years Ending December 31, | Amount |
| 2022 | $ | 1,541 | |
| 2023 | 1,587 | |
| 2024 | 953 | |
| Total | $ | 4,081 | |
Rental expense under operating leases was approximately $371 and $1,111 for the three and nine months ended September 30, 2021, respectively.
Note 5. 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, and content, and are recognized over the service period of the performance obligations, which range from 5 to 27 months.
Changes in the total deferred revenues balance were as follows:
| | | | | | | | | | | |
| For the Three Months Ended September 30, |
| 2022 | | 2021 |
| Beginning balance | $ | 1,379 | | | $ | 1,831 | |
| Deferral of revenues | 702 | | | 1,410 | |
| Recognition of deferred revenues | (557) | | | (1,167) | |
| Ending balance | $ | 1,524 | | | $ | 2,074 | |
The Company recognized $451 and $848 of revenue during the three months ended September 30, 2022 and 2021, respectively, that was included in the deferred revenue balance at the beginning of the respective period.
| | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2022 | | 2021 |
| Beginning balance | $ | 1,235 | | | $ | 1,802 | |
| Deferral of revenues | 2,132 | | | 3,428 | |
| Recognition of deferred revenues | (1,843) | | | (3,156) | |
| Ending balance | $ | 1,524 | | | $ | 2,074 | |
The Company recognized $982 and $1,502 of revenue during the nine months ended September 30, 2022 and 2021, respectively, that was included in the deferred revenue balance at the beginning of the respective period.
Note 6. Long-Term Debt and Other Financing Arrangements
The following is a summary of the Company’s long-term indebtedness as of:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Term note payable to SVB, maturing on April 1, 2024 | $ | 9,500 | | | $ | 14,000 | |
| Financed insurance premium | 2,497 | | 2,534 |
| Total debt | 11,997 | | | 16,534 | |
| Less: current portion | (11,997) | | | (8,534) | |
| Less: debt discount and debt issuance costs | — | | | (7) | |
| Total long-term debt, net | $ | — | | | $ | 7,993 | |
As of September 30, 2022, the Company was in violation of its minimum net revenue requirement for the three months ended September 30, 2022 under the amended and restated loan and security agreement, which governs both the Company’s term loan and its line of credit. As a result, the $9,500 term note and the Company’s line of credit with $5,000 of outstanding borrowings is presented as a current liability.
The Company is actively engaged with SVB to come to terms on a further amended financing agreement, including revised financial and liquidity covenants for future periods. The Company expects to finalize an amended agreement with SVB prior to the end of the fiscal year.
Future Aggregate Maturities
As of September 30, 2022, future aggregate maturities of the Term Note and Financed Insurance Premium (defined below) payables were as follows:
| | | | | | | | |
| Years Ending December 31, | | Amount |
| 2022 (excluding the nine months ended September 30, 2022) | | $ | 2,323 | |
| 2023 | | 7,674 | |
| 2024 | | 2,000 | |
| Total | | $ | 11,997 | |
The maturities shown in the table above represent the contractual maturities of the Term Note and Financed Insurance Premium payables as of September 30, 2022. If the Company is unable to come to terms regarding an amendment, and the Company is in violation of its covenants in future periods, SVB can elect to take certain actions, including terminating the line of credit and declaring the principal amount of the Term Note and line of credit as immediately due and payable.
Term Note
The Company has an amended and restated loan and security agreement (the "A&R LSA") with SVB which was entered into on April 22, 2020, and which replaced the loan and security agreement previously in place (the ‘‘Original LSA’’). These agreements provided the Company with both a line of credit (the ‘‘SVB Revolver’’) and a term loan (the ‘‘Term Note’’).
On January 31, 2022, the Company further amended the A&R LSA, which modified the SVB Revolver annual interest rate, decreased the advance rate for borrowing base assets, and increased the cash and cash availability streamline threshold. The amendment also modified the Term Note annual interest rates, replaced the existing EBITDA covenant for 2022 and beyond with a net revenue covenant, and increased the minimum liquidity threshold from $5,000 to $30,000.
As of September 30, 2022, the Term Note had an aggregate principal balance of $9,500, bore interest at a rate equal to the greater of the bank's prime rate plus 2.50%, or 5.75%, and matures on April 1, 2024.
Prior to January 31, 2022, the Term Note bore interest at a rate equal to the greater of the bank's prime rate plus 3.50%, or 6.50%.
The Company's borrowings under the A&R LSA are secured by substantially all of its current and future assets.
Line of Credit
As of September 30, 2022, our borrowing capacity under the SVB Revolver was $17,500 with a reduced line of credit availability of $5,000, and bore interest at an annual rate equal to (i) the greater of the bank’s prime rate plus 0.75%, or 5.00% when a streamline period is in effect and (ii) the greater of the bank’s prime rate plus 1.25%, or 5.00% at all other times. The SVB Revolver is an asset based lending facility subject to borrowing base availability which is limited by specified percentages of eligible accounts receivable and eligible inventory. Borrowing base availability can be impacted based upon the period's eligible accounts receivable and eligible inventory, and may be significantly lower than borrowing base capacity.
Prior to January 31, 2022, the SVB Revolver bore interest at an annual rate equal to (i) the greater of the bank’s prime rate plus 0.75%, or 5.50% when a streamline period is in effect and (ii) the greater of the bank’s prime rate plus 1.25%, or 6.00% at all other times.
Each streamline period commences the first day of the month following a written report of our liquidity and ends the first day after we fail to maintain a required cash and cash availability streamline threshold, provided no event of default has occurred and is continuing. If an event of default has occurred and is continuing, SVB may maintain our streamline status at its discretion. The required cash and cash availability streamline threshold was $50,000 as of September 30, 2022, which the Company did not maintain and was therefore not within a streamline period. The actual interest rate on the SVB Revolver was 7.50% as of September 30, 2022. The SVB Revolver is subject to renewal and is scheduled to mature on April 22, 2024. As of September 30, 2022, there was $5,000 of outstanding borrowings under the SVB Revolver.
Financed Insurance Premium
In July 2022, the Company renewed its corporate directors & officers and employment liability insurance policies and entered into a new short-term commercial premium finance agreement with First Insurance Funding totaling $3,041 to be paid in eleven equal monthly payments, accruing interest at a rate of 4.40% (the "Financed Insurance Premium").
Note 7. Commitments and Contingencies
Litigation
The Company is involved in legal proceedings from time to time arising in the normal course of business. Management, after consultation with legal counsel, 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, Butala v. Owlet, Inc., et al., Case No. 2:21-cv-09016, and Cherian v. Owlet, Inc., et al., Case No. 2:21-cv-09293. Both complaints allege violations of the Securities Exchange Act of 1934 against the Company and certain of its officers and directors on behalf of a putative class of investors who (i) purchased the Company’s common stock between March 31, 2021 and October 4, 2021 or (ii) 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. 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 product as a medical device requiring marketing authorization. The Court has consolidated the Butala and Cherian cases but has yet to appoint a lead plaintiff. The Company intends to vigorously defend itself against these claims, including by filing a motion to dismiss on behalf of itself and the named officers and directors. A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time.
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.
Note 8. Share-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 9 to the Consolidated Financial Statements - Share-based Compensation" in the 2021 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, restricted stock units, performance stock units, dividend equivalents, or other stock or cash-based awards to employees, directors, or consultants.
During the nine months ended September 30, 2022, the Company granted 1,854,105 performance restricted stock units ("PRSU"), of which 631,579 were forfeited during the three months ended September 30, 2022 due to an executive departure. The PRSU awards function in the same manner as restricted stock units except that vesting terms are based on achievement of performance measures, such as the achievement of net revenue targets and obtaining certain FDA regulatory results. PRSUs are recognized as expense following a graded vesting schedule with their performance re-assessed and updated on a quarterly basis, or more frequently as changes in facts and circumstances warrant.
On January 1, 2022, the Company began offering an Employee Stock Purchase Plan ("ESPP"). The ESPP allows eligible employees to contribute a portion of their eligible earnings toward the semi-annual purchase of our shares of
common stock at a discounted price, subject to an annual maximum dollar amount. Employees can purchase stock at a 15% discount applied to the lower closing stock price on the first or last day of the six-month purchase period.
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 PRSU awards generally vest over a period of four years.
Share-based Compensation Expense
Total share-based compensation was recognized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| General and administrative | $ | 880 | | | $ | 347 | | | $ | 4,289 | | | $ | 1095 | |
| Sales and marketing | 238 | | | 127 | | 1,650 | | | 489 |
| Research and development | 722 | | | 223 | | 2,476 | | | 726 |
| Total share-based compensation | $ | 1,840 | | | $ | 697 | | | $ | 8,415 | | | $ | 2,310 | |
During the three and nine months ended September 30, 2022, the Company capitalized $3 and $36, respectively, of share-based compensation attributable to internally developed software.
As of September 30, 2022, the Company had $2,590 of unrecognized share-based compensation costs related to non-vested options that will be recognized over a weighted-average period of 2.2 years, $19,289 of unrecognized share-based compensation costs related to unvested RSUs that will be recognized over a weighted-average period of 2.5 years, and $1,559 of unrecognized share-based compensation costs related to unvested PRSUs that will be recognized over a weighted-average period of 2.4 years.
Note 9. Fair Value Measurements
The following table presents information about the Company's assets and liabilities measured and reported in the financial statements at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Balance |
| Assets: | | | | | | | |
| Money market funds | $ | 16,682 | | $ | — | | $ | — | | $ | 16,682 |
| Total assets | $ | 16,682 | | $ | — | | $ | — | | $ | 16,682 |
| Liabilities: | | | | | | | |
| Common stock warrant liability - public warrants | $ | 1,435 | | | $ | — | | | $ | — | | | $ | 1,435 | |
| Common stock warrant liability - private placement warrants | — | | | 824 | | | — | | | 824 | |
| Total liabilities | $ | 1,435 | | $ | 824 | | $ | — | | $ | 2,259 |
| | | | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Balance |
| Assets: | | | | | | | |
| Money market funds | $ | 94,973 | | | $ | — | | | $ | — | | | $ | 94,973 | |
| Total assets | $ | 94,973 | | $ | — | | $ | — | | $ | 94,973 |
| Liabilities: | | | | | | | |
| Common stock warrant liability - public warrants | $ | 4,486 | | | $ | — | | | $ | — | | | $ | 4,486 | |
| Common stock warrant liability - private placement warrants | | | 2,575 | | | | 2,575 |
| Total liabilities | $ | 4,486 | | $ | 2,575 | | $ | — | | $ | 7,061 |
| | | | | | | |
Money market funds are included within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The common stock warrant liability for the public warrants as of September 30, 2022 is also included within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The private placement warrants are included within Level 2 of the fair value hierarchy as the Company determined that the private placement warrants are economically equivalent to the public warrants and estimated the fair value of the private placement warrants based on the quoted market price of the public warrants. See Part II, Item 8 "Financial Statements and Supplementary Data - Note 10 to the Consolidated Financial Statements - Common Stock Warrants and Earnout Shares" in the Form 10-K for more information on the common stock warrants.
There were no transfers between Level 1 and Level 2 in the periods reported. There were no transfers into or out of Level 3 in the periods reported.
Note 10. Income Taxes
In order to determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates. To the extent that application of the estimated annual effective tax rate is not representative of the quarterly portion of actual tax expense expected to be recorded for the year, the Company determines the quarterly provision for income taxes based on actual year-to-date income. Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
The Company recognized an income tax benefit of $5 for the three months ended September 30, 2022, and income tax expense of $15 for the three months ended September 30, 2021. The provision for income taxes was $28 and $22 for the nine months ended September 30, 2022 and September 30, 2021, respectively.
Significant judgment is required in determining the Company’s provision for income taxes, recording valuation allowances against deferred tax assets, and evaluating the Company’s uncertain tax positions. In evaluating the
ability to realize its deferred tax assets, in full or in part, the Company considers all available positive and negative evidence, including past operating results, forecasted future earnings, and prudent and feasible tax planning strategies. Due to historical net losses incurred and the uncertainty of realizing the deferred tax assets, for all the periods presented, the Company maintains a valuation allowance against the net U.S. deferred tax assets. The Company files U.S. and state income tax returns in jurisdictions with various statutes of limitations. The Company’s federal and state tax returns are not currently under examination.
Note 11. Net Loss Per Share Attributable to Common Stockholders
The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Numerator: | | | | | | | |
Net loss attributable to common stockholders (1) | $ | (19,362) | | | $ | (34,456) | | | $ | (59,838) | | | $ | (47,647) | |
| Denominator: | | | | | | | |
| Weighted-average common shares used in computed net loss per share attributable to common stockholders, basic and diluted | 111,775,265 | | 96,681,887 | | 110,995,687 | | 47,421,668 |
| Net loss per share attributable to common stockholders, basic and diluted | $ | (0.17) | | | $ | (0.36) | | | $ | (0.54) | | | $ | (1.00) | |
(1) For the three and nine months ended September 30, 2021, the Company did not allocate its net loss to participating redeemable convertible preferred stock as those shares are not obligated to share in the losses of the Company. As of September 30, 2022, the Company no longer has participating redeemable convertible preferred stock.
The following potentially dilutive outstanding securities were excluded from the computation of diluted net loss per share due to their anti-dilutive effect:
| | | | | | | | | | | |
| As of September 30, |
| 2022 | | 2021 |
| Stock options | 8,097,810 | | | 9,682,869 | |
| RSUs | 7,842,631 | | | — | |
| PRSUs | 1,222,526 | | | — | |
| ESPP shares committed | 119,413 | | | — | |
| Common stock warrants | 18,100,000 | | | 18,100,000 | |
| Total | 35,382,380 | | | 27,782,869 | |
The Company’s 2,807,500 unvested earnout shares 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, 2022.
Note 12. 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. Since the Company operates in one operating segment, all required financial segment information can be found in these consolidated financial statements.
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, |
| 2022 | | 2021 | | 2022 | | 2021 |
| United States | $ | 15,248 | | | $ | 28,174 | | | $ | 49,837 | | | $ | 71,876 | |
| International | 2,111 | | 3,331 | | 7,409 | | 6,478 |
| Total revenues | $ | 17,359 | | | $ | 31,505 | | | $ | 57,246 | | | $ | 78,354 | |
Other than the United States, no individual country exceeded 10% of total revenues during the three and nine months ended September 30, 2022 and September 30, 2021.
Note 13. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets obtained in exchange for lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted the new guidance as of January 1, 2022. See Note 4 for the impact of adoption on these condensed consolidated financial statements (unaudited).
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as the elimination of exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, the recognition of deferred tax liabilities for outside basis differences, ownership changes in investments, and tax basis step-up in goodwill obtained in a transaction that is not a business combination. The guidance will be effective for annual reporting periods beginning after December 15, 2021. The Company adopted ASU 2019-12 in the first quarter of 2022. The adoption of this standard does not currently have a material impact on the Company's consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for convertible instruments by removing major separation models required under current guidance. ASU 2020-06 also removes certain settlement conditions that are required for equity contracts to qualify for derivative scope exception and simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for annual reporting periods beginning after December 15, 2021, including interim periods. The Company adopted ASU 2020-06 on January 1, 2022. The adoption of this standard does not currently have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and has since released various amendments including ASU No. 2019-04. The guidance modifies the measurement of expected credit losses on certain financial instruments. This guidance will be effective for annual reporting periods beginning after December 15, 2022. Early adoption is permitted. The Company is currently assessing the impact of the guidance on its consolidated financial statements and disclosures.