For the six months ended June 30, 2020, net cash provided by financing activities was
$1.9 million, primarily driven by gross draws of $9.9 million on our line of credit, the issuance of $3.1 million in additional long-term debt (including the $2.1 million SBA PPP loan), and the issuance of an additional
$0.1 million in common stock resulting from stock options exercises, offset by gross payments of $11.0 million on our line of credit
Indemnification
In the ordinary course of business, we enter into agreements that may include indemnification provisions. Pursuant to such agreements, we 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 we could be required to make under these provisions is not determinable. We have never incurred material costs to defend lawsuits or settle claims related to
these indemnification provisions.
In connection with the consummation of the Business Combination, we intend to enter into
indemnification agreements with our directors and officers that may require us to indemnify our 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. We currently have directors and officers insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification
agreements in excess of applicable insurance coverage is immaterial.
Critical Accounting Policies and Estimates
Our managements discussion and analysis of our financial condition and results of operations is based on our condensed consolidated
financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues generated and expenses incurred during the reporting periods. Our estimates are based on our historical
experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other
sources.
Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting
policies discussed below are critical to understanding our historical and future performance, as these policies relate to more significant areas involving managements judgment and estimates.
While our significant accounting policies are described in the notes to the consolidated financial statements including in this prospectus, we
believe that the following accounting policies are most critical to understanding the financial condition and historical and future results of operations:
Revenue Recognition
We generate
substantially all of our revenues from the sale of products, primarily the Owlet Smart Sock, Owlet Cam, and Owlet Monitor Duo. Revenues are recognized when control of goods and services is transferred to customers at the transaction price, an amount
that reflects the consideration expected to be received by us in exchange for those goods and services. The transaction price is calculated as selling price less our estimate of variable consideration, including future returns, volume rebates, and
sales incentives related to current period sales.
Arrangements with Multiple Performance Obligations
We enter into contracts that have multiple performance obligations. Determining whether products and services are considered separate
performance obligations that should be accounted for separately requires significant judgment. Product sales include three separate performance obligations which function independently or with readily available other goods and services. The first
performance obligation is the delivery of hardware and embedded firmware essential to the functionality of the hardware. Embedded firmware allows the hardware to recognize inputs to the hardware and provide appropriate outputs. The second
performance obligation is the implied right to connect the downloadable mobile application, provided free of charge, to the hardware, which enables users to view and access real-time data outputs. The third performance obligation is the implied
right to receive, on a when-and-if-available basis, future unspecified application upgrades, added features, and bug fixes
relating to the products essential firmware.
We allocate the transaction price to each performance obligation based on a relative
standalone selling price (SSP). Our process for determining the SSP considers multiple factors, including an adjusted market assessment and consumer behaviors, and varies depending on the facts and circumstances of each performance
obligation. Revenues allocated to the delivery of the hardware and embedded firmware essential to the functionality of the hardware represent substantially all of the arrangement consideration and reflect our best estimate of the selling price if it
was sold regularly on a stand-alone basis. SSP for the mobile application connection and upgrade rights are estimated based on relevant market and consumer data.
Revenues are recognized at the time the related performance obligation is satisfied by transferring control of the promised good or service to
a customer. Revenues allocated to the hardware and embedded firmware are recognized at the time of product delivery, provided the other conditions for revenue recognition have been met. This generally occurs upon delivery of the product to a third-party carrier. Revenues allocated to the implied right to access the mobile application and the implied right to receive, on a
when-and-if-available basis, future unspecified application upgrades, added features, and bug fixes, are recognized on a straight-line basis over the estimated usage
period of the underlying hardware product. The usage period is estimated based on historical user activity and ranges from 10 to 27 months.
We record revenues net of sales tax and variable consideration such as discounts and customer returns. Payment is typically due within
90 days or less from shipment of the product. We record estimated reductions to revenue in the form of variable consideration for customer sales programs, returns, and incentive offerings including rebates, markdowns, promotions, and
volume-based incentives.
Consideration payable to a customer, such as cooperative advertising and pricing promotions to retailers and
distributors, is recorded as a reduction to revenue and an accrued liability unless we receive a distinct benefit in exchange for credits claimed and can reasonably estimate the fair value of the distinct benefit received. Deferred revenues
represent advance payments received from customers prior to performance by us. Sales taxes collected from customers which are remitted to governmental authorities are not included in revenues and are reflected as a liability in the accompanying
consolidated balance sheets.
Sales Returns, Rebates, Discounts, and Allowances
Our contract liabilities include promises to provide customers rights of return, which range from 15 to 30 days from product activation
and from 15 to 45 days from product purchase as of December 31, 2020 and December 31, 2019, respectively, as well as promises to issue discounts and provide rebates or allowances to certain retail channel customers if specified
conditions are met. Revenues are reduced in the accompanying consolidated statements of operations for anticipated sales returns, discounts, and allowances, based on our analysis of historical sales returns and contractual discounts and allowances.
Expected returns, as well as estimated discounts and allowances that have been earned but not yet honored or paid out, are included in accrued and other expenses in the accompanying balance sheets. Actual returns may vary from estimates if we
experience a change in actual sales returns or exchange patterns due to unanticipated changes in products or competitive pressures.
Sales
return rates have been sufficiently predictable to allow us to estimate expected future returns. We review the actual returns as a percentage of sales to determine the historical rate of return. The historical rate of return is used as a basis for
estimating future returns based on current sales. The sales return estimate can be affected by the release of new products or changes to sales channels. Actual returns may vary from estimates if we experience a change in actual sales returns or
exchange patterns due to unanticipated changes in products or competitive pressures.
Sales rebates, discounts, and allowances provided to
our customers have been sufficiently predictable to allow us to estimate expected future discounts and allowances. Discounts and allowances are estimable based on existing and expected promotional programs and contractual terms in place at the time
of sale. New promotional programs or changes to existing promotional programs could impact the estimated sales rebates, discounts, and allowances.
The estimates and assumptions used to reserve for rights of return, rebates, discounts, and allowances have been accurate in all material
respects and have not materially changed in the past.
Warranty Reserves
Our products include an assurance-type limited warranty. The estimated warranty costs, which are expensed at the time of sale and included in
cost of revenues, are based on the results of historical trends and warranty claim rates incurred and are adjusted for any current or expected trends as appropriate. The warranty reserve estimate can be affected by the release of new products or
updates which could have failure rates that differ from historical products. We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs.
Determination of the Fair Value of Common Stock
As there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by our Board
as of the date of each option grant with input from management, considering our most recently available third-party valuation of common stock, and our Boards assessment of additional objective and subjective factors that it believed were
relevant and which may have changed from the date of the most recent valuation through the date of the grant. We believe that the Board has the relevant experience and expertise to determine fair value of our common stock. Third-party valuations
were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities
Issued as Compensation. Management has considered numerous factors in determining the best estimate of fair value of our common stock, including the following:
|
|
|
valuation performed by un-related third-party specialists;
|
|
|
|
our operating results, financial position and capital resources;
|
|
|
|
our stage of development and current business conditions and projections, including the introduction of new
products;
|
|
|
|
the lack of marketability of our common stock;
|
|
|
|
the hiring of key personnel and the experience of our management;
|
|
|
|
the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given
the prevailing market conditions;
|
|
|
|
the nature and history of our business;
|
|
|
|
industry trends and the competitive environment;
|
|
|
|
illiquidity of stock-based awards involving securities in a private company; and
|
|
|
|
the overall economic, regulatory, and capital market conditions.
|
The assumptions underlying these valuations were highly complex and subjective and represented managements best estimates, which
involved inherent uncertainties and the application of managements judgment. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could be
materially different.
Since a public trading market for our common stock has been established after the Business Combination, it will no
longer be necessary for our Board to estimate the fair value of our common stock in connection with our accounting for granted stock options and other such awards we may grant, as the fair value of our common stock will be determined based on the
quoted market price of our common stock. Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.
Stock-based Compensation Expense
We classify stock-based awards granted in exchange for services as equity awards. Stock-based compensation expense related to awards to
employees and non-employees is measured at the grant date based on the fair value of the award. The calculation of the stock-based compensation is based on the
Black-Scholes valuation model, which requires significant estimates including the expected volatility of our common stock, expected dividend yield, option term and risk-free rate. We derive our volatility from the average historical stock
volatilities of peer public companies over a period equivalent to the expected term of the awards. As our historical share option exercise experience does not provide a reasonable basis upon which to estimate the expected term, we estimate the
expected term using the simplified method based on the vesting and contractual terms of the award. Under the simplified method, the expected term is equal to the average of the stock-based awards weighted average vesting period and its
contractual term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield is 0.0% as we do not anticipate paying dividends on our common stock for the foreseeable future.
The fair value of each stock option award granted was estimated on the date of grant using the Black-Scholes option pricing model with the
following assumptions for the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
Risk-free interest rate
|
|
|
0.44% - 0.61
|
%
|
|
|
0.51
|
%
|
Expected volatility
|
|
|
62.88% - 63.27
|
%
|
|
|
63.38
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected term of options (in years)
|
|
|
5.00 - 6.00
|
|
|
|
6.00
|
|
The fair value of each stock option award granted was estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Risk-free interest rate
|
|
|
0.46%- 0.51
|
%
|
|
|
1.57% - 2.53
|
%
|
Expected volatility
|
|
|
63.38% - 64.04
|
%
|
|
|
54.29% - 55.03
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected term of options (in years)
|
|
|
6.00
|
|
|
|
5.00 - 6.25
|
|
Preferred Stock Warrant Liability
We classify warrants to purchase shares of our redeemable convertible preferred stock as a liability on our consolidated balance sheets as each
warrant is a free-standing instrument that may require us to transfer consideration upon exercise. Each warrant is initially recorded at fair value upon issuance, net of issuance costs, using the Black-Scholes option pricing model, and is
subsequently re-measured to fair value at each subsequent balance sheet date. Changes in fair value of warrants are recognized as a component of preferred stock mark to market adjustment in the consolidated
statements of operations. We will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrants.
The Black-Scholes valuation model requires significant estimates including the expected volatility of our common stock, expected dividend
yield, option term and risk-free rate. We derive our volatility from the average historical stock volatilities of peer public companies over a period equivalent to the expected term of the awards. As our historical share option exercise experience
does not provide a reasonable basis upon which to estimate the expected term, we estimate the expected term using the simplified method based on the vesting and contractual terms of the award. Under the simplified method, the expected term is equal
to the average of the stock-based awards weighted average vesting period and its contractual term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield is 0.0% as we do
not anticipate paying dividends on our common stock for the foreseeable future.
We utilized the Black-Scholes option pricing model and
the assumptions in the following table to determine the fair value on the date of grant of the warrants issued for the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
Expected term (in years)
|
|
|
9.67 - 10.00
|
|
|
|
9.67 - 10.00
|
|
Risk-free interest rate
|
|
|
0.63%- 3.14
|
%
|
|
|
0.63% - 3.14
|
%
|
Expected volatility
|
|
|
50.00% - 55.00
|
%
|
|
|
50.00% - 55.00
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Exercise price
|
|
$
|
1.30 - $1.59
|
|
|
$
|
1.30 - $1.59
|
|
Stock price
|
|
$
|
1.30 - $1.59
|
|
|
$
|
1.30 - $1.59
|
|
We utilized the Black-Scholes options pricing model and the assumptions in the following table to determine
the fair value on the date of grant of the warrants issued for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Expected term (in years)
|
|
|
9.67 - 10.00
|
|
|
|
9.67 - 10.00
|
|
Risk-free interest rate
|
|
|
0.63%- 3.14
|
%
|
|
|
2.06% - 3.14
|
%
|
Expected volatility
|
|
|
50.00% - 55.00
|
%
|
|
|
50.00% - 55.00
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Exercise price
|
|
$
|
1.30 - $1.59
|
|
|
$
|
1.30 - $1.59
|
|
Stock price
|
|
$
|
1.30 - $1.59
|
|
|
$
|
1.30 - $1.59
|
|
Income Taxes
We account for income taxes using the asset and liability method. We recognize deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse.
In evaluating the ability to recover our
deferred income tax assets, we consider all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income on a
jurisdiction-by-jurisdiction basis. In the event we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded
amount, we would make an adjustment to the valuation allowance that would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined to not be realizable in the future, an
adjustment to the valuation allowance would be charged to earnings in the period when such a determination is made. As of December 31, 2020 and December 31, 2019, we recorded a full valuation allowance on our deferred tax assets.
Uncertain tax positions are recorded when it is more likely than not that a given tax position would not be sustained upon examination by
taxing authorities. Based on positions taken in our tax filings, we concluded that there are no significant uncertain tax positions requiring disclosure as of December 31, 2020 and December 31, 2019, and that there are no material amounts
of unrecognized tax benefits. Our policy for recording interest and penalties related to income taxes, including uncertain tax positions, is to record such items as a component of the provision for income taxes.
Recent Accounting Pronouncements
See Note 1, Description of Organization and Summary of
Significant Accounting Policies, in the notes to our accompanying unaudited condensed consolidated financial statements as of June 30, 2021 included in this prospectus for a full description
of recent accounting pronouncements, including expected dates of adoption and estimated effects on results of operations and financial condition.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial
position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of interest rate fluctuations and credit risk.
Interest Rate Risk
As discussed
above, the Term Note, as amended on September 22, 2020, had an interest rate of the greater of either the prime rate plus 3.5%, or 6.5% as of June 30, 2021. During the three and six months ended June 30, 2021, the prime rate did not
exceed 5.0%. We have not been exposed to material risk due to fluctuations in interest rates. A hypothetical 10% change in interest rates would not result in a material impact on our consolidated financial statements.
Credit Risk
Financial instruments
that potentially subject us to concentration of credit risk consist of cash and cash equivalents and accounts receivable. Substantially all of our cash and cash equivalents are deposited in accounts at one financial institution, and account balances
may at times exceed federally insured limits. We believe that we are not exposed to significant credit risk due to the financial strength of the depository institution in which the cash is held.
75