Butterfly Network, Inc 10-Q for FY2021 Q3
Butterfly Network, Inc. (BFLY)
About this 10-Q
Butterfly Network, Inc filed this 10-Q on November 15, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $14.62M
- up 44.3% from $10.14M a year earlier
- Net loss
- $13.56M
- compared with a net loss of $92.21M a year earlier
- Diluted EPS
- -$0.07
- compared with -$15.20 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
EXCHANGE ACT OF 1934
For the quarterly period ended
or
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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(Address of principal executive offices) | | (Zip Code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | | |
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☒ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of November 1, 2021, the registrant had
TABLE OF CONTENTS
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| | Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (Unaudited) | | 3 |
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| | Notes to Condensed Consolidated Financial Statements (Unaudited) | | 7 |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 25 | |
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In this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” the “Company” and “Butterfly” mean Butterfly Network, Inc. (formerly Longview Acquisition Corp.) and our subsidiaries. On February 12, 2021 (the “Closing Date”), Longview Acquisition Corp., a Delaware corporation (“Longview” and after the Business Combination described herein, the “Company”), consummated a business combination (the “Business Combination”) pursuant to the terms of the Business Combination Agreement, dated as of November 19, 2020 (the “Business Combination Agreement”), by and among Longview, Clay Merger Sub, Inc., a Delaware corporation (“Merger Sub”), and Butterfly Network, Inc., a Delaware corporation (“Legacy Butterfly”). Immediately upon the consummation of the Business Combination and the other transactions contemplated by the Business Combination Agreement (collectively, the “Transactions”, and such completion, the “Closing”), Merger Sub merged with and into Legacy Butterfly, with Legacy Butterfly surviving the Business Combination as a wholly-owned subsidiary of Longview (the “Merger”). In connection with the Transactions, Longview changed its name to “Butterfly Network, Inc.” and Legacy Butterfly changed its name to “BFLY Operations, Inc.”
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that relate to future events or our future financial performance regarding, among other things, the plans, strategies and prospects, both business and financial, of the Company. These statements are based on the beliefs and assumptions of the Company’s management team. Generally, statements that are not historical facts, including statements concerning possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
| ● | the success, cost and timing of our product development activities; |
| ● | the potential attributes and benefits of our products and services; |
| ● | our ability to obtain and maintain regulatory approval for our products, and any related restrictions and limitations of any authorized product; |
| ● | our ability to identify, in-license or acquire additional technology; |
| ● | our ability to maintain our existing license, manufacturing and supply agreements; |
| ● | our ability to compete with other companies currently marketing or engaged in the development of ultrasound imaging devices, many of which have greater financial and marketing resources than us; |
| ● | the size and growth potential of the markets for our products and services, and the ability of each to serve those markets, either alone or in partnership with others; |
| ● | our estimates regarding expenses, revenue, capital requirements and needs for additional financing; |
| ● | our ability to raise financing in the future; |
| ● | our financial performance; or |
| ● | the potential impacts of the COVID-19 pandemic on our business operations or financial condition. |
These statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “should,” “seeks,” “plans,” “scheduled,” “anticipates” or “intends” or similar expressions or phrases, or the negative of those expressions or phrases. The forward-looking statements are based on projections prepared by, and are the responsibility of, the Company’s management. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, the Company cannot assure you that it will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions relating, among other things, to:
| ● | our rapid growth may not be sustainable and depends on our ability to attract and retain customers; |
| ● | our business could be harmed if we fail to manage our growth effectively; |
| ● | the ability to recognize the anticipated benefits of the Business Combination, which may be affected by, among other things, competition and our ability to grow and manage growth profitably and retain our key employees; |
| ● | our projections are subject to risks, assumptions, estimates and uncertainties; |
| ● | our business is subject to a variety of U.S. and foreign laws, which are subject to change and could adversely affect our business; |
| ● | the pricing of our products and services and reimbursement for medical procedures conducted using our products and services; |
| ● | changes in applicable laws or regulations; |
| ● | our ability to remediate the material weakness in our internal controls over financial reporting; |
| ● | failure to protect or enforce our intellectual property rights could harm our business, results of operations and financial condition; |
| ● | the ability to maintain the listing of our Class A common stock on the New York Stock Exchange; |
| ● | economic downturns and political and market conditions beyond our control could adversely affect our business, financial condition and results of operations; and |
| ● | the impact of the COVID-19 pandemic on our business. |
These and other risks and uncertainties are described in greater detail under the caption “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as amended, in Item 1A of Part II of this quarterly report, and in other filings that we make with the Securities and Exchange Commission, or SEC. The risks described under the heading “Risk Factors” are not exhaustive. New risk factors emerge from time to time, and it is not possible to predict all such risk factors, nor can the Company assess the impact of all such risk factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements, which speak only as of the date hereof. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. The Company undertakes no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
BUTTERFLY NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
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| December 31, | | ||
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Assets | |
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Current assets: | |
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Cash and cash equivalents | | $ | | | $ | | |
Marketable securities | | | | | | — | |
Accounts receivable, net | |
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Inventories | |
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Current portion of vendor advances | | | | | | | |
Prepaid expenses and other current assets | |
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Total current assets | | $ | | | $ | | |
Property and equipment, net | | | | | | | |
Non-current portion of vendor advances | |
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Other non-current assets | |
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Total assets | | $ | | | $ | | |
Liabilities, convertible preferred stock and stockholders’ equity (deficit) | |
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Current liabilities: | |
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Accounts payable | | $ | | | $ | | |
Deferred revenue, current | |
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Accrued purchase commitments, current | |
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Accrued expenses and other current liabilities | | | | | | | |
Total current liabilities | | $ | | | $ | | |
Deferred revenue, non-current | | | | | | | |
Convertible debt | | | — | | | | |
Loan payable | | | — | | | | |
Warrant liabilities | | | | | | — | |
Accrued purchase commitments, non-current | | | | | | | |
Other non-current liabilities | | | | | | | |
Total liabilities | | $ | | | $ | | |
Commitments and contingencies (Note 16) | | | | | | | |
Convertible preferred stock: | | | | | | | |
Convertible preferred stock (Series A, B, C and D) $ | | | — | | | | |
Stockholders’ equity (deficit): | | | | | | | |
Class A common stock $ | | | | | | | |
Class B common stock $ | | | | | | — | |
Additional paid-in capital | | | | | | | |
Accumulated deficit | | | ( | | | ( | |
Total stockholders’ equity (deficit) | | $ | | | $ | ( | |
Total liabilities, convertible preferred stock and stockholders’ equity (deficit) | | $ | | | $ | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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BUTTERFLY NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
(Unaudited)
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| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
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Revenue: | | |
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Product | | $ | | | $ | | | $ | | | $ | | |
Subscription | |
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Total revenue | | $ | | | $ | | | $ | | | $ | | |
Cost of revenue: | |
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Loss on product purchase commitments | | | | | | | | | | | | | |
Product | | | | | | | | | | | | | |
Subscription | |
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Total cost of revenue | | $ | | | $ | | | $ | | | $ | | |
Gross profit | | $ | ( | | $ | ( | | $ | | | $ | ( | |
Operating expenses: | | | | | | | | | | | | | |
Research and development | | $ | | | $ | | | | | | | | |
Sales and marketing | |
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General and administrative | |
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Total operating expenses | |
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Loss from operations | | $ | ( | | $ | ( | | $ | ( | | $ | ( | |
Interest income | | $ | | | $ | | | | | | | | |
Interest expense | |
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Change in fair value of warrant liabilities | | | | | | — | | | | | | — | |
Other income (expense), net | |
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Loss before provision for income taxes | | $ | ( | | $ | ( | | $ | ( | | $ | ( | |
Provision for income taxes | |
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Net loss and comprehensive loss | | $ | ( | | $ | ( | | $ | ( | | $ | ( | |
Net loss per common share attributable to Class A and B common stockholders, basic and diluted | | ( | | ( | | ( | | ( | | ||||
Weighted-average shares used to compute net loss per share attributable to Class A and B common stockholders, basic and diluted | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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BUTTERFLY NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
(Unaudited)
Three months ended September 30, 2020 | |||||||||||||||||||||||||
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| | Preferred | | | Common | | Common | | Additional | | | | | Total | |||||||||||
| | Stock | | | Stock | | Stock | | Paid-In | | Accumulated | | Stockholders’ | ||||||||||||
| | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Equity (Deficit) | ||||||
June 30, 2020 | | | | $ | | | | | | $ | | | — | | $ | — | | $ | | | $ | ( | | $ | ( |
Net loss | | — | | | — | | | — | | | — | | — | | | — | | | — | | | ( | | | ( |
Common stock issued upon exercise of stock options | | — | | | — | | | | | | — | | — | | | — | | | | | | — | | | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | — | | | — | | | | | | — | | | |
September 30, 2020 | | | | $ | | | | | | $ | | | — | | $ | — | | $ | | | $ | ( | | $ | ( |
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Nine months ended September 30, 2020 | |||||||||||||||||||||||||
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| | Preferred | | | Common | | Common | | Additional | | | | | Total | |||||||||||
| | Stock | | | Stock | | Stock | | Paid-In | | Accumulated | | Stockholders’ | ||||||||||||
| | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Equity (Deficit) | ||||||
December 31, 2019 | | | | $ | | | | | | $ | | | — | | $ | — | | $ | | | $ | ( | | $ | ( |
Net loss | | — | | | — | | | — | | | — | | — | | | — | | | — | | | ( | | | ( |
Common stock issued upon exercise of stock options | | — | | | — | | | | | | — | | — | | | — | | | | | | — | | | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | — | | | — | | | | | | — | | | |
September 30, 2020 | | | | $ | | | | | | $ | | | — | | $ | — | | $ | | | $ | ( | | $ | ( |
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Three months ended September 30, 2021 | |||||||||||||||||||||||||
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| | Preferred | | | Common | | Common | | Additional | | | | | Total | |||||||||||
| | Stock | | | Stock | | Stock | | Paid-In | | Accumulated | | Stockholders’ | ||||||||||||
| | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Equity (Deficit) | ||||||
June 30, 2021 | | — | | $ | — | | | | | $ | | | | | $ | | | $ | | | $ | ( | | $ | |
Net loss | | — | | | — | | | — | | | — | | — | | | — | | | — | | | ( | | | ( |
Common stock issued upon exercise of stock options and warrants | | — | | | — | | | | | | — | | — | | | — | | | | | | — | | | |
Common stock issued upon vesting of restricted stock units | | — | | | — | | | | | | — | | — | | | — | | | — | | | — | | | — |
Stock-based compensation expense | | — | | | — | | | — | | | — | | — | | | — | | | | | | — | | | |
September 30, 2021 | | — | | $ | — | | | | | $ | | | | | $ | | | $ | | | $ | ( | | $ | |
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Nine months ended September 30, 2021 | |||||||||||||||||||||||||
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| | Preferred | | | Common | | Common | | Additional | | | | | Total | |||||||||||
| | Stock | | | Stock | | Stock | | Paid-In | | Accumulated | | Stockholders’ | ||||||||||||
| | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Equity (Deficit) | ||||||
December 31, 2020 | | | | $ | | | | | | $ | | | — | | $ | — | | $ | | | $ | ( | | $ | ( |
Net loss | | — | | | — | | | — | | | — | | — | | | — | | | — | | | ( | | | ( |
Common stock issued upon exercise of stock options and warrants | | — | | | — | | | | | | | | — | | | — | | | | | | — | | | |
Common stock issued upon vesting of restricted stock units | | — | | | — | | | | | | — | | — | | | — | | | — | | | — | | | — |
Conversion of convertible preferred stock | | ( | | | ( | | | | | | | | | | | | | | | | | — | | | |
Conversion of convertible debt | | — | | | — | | | | | | | | — | | | — | | | | | | — | | | |
Net equity infusion from the Business Combination | | — | | | — | | | | | | | | — | | | — | | | | | | — | | | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | — | | | — | | | | | | — | | | |
September 30, 2021 | | — | | $ | — | | | | | $ | | | | | $ | | | $ | | | $ | ( | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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BUTTERFLY NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | Nine months ended September 30, | ||||
| | 2021 | | 2020 | ||
Cash flows from operating activities: | | | | | | |
Net loss |
| $ | ( |
| $ | ( |
Adjustments to reconcile net loss to net cash used in operating activities: | |
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Depreciation and amortization | |
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Non-cash interest expense on convertible debt | | | | | | |
Write-down of inventories | | | | | | |
Stock-based compensation expense | | | | | | |
Change in fair value of warrant liabilities | | | ( | | | |
Other | | | | | | |
Changes in operating assets and liabilities: | |
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Accounts receivable | | | ( | | | ( |
Inventories | |
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Prepaid expenses and other assets | | | ( | | | ( |
Vendor advances | | | ( | | | |
Accounts payable | | | ( | | | |
Deferred revenue | | | | | | |
Accrued purchase commitments | | | ( | | | |
Accrued expenses and other liabilities | | | | | | |
Net cash used in operating activities | | $ | ( | | $ | ( |
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Cash flows from investing activities: | |
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Purchases of marketable securities | | | ( | | | |
Sales of marketable securities | | | | | | |
Purchases of property and equipment | |
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Net cash used in investing activities | | $ | ( | | $ | ( |
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Cash flows from financing activities: | |
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Proceeds from exercise of stock options and warrants | |
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Net proceeds from equity infusion from the Business Combination | | | | | | |
Proceeds from loan payable | |
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Proceeds from issuance of convertible debt | |
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Payment of loan payable | | | ( | | | |
Payments of debt issuance costs | | | ( | | | |
Net cash provided by financing activities | | $ | | | $ | |
Net (decrease) increase in cash, cash equivalents and restricted cash | | $ | | | $ | ( |
Cash, cash equivalents and restricted cash, beginning of period | | | | | | |
Cash, cash equivalents and restricted cash, end of period | | $ | | | $ | |
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Reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets | | | | | | |
Cash and cash equivalents | | $ | | | $ | |
Restricted cash | | | | | | |
Total cash, cash equivalents and restricted cash shown in the statement of cash flows | | $ | | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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BUTTERFLY NETWORK, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Description of Business
Butterfly Network, Inc., formerly known as Longview Acquisition Corp. (the “Company” or “Butterfly”), was incorporated in Delaware on February 4, 2020. The Company’s legal name became Butterfly Network, Inc. following the closing of the business combination discussed in Note 3 “Business Combination”. The prior period financial information represents the financial results and condition of BFLY Operations, Inc.
The Company is an innovative digital health business whose mission is to democratize healthcare by making medical imaging accessible to everyone around the world. Butterfly’s solution uses a unique combination of software and hardware technology to enable medical imaging to drive more clinical insight at patient point-of-care. The hardware platform works alongside cloud-based software that is intended to make the product easy to use, integrate with the clinical workflow and be accessible on a user’s smartphone, tablet and/or healthcare enterprise systems.
The Company operates wholly-owned subsidiaries in Australia, Germany, the Netherlands, the United Kingdom and Taiwan.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Butterfly Network, Inc. and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the accounting disclosure rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s audited consolidated financial statements as of and for the years ended December 31, 2020 and 2019. All intercompany balances and transactions are eliminated upon consolidation.
The condensed consolidated balance sheet as of December 31, 2020, 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, required on an annual reporting basis. Certain prior period amounts have been reclassified to conform to the current period presentation. The Company reclassified the loss on product purchase commitments that was recorded within cost of product revenue on the condensed consolidated statement of operations and comprehensive loss to be presented separately.
In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for any subsequent quarter, the year ending December 31, 2021, or any other period.
Except as described elsewhere in this Note 2, including under the heading “Recent Accounting Pronouncements Adopted”, and Note 3 “Business Combination”, there have been no material changes to the Company’s significant accounting policies as described in the audited consolidated financial statements as of December 31, 2020 and 2019.
COVID-19 Outbreak
The COVID-19 pandemic that began in 2020 has created significant global economic uncertainty and has impacted the Company’s operating results, financial condition and cash flows. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition will depend on
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future developments that are highly uncertain, including those that result from new information that may emerge concerning COVID-19, the actions taken to contain or treat COVID-19 and the economic impacts of COVID-19.
The estimates of the impact on the Company’s business may change based on new information that may emerge concerning COVID-19, the actions to contain it or address its impact and the economic impact on local, regional, national and international markets. The Company has not incurred any significant impairment losses in the carrying values of its assets as a result of the COVID-19 pandemic and is not aware of any specific related event or circumstance that would require the Company to revise the estimates reflected in its condensed consolidated financial statements.
Although the Company has incurred recurring losses in each year since inception, the Company expects its cash and cash equivalents and marketable securities will be sufficient to fund operations for at least the next twelve months
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, marketable securities and accounts receivable. At September 30, 2021, substantially all of the Company’s marketable securities were invested in mutual funds with one financial institution. At September 30, 2021 and December 31, 2020, substantially all of the Company’s cash and cash equivalents were invested in money market accounts at one financial institution. The Company also maintains balances in various operating accounts above federally insured limits. The Company has not experienced significant losses on such accounts and does not believe it is exposed to any significant credit risk on cash and cash equivalents and marketable securities.
As of September 30, 2021 and December 31, 2020,
Segment Information
The Company’s Chief Operating Decision Maker, its Chief Executive Officer (“CEO”), reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating its financial performance. Accordingly, the Company has determined that it operates in a single reportable segment. Substantially all of the Company’s long-lived assets are located in the United States. Since the Company operates in
Use of Estimates
The Company makes estimates and assumptions about future events that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Future events and their effects cannot be determined with certainty. On an ongoing basis, management evaluates these estimates, judgments and assumptions.
The Company bases its estimates on historical and anticipated results and trends and on various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates, and any such differences may be material to the Company’s condensed consolidated financial statements. Except with respect to estimates related to the warrant liabilities, there have been no material changes to the Company’s use of estimates as described in the audited consolidated financial statements as of December 31, 2020.
Investments in Marketable Securities
The Company’s investments in marketable securities are ownership interests in fixed income mutual funds. The equity securities are stated at fair value, as determined by quoted market prices. As the securities have readily determinable fair value, unrealized gains and losses are reported as other income (expense), net on the condensed consolidated statements of operations and comprehensive loss. Subsequent gains or losses realized upon redemption or sale of these securities are also recorded as other income (expense), net on the condensed consolidated statements of operations and comprehensive loss. The Company considers all of its investments in marketable securities as available for use in current operations and therefore classifies these securities within current assets on the condensed consolidated balance sheets. For the three and
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nine months ended September 30, 2021, the Company recognized $
Restricted Cash
Restricted cash includes deposits in financial institutions used to secure a lease agreement. The Company classified the amounts within other non-current assets as the deposits are used to secure a long-term lease. The amount shown as restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the condensed consolidated statement of cash flows.
Warrant Liability
The Company’s outstanding warrants include publicly-traded warrants (the “Public Warrants”) which were issued as -third of a warrant per unit during the Company’s initial public offering on May 26, 2020 (the “IPO”) and warrants sold in a private placement to Longview’s sponsor (the “Private Warrants”). The Company evaluated its warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, and concluded that they do not meet the criteria to be classified in stockholders’ equity. Since the Public Warrants and Private Warrants meet the definition of a derivative under ASC 815, the Company recorded these warrants as long-term liabilities on the balance sheet at fair value upon the Closing of the Business Combination, with subsequent changes in their respective fair values recognized in the condensed consolidated statements of operations and comprehensive loss at each reporting date.
Recent Accounting Pronouncements Adopted
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that Is a Service Contract (Topic 350-40), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). As a result, eligible implementation costs incurred in a cloud computing arrangement that is a service contract are capitalized as prepaid expenses and other current assets on the balance sheet, recognized on a straight-line basis over its life in the statement of operations and comprehensive loss in the same line item as the fees for the associated arrangement, and the related activity is generally classified as an operating activity in the statement of cash flows. The Company prospectively adopted such guidance on January 1, 2021 and there was no material effect of adoption on the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2021.
Recent Accounting Pronouncements Issued but Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which outlines a comprehensive lease accounting model and supersedes the prior lease guidance. The new guidance requires lessees to recognize almost all of their leases on the balance sheet by recording a lease liability and corresponding right-of-use assets. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. As per the latest ASU 2020-05 issued by the FASB, entities that have not yet issued or made available for issuance their financial statements as of June 3, 2020 can defer the new guidance for one year. For public entities, this guidance was effective for annual reporting periods beginning January 1, 2019, including interim periods within that annual reporting period. For other entities, this guidance is effective for the annual reporting period beginning January 1, 2022, and interim reporting periods within annual reporting periods beginning January 1, 2023. This will require application of the new accounting guidance at the beginning of the earliest comparative period presented in the year of adoption. The impact of the Company's adoption of Topic 842 to the condensed consolidated financial statements will be to recognize the operating lease commitments as operating lease liabilities and right-of-use assets upon adoption, which will result in an increase in the assets and liabilities recorded on the balance sheet. The Company is continuing its assessment, which may identify additional impacts Topic 842 will have on the condensed consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that,
9
when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans, and available-for-sale debt securities. For public entities, this guidance was effective for annual reporting periods beginning January 1, 2020, including interim periods within that annual reporting period. For other entities, this guidance is effective for the annual reporting period beginning January 1, 2023, including interim periods within that annual reporting period. The standard will apply as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is in the process of evaluating the impact the adoption of this pronouncement will have on the Company’s condensed consolidated financial statements and disclosures.
Note 3. Business Combination
On February 12, 2021 (the “Closing Date”), the Company consummated the previously announced business combination (the “Business Combination”) pursuant to the terms of the Business Combination Agreement, dated as of November 19, 2020 (the “Business Combination Agreement”), by and among Longview, Clay Merger Sub, Inc., a Delaware corporation incorporated on November 12, 2020 (“Merger Sub”), and Butterfly Network, Inc., a Delaware corporation (“Legacy Butterfly”).
Immediately upon the consummation of the Business Combination and the other transactions contemplated by the Business Combination Agreement (collectively, the “Transactions”, and such completion, the “Closing”), Merger Sub merged with and into Legacy Butterfly, with Legacy Butterfly surviving the Business Combination as a wholly-owned subsidiary of Longview (the “Merger”). In connection with the Transactions, Longview changed its name to “Butterfly Network, Inc.” and Legacy Butterfly changed its name to “BFLY Operations, Inc.”
The Merger is accounted for as a reverse recapitalization in accordance with U.S. GAAP primarily due to the fact that Legacy Butterfly stockholders continue to control the Company following the closing of the Business Combination. Under this method of accounting, Longview is treated as the “acquired” company for accounting purposes and the Business Combination is treated as the equivalent of Legacy Butterfly issuing stock for the net assets of Longview, accompanied by a recapitalization. The net assets of Longview will be stated at historical cost, with no goodwill or other intangible assets recorded. Reported shares and earnings per share available to holders of the Company’s capital stock and equity awards prior to the Business Combination have been retroactively restated reflecting the exchange ratio established pursuant to the Business Combination Agreement (1:
Pursuant to the Merger, at the Effective Time of the Merger (the “Effective Time”):
| • | each share of Legacy Butterfly capital stock (other than the Legacy Butterfly Series A preferred stock) that was issued and outstanding immediately prior to the Effective Time was automatically canceled and converted into the right to receive |
| • | each share of Legacy Butterfly Series A preferred stock that was issued and outstanding immediately prior to the Effective Time was automatically canceled and converted into the right to receive |
| ||
| • | each option to purchase shares of Legacy Butterfly common stock, whether vested or unvested, that was outstanding and unexercised as of immediately prior to the Effective Time was assumed by the Company and became an option (vested or unvested, as applicable) to purchase a number of shares of the Company’s Class A common stock equal to the number of shares of Legacy Butterfly common stock subject to such option immediately prior to the Effective Time multiplied by |
10
shares, at an exercise price per share equal to the exercise price per share of such option immediately prior to the Effective Time divided by
| ||
| • | each Legacy Butterfly restricted stock unit outstanding immediately prior to the Effective Time was assumed by the Company and became a restricted stock unit with respect to a number of shares of the Company’s Class A common stock, rounded to the nearest whole share, equal to the number of shares of Legacy Butterfly common stock subject to such Legacy Butterfly restricted stock unit immediately prior to the Effective Time multiplied by |
| • | the principal amount plus accrued but unpaid interest, if any, on the Legacy Butterfly convertible notes outstanding as of immediately prior to the Effective Time was automatically canceled and converted into the right to receive shares of the Company’s Class A common stock, with such shares of the Company’s Class A common stock calculated by dividing the outstanding principal plus accrued interest, if any, of each Legacy Butterfly convertible note by $ |
In addition, on February 12, 2021, Longview filed the Second Amended and Restated Certificate of Incorporation (the “Restated Certificate”) with the Secretary of State of the State of Delaware, which became effective simultaneously with the Effective Time. As a consequence of filing the Restated Certificate, the Company adopted a dual class structure, comprised of the Company’s Class A common stock, which is entitled to
In addition, concurrently with the execution of the Business Combination Agreement, on November 19, 2020, Longview entered into subscription agreements (the “Subscription Agreements”) with certain institutional investors (the “PIPE Investors”), pursuant to which the PIPE Investors purchased, immediately prior to the Closing, an aggregate of
The total number of shares of the Company’s Class A common stock outstanding immediately following the Closing was approximately
59 | ||
| • |
| • | |
| ||
| • |
|
| • |
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The total number of shares of the Company’s Class B common stock issued at the Closing was approximately
The most significant change in the post-combination Company’s reported financial position and results was an increase in cash of $
Note 4. Revenue Recognition
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers by product type and by geographical market. The Company believes that these categories aggregate the payor types by nature, amount, timing and uncertainty of their revenue streams. The following table summarizes the Company’s disaggregated revenues (in thousands) for the three and nine months ended September 30, 2021 and 2020:
| | Pattern of | | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
| | Recognition | | 2021 | | 2020 | | 2021 | | 2020 | | ||||
By Product Type: |
| |
|
| |
|
| |
|
| |
|
| |
|
Devices and accessories | | Point-in-time | | $ | | | $ | | | $ | | | $ | | |
Subscription services and other services | | Over time | | | | | | | | | | | | | |
Total revenue | | | | $ | | | $ | | | $ | | | $ | | |
By Geographical Market: | | | | | | | | | | | | | | | |
United States | | | | $ | | | $ | | | $ | | | $ | | |
International | | | | | | | | | | | | | | | |
Total revenue | | | | $ | | | $ | | | $ | | | $ | | |
Contract Balances
Contract balances represent amounts presented in the condensed consolidated balance sheets when either the Company has transferred goods or services to the customer, or the customer has paid consideration to the Company under the contract. These contract balances include trade accounts receivable and deferred revenue. Deferred revenue represents cash consideration received from customers for services that are transferred to the customer over the respective subscription period. The accounts receivable balances represent amounts billed to customers for goods and services where the Company has an unconditional right to payment of the amount billed.
The following table provides information about receivables and deferred revenue from contracts with customers (in thousands):
|
| September 30, |
| December 31, | ||
| | 2021 | | 2020 | ||
Accounts receivable, net | | $ | | | $ | |
Deferred revenue, current | |
| | |
| |
Deferred revenue, non-current | |
| | |
| |
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The Company recognizes a receivable when it has an unconditional right to payment, and payment terms are typically
The amount of revenue recognized during the three months ended September 30, 2021 and 2020 that was included in the deferred revenue balance at the beginning of the period was $
The Company incurs incremental costs of obtaining contracts and costs of fulfilling contracts with customers. The amount of costs capitalized during the three and nine months ended September 30, 2021 and 2020 was not significant.
Transaction Price Allocated to Remaining Performance Obligations
On September 30, 2021, the Company had $
Note 5. Fair Value of Financial Instruments
Fair value estimates of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair value.
The Company measures fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The Company utilizes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
| ● | Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. |
| ● | Level 2 — Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. |
| ● | Level 3 — Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company has no assets or liabilities valued with Level 3 inputs. |
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates their fair values due to the short-term or on-demand nature of these instruments.
There were no transfers between fair value measurement levels during the periods ended September 30, 2021 and December 31, 2020.
The Company determined the fair value of its Public Warrants as Level 1 financial instruments, as they are traded in active markets. Because any transfer of Private Warrants from the initial holder of the Private Warrants would result in the Private Warrants having substantially the same terms as the Public Warrants, management determined that the fair value of each Private Warrant is the same as that of a Public Warrant. Accordingly, the Private Warrants are classified as Level 2 financial instruments.
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The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy (in thousands):
| | | | | Fair Value Measurement Level | |||||||
| Total | | Level 1 | | Level 2 | | Level 3 | |||||
September 30, 2021: |
| |
|
| |
|
| |
|
| |
|
Marketable securities: |
| |
|
| | |
| |
|
| |
|
Mutual funds | | $ | | | $ | | | $ | — | | $ | — |
Total assets at fair value on a recurring basis | | $ | | | $ | | | $ | — | | $ | — |
| | | | | | | | | | | | |
Warrants: | | | | | | | | | | | | |
Public Warrants | | $ | | | $ | | | $ | — | | $ | — |
Private Warrants | | | | | | — | | | | | | — |
Total liabilities at fair value on a recurring basis | | $ | | | $ | | | $ | | | $ | — |
The Company did not have any assets or liabilities similar to those above requiring fair value measurement at December 31, 2020.
Note 6. Inventories
A summary of inventories is as follows at September 30, 2021 and December 31, 2020 (in thousands):
| | | | | | |
|
| September 30, |
| December 31, | ||
|
| 2021 |
| 2020 | ||
Raw materials | | $ | |
| | |
Work-in-progress | |
| |
| | |
Finished goods | |
| |
| | |
Total inventories | | $ | | | $ | |
Work-in-progress represents inventory items in intermediate stages of production by third-party manufacturers. For the three and nine months ended September 30, 2021, net realizable value inventory adjustments and excess and obsolete inventory charges were $
Note 7. Non-Current Assets
The Company’s property and equipment, net consists of the following at September 30, 2021 and December 31, 2020 (in thousands):
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2021 |
| 2020 | ||
Property and equipment, gross | | $ | | | $ | |
Less: accumulated depreciation and amortization | |
| ( | |
| ( |
Property and equipment, net | | $ | | | $ | |
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Other non-current assets consist of the following at September 30, 2021 and December 31, 2020 (in thousands):
| | | | | | |
|
| September 30, |
| December 31, | ||
|
| 2021 |
| 2020 | ||
Security deposits | | $ | | | $ | |
Restricted cash | | | | | | — |
Deferred offering costs | |
| — | |
| |
Other long-term assets | | | | | | — |
Total other non-current assets | | $ | | | $ | |
Note 8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at September 30, 2021 and December 31, 2020 (in thousands):
|
| September 30, |
| December 31, | ||
|
| 2021 |
| 2020 | ||
Employee compensation | | $ | | | $ | |
Customer deposits | |
| | |
| |
Accrued warranty liability | |
| | |
| |
Non-income tax | |
| | |
| |
Professional fees | |
| | |
| |
Vendor settlements | | | — | | | |
Other | |
| | |
| |
Total accrued expenses and other current liabilities | | $ | | | $ | |
Warranty expense activity for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands):
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
Balance, beginning of period | | $ | | | $ | | | $ | | | $ | | |
Warranty provision charged to operations | |
| | |
| | |
| ( | |
| | |
Warranty claims | |
| ( | |
| ( | |
| ( | |
| ( | |
Balance, end of period | | $ | | | $ | | | $ | | | $ | | |
The Company classifies its accrued warranty liability based on the timing of expected warranty activity. The future costs of expected activity greater than one year is recorded within other non-current liabilities on the condensed consolidated balance sheet.
Note 9. Convertible Preferred Stock
The Company has issued
|
| |
| Issuance |
| Shares |
| Total |
| | |
| | |
| Initial | |||
| | | | Price | | Authorized, | | Proceeds or | | | | | Net | | Liquidation | ||||
| | Year of | | per | | Issued and | | Exchange | | Issuance | | Carrying | | Price per | |||||
Class | | Issuance | | share | | Outstanding | | Value | | Costs | | Value | | share | |||||
Series A |
| 2012 | | $ | |
| | | $ | | | $ | | | $ | | | $ | |
Series B |
| 2014 | |
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| | |
| | |
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Series C |
| 2014 – 2015 | |
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Series D |
| 2018 | |
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| | | | | | | | | | | | | |
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Prior to the completion of the Business Combination there were no significant changes to the terms of the Convertible Preferred Stock. Upon the Closing of the Business Combination, the Convertible Preferred stock converted into the right to receive Class A and Class B common stock based on the Business Combination’s conversion ratio of
Note 10. Equity Incentive Plans
The Company’s 2012 Employee, Director and Consultant Equity Incentive Plan (the “2012 Plan”) was adopted by its Board of Directors and stockholders in March 2012. The Butterfly Network, Inc. Amended and Restated 2020 Equity Incentive Plan (the “2020 Plan”) was approved by the Board of Directors in the fourth quarter of 2020 and by the stockholders in the first quarter of 2021. Grants under the 2012 Plan and 2020 Plan are included in the tables below.
In connection with the Closing of the Business Combination, the Company adjusted the equity awards as described in Note 3 “Business Combination”. The adjustments to the awards did not result in incremental expense as the equitable adjustments were made pursuant to a preexisting, nondiscretionary anti-dilution provision in the 2012 Plan, and the fair-value, vesting conditions and classification of the awards are the same immediately before and after the modification.
Stock option activity
The following table summarizes the changes in the Company’s outstanding stock options for the nine months ended September 30, 2021:
| | Number of |
| | Options |
Outstanding at December 31, 2020 |
| |
Granted |
| |
Exercised |
| ( |
Forfeited |
| ( |
Outstanding at September 30, 2021 |
| |
Each award will vest based on continued service which is generally over -
On January 23, 2021, the former Chief Executive Officer and member of the Board of Directors of Legacy Butterfly resigned from his position as Chief Executive Officer. Pursuant to the separation agreement between the former Chief Executive Officer and Legacy Butterfly, the former officer received equity-based compensation. The equity compensation includes the acceleration of vesting of the officer’s service-based options. The acceleration of
16
Restricted stock unit (“RSU”) activity
The following table summarizes the changes in the Company’s outstanding restricted stock units for the nine months ended September 30, 2021:
| | Number of |
| | RSUs |
Outstanding at December 31, 2020 |
| |
Granted |
| |
Vested |
| ( |
Forfeited |
| ( |
Outstanding at September 30, 2021 |
| |
Included in the table above are service-based restricted stock units. During the nine months ended September 30, 2021, the Company granted
Included in the table above are performance-based restricted stock units that include certain service conditions in the award. In January 2021, the Company granted
The fair value of performance-based restricted stock units was estimated on the date of grant based on the fair value of the Company’s Class A common stock. For each award, the Company recognizes the expense over the requisite service period as defined in the award agreement. During the nine months ended September 30, 2021, the Company recognized the full grant date fair value of the awards granted to the Chairman of the Board and one other consultant as service to the Company was no longer required since the Business Combination closed in the first quarter of 2021.
In the third quarter of 2021 and excluded from the table above, the Company approved
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The Company’s total stock-based compensation expense for all stock option and restricted stock unit awards for the periods presented was as follows (in thousands):
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
Cost of revenue – subscription | | $ | | | $ | | | $ | | | $ | | |
Research and development | |
| | |
| | |
| | |
| | |
Sales and marketing | | | | | | | | | | | | | |
General and administrative | | | | | | | | | | | | | |
Total stock-based compensation expense | | $ | | | $ | | | $ | | | $ | | |
Note 11. Net Loss Per Share
We compute net loss per share of Class A and Class B common stock using the two-class method. Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of each class of the Company’s common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of the Company’s common stock, including those presented in the table below, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential shares of the Company’s common stock outstanding would have been anti-dilutive. Since the Company was in a net loss position for all periods presented, the basic earnings per share (“EPS”) calculation excludes preferred stock as it does not participate in net losses of the Company.
As the Company uses the two-class method required for companies with multiple classes of common stock, the following table presents the calculation of basic and diluted net loss per share for each class of the Company’s common stock outstanding (in thousands, except share and per share amounts):
Three months ended September 30, 2021 | | | | | | | | | | |
| | | | | | | | Total | | |
|
| Class A |
| Class B |
| Common Stock | | |||
Numerator: | | |
| | |
|
| |
| |
Allocation of undistributed earnings | | $ | ( | | $ | ( | | $ | ( | |
Numerator for basic and diluted EPS – loss available to common stockholders | | $ | ( | | $ | ( | | $ | ( | |
Denominator: | |
|
| |
|
| |
|
| |
Weighted-average common shares outstanding | |
| | |
| | |
| | |
Denominator for basic and diluted EPS – weighted-average common stock | |
| | |
| | |
| | |
Basic and diluted loss per share | | ( | | ( | | ( | | |||
Three months ended September 30, 2020 | | | | | | | | | | |
| | | | | | | | Total | | |
|
| Class A |
| Class B |
| Common Stock | | |||
Numerator: | | |
| | |
|
| |
| |
Allocation of undistributed earnings | | $ | ( | | $ | — | | $ | ( | |
Numerator for basic and diluted EPS – loss available to common stockholders | | $ | ( | | $ | — | | $ | ( | |
Denominator: | |
|
| |
|
| |
|
| |
Weighted-average common shares outstanding | |
| | |
| — | |
| | |
Denominator for basic and diluted EPS – weighted-average common stock | |
| | |
| — | |
| | |
Basic and diluted loss per share | | ( | | $ | — | | ( | | ||
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Nine months ended September 30, 2021 | | | | | | | | | | |
| | | | | | | | Total | | |
|
| Class A |
| Class B |
| Common Stock | | |||
Numerator: | | |
| | |
|
| |
| |
Allocation of undistributed earnings | | $ | ( | | $ | ( | | $ | ( | |
Numerator for basic and diluted EPS – loss available to common stockholders | | $ | ( | | $ | ( | | $ | ( | |
Denominator: | |
|
| |
|
| |
|
| |
Weighted-average common shares outstanding | |
| | |
| | |
| | |
Denominator for basic and diluted EPS – weighted-average common stock | |
| | |
| | |
| | |
Basic and diluted loss per share | | ( | | ( | | ( | | |||
Nine months ended September 30, 2020 | | | | | | | | | | |
| | | | | | | | Total | | |
|
| Class A |
| Class B |
| Common Stock | | |||
Numerator: | | |
| | |
|
| |
| |
Allocation of undistributed earnings | | $ | ( | | $ | — | | $ | ( | |
Numerator for basic and diluted EPS – loss available to common stockholders | | $ | ( | | $ | — | | $ | ( | |
Denominator: | |
|
| |
|
| |
|
| |
Weighted-average common shares outstanding | |
| | |
| — | |
| | |
Denominator for basic and diluted EPS – weighted-average common stock | |
| | |
| — | |
| | |
Basic and diluted loss per share | | ( | | $ | — | | ( | | ||
For the periods presented above, the net loss per share amounts are the same for Class A and Class B common stock because the holders of each class are entitled to equal per share dividends or distributions in liquidation in accordance with the Certificate of Incorporation. The undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common stock as if the earnings for the year had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis.
For the periods presented, anti-dilutive common equivalent shares were as follows:
| | September 30, | | ||
|
| 2021 |
| 2020 |
|
Outstanding options to purchase common stock | | | | | |
Outstanding restricted stock units | | | | — | |
Outstanding warrants | | | | — | |
Outstanding convertible preferred stock (Series A through D) | | — | | | |
Total anti-dilutive common equivalent shares | | | | | |
Note 12. Related Party Transactions
Prior to the Closing of the Business Combination, there were no significant changes in the nature of the Company’s related party transactions since December 31, 2020. Pursuant to a First Addendum dated November 19, 2020 to the Amended and Restated Technology Services Agreement dated November 11, 2020 by and between the Company, 4Catalyzer Corporation (“4Catalyzer”), and other participant companies controlled by Dr. Rothberg (the “ARTSA”), Butterfly terminated its participation under the ARTSA immediately prior to the Effective Time of the Business Combination.
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A summary of related-party transactions and balances with 4Catalyzer are as follows (in thousands):
| | Three months ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Total incurred for operating expenses | | $ | | | $ | | | $ | | | $ | |
|
| September 30, | | December 31, | ||
| | 2021 |
| 2020 | ||
Due from related parties | | $ | — | | $ | |
Due to related parties | |
| | |
| |
Note 13. Loan Payable
In May 2020, the Company received loan proceeds of $
Note 14. Convertible Debt
In the year ended December 31, 2020, the Company issued convertible debt for total gross proceeds of $
Pursuant to the terms of the debt, at the Effective Time of the Merger discussed in Note 3 “Business Combination”, the convertible debt was automatically cancelled and converted into the right to receive shares of the Company’s Class A common stock. The debt was converted with $
The Company recorded interest expense and amortization expense for the issuance costs of $
Note 15. Warrants
Public Warrants
The Company issued Public Warrants and Private Warrants in connection with its IPO. As of September 30, 2021, there were an aggregate of
Redemptions
At any time while the warrants are exercisable, Butterfly may redeem not less than all of the outstanding Public Warrants:
| ● | at a price of $ |
| ● | upon a minimum of |
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| ● | provided that the last reported sale price of the Class A common stock equals or exceeds $ |
| ● | provided that there is an effective registration statement covering the issuance of the shares of Class A common stock issuable upon exercise of the warrants, and a current prospectus relating thereto, available through the -day redemption period or Butterfly has elected to require the exercise of the warrants on a “cashless basis” (as described below). |
If the foregoing conditions are satisfied and the Company issues a notice of redemption of the Public Warrants at $
If the Company calls the Public Warrants for redemption for $
Commencing
| ● | at $ |
| ● | upon a minimum of |
| ● | provided that the last reported sale price of the Class A common stock equals or exceeds $ |
| ● | provided that the Private Warrants are also concurrently exchanged at the same price (equal to a number of shares of Class A common stock) as the outstanding Public Warrants; and |
| ● | provided that there is an effective registration statement covering the issuance of the shares of Class A common stock issuable upon exercise of the warrants and a current prospectus relating thereto available throughout the redemption period. |
If the foregoing conditions are satisfied and the Company issues a notice of redemption of the warrants at $
The Company evaluated the Public Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, in conjunction with the SEC Division of Corporation Finance’s April 12, 2021 Public Statement, Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”), and concluded that they do not meet the criteria to be classified in stockholders’ equity. Specifically, the exercise of the warrants may be settled in cash upon the occurrence of a tender offer or exchange offer in which the maker of the tender offer or exchange offer, upon completion of the tender offer or exchange offer, beneficially owns more than
21
Private Warrants
As of September 30, 2021, there were
The Company evaluated the Private Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, in conjunction with the SEC Division of Corporation Finance’s April 12, 2021 Public Statement, Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”), and concluded that they do not meet the criteria to be classified in stockholders’ equity. Specifically, the terms of the warrants provide for potential changes to the settlement amounts dependent upon the characteristics of the warrant holder, and, because the holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares, such provision would preclude the warrant from being classified in equity and thus the warrants should be classified as a liability.
The Company recognized a gain of $
Note 16. Commitments and Contingencies
Commitments
Operating leases:
The Company leases office space under operating leases. Minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease. Rent expense under operating leases was $
In May 2021, the Company entered into a lease arrangement for office space in Burlington, MA which expires in September 2032 and includes approximately $
In the second quarter of 2021, the Company delivered a $
22
The following is a schedule of future minimum rental payments under non-cancelable operating leases with initial terms in excess of one year (in thousands):
Years ending December 31: |
| |
|
Remainder of 2021 | | $ | |
2022 | |
| |
2023 | |
| |
2024 | |
| |
2025 | |
| |
Thereafter | |
| |
Total future minimum rental payments | | $ | |
Purchase commitments:
The Company enters into inventory purchase commitments with third-party manufacturers in the ordinary course of business. These commitments are generally non-cancellable and are based on sales forecasts. These agreements range from to
During 2019, the Company entered into an inventory supply agreement with a certain third-party manufacturing vendor. In November 2020, the Company and the vendor amended the 2019 inventory supply arrangement. The amended agreement included provisions to increase the aggregate purchase commitments to $
During the three and nine months ended September 30, 2021, the Company recognized a net loss and additional accrued liability for the vendor purchase commitment of $
The Company applied the guidance in Topic 330, Inventory, to assess the purchase commitment and related loss. The Company considered a variety of factors and data points when determining the existence and scope of a loss for the minimum purchase commitment. The factors and data points included Company-specific forecasts which are reliant on the Company’s limited sales history, agreement-specific provisions, macroeconomic factors and market and industry trends. Determining the loss is subjective and requires significant management judgment and estimates. Future events may differ from those assumed in the Company’s assessment, and therefore the loss may change in the future.
As of September 30, 2021, the Company has a prepaid advance of $
Other commitments:
The Company sponsors a 401(k) defined contribution plan covering all eligible U.S. employees. Contributions to the 401(k) plan are discretionary. The Company did not make any matching contributions to the 401(k) plan for the periods ended September 30, 2021 and December 31, 2020.
Contingencies
The Company is involved in litigation and legal matters from time to time, which have arisen in the normal course of business. Although the ultimate results of these matters are not currently determinable, management does not expect that
23
they will have a material effect on the Company’s condensed consolidated balance sheets, statements of operations and comprehensive loss, or statements of cash flows.
On December 14, 2020, Nidhish Nair, a purported stockholder of Longview, filed a lawsuit in the Supreme Court of the State of New York, County of New York, captioned Nair v. Longview Acquisition Corp., against Longview and the members of its Board of Directors (the “Nair Complaint”). On December 16, 2020, Eric Lau, a purported stockholder of Longview, filed a lawsuit in the Supreme Court of the State of New York, County of New York, captioned Lau v. Longview Acquisition Corp., against Longview, the members of its Board of Directors, and Legacy Butterfly (the “Lau Complaint”). The Nair Complaint and the Lau Complaint, which are referred to collectively as the Complaints, asserted a breach of fiduciary duty claim against the individual defendants and an aiding and abetting claim against Longview in connection with the Business Combination between Longview and Legacy Butterfly. The Lau Complaint also asserted an aiding and abetting claim against Legacy Butterfly. The Complaints alleged, among other things, that (i) defendants engaged in an unfair sales process and agreed to inadequate consideration in connection with the Business Combination, and (ii) that the Registration Statement on Form S-4 filed with the SEC on November 27, 2020 in connection with the Business Combination was materially misleading. The Complaints sought, among other things, to enjoin the Business Combination, rescind the transaction or award rescissory damages to the extent it is consummated, and an award of attorneys’ fees and expenses. The Nair Complaint was voluntarily dismissed on February 21, 2021, and the Lau Complaint was voluntarily dismissed on March 2, 2021. During the second quarter of 2021, the Company paid an insignificant amount to resolve plaintiffs’ requests for an attorney fee award.
The Company enters into agreements that contain indemnification provisions with other parties in the ordinary course of business, including business partners, investors, contractors, customers and the Company’s officers, directors and certain employees. The Company has agreed to indemnify and defend the indemnified party claims and related losses suffered or incurred by the indemnified party from actual or threatened third-party claims because of the Company’s activities or non-compliance with certain representations and warranties made by the Company. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in any particular case. To date, losses recorded in the Company’s condensed consolidated statements of operations and comprehensive loss in connection with the indemnification provisions have not been material.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. The discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto for the year ended December 31, 2020 contained in Amendment No. 2 to the Current Report on Form 8-K filed with the SEC on March 29, 2021. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2020, as amended, and of this Quarterly Report on Form 10-Q. Actual results may differ materially from those contained in any forward-looking statements. Unless the context otherwise requires, references to “we”, “us”, “our”, and “the Company” are intended to mean the business and operations of Butterfly Network, Inc. and its consolidated subsidiaries. The unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2021 and 2020, respectively, present the financial position and results of operations of Butterfly Network, Inc. and its wholly-owned subsidiaries.
Overview
We are an innovative digital health business whose mission is to democratize healthcare by making medical imaging accessible to everyone around the world. Powered by our proprietary Ultrasound-on-Chip™ technology, our solution uses a unique combination of software and hardware enabling medical imaging to drive more clinical insight at patient point-of-care. With this technology, Butterfly created the only ultrasound transducer that can perform “whole-body imaging” in a single handheld probe using semiconductor technology. After launching our first-generation Butterfly iQ hardware product in 2019, in 2020 we launched and commercialized the second-generation product, the Butterfly iQ+. Our proprietary software and artificial intelligence (“AI”) solution are intended to make the product easy to use, integrated with the clinical workflow and accessible on a user’s smartphone or tablet, as well as healthcare enterprise systems. Our portable, usable, accessible and affordable handheld solution is protected by a robust intellectual property portfolio with more than 800 patents granted or pending.
The Butterfly iQ / iQ+ is currently cleared as a Class II medical device by the U.S. Food and Drug Administration (“FDA”), received a medical device license in Canada and has the CE mark in Europe for use by health care practitioners. It is commercially available in over 20 countries including the United States, Canada, Australia, New Zealand and throughout greater Europe.
We are focused on driving the adoption of our handheld solution in order to democratize healthcare globally. We believe that the potential global addressable ultrasound market is estimated to be $8 billion. We seek to expand the addressable market through three strategies: increasing users, expanding use cases and expanding to more care settings where the Butterfly solutions are used. We also seek to increase touchpoints with our existing and potential customers through new sales channels such as medical and nursing schools, veterinarian usage, non-governmental organizations and distributors. Generally, we currently sell directly to users through our ecommerce channel and also sell to enterprise customers through our direct sales force and distributors.
We plan to continue to invest in the development of our products and solutions across the Butterfly platform. With the launch of Butterfly iQ+, we lowered manufacturing costs and improved capabilities including lower power consumption, Needle Viz™ technology, faster frame rates and improved interoperability. Additionally, over the course of 2021, we launched multiple new software features that improve image acquisition, added features for use cases and enhanced ease of use.
While we are driving revenue growth, we are also focused on improving gross profits by working to drive operational efficiencies in our supply chain and incorporate a greater mix of higher margin products and services over time.
COVID-19
The COVID-19 pandemic that began in 2020 has created significant global economic uncertainty. Uncertainty remains regarding the extent, timing and duration of the pandemic, including the emergence of new strains of the virus that may be more contagious or virulent and the extent to which the availability of vaccines and other safety measures will positively
25
impact public health conditions. The uncertainty and potential economic volatility impact our customer base, supply chains, our business practices and our employees.
The COVID-19 pandemic and its economic impact have caused financial strain on our customer base due to decreased funding and other revenue shortfalls. With the recent Delta variant wave of infections, we have seen our customer base become further strained in solving immediate problems associated with the variant. As a result, some of our customers have had to shift their attention to these pressing issues, resulting in decreased sales volume.
In addition, the issues originally brought on by COVID-19 continue to have an ongoing adverse impact on global supply chains, including ours. We have experienced constraints in availability, increasing lead times and costs required to obtain some inventory components. We are actively implementing new operating efficiencies in our supply chain processes to help offset the cost increases in component parts for our device.
The pandemic caused us to make modifications to our business practices, including work from home policies, establishing strict health and safety protocols for our offices specific to COVID-19 and imposing restrictions on employee travel. Our employees have resumed traveling to perform sales-generating and corporate activities, and we have opened our offices and have allowed employees at their discretion to return to our offices. We are designing and implementing a plan to allow employees to safely resume work in the office on a more regular basis.
We continue to closely monitor the developments of COVID-19 for any material impact on our business. Given the uncertainty and potential economic volatility of the impact of the COVID-19 pandemic, the recent developments we have experienced may change based on new information that may emerge concerning COVID-19, the actions to contain it or treat its impact and the economic impact on local, regional, national and international markets.
Business Combination
On February 12, 2021 we completed the business combination with Longview (the “Business Combination”) pursuant to the terms of the Business Combination Agreement, dated as of November 19, 2020 (the “Business Combination Agreement”), by and among Longview Acquisition Corp. (“Longview”), Clay Merger Sub, Inc., a Delaware corporation (“Merger Sub”), and Butterfly Network, Inc., a Delaware corporation (“Legacy Butterfly”). The Business Combination was approved by Longview's stockholders at its special meeting held on February 12, 2021. The transaction resulted in the Company being renamed to "Butterfly Network, Inc.," Legacy Butterfly being renamed “BFLY Operations, Inc.” and the Company’s Class A common stock and warrants to purchase Class A common stock commencing trading on the New York Stock Exchange ("NYSE") on February 16, 2021 under the symbol "BFLY" and “BFLY WS”, respectively. As a result of the Business Combination, we received gross proceeds of approximately $589 million.
Recent Developments
In October 2021 we launched Butterfly iQ+ Vet, a second-generation device with sharper imaging, a new procedural guidance tool and hardware improvements that make the solution more powerful, versatile and easy-to-use for veterinarians in a variety of care settings.
Key Performance Metrics
We review the key performance measures discussed below to evaluate the business and measure performance, identify trends, formulate plans and make strategic decisions.
Units fulfilled
We define units fulfilled as the number of devices whereby control is transferred to a customer. We do not adjust this metric for returns as our volume of returns has historically been low. We view units fulfilled as a key indicator of the growth of our business. We believe that this metric is useful to investors because it presents our core growth and performance of our business period over period.
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Units fulfilled increased by 1,609, or 40.8%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily due to increased sales from our veterinary, distributor and direct sales force revenue channels. The increased sales in these channels were offset by slowing sales in our e-commerce revenue channel.
Subscription Mix
We define subscription mix as a percentage of our total revenue recognized in a reporting period that is subscription-based, consisting primarily of our software as a service (“SaaS”) offering. We view subscription mix as a key indicator of the profitability of our business, and thus we believe that this metric is useful to investors. Because the costs and associated expenses to deliver our subscription offerings are lower as a percentage of sales than the costs of sales of our products, we believe a shift towards subscription will result in an improvement in profitability and margin expansion.
Subscription mix increased by 10.9 percentage points, to 25.8% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was due to an increased volume of units fulfilled and increases in subscription renewals, as well as the timing of revenue recognition for our SaaS and other subscription contracts and the timing of units fulfilled. Revenue from such contracts is deferred and recognized over the service period.
27
Non-GAAP Financial Measures
We present non-GAAP financial measures in order to assist readers of our condensed consolidated financial statements in understanding the core operating results that our management uses to evaluate the business and for financial planning purposes. Our non-GAAP financial measures, Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA, provide an additional tool for investors to use in comparing our financial performance over multiple periods.
Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA are key performance measures that our management uses to assess our operating performance. Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA facilitate internal comparisons of our operating performance on a more consistent basis. We use these performance measures for business planning purposes and forecasting. We believe that Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA enhance an investor’s understanding of our financial performance as they are useful in assessing our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business.
Our Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate these measures in the same manner. Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA are not prepared in accordance with U.S. GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with U.S. GAAP. When evaluating our performance, you should consider Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA alongside other financial performance measures prepared in accordance with U.S. GAAP, including gross profit, gross margin, operating loss and net loss.
Adjusted Gross Profit and Adjusted Gross Margin
We calculate Adjusted Gross Profit as gross profit adjusted to exclude depreciation and amortization, non-recurring changes to our warranty liability, non-recurring losses on purchase commitments and non-recurring inventory write-downs. We calculate Adjusted Gross Margin as gross margin adjusted to exclude depreciation and amortization, non-recurring changes to our warranty liability, non-recurring losses on purchase commitments and non-recurring inventory write-downs.
Our changes in the warranty liability are excluded from gross profit and gross margin when they are outside the normal course of operations for our business. The non-recurring warranty liability adjustments are for changes in our warranty policy resulting from a shift in product lines that impacted our estimate of future warranty costs.
We also exclude from gross profit and gross margin non-recurring losses on purchase commitments and non-recurring inventory write-downs when they are outside the normal course of business and in the period the expenses are incurred. The non-recurring losses on purchase commitments relate to inventory supply agreements where the expected losses exceed the benefit of the contracts, and the non-recurring inventory write-down adjustments are for excess and obsolete inventory resulting from a shift in product lines.
28
The following table reconciles Adjusted Gross Profit to gross profit and Adjusted Gross Margin to gross margin, the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP.
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | | ||||
Revenue |
| $ | 14,621 | | $ | 10,135 | | $ | 43,578 | | $ | 30,597 | |
Cost of revenue | |
| 19,743 | |
| 79,386 | |
| 34,064 | |
| 100,519 | |
Gross profit | | $ | (5,122) | | $ | (69,251) | | $ | 9,514 | | $ | (69,922) | |
| | | | | | | | | | | | | |
Gross margin | | | (35.0)% | | | (683.3)% | | | 21.8% | | | (228.5)% | |
| | | | | | | | | | | | | |
Add: | |
|
| |
|
| |
|
| |
|
| |
Depreciation and amortization | |
| 131 | |
| 23 | |
| 291 | |
| 69 | |
Warranty liability policy change | | | — | | | — | | | (560) | | | — | |
Loss on purchase commitments | |
| 11,623 | |
| 63,993 | |
| 11,623 | |
| 63,993 | |
Inventory write-downs | |
| 582 | |
| 2,570 | |
| 582 | |
| 2,570 | |
Adjusted gross profit | | $ | 7,214 | | $ | (2,665) | | $ | 21,450 | | $ | (3,290) | |
| | | | | | | | | | | | | |
Adjusted gross margin | | | 49.3% | | | (26.3)% | | | 49.2% | | | (10.8)% | |
Adjusted EBITDA
We calculate Adjusted EBITDA as net loss adjusted to exclude interest income, interest expense, changes in the fair value of warrant liabilities, other expense, net, provision for income taxes, stock-based compensation, depreciation and amortization and other non-recurring items. The other non-recurring items include costs related to our executive transition, adjustments for the warranty liability policy changes, discretionary transaction bonuses, non-recurring losses on purchase commitments, non-recurring inventory write-downs and other fees incurred with the close of the Business Combination.
Our non-recurring discretionary bonuses are excluded from Adjusted EBITDA when they are outside the normal course of operations for our business and were given at the discretion of management due to the completion of the Business Combination. The non-recurring costs related to the executive transition include one-time severance and bonus payments and the recruiting expenses for our current CEO. The non-recurring warranty liability adjustments are for changes in our warranty policy resulting from a shift in product lines that impacted our estimate of future warranty costs. The non-recurring losses on purchase commitments relate to inventory supply agreements where the expected losses exceed the benefit of the contracts and the non-recurring inventory write-down adjustments are for excess and obsolete inventory resulting from a shift in product lines.
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The following table reconciles Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
(In thousands) | | 2021 | | 2020 | | 2021 | | 2020 | | ||||
Net loss |
| $ | (13,561) |
| $ | (92,208) |
| $ | (17,193) |
| $ | (139,803) | |
Interest income |
| | (893) |
| | (16) |
| | (1,739) |
| | (238) | |
Interest expense |
| | — |
| | 300 |
| | 645 |
| | 418 | |
Change in fair value of warrant liabilities | | | (42,958) | | | — | | | (130,528) | | | — | |
Other expense, net |
| | 428 |
| | 84 |
| | 1,320 |
| | 183 | |
Provision for income taxes |
| | (3) |
| | 12 |
| | 72 |
| | 32 | |
Stock based compensation |
| | 10,734 |
| | 2,382 |
| | 38,769 |
| | 7,727 | |
Depreciation and amortization |
| | 505 |
| | 311 |
| | 1,420 |
| | 904 | |
CEO transition costs | | | — | | | — | | | 5,398 | | | — | |
Warranty liability policy change | | | — | | | — | | | (560) | | | — | |
Transaction bonus | | | — | | | — | | | 1,653 | | | — | |
Loss on purchase commitments |
| | 11,623 |
| | 63,993 |
| | 11,623 |
| | 63,993 | |
Inventory write-downs |
| | 582 |
| | 2,570 |
| | 582 |
| | 2,570 | |
Adjusted EBITDA |
| $ | (33,543) |
| $ | (22,572) |
| $ | (88,538) |
| $ | (64,214) | |
Description of Certain Components of Financial Data
Revenue
Revenue consists of revenue from the sale of products, such as medical devices and accessories, and related services, classified as subscription revenue on our condensed consolidated statements of operations and comprehensive loss, which are SaaS subscriptions and Support. SaaS subscriptions include licenses for teams and individuals as well as enterprise level subscriptions. For sales of products, which include the ultrasound devices and any ultrasound device accessories, revenue is recognized at a point in time upon transfer of control to the customer. SaaS subscriptions and Support are generally related to stand-ready obligations and are recognized ratably over time.
Over time as adoption of our devices increases through further market penetration and as practitioners in the Butterfly network continue to use our devices, we expect our annual revenue mix to shift more toward subscriptions. The quarterly revenue mix may be impacted by the timing of device sales.
From time to time, we may transition to higher prices for our product and services. The transition to higher prices may impact the timing and volume of sales and the related revenue. Partially as a result of a pricing adjustment in August 2021, we are seeing slowing sales in our ecommerce revenue channel.
Cost of revenue
Loss on product purchase commitments relates to inventory supply agreements where the expected losses exceed the benefit of the contracts. The Company considers a variety of factors and data points when determining the existence and scope of a loss for the minimum purchase commitment. The factors and data points include Company-specific forecasts which are reliant on the Company’s limited sales history, agreement-specific provisions, macroeconomic factors and market and industry trends. Determining the loss is subjective and requires significant management judgment and estimates. Future events may differ from those assumed in the Company’s assessment, and therefore the loss may change in the future.
Cost of product revenue consists of product costs including manufacturing costs, personnel costs and benefits, inbound freight, packaging, warranty replacement costs, payment processing fees and inventory obsolescence and write-offs. We expect our cost of product revenue to fluctuate over time due to the level of units fulfilled in any given period and decrease as a percentage of revenues over time as we focus on operational efficiencies in our supply chain. Our vendors may from time to time increase prices of certain inventory components that could in the future offset the operational efficiencies in our supply chain.
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Cost of subscription revenue consists of personnel costs, cloud hosting costs and payment processing fees. Because the costs and associated expenses to deliver our SaaS offerings are less than the costs and associated expenses of manufacturing and selling our device, we anticipate an improvement in profitability and margin expansion over time as our mix shifts increasingly towards subscriptions. We plan to continue to invest additional resources into our products to expand and further develop our offerings. The level and timing of investment in these areas could affect our cost of revenue in the future. We expect the cost of revenue to increase as a percentage of revenue in the near term due to the investments we are making, which will generally increase more rapidly than that of subscription revenue.
Research and development (R&D)
Research and development expenses primarily consist of personnel costs and benefits, facilities-related expenses, depreciation expense, consulting and professional fees, fabrication services, software and other outsourcing expenses. Most of our research and development expenses are related to developing new products and services and improving existing products and services, which we define as not having reached the point of commercialization, and improving our products and services that have been commercialized. Consulting expenses are related to general development activities and clinical/regulatory research. Fabrication services include certain third-party engineering costs, product testing and test boards. Research and development expenses are expensed as incurred. We expect to continue to make substantial investments in our product development, clinical and regulatory capabilities. Prospectively, we expect R&D spending to increase in absolute dollars in the near term and then fluctuate over time due to the level and timing of our product development efforts. R&D as a percentage of revenue will fluctuate given the level and timing of the product development efforts as well the amount of revenue recognized in a period.
Sales and marketing
Sales and marketing expenses primarily consist of personnel costs and benefits, third party logistics, fulfillment and outbound shipping costs, digital marketing, advertising, promotional, as well as conferences, meetings and other events and related facilities and information technology costs. We expect our sales and marketing expenses to increase in absolute dollars in the long term as we continue to increase the size of our direct sales force and sales support personnel and expand into new products and markets. We expect our sales and marketing expenses will also increase in the near term as we promote our brand through marketing and advertising initiatives, expand market presence and hire additional personnel to drive penetration and generate leads. We expect that sales and marketing expenses as a percentage of revenues will increase in the near term and then fluctuate over time as we evaluate expansion opportunities.
General and administrative
General and administrative expenses primarily consist of personnel costs and benefits, patent and filing fees, facilities costs and outside services. Outside services consist of professional services, legal and other professional fees. We expect our general and administrative expenses to increase in absolute dollars in the foreseeable future. We anticipate general and administrative expenses as a percentage of revenues will fluctuate over time due to the timing and amount of these expenses.
Results of Operations
We operate as a single reportable segment to reflect the way our chief operating decision maker (“CODM”) reviews and assesses the performance of the business. The accounting policies are described in Note 2 “Summary of Significant Accounting Policies” in our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, |
| | Nine months ended September 30, |
| ||||||||||||||||||
| | 2021 | | | 2020 |
| | 2021 | | | 2020 |
| ||||||||||||
| | | | % of | | | | | | % of |
| | | | | % of | | | | | | % of |
| |
(in thousands) | | Dollars | | revenue | | | Dollars | | revenue |
| | Dollars | | revenue | | | Dollars | | revenue |
| ||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product | | $ | 10,848 |
| 74.2 | % | | $ | 8,621 |
| 85.1 | % | | $ | 33,455 |
| 76.8 | % | | $ | 25,820 |
| 84.4 | % |
Subscription | | | 3,773 |
| 25.8 | % | | | 1,514 |
| 14.9 | % | | | 10,123 |
| 23.2 | % | | | 4,777 |
| 15.6 | % |
Total revenue: | | $ | 14,621 |
| 100.0 | % | | $ | 10,135 |
| 100.0 | % | | $ | 43,578 |
| 100.0 | % | | $ | 30,597 |
| 100.0 | % |
Cost of revenue: | | |
|
|
|
| | |
|
|
| | | |
|
|
|
| | |
|
|
| |
Loss on product purchase commitments | | | 11,623 | | 79.5 | % | | | 63,993 | | 631.4 | % | | | 11,623 | | 26.7 | % | | | 63,993 | | 209.1 | % |
Product | | | 7,584 |
| 51.9 | % | | | 14,619 |
| 144.2 | % | | | 21,090 |
| 48.4 | % | | | 35,266 |
| 115.3 | % |
Subscription | | | 536 |
| 3.7 | % | | | 774 |
| 7.6 | % | | | 1,351 |
| 3.1 | % | | | 1,260 |
| 4.1 | % |
Total cost of revenue: | | $ | 19,743 |
| 135.0 | % | | $ | 79,386 |
| 783.3 | % | | $ | 34,064 |
| 78.2 | % | | $ | 100,519 |
| 328.5 | % |
Gross profit | | $ | (5,122) |
| (35.0) | % | | $ | (69,251) |
| (683.3) | % | | $ | 9,514 |
| 21.8 | % | | $ | (69,922) |
| (228.5) | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | |
|
|
|
| | |
|
|
| | | |
|
|
|
| | |
|
|
| |
Research and development | | | 21,654 |
| 148.1 | % | | | 11,971 |
| 118.1 | % | | | 54,459 |
| 125.0 | % | | | 36,427 |
| 119.1 | % |
Sales and marketing | | | 14,203 |
| 97.1 | % | | | 5,538 |
| 54.6 | % | | | 34,550 |
| 79.3 | % | | | 17,408 |
| 56.9 | % |
General and administrative | | | 16,008 |
| 109.5 | % | | | 5,068 |
| 50.0 | % | | | 67,928 |
| 155.9 | % | | | 15,651 |
| 51.2 | % |
Total operating expenses | | $ | 51,865 |
| 354.7 | % | | $ | 22,577 |
| 222.8 | % | | $ | 156,937 |
| 360.1 | % | | $ | 69,486 |
| 227.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss from operations | | $ | (56,987) |
| (389.8) | % | | $ | (91,828) |
| (906.0) | % | | $ | (147,423) |
| (338.3) | % | | $ | (139,408) |
| (455.6) | % |
Interest income | | | 893 |
| 6.1 | % | | | 16 |
| 0.2 | % | | | 1,739 |
| 4.0 | % | | | 238 |
| 0.8 | % |
Interest expense | | | — |
| — | % | | | (300) |
| (3.0) | % | | | (645) |
| (1.5) | % | | | (418) |
| (1.4) | % |
Change in fair value of warrant liabilities | | | 42,958 | | 293.8 | % | | | — | | — | % | | | 130,528 | | 299.5 | % | | | — | | — | % |
Other income (expense), net | | | (428) |
| (2.9) | % | | | (84) |
| (0.8) | % | | | (1,320) |
| (3.0) | % | | | (183) |
| (0.6) | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss before provision for income taxes | | $ | (13,564) |
| (92.8) | % | | $ | (92,196) |
| (909.7) | % | | $ | (17,121) |
| (39.3) | % | | $ | (139,771) |
| (456.8) | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Provision for income taxes | | | (3) |
| (0.0) | % | | | 12 |
| 0.1 | % | | | 72 |
| 0.2 | % | | | 32 |
| 0.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (13,561) |
| (92.8) | % | | $ | (92,208) |
| (909.8) | % | | $ | (17,193) |
| (39.5) | % | | $ | (139,803) |
| (456.9) | % |
Comparison of the three months ended September 30, 2021 and 2020
Revenue
| | Three months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
Revenue: |
| |
|
| |
|
| |
|
|
| |
Product |
| $ | 10,848 | | $ | 8,621 | | $ | 2,227 |
| 25.8 | % |
Subscription |
| | 3,773 | | | 1,514 | | | 2,259 |
| 149.2 | % |
Total revenue: | | $ | 14,621 | | $ | 10,135 | | $ | 4,486 |
| 44.3 | % |
Total revenue increased by $4.5 million, or 44.3%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
Product revenue increased by $2.2 million, or 25.8%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase in product revenue was primarily driven by a higher volume of Butterfly iQ+ probes sold, as a result of our increased investment in our sales and marketing efforts domestically and internationally.
32
Subscription revenue increased by $2.3 million, or 149.2%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was driven by an increased volume of our SaaS subscriptions sold in conjunction with sales of our devices as well as the increase from subscription renewals year over year.
Cost of revenue
| | Three months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
Cost of revenue: |
| |
|
| |
|
| |
|
|
| |
Loss on product purchase commitments | | $ | 11,623 | | $ | 63,993 | | $ | (52,370) |
| (81.8) | % |
Product |
| | 7,584 | | | 14,619 | | | (7,035) |
| (48.1) | % |
Subscription |
| | 536 | | | 774 | | | (238) |
| (30.7) | % |
Total cost of revenue | | $ | 19,743 | | $ | 79,386 | | $ | (59,643) |
| (75.1) | % |
Percentage of revenue | |
| 135.0 | % |
| 783.3 | % |
|
|
|
| |
Loss on product purchase commitments decreased by $52.4 million, or 81.8%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The overall decrease is primarily due to a decrease in the purchase commitment loss related to a certain third-party vendor of $44.8 million. The decreased loss related to such vendor is due to the purchase commitment loss taken in the prior fiscal year as an estimate of future excess inventory and the additional purchase commitment loss recorded for the three months ended September 30, 2021. The additional loss was the result of changes to certain factors management considers when determining the existence and scope of a loss for the minimum purchase commitment. Additionally, the overall decrease is due to the non-recurrence of losses on other purchase commitments with other third-party vendors recorded in the prior year of $7.6 million.
Cost of product revenue decreased by $7.0 million, or 48.1%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. This decrease was driven by the sale of our second generation product, the Butterfly IQ+, which is less costly to produce, in the quarter ended September 30, 2021 as opposed to the Butterfly IQ in the quarter ended September 30, 2020. The overall decrease of product cost of revenue was primarily driven by decreases in product costs of $2.0 million and a decrease in net realizable value inventory adjustments and excess and obsolete inventory charges of $5.7 million. The decreases were partially offset by increases in component product costs related to global supply chain constraints of $0.5 million and other items that were not significant.
Cost of subscription revenue decreased by $0.2 million, or 30.7%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. This decrease was primarily driven by decreased payment processing fees partially offset by increased cloud hosting costs.
Research and development
| | Three months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
Research and development |
| $ | 21,654 |
| $ | 11,971 |
| $ | 9,683 |
| 80.9 | % |
Percentage of revenue | |
| 148.1 | % |
| 118.1 | % |
|
|
|
| |
Research and development expenses increased by $9.7 million, or 80.9%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. This increase was primarily driven by increases in personnel costs including stock-based compensation expense of $7.9 million and an increase in professional service fees of $1.1 million as we continue to invest in expanding our overall product development capabilities and resources.
Sales and marketing
| | Three months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
Sales and marketing |
| $ | 14,203 |
| $ | 5,538 |
| $ | 8,665 |
| 156.5 | % |
Percentage of revenue | |
| 97.1 | % |
| 54.6 | % |
|
|
|
| |
33
Sales and marketing expenses increased by $8.7 million, or 156.5%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. This increase was primarily driven by increases in personnel costs including stock-based compensation of $5.5 million, an increase in demand generation costs of $1.3 million due to investments made to promote sales growth and an increase in travel, an increase in overhead costs of $0.6 million and entertainment costs of $0.7 million primarily related to the Company’s annual sales conference.
General and administrative
| | Three months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
General and administrative |
| $ | 16,008 |
| $ | 5,068 |
| $ | 10,940 |
| 215.9 | % |
Percentage of revenue | |
| 109.5 | % |
| 50.0 | % |
|
|
|
| |
General and administrative expenses increased by $10.9 million, or 215.9%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. This increase was primarily driven by increases in personnel cost including stock-based compensation and benefits of $7.8 million associated with investments to scale up our back-office support and executive functions. In addition, the increase in general and administrative expenses is due to increased recruiting expense of $0.5 million to support our investments in personnel growth, increased professional service fees of $1.3 million and other general and administrative costs incremental to being a publicly traded company of $0.8 million.
Loss from operations
| | Three months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
Loss from operations |
| $ | (56,987) |
| $ | (91,828) |
| $ | 34,841 |
| (37.9) | % |
Percentage of revenue | |
| (389.8) | % |
| (906.0) | % |
|
|
|
| |
Loss from operations decreased by $34.8 million, or 37.9%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. This decrease was primarily a result of an increase in gross profit of $64.1 million partially offset by increases in operating expenses of $29.3 million. The increase in gross profit was due to higher volume of sales, lower cost of product revenue and lower losses on product purchase commitments.
Net loss
| | Three months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
Net loss |
| $ | (13,561) |
| $ | (92,208) |
| $ | 78,647 |
| (85.3) | % |
Percentage of revenue | |
| (92.8) | % |
| (909.8) | % |
|
|
|
| |
Net loss decreased by $78.6 million, or 85.3%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. This decrease in the net loss was primarily a result of a decrease in the operating loss of $34.8 million and the gain for the change in the fair value of the warrant liabilities of $43.0 million. The warrant liabilities were recorded as part of the Business Combination and therefore did not exist in the prior year.
Comparison of the nine months ended September 30, 2021 and 2020
Revenue
| | Nine months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
Revenue: |
| |
|
| |
|
| |
|
|
| |
Product |
| $ | 33,455 | | $ | 25,820 | | $ | 7,635 |
| 29.6 | % |
Subscription |
| | 10,123 | | | 4,777 | | | 5,346 |
| 111.9 | % |
Total revenue: | | $ | 43,578 | | $ | 30,597 | | $ | 12,981 |
| 42.4 | % |
34
Total revenue increased by $13.0 million, or 42.4%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
Product revenue increased by $7.6 million, or 29.6%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase in product revenue was primarily driven by a higher volume of Butterfly iQ+ probes sold, as a result of our increased investment in our sales and marketing efforts domestically and internationally. For the nine months ended September 30, 2020, revenue was positively impacted by COVID-19, as the Butterfly iQ was utilized in the monitoring of acute symptoms of COVID-19. We are unable to measure precisely the positive impact of COVID-19 on our revenue for the nine months ended September 30, 2020.
Subscription revenue increased by $5.3 million, or 111.9%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was driven by an increased volume of our SaaS subscriptions sold in conjunction with sales of our devices as well as the increase from subscription renewals year over year.
Cost of revenue
| | Nine months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
Cost of revenue: |
| |
|
| |
|
| |
|
|
| |
Loss on product purchase commitments | | $ | 11,623 | | $ | 63,993 | | $ | (52,370) | | (81.8) | % |
Product |
| | 21,090 | | | 35,266 | | | (14,176) |
| (40.2) | % |
Subscription |
| | 1,351 | | | 1,260 | | | 91 |
| 7.2 | % |
Total cost of revenue | | $ | 34,064 | | $ | 100,519 | | $ | (66,455) |
| (66.1) | % |
Percentage of revenue | |
| 78.2 | % |
| 328.5 | % |
|
|
|
| |
Loss on product purchase commitments decreased by $52.4 million, or 81.8%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The overall decrease is primarily due to a decrease in the purchase commitment loss related to a certain third-party vendor of $44.8 million. The decreased loss related to such vendor is due to the purchase commitment loss taken in the prior fiscal year as an estimate of future excess inventory and the additional purchase commitment loss recorded for the nine months ended September 30, 2021. The additional loss was the result of changes to certain factors management considers when determining the existence and scope of a loss for the minimum purchase commitment. Additionally, the overall decrease is due to the non-recurrence of losses on other purchase commitments with other third-party vendors recorded in the prior year of $7.6 million.
Cost of product revenue decreased by $14.2 million, or 40.2%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. This decrease was driven by the sale of our second generation product, the Butterfly IQ+, which is less costly to produce in the period ended September 30, 2021 as opposed to the Butterfly IQ in the period ended September 30, 2020. The overall decrease of product cost of revenue was primarily driven by decreases in product costs of $6.9 million, a decrease in warranty expense of $1.6 million and a decrease in net realizable value inventory adjustments and excess and obsolete inventory charges of $7.6 million. The decreases were partially offset by an increase in component product costs related to global supply chain constraints of $0.6 million, an increase in royalty fees due to increased sales of the Butterfly IQ+ of $0.6 million and an increase in payment processing fees of $0.6 million.
Cost of subscription revenue increased by $0.1 million, or 7.2%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. This increase was primarily driven by increased cloud hosting costs and amortization expense partially offset by decreased payment processing fees.
Research and development
| | Nine months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
Research and development |
| $ | 54,459 |
| $ | 36,427 |
| $ | 18,032 |
| 49.5 | % |
Percentage of revenue | |
| 125.0 | % |
| 119.1 | % |
|
|
|
| |
35
Research and development expenses increased by $18.0 million, or 49.5%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. This increase was primarily driven by increases in personnel costs including stock-based compensation expense of $16.3 million and an increase in professional service fees of $1.5 million as we continue to invest in expanding our overall product development capabilities and resources.
Sales and marketing
| | Nine months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
Sales and marketing |
| $ | 34,550 |
| $ | 17,408 |
| $ | 17,142 |
| 98.5 | % |
Percentage of revenue | |
| 79.3 | % |
| 56.9 | % |
|
|
|
| |
Sales and marketing expenses increased by $17.1 million, or 98.5%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. This increase was primarily driven by an increase in personnel cost including stock-based compensation of $11.5 million, an increase in demand generation costs of $3.1 million due to investments made to promote sales growth, an increase in travel and entertainment costs of $0.7 million related to internal and external events and an increase in professional service fees of $0.8 million to support our sales and marketing efforts.
General and administrative
| | Nine months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
General and administrative |
| $ | 67,928 |
| $ | 15,651 |
| $ | 52,277 |
| 334.0 | % |
Percentage of revenue | |
| 155.9 | % |
| 51.2 | % |
|
|
|
| |
General and administrative expenses increased by $52.3 million, or 334.0%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. This increase is primarily due to an increase in stock-based compensation expense of $23.2 million due to the additional awards granted and the performance condition for certain restricted stock units being achieved upon the Closing of the Business Combination. In addition to stock-based compensation, the increase was primarily driven by increased personnel costs of $13.7 million due to investments made to scale up our back-office support and executive functions, certain costs with regards to our CEO transition, an increase in recruiting expense of $3.5 million, an increase in professional services of $7.7 million and an increase in other general and administrative costs incremental to being a publicly traded company of $2.4 million.
Loss from operations
| | Nine months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
Loss from operations |
| $ | (147,423) |
| $ | (139,408) |
| $ | (8,015) |
| 5.7 | % |
Percentage of revenue | |
| (338.3) | % |
| (455.6) | % |
|
|
|
| |
Loss from operations increased by $8.0 million, or 5.7%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. This increase was primarily a result of increases in operating expenses of $87.5 million partially offset by an increase in gross profit of $79.4 million. The increase in gross profit was primarily due to a higher volume of sales, lower cost of product revenue and lower losses on purchase commitments.
Net loss
| | Nine months ended September 30, | | | | | |
| ||||
(in thousands) | | 2021 | | 2020 | | Change | | % Change |
| |||
Net loss |
| $ | (17,193) |
| $ | (139,803) |
| $ | 122,610 |
| (87.7) | % |
Percentage of revenue | |
| (39.5) | % |
| (456.9) | % |
|
|
|
| |
Net loss decreased by $122.6 million, or 87.7%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. This decrease in net loss was primarily a result of the gain for the change in the fair
36
value of the warrant liabilities of $130.5 million. The warrant liabilities were recorded as part of the Business Combination and therefore did not exist in the prior year. The gain was partially offset by the increased loss from operations of $8.0 million.
Liquidity and Capital Resources
Since our inception, our primary sources of liquidity are cash flows from operations and issuances of preferred stock and convertible notes. In addition, on February 12, 2021, we completed the Business Combination, and as a result we received gross proceeds of approximately $589 million. Our primary uses of liquidity are operating expenses, working capital requirements and capital expenditures. Cash flows from operations have been historically negative as we continue to develop new products and services and increase our sales and marketing efforts. We expect to be cash flow negative on an annual basis, although we may have quarterly results where cash flows from operations are positive.
We expect to continue to incur losses from operations, as we continue to invest in research and development of our products and in sales and marketing efforts into expanding new markets and verticals.
We expect that the funds raised in connection with the Business Combination and cash flows from operations will be sufficient to meet our liquidity, capital expenditure, and anticipated working capital requirements and fund our operations for at least the next 12 months. We expect to use the funds raised in connection with the Business Combination to scale our sales and marketing capabilities, develop new products and services and for working capital and general corporate purposes.
Our cash and cash equivalents and investments in marketable securities balance as of September 30, 2021 was $469.4 million. Our future capital requirements may vary from those currently planned and will depend on various factors, including our rate of revenue growth and the timing and extent of spending on strategic business initiatives.
The Company has restricted cash of $4.0 million as of September 30, 2021 to secure a letter of credit for one of the Company’s leases. The Company expects to maintain the letter of credit as security deposit for the duration of the lease.
Cash flows
Comparison of the period for the nine months ended September 30, 2021 and September 30, 2020
The following table summarizes our sources and uses of cash for the nine months ended September 30, 2021 and September 30, 2020:
| | Nine months ended September 30, | ||||
(in thousands) | | 2021 | | 2020 | ||
Net cash used in operating activities |
| $ | (146,410) |
| $ | (61,077) |
Net cash used in investing activities |
| | (319,769) |
| | (2,597) |
Net cash provided by financing activities |
| | 563,299 |
| | 25,358 |
Net (decrease) increase in cash, cash equivalents and restricted cash |
| $ | 97,120 |
| $ | (38,316) |
Net cash used in operating activities
Net cash used in operating activities represents the cash receipts and disbursements related to our activities other than investing and financing activities. We expect cash provided by historical financing activities such as the Business Combination will continue to be our primary source of funds to support operating needs and capital expenditures for the foreseeable future.
Net cash used in operating activities increased by $85.3 million, or 139.7%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase in net cash used in operating activities was due to a $86.4 million increase in accrued purchase commitments resulting from increased purchases of inventory components and purchase commitment losses recorded during the period. This increase was partially offset by a decrease of $13.9 million in inventories due to the costs of revenue recognized during the period. The increase in net cash used in
37
operating activities was also due to an $8.6 million increase in prepaid expenses and other assets and a $10.6 million increase of vendor advances to be used in operations, as well as a $11.6 million increase in accounts payable and accrued expenses due to the timing of expenses and payments. Additionally, there was a $105.4 million increase in adjustments to reconcile net loss partially offset by a $122.6 million decrease in net losses.
Net cash used in investing activities
Net cash used in investing activities increased by $317.2 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily due to the investment activity for the funds received from the Business Combination.
Net cash provided by financing activities
For the nine months ended September 30, 2021, net cash provided by financing activities increased by $537.9 million compared to the nine months ended September 30, 2020. The increase was primarily due to net proceeds from the Business Combination of $547.8 million. Additionally, the proceeds from the exercise of stock options increased by $18.9 million which was partially offset by a $4.4 million loan repayment under the Paycheck Protection Program, the non-recurrence of $20.7 million of proceeds from the issuance of convertible debt in fiscal 2020 and $4.3 million of proceeds from the loan payable issued in fiscal 2020.
Contractual Obligations
As of September 30, 2021, our contractual obligations were as follows:
(in thousands) |
| Total |
| < 1 year |
| 1-3 Years |
| 3-5 Years |
| > 5 years | |||||
Operating leases | | $ | 42,864 | | $ | 1,828 | | $ | 8,139 | | $ | 9,400 | | $ | 23,497 |
Purchase obligations (1) | | | 129,467 | | | 59,576 | | | 69,891 | | | — | | | — |
Total contractual obligations | | $ | 172,331 | | $ | 61,404 | | $ | 78,030 | | $ | 9,400 | | $ | 23,497 |
(1) | Purchase obligations include all legally binding contracts and relate to firm commitments for inventory purchases. Our purchase obligations are related to a contract for a key inventory component in our manufacturing process. Purchase orders that are not binding agreements are excluded from the table above. |
Critical Accounting Policies and Significant Judgments and Estimates
Our management's 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 condensed consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about items that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, there have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K.
Recently Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 “Summary of Significant Accounting Policies – Recent Accounting Pronouncements Adopted” to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.
38
Emerging Growth Company
We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by the FASB or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We intend to take advantage of the exemption for complying with new or revised accounting standards within the same time periods as private companies. Accordingly, the information contained in this report may be different than the information you receive from other public companies.
We also intend to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.
However, based on the market value of the Company's common stock held by non-affiliates as of June 30, 2021, the Company expects to become a large-accelerated filer and thus cease to be an emerging growth company on December 31, 2021. At that time, the Company will be required to adopt new or revised accounting standards as required by public companies, including those standards which the Company had previously deferred pursuant to the JOBS Act. Additionally, the Company will no longer be able to take advantage of the reduced regulatory and reporting requirements of emerging growth companies described above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We did not have any floating rate debt as of September 30, 2021. Our cash, cash equivalents and marketable securities are comprised primarily of bank deposits, money market accounts and equity interests in mutual funds. The primary objective of our investments is the preservation of capital to fulfill liquidity needs. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we do not expect cash flows to be affected to any significant degree by a sudden change in market interest rates.
Foreign Exchange Risk
We operate our business primarily within the United States and currently execute the majority of our transactions in U.S. dollars. We have not utilized hedging strategies with respect to such foreign exchange exposure. This limited foreign currency translation risk is not expected to have a material impact on our condensed consolidated financial statements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that, solely due to the Company’s material weakness as described below and in Amendment No. 1 to our Annual Report
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on Form 10-K/A for the year ended December 31, 2020 filed on May 12, 2021, our disclosure controls and procedures were not effective as of September 30, 2021.
Material Weakness in Internal Control over Financial Reporting
As previously disclosed in our Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2020, we identified a material weakness in our internal controls over financial reporting related to inaccurate accounting for public warrants and private placement warrants issued in connection with our initial public offering. Notwithstanding this material weakness, management has concluded that our unaudited financial statements included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with GAAP for each of the periods presented therein.
Plan for Remediation of the Material Weakness in Internal Control over Financial Reporting
In response to this material weakness, the Company’s management has expended, and will continue to expend, a substantial amount of effort and resources for the remediation and improvement of our internal control over financial reporting. While we have processes to properly identify and evaluate the appropriate accounting technical pronouncements and other literature for all significant or unusual transactions, we are improving these processes to ensure that the nuances of such transactions are effectively evaluated in the context of the increasingly complex accounting standards.
We are continually working to remediate the identified material weakness in internal control over financial reporting and execute on our plan to remediate the material weakness. Our plans at this time include acquiring enhanced access to accounting literature, research materials and documents and improving the communication among our personnel and third-party professionals with whom we may consult regarding the application of complex accounting transactions.
Our remediation plan can only be accomplished over time and will be continually reviewed to determine that it is achieving its objectives. We believe we are making progress toward achieving the effectiveness of our internal controls and disclosure controls; however we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.
Changes in Internal Control over Financial Reporting
Other than the changes made to remediate the material weakness described above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. The inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently a party to any material legal proceedings.
Item 1A. Risk Factors
Our business, results of operations and financial condition are subject to various risks and uncertainties including the risk factors described under the caption “Risk Factors” in our most recent Annual Report on Form 10-K, filed with the SEC on March 29, 2021, as amended on May 12, 2021 (the “2020 Annual Report on Form 10-K”). There have been no material changes to the risk factors described in the 2020 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
Not applicable.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the three months ended September 30, 2021.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
See Exhibit Index.
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EXHIBIT INDEX
Exhibit Number | | Exhibit Description | | Filed Herewith | | Incorporated by Reference herein from Form or Schedule | | Filing Date | | SEC File/ Reg. Number |
|---|---|---|---|---|---|---|---|---|---|---|
10.1+ | | | | | Form 8-K (Exhibit 10.1) | | 7/22/2021 | | 001-39292 | |
10.2+ | | | X | | | | | | | |
10.3+ | | | X | | | | | | | |
10.4+ | | | | | Form 10-Q (Exhibit 10.5) | | 8/9/2021 | | 001-39292 | |
10.5+ | | Amended and Restated Nonemployee Director Compensation Policy. | | | | Form 8-K (Exhibit 10.1) | | 9/10/2021 | | 001-39292 |
31.1 |
|
| X |
| |
| | | | |
31.2 |
|
| X |
| |
| | | | |
32* |
|
| X |
| |
| | | | |
101.INS |
| Inline XBRL Instance Document - The instance document does not appear |
| X |
| |
| | | |
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Exhibit Number | | Exhibit Description | | Filed Herewith | | Incorporated by Reference herein from Form or Schedule | | Filing Date | | SEC File/ Reg. Number |
|---|---|---|---|---|---|---|---|---|---|---|
in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document. | ||||||||||
101.SCH |
| Inline XBRL Taxonomy Extension Schema Document. |
| X |
| |
| | | |
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| X |
| |
| | | |
101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| X |
| |
| | | |
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document. |
| X |
| |
| | | |
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| X |
| |
| | | |
104 | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | | X | | | | | | |
+ | Management contract or compensatory plan or arrangement. |
* | The certifications attached as Exhibit 32 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Butterfly Network, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BUTTERFLY NETWORK, INC. | |
| | |
Date: November 15, 2021 | By: | /s/ Todd Fruchterman, M.D., Ph.D. |
| | Todd Fruchterman, M.D., Ph.D. |
| | President and Chief Executive Officer |
| | |
Date: November 15, 2021 | By: | /s/ Stephanie Fielding |
| | Stephanie Fielding |
| | Chief Financial Officer |
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