Good afternoon. Thank you for attending the Owlet Q3 Earnings Call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. I'd now like to pass the conference over to your host, Mike Cavanaugh, with Investor Relations. Thank you. Mike, you may proceed.

Good afternoon, and thank you for joining us today. Earlier today, Owlet Incorporated released financial results for the quarter ended September 30, 2022. The release is currently available on the Company’s website at investors.owletcare.com. Kurt Workman, Owlet's Co-Founder, President and Chief Executive Officer; and Kate Scolnick, Chief Financial Officer, will host this afternoon's call. Before we get started, I would like to remind everyone that certain matters discussed in today's conference call and/or answers that may be given to questions asked are forward-looking statements that are subject to risks and uncertainties relating to future events and/or the future financial performance of the Company. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in the Company’s most recent public filings with the U.S. Securities and Exchange Commission, including its Quarterly Report filed today November 14, 2022, and other reports filed with the SEC, which can be found on its website at investors.owletcare.com or on the SEC's website at www.sec.gov. The information provided in this conference call speaks only as of today's live call. Owlet disclaims any intention or obligation except as required by law to update or revise any information, financial projections or other forward-looking statements, whether because of new information, future events, or otherwise. Please also note that Owlet will refer to certain non-GAAP financial information on today's call. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures in the Company's earnings release, which is also available on the Company's quarterly results page of its website. With that, I will now turn the call over to Kurt Workman. Kurt?

Thank you, Mike, and good afternoon to everyone joining us. Today, I will share our results for the third quarter of 2022 and provide additional updates on our business, specifically around our three key areas of focus: Our dream product portfolio performance in the marketplace; progress towards regulatory authorizations and operational strides towards profitability. As noted in today's earnings release, we delivered revenue of $17.4 million for the third quarter of 2022. Highlights in the quarter included our strongest Prime Day event ever, significant distribution expansion development with U.S. retailers for 2023 and beyond, and the measured benefit of our marketing investments as we reposition back into leadership and growth in the connected nursery ecosystem. That said, as we discussed in our second quarter call, we are recognizing the headwinds from an uncertain macroeconomic environment as retailers focused on managing their working capital by reducing weeks of supply, which impacted our Q3 sell and demand compared to prior periods. Moving forward, one of our highest operating priorities is working towards getting back to 45% to 50% gross margin in future periods through tighter management of promotional spend and supply chain costs. Outside of these factors, we believe consumer satisfaction of our product and trust and belief in the Owlet brand is strong, as we have continued to see baseline demand for our dream product portfolio improve over the course of this year. Notably, in the fourth quarter, we significantly reduced media acquisition spend in the U.S., while growing the units sold to the end consumer quarter-over-quarter by more than 50%, in part due to July's Prime Day performance. In July, we launched our next-generation camera and introduced the new predictive Sleep Technology into our Sock and Cam. The new Dream Duo 2 has already been named Best Baby Monitor by…

Thank you, and good afternoon, everyone. Turning to our Q3 results. Gross billings for the quarter were $23.4 million up from $22.7 million in Q2 sequentially. As we noted last quarter, we are experiencing selling macroeconomic headwinds with our retailers and their inventory management. However, we believe that recovering sell-through trends and brand awareness for our dream platform are all positive indications of the underlying strengths of the value proposition of our products with consumers. Q3 product promotions and discounts were $3.2 million, primarily associated with seasonal and promotional activity across retailers that are taking place in Q4 and pricing changes at retailers related to our camera product transition. This compares to product promotions and discounts of $2.5 million sequentially in Q2. Returns and allowance reserves for Q3 in 2022 were $2.7 million, 11.5% of gross billings. This compares to reserves sequentially in Q2 of $1.8 million. To provide some context for the increase in Q3 returns and allowances, we experienced some lumpiness in the returns and chargebacks claimed by our large retailers that exceeded our estimates this quarter. We are engaging with them to make sure root causes are understood and where necessary addressed. While we believe the majority of the return to vendor program with retailers is behind us, we experienced some overhanging activity this quarter that we did not anticipate. Q3 revenues were $17.4 million, including the impact of adjustments such as promotions, discounts, returns and other allowances. Cost of goods sold in Q3 was $12.7 million and gross profit was $4.6 million. Q3 gross margin was 26.6% compared to 36.1% gross margin sequentially. Cost and other items impacting our gross margin unfavorably in Q3 compared to Q2, primarily from the sequential increase in returns and allowances at an out-of-period inventory adjustment. In addition, the mix of…

We'll now begin the Q&A session. [Operator Instructions] The first question is from the line of Charles Rhyee with Cowen. You may proceed.

Hey, guys. Thanks for taking the questions. I guess, maybe to start. Kate, you mentioned that there was an out-of-period inventory adjustment also in the quarter. How much was that?

Yes. The out-of-period inventory adjustment was about the third of the margin impact that we had in the quarter.

Okay. And then you talked about the $2.7 million returns and that's a little bit more than you expected. How much is left in terms of what's out there that could be returned at this point?

Yes. To further characterize that, so some of that – a small portion of that was product return and some of that – that was related to Smart Sock, some of it is – some administrative items that we're working through. We believe that based on the conversations that we have with retailers that they have returned what they expect to return. However, these are large retailers. They do have large locations, and so it is within their purview to return anything that they do have within their warehouses. So based on the tremendous slowdown that has really moved to a trickle, we do not anticipate that we will see much more from them, but we're continuing that dialogue to make sure that's the case.

Okay. And then I missed it. You talked about some of these one-time items, $1.2 million severance and $850,000 for regulatory submission. What was the third item?

Yes. And we had $1 million in marketing and additional marketing – partner marketing expenses in the quarter that we don't expect to see in the fourth quarter.

Okay. So when you talk about the big drivers to gross margin, you're saying like a third is sort of this out-of-period inventory adjustment. A third – another portion is from the mix because we ended up having more camera revenue, which is lower margin than a Sock. Is that the right way to think about it?

That's right, yes.

And then some of these…

Increase in returns.

Increase in returns?

Yes.

Okay. Is that roughly about a…

Yes. So the margin was really – yes, so about a third, a third, a third on the margin.

Okay. If we were to add that back, what would you estimate gross margin would've been roughly ignoring the Sock piece, I guess.

Some other small – yes, outside of a couple of other small items, I would say sequentially relatively flat.

Okay. And then – and I guess, obviously in this macro environment you're having retailers kind of tighten their days and inventory. So how much would you say the revenue impact is tied just to that versus any maybe perhaps change in actual demand for the product?

So Charles, I'll jump in on that one. I think when we compare Q3 of this year to prior years, it's higher than 2020 and I would say just shy of 2021. So the underlying demand was pretty strong and we saw one of our best Prime Days ever. So I think that's a big part of it. The fact that a lot of the first half revenue was load-in revenue to those retailers after having removed product from the shelf. This was really our first kind of full quarterback to market and we felt really good about the demand this quarter. And so I think as we move forward and we rebalanced those inventory levels, we'll see that revenue will sort of follow sell-through trends, whereas I think that was a big – one of the big headwinds this quarter.

But the revenue guidance for the full-year $69 million to $74 million, I think the midpoint would imply, I'm just going to do the rough math here that fourth quarter could be down sequentially. Can you talk through that a little bit?

Yes. That's correct. I think – yes, what I would say is that, we're just on the precipice here of the holiday season. We best position ourselves with all of the retailers and with especially Amazon here to get through the next few weeks. So a lot depends on how things go, right, over the next several weeks. So we're just sitting here with a lot of information that'll be on the other side of that, and we're just trying to best position ourselves in Q4 that we'll see what we sold in and what we may see sell-through in Q4 to be in a balance. If we could put that better than that, terrific, if we're within that range, that would be an outcome that would be fair just given this macroeconomic environment and what we're hearing in terms of inventory management from retailers across the board from the different types of companies that sell in there.

Got it. And last question for me is on the FDA submission for BabySat and then also for OTC. Currently, obviously we're seeing a big spike in RSV, and curious whether with BabySat that is something you can market for detection of given, right, obviously it has kind of flu like symptoms. Is that something that you can talk about under Dream Sock? I'm guessing no, but once – with BabySat and maybe OTC, is that something you can talk about more openly perhaps?

That's a good question. And what I would say is that, yes, I mean the RSV pandemic right now is really – it's really unfortunate, it's affecting a lot of hospitals and a lot of families. It's a big deal. We don't have any indications specifically for RSV, like the treatment or diagnosis or prediction of RSV, but we do measure baby's oxygen saturation. That's a pretty critical metric for home monitoring for babies who are – for BabySat for babies who are sick or high risk, and for the Dream Sock just for parents to know have additional information and kind of opportunistically know if that goes lower. And so the products will be really helpful with any situation where oxygen plays a role, which that can sometimes be the case in RSV.

Okay. And then lastly, you talked about submitting for OTC in the next few weeks. I missed that earlier part. You said, you are sort of straight with the FDA in terms of necessary information. Any other discussions needed before submitting?

So we've done a pre-sub starting in Q4 of last year. We've had pre-sub meetings every quarter. And we'll probably have a few more informal check-ins just on like those little piece of this submission. But at a high level, we feel very aligned with what's needed for that submission.

Okay. Great. Appreciate all the comments. Thanks.

Yes. Thanks, Charles.

Thank you. [Operator Instructions] The next question is from the line of Jim Suva with Citigroup. You may proceed.

Thank you. In your prepared comments, I believe one of you made a comment about a little bit more returns that you weren't expected, and then you mentioned that you kind of sorted it all out. Just curious was there a general theme to the reason or rationale behind those returns or something that we can kind of grasp a little bit? Thank you.

Hi, Jim. Sure. So we're in the process of working through some of the information that we got back on the returns and allowances for the quarter. We take that information and a lot of that happens actually after we close our quarter. So some of that information came in October and we're working through that. And so we take a return in allowance for that and then getting the information afterwards. What I would say at a high level is that given the – going back to the return to vendor program that we conducted over the last several quarters, there is a lot of inventory that came back from the retailers and there was a lot of activity that we had to work through and a lot of information that came back from them through their portals. So it was not a perfect science in terms of the information and the pace of information from them. So some of that came back in what I would say, a batch and we need to work through that with them. And it just – some of it, it just exceeded our estimation of what we were going to get this quarter.

Okay. And Kate, if I hear you correctly, are you saying that it wasn't like a bad battery or bad velcro or bad misaligned screen or something, it's more excess inventory they wanted to remove off, or are you saying more that you still have to work through all the information?

Yes. It was not physical to the product, no. So in some cases there was some additional product that was included, in some cases there is some charges that are related to how product is received or something regarding the status of the product when it is received in a warehouse of those kind of administrative allowances. So it had nothing to do with the physical nature of the product.

Great. Thank you. And then if I heard your outlook correctly, and maybe you can correct me if I'm wrong. Revenues for next year, [are you still] 13% to 16% off the base of what you just gave for guidance now of $69 million to $74 million in gross margins, 45% to 50%. Is that the guidance?

Yes, it is for 2023, yes. Assuming stable macroeconomic conditions and relative to retailer health, yes.

Okay. And then no FDA approvals coming through that would be additive if that occurred. You're not baking in a percentage of hopeful probability?

Correct. We were not predicting timing on that. So we have no assumptions in the margin or revenue for FDA submission clearance.

Okay. Got you. That's good to have that cleared out there that way nobody misunderstands in case they have an assumption. Thank you so much for your details and clarifications.

Thanks.

Thank you. [Operator Instructions] There are no additional questions waiting at this time. With that, we will conclude today's Owlet Q3 earnings call. Thank you for joining today. Please enjoy the rest of your night.