Hello and welcome to the Owlet Q1, 2023 Earnings Call.. My name is Elliot, and I will be coordinating the call today. [Operator Instructions]. I now like to hand over to Mike Cavanaugh, Investor Relations. Floor is yours. Please go ahead.

Thank you Elliot. Good afternoon, and thank you all for joining us today. Earlier today, Owlet Incorporated released financial results for the quarter ended March 31, 2023. The release is currently available on the company's website at investors.owletcare.com. Kurt Workman, Owlet's Co-Founder and Chief Executive Officer; and Kate Scolnick, Chief Financial Officer, will host this afternoon's call. As a reminder, some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date should not place undue reliance on these forward-looking statements. And the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's SEC filings for further guidance on this matter. With that, I will now turn the call over to Kurt Workman, Owlet's cofounder and Chief Executive Officer. Kurt?

Good afternoon, and thank you for joining us for Owlet's Q1, 2023 earnings call. Before we dive into the details, let's revisit our objectives from our last update in March. Through category defining products with FDA clearance and a focus on operational discipline and cost management, our goal is to position Owlet on a pathway to long-term sustainable growth and profitability. We believe that by focusing on these objectives, we can advance our mission to improve infant health and wellness and deliver value to our shareholders. Owlet has made significant progress towards these goals in reducing operating expenses year-over-year by approximately 50% on a run rate basis, and including cutting marketing cost per acquisition by 80% year-over-year, resulting in a significant improvement in the adjusted EBITDA loss from Q4 to Q1. Despite these aggressive cost reductions, channel sell-through was up 36% year-over-year as we continue to see strong consumer demand for our products. From a revenue perspective, we typically see a sequential decline in revenue from Q4 to Q1. As you recall from Q1 last year, we had our first large initial load-ins for the Dream Sock late in Q1, so year-over-year selling comparisons reflects that impact. In addition, for Q1 2023, we managed channel sell-in specifically reducing in certain areas to support our goal of improving our channel health and in stock levels. We have more work to do here, but we are making improvements. Overall, implementing continuous cost reductions and achieving marketing efficiencies, while achieving strong consumer demand and improving channel health will create a stronger, more sustainable business as we continue to work towards clearances and be in a favorable position to eventually accelerate in long-term healthy growth. As Q1 was the anniversary of our Dream Sock launch, I thought it appropriate to take a look back…

Thank you, and good afternoon, everyone. Kurt covered under number of our financial highlights in his overview. I will repeat a few items with some color and provide some additional financial commentary. Gross billings for the first quarter of 2023 were $12.4 million, down from $15.4 million sequentially. Q1 product promotions and discounts were $700,000, primarily associated with promotional activity for owlet.com and Q1 retail promotional discounts. Returns and allowances reserves for Q1 2023 were $1.1 million, 8.9% of gross billings. This compares to reserve sequentially in Q4 of $1.5 million, 10.7% of gross billings. Total revenues in the first quarter of 2023 were $10.7 million, a sequential decrease from $12 million in the fourth quarter of 2022. Total revenues were driven primarily by sales of Dream Sock and Dream Duo. Cost of revenues were $6.6 million in Q1, resulting in gross margin of 39.3% compared to 27.5% gross margin in the fourth quarter.The substantial improvement in gross margin was primarily due to improvements in purchase price variance costs, prior period inventory adjustments and declines in promotional activity. Operating expenses in the quarter were $15.1 million, including stock-based compensation of $2.8 million and transaction costs of $2.1 million, which was a sequential decline of 37% from $24.1 million in the fourth quarter. Excluding stock-based compensation and transaction costs, Q1 operating expenses were $10.2 million. The sequential decrease in operating expenses was primarily due to employee-related costs, bad debt reserves and marketing expense. Operating loss in the quarter was $11 million compared with operating loss of $20.7 million in the fourth quarter, and $21.7 million in the first quarter of 2022. Net loss in the quarter was $11.9 million compared with $19.5 million last quarter, and $28.8 million in the first quarter of 2022. Adjusted EBITDA loss for Q1 was $5.8…

Thank you. [Operator Instructions] Our first question comes from Charles Rhyee with TD Cowen. Your line is open.

Yes. Thanks for taking the questions. I wanted to start with the -- sort of the impact of the buybuy Baby bankruptcy. Can you give us a sense for what percent of your sales go through that channel or that retailer specifically? And then you said that it will take some time for this -- the impact to materialize. Is that because the stores are still operating and they're still inventory there? Maybe if you could just give us a little bit more color on the dynamics going on.

Great question. I think buybuy Baby is our fourth largest retailer. So not insignificant, but also not the -- one of the larger contributions in terms of revenue. Buybuy Baby was a key specialty retailer that assisted in customer education in our space. They were the largest specialty retailer in the category. That said, I think Owlet has fantastic customer awareness independent of channel, because our product is so highly considered, and there is so much awareness around it. So most of the time, parents will actually do quite a bit of research outside of channel before then deciding which channels to purchase in. And so, I think long-term will be very resilient to the changes in channel mix. I do think it will take some time for that demand to shift to new channels, specifically in Q2, buybuy Baby will be liquidating inventory, so that will have some pull-in effect from other channels. And then as we get into Q3 and Q4, we're going to work aggressively with other channels like Babylist, Target, Amazon, to bring that demand back through other channel opportunities. So short-term, there are some headwinds with inventory liquidation and consumers finding their new shopping partner. I think long-term, this category will continue to grow, and we'll reinforce a great shopping experience with new partners. And we're excited about what Babylist specifically is doing to capture this demand. Amazon continues to grow as a channel, and Target, we're hoping will play a big role as well.

When a retailer liquidates inventory in this kind of situation, with your businesses -- we're not going to get the sell-in into that retailer as they're just winding down. Is that the right way to think of it? So that's the headwind to 2Q revenue and the rest of the year.

That's right. Yeah. So the sell-in in Q2 won't be balanced -- the sell-through won't be balanced with sell-in in terms of revenue. As we move throughout the rest of the year, we'll start that based on hand and inventory calculation for other retailers, I think will start to change as we see some of that demand shift to other channels. And so, we hope to be able to move some of that sell-in revenue into other channels as we -- as their sell-through starts to pick up with buybuy Baby going out of business?

Okay. Does this impact at all your ability to reach adjusted EBITDA breakeven by year-end in your view?

I think we still are on track to do that, but I'll pass it over to Kate to answer that question.

Yeah. I mean, no one likes to have an additional headwind with what we're trying to accomplish this year, but it's a signal that we have here in May. And I think we see a lot of opportunity in Q2 with the holidays that we have coming up. We obviously have the prime opportunity with Amazon that's been very successful. We've been experimenting with some additional ways to maximize our own online presence with owlet.com. So, there is a lot of opportunity to be successful as we head into the back half of the year, especially as we see this momentum that's starting to improve with the sell-through. So not a headwind that we wanted, but it's at least a signal that we understand now that we'll try to overcome.

Great. And maybe the last question for me. The sell-through being up 36% sequentially, sounds really pretty impressive here. Can you give us a sense in terms of what -- on a revenue basis, what that kind of looks like to give us a sense on once we kind of get the balance on inventory, we could -- what is the real selling power of the brand right now?

Kate, do you want to take that or do you want me to take that?

Go ahead, Kurt.

Okay. Yeah. So what I would say is that, our sell-through in Q1 again outpaced the sell-in as we booked kind of rebalance inventory levels. Overall sell-through, we believe is on a healthy track. And keeping in mind that we've significantly reduced our cost per acquisition across the business, and we held that from Q4 into Q1, and we'll continue to maintain that efficiency this year. So we feel really healthy with that. Generally, Q1 sees a 10% to 15% decline in sell-through based on promotional activity. So we were sort of in that ballpark from Q4 as we reported in Q4, and then we'll see an increase as we move into Q2, and then finding Q3 and then you have the holidays in Q4. So we feel like we've got the revenue baseline to get to profitability this year.

Okay. Great. I will stop there. Thanks.

This is all the time we have for questions today. We'd like to thank you for your participation. You may now disconnect your lines.