Butterfly Network, Inc 8-K/A, filed Mar 29, 2021
Butterfly Network, Inc. (BFLY)
About this 8-K/A
Butterfly Network, Inc filed this 8-K/A on March 29, 2021, reporting on events of February 12, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 2)
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of
the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 12, 2021
BUTTERFLY NETWORK, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 001-39292 | 84-4618156 |
| (State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
| 530 Old Whitfield Street Guilford, Connecticut |
06437 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (203) 689-5650
Longview Acquisition Corp.
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Class A common stock, par value $0.0001 per share | BFLY | The New York Stock Exchange | ||
| Warrants to purchase one share of Class A common stock, each at an exercise price of $11.50 per share | BFLY WS | The New York Stock Exchange |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company x
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. ¨
EXPLANATORY NOTE
This Amendment No. 2 to Butterfly Network, Inc.’s (the “Company”) Current Report on Form 8-K (the “Form 8-K”) originally filed by the Company on February 16, 2021, as amended by Amendment No. 1 to the Form 8-K filed by the Company on February 16, 2021, is being filed solely for the purpose of amending the historical financial statements provided under Items 9.01(a) and 9.01(b) in the Form 8-K to include the audited consolidated financial statements of BFLY Operations, Inc. (formerly Butterfly Network, Inc.) (“Legacy Butterfly”) as of December 31, 2020 and 2019 and for each of the two years in the period ended December 31, 2020 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations of Legacy Butterfly for the year ended December 31, 2020. This Amendment No. 2 does not amend any other item of the Form 8-K or purport to provide an update or a discussion of any developments at the Company subsequent to the filing date of the Form 8-K.
Capitalized terms used but not defined herein have the meanings assigned to them in the Form 8-K.
| Item 9.01 | Financial Statements and Exhibits |
(a) Financial Statements of Business Acquired
The audited consolidated financial statements of Legacy Butterfly as of December 31, 2020 and 2019 and for each of the two years in the period ended December 31, 2020 are filed herewith as Exhibit 99.1.
Also included herewith as Exhibit 99.2 and incorporated by reference herein is the Management’s Discussion and Analysis of Financial Condition and Results of Operations of Legacy Butterfly for the year ended December 31, 2020.
(d) Exhibits
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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 hereunto duly authorized.
| BUTTERFLY NETWORK, INC. |
| By: | /s/ Todd M. Fruchterman, M.D., Ph.D. | |
| Name: | Todd M. Fruchterman, M.D., Ph.D. | |
| Title: | President and Chief Executive Officer | |
| Date: March 29, 2021 |
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Exhibit 99.1
INDEX TO FINANCIAL STATEMENTS
| Report of Independent Registered Public Accounting Firm | 2 |
| Consolidated Balance Sheets as of December 31, 2020 and 2019 | 3 |
| Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2020 and 2019 | 4 |
| Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Deficit for the years ended December 31, 2020 and 2019 | 5 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 | 6 |
| Notes to the Consolidated Financial Statements | 7 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of BFLY Operations, Inc. and its subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BFLY Operations, Inc. and its subsidiaries (formerly Butterfly Network, Inc., the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, changes in convertible preferred stock and stockholders’ deficit, and cash flows, for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
March 29, 2021
New York City, New York
We have served as the Company's auditor since 2020.
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BFLY OPERATIONS, INC. (FORMERLY BUTTERFLY NETWORK, INC.)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 60,206 | $ | 90,002 | ||||
| Accounts receivable, net | 5,752 | 1,951 | ||||||
| Inventories | 25,805 | 9,441 | ||||||
| Current portion of vendor advances | 2,571 | 5,239 | ||||||
| Prepaid expenses and other current assets | 2,960 | 1,793 | ||||||
| Due from related parties | 38 | 829 | ||||||
| Total current assets | $ | 97,332 | $ | 109,255 | ||||
| Property and equipment, net | 6,870 | 5,325 | ||||||
| Non-current portion of vendor advances | 37,390 | 46,940 | ||||||
| Other assets – related party | - | 1,661 | ||||||
| Other non-current assets | 5,599 | 1,956 | ||||||
| Total assets | $ | 147,191 | $ | 165,137 | ||||
| Liabilities, convertible preferred stock, and stockholders’ deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 16,400 | $ | 5,168 | ||||
| Deferred revenue, current | 8,443 | 3,200 | ||||||
| Due to related parties | 154 | 6 | ||||||
| Accrued purchase commitments, current | 22,890 | - | ||||||
| Accrued expenses and other current liabilities | 21,808 | 6,951 | ||||||
| Total current liabilities | $ | 69,695 | $ | 15,325 | ||||
| Deferred revenue, non-current | $ | 2,790 | $ | 587 | ||||
| Convertible debt | 49,528 | - | ||||||
| Loan payable | 4,366 | - | ||||||
| Accrued purchase commitments, non-current | 19,660 | - | ||||||
| Other non-current liabilities | 2,146 | 566 | ||||||
| Total liabilities | $ | 148,185 | $ | 16,478 | ||||
| Commitments and contingencies (Note 17) | ||||||||
| Convertible preferred stock: | ||||||||
| Convertible preferred stock (Series A, B, C and D) $.0001 par value with an aggregate liquidation preference of $383,829; 103,242,914 shares authorized, issued and outstanding | 360,937 | 360,937 | ||||||
| Stockholders’ deficit: | ||||||||
| Common stock $.0001 par value; 112,000,000 and 112,000,000 shares authorized at December 31, 2020 and 2019, respectively; 6,350,083 and 5,720,842 shares issued and outstanding at December 31, 2020 and 2019, respectively | 1 | 1 | ||||||
| Special-voting common stock, $.0001 par value; 25,952,123 shares authorized; 0 shares issued and outstanding | - | - | ||||||
| Additional paid-in capital | 32,874 | 19,782 | ||||||
| Accumulated deficit | (394,806 | ) | (232,061 | ) | ||||
| Total stockholders’ deficit | $ | (361,931 | ) | $ | (212,278 | ) | ||
| Total liabilities, convertible preferred stock and stockholders’ deficit | $ | 147,191 | $ | 165,137 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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BFLY OPERATIONS, INC. (FORMERLY BUTTERFLY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except shares and per share amounts)
| Year ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenue: | ||||||||
| Product | $ | 38,347 | $ | 25,081 | ||||
| Subscription | 7,905 | 2,502 | ||||||
| Total revenue | $ | 46,252 | $ | 27,583 | ||||
| Cost of revenue: | ||||||||
| Product (including losses on purchase commitments of $60.1 million and $9.5 million, respectively) | $ | 106,407 | $ | 47,857 | ||||
| Subscription | 1,068 | 621 | ||||||
| Total cost of revenue | $ | 107,475 | $ | 48,478 | ||||
| Gross margin | $ | (61,223 | ) | $ | (20,895 | ) | ||
| Operating expenses: | ||||||||
| Research and development | $ | 49,738 | $ | 48,934 | ||||
| Sales and marketing | 26,263 | 14,282 | ||||||
| General and administrative | 24,395 | 18,185 | ||||||
| Total operating expenses | 100,396 | 81,401 | ||||||
| Loss from operations | $ | (161,619 | ) | $ | (102,296 | ) | ||
| Interest income | $ | 285 | $ | 2,695 | ||||
| Interest expense | (1,141 | ) | — | |||||
| Other income (expense), net | (231 | ) | (96 | ) | ||||
| Loss before provision for income taxes | $ | (162,706 | ) | $ | (99,697 | ) | ||
| Provision for income taxes | 39 | — | ||||||
| Net loss and comprehensive loss | $ | (162,745 | ) | $ | (99,697 | ) | ||
| Net loss per common share attributable to common stockholders, basic and diluted | $ | (27.90 | ) | $ | (17.73 | ) | ||
| Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted | 5,833,164 | 5,622,752 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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BFLY OPERATIONS, INC. (FORMERLY BUTTERFLY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE
PREFERRED STOCK AND
STOCKHOLDERS’ DEFICIT
(In thousands, except share amounts)
| Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | deficit | ||||||||||||||||||||||
| January 1, 2019 | 103,242,914 | $ | 360,937 | 5,549,112 | $ | 1 | $ | 13,420 | $ | (132,364 | ) | $ | (118,943 | ) | ||||||||||||||
| Net loss | — | — | — | — | — | (99,697 | ) | (99,697 | ) | |||||||||||||||||||
| Common stock issued upon exercise of stock options | — | — | 171,730 | — | 324 | — | 324 | |||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 6,038 | — | 6,038 | |||||||||||||||||||||
| December 31, 2019 | 103,242,914 | $ | 360,937 | 5,720,842 | $ | 1 | $ | 19,782 | $ | (232,061 | ) | $ | (212,278 | ) | ||||||||||||||
| Net loss | — | — | — | — | — | (162,745 | ) | (162,745 | ) | |||||||||||||||||||
| Common stock issued upon exercise of stock options | — | — | 629,241 | — | 2,009 | — | 2,009 | |||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 11,083 | — | 11,083 | |||||||||||||||||||||
| December 31, 2020 | 103,242,914 | $ | 360,937 | 6,350,083 | $ | 1 | $ | 32,874 | $ | (394,806 | ) | $ | (361,931 | ) | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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BFLY OPERATIONS, INC. (FORMERLY BUTTERFLY NETWORK, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (162,745 | ) | $ | (99,697 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,316 | 758 | ||||||
| Provision for bad debt | 576 | — | ||||||
| Write-down of other assets – related party | 1,390 | — | ||||||
| Write-down of vendor advance | 10,560 | 9,500 | ||||||
| Non-cash interest expense on convertible debt | 1,047 | — | ||||||
| Write-down of inventories | 7,123 | 2,711 | ||||||
| Stock-based compensation expense | 11,004 | 6,038 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (4,377 | ) | (1,195 | ) | ||||
| Inventories | (23,487 | ) | (1,390 | ) | ||||
| Prepaid expenses and other current assets | (1,082 | ) | (31 | ) | ||||
| Vendor advances | 1,658 | (48,488 | ) | |||||
| Due from related parties | 791 | 877 | ||||||
| Other assets – related party | 271 | 85 | ||||||
| Accounts payable | 11,175 | 2,549 | ||||||
| Deferred revenue | 7,446 | 3,497 | ||||||
| Due to related parties | 148 | (871 | ) | |||||
| Accrued purchase commitments | 42,550 | — | ||||||
| Accrued expenses and other liabilities | 12,936 | 5,225 | ||||||
| Net cash used in operating activities | $ | (81,700 | ) | $ | (120,432 | ) | ||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (2,376 | ) | (4,468 | ) | ||||
| Net cash used in investing activities | $ | (2,376 | ) | $ | (4,468 | ) | ||
| Cash flows from financing activities: | ||||||||
| Proceeds from exercise of stock options | 2,038 | 324 | ||||||
| Proceeds from loan payable | 4,366 | — | ||||||
| Proceeds from issuance of convertible debt | 50,000 | — | ||||||
| Payments of deferred offering costs | (657 | ) | — | |||||
| Payments of debt issuance costs | (1,467 | ) | — | |||||
| Net cash provided by financing activities | $ | 54,280 | $ | 324 | ||||
| Net (decrease) increase in cash and cash equivalents | $ | (29,796 | ) | (124,576 | ) | |||
| Cash and cash equivalents, beginning of year | 90,002 | 214,578 | ||||||
| Cash and cash equivalents, end of year | $ | 60,206 | $ | 90,002 | ||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Purchase of property and equipment | 564 | 75 | ||||||
| Deferred offering costs and debt issuance costs | 3,106 | — | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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BFLY OPERATIONS, INC. (FORMERLY BUTTERFLY NETWORK, INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Description of Business
BFLY Operations, Inc. (formerly Butterfly Network, Inc., the “Company” or “Butterfly”) was incorporated as a Delaware corporation on January 25, 2011. The Company’s legal name became BFLY Operations, Inc. following the closing of the business combination discussed in Note 18 “Subsequent Events.” The Company is an innovative digital health business with a mission of democratizing healthcare by making medical imaging accessible to everyone around the world. Butterfly’s solution addresses the needs of point of care imaging with a unique combination of software and hardware technology. This hardware platform is combined with cloud-based software to provide image interpretation, content storage, and acquisition assistance to less-expert users worldwide. The Company’s cloud environment allows for telemedicine.
The Company operates wholly-owned subsidiaries in Australia, Germany, Netherlands, the United Kingdom and Taiwan.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of BFLY Operations, Inc. (formerly 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”). All intercompany balances and transactions have been eliminated in consolidation. Certain items in the prior year’s consolidated financial statements have been reclassified to conform to the current year presentation reflected in the consolidated financial statements.
COVID-19 Outbreak
The outbreak of the novel coronavirus (“COVID-19”), which was declared a pandemic by the World Health Organization on March 11, 2020 and declared a National Emergency by the President of the United States on March 13, 2020, has led to adverse impacts on the U.S. and global economies and created uncertainty regarding potential impacts on 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 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 treat 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 financial statements.
Functional Currency
The Company’s worldwide operations utilize the U.S. dollar ("USD") as the functional currency considering the significant dependency of each subsidiary on the Company. Subsidiary operations are financed through the funding received from the Company in USD. For foreign entities where the USD is the functional currency, all foreign currency-denominated monetary assets and liabilities are remeasured at end-of-period exchange rates. Exchange gains and losses arising from remeasurement of foreign currency-denominated monetary assets and liabilities are included in the Company’s operating results in the consolidated statements of operations and comprehensive loss.
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Going Concern
In accordance with Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.
On February 12, 2021, the Company completed a business combination with Longview Acquisition Corp, (“Longview”), a Special Purpose Acquisition Company. As a result of the business combination, the Company received gross proceeds of approximately $589 million. As of March 29, 2021, the issuance date of the annual consolidated financial statements for the years ended December 31, 2020 and 2019, the Company expects that its cash and cash equivalents will be sufficient to fund the business through at least 12 months from the issuance of the consolidated financial statements. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. At December 31, 2020 and 2019, 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 any losses on such accounts and does not believe it is exposed to any significant credit risk on cash and cash equivalents.
As of December 31, 2020 and 2019, no customer accounts for more than 10% of the Company’s accounts receivable. For the years end December 31, 2020 and 2019, no customer accounts for more than 10% of the total revenues.
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. All of the Company’s long-lived assets are located in the United States. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions about future events that affect the amounts reported in its consolidated financial statements and accompanying notes. Future events and their effects cannot be determined with certainty. On an ongoing basis, management evaluates these estimates and assumptions. Significant estimates and assumptions include:
| • | revenue recognition, including determination of the timing and pattern of satisfaction of performance obligations, determination of the standalone selling price (“SSP”) of performance obligations and estimation of variable consideration, such as product returns; |
| • | allowance for doubtful accounts; |
| • | assumptions underlying the warranty liability calculation; |
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| • | measurement and allocation of capitalized costs, the net realizable value (the selling price as well as estimated costs of completion, disposal and transportation) of inventory, and demand and future use of inventory; |
| • | valuation allowances with respect to deferred tax assets; and |
| • | assumptions underlying the fair value used in calculation of the stock-based compensation. |
The Company bases these 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 consolidated financial statements.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. Revenue is recognized when or as a customer obtains control of the promised goods and services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to in exchange for these goods and services. To achieve this core principle, the Company applies the following 5 steps:
| • | Step 1: Identify Contracts with Customers: The Company’s contracts with customers typically occur either through eCommerce or through direct sales. The Company’s contracts with eCommerce customers are executed when the customer indicates that it has read and agrees to the terms and conditions of the purchase prior to purchasing the specific goods and services. The Company executes signed contracts with direct sales customers. The goods and services sold through the Company’s eCommerce platform require upfront payment for the goods and the services upon check-out. Direct sales typically have 30-day payment terms, and multi-year software subscriptions typically require advance payment for each annual subscription period. |
| • | Step 2: Identify Performance Obligations: The Company’s contracts with customers often include multiple performance obligations. The Company has identified the following performance obligations in its contracts with customers: |
| • | Hardware devices |
| • | Hardware accessories |
| • | Maintenance and support for the software that is used in connection with the hardware devices, including the right to an unspecified number of software updates as and when available |
| • | Cloud-based software subscriptions, which represent an obligation to provide the customer with ongoing access to the Company’s hosted software applications on a continuous basis throughout the subscription period |
| • | Implementation and integration services |
| • | Extended warranties |
| • | Step 3: Determine Transaction Price: The Company’s contracts with customers include variable consideration in the form of refunds and credits for product returns and price concessions. The Company estimates variable consideration using the expected value method based on a portfolio of data from similar contracts. |
| • | Step 4: Allocate Transaction Price to Performance Obligations: The Company allocates transaction price to the performance obligations in a contract with a customer based on the relative standalone selling prices of the goods and services. For the cloud-based software subscriptions, which the Company sells to customers on a standalone basis (including renewals of subscriptions), the Company uses the observable standalone selling price, based on the price for which the Company sells these services to customers in standalone contracts, including contracts for renewals of subscriptions. The Company’s sales of hardware devices represent a bundled sale of a good and a service that includes two performance obligations, namely the unit of hardware device, and the support and maintenance of the software that is used in conjunction with the device, including a right for the customer to receive an unspecified number of software updates. The Company has an observable standalone selling price for the bundle and estimates the standalone selling price of the performance obligations within the bundle using estimation techniques that maximize the use of observable inputs. |
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| • | Step 5: Recognize Revenue as Performance Obligations are Satisfied: Each unit of hardware devices and accessories is a performance obligation satisfied at a point in time, when control of the good transfers from the Company to the customer. The Company’s services, including the cloud-based software subscriptions, extended warranties, and support and maintenance, are stand-ready obligations that are satisfied over time by providing the customer with ongoing access to the Company’s resources. The Company uses the time elapsed (straight-line) measure of progress to recognize revenue as these performance obligations are satisfied evenly over the respective service period. The implementation and integration services are performance obligations satisfied over time, and the Company uses the costs incurred as inputs in the measure of progress to recognize revenue as it satisfies these performance obligations. |
Deferred Revenue
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services described above and is reduced as the revenue recognition criteria are met. Deferred revenue is classified as current or non-current based on expected revenue recognition timing. Specifically, deferred revenue that will be recognized as revenue within the succeeding 12 month period is recorded as current, and the portion of deferred revenue where revenue is expected to be recognized beyond 12 months from the reporting date is recorded as non-current deferred revenue in the Company’s consolidated balance sheets.
Warranties
The Company offers a standard product warranty that its products will operate free of material defects and function in accordance with the standard specifications for a period of one year from when control is transferred to the customer. The Company evaluated the warranty liability under ASC Topic 606 and determined that it is an assurance type warranty. At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of revenue and as liability in accrued expenses. Factors that affect the warranty obligation include historical as well as current product failure rates, service delivery costs incurred in correcting product failures, and warranty policies and business practices.
Cash and Cash Equivalents
All highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. At December 31, 2020 and 2019, cash and cash equivalents consist principally of cash and money market accounts.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are carried at the original invoiced amount less an allowance for doubtful accounts based on the probability of future collection. On a periodic basis, the Company evaluates accounts receivable estimated to be uncollectible and provides allowances for doubtful accounts as necessary. The Company estimates its allowance for doubtful accounts based on historical loss patterns and the number of days that billings are past due. The following table summarizes the allowance for doubtful accounts activity for the year ended December 31, 2020:
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| (in thousands) | Fair Value | |||
| Allowance for doubtful accounts as of December 31, 2019 | $ | — | ||
| Additions | 576 | |||
| Deductions – write offs | — | |||
| Allowance for doubtful accounts as of December 31, 2020 | $ | 576 | ||
Inventories
Inventories primarily consist of raw materials, work in progress and finished goods which are purchased and held by the Company’s third-party contract manufacturers. Inventories are stated at the lower of actual cost, determined using the average cost method, or net realizable value. Cost includes all direct and indirect production costs to convert materials into a finished product. Net realizable value is based upon an estimated average selling price reduced by the estimated costs of completion, disposal and transportation. The determination of net realizable value involves certain judgments including estimating average selling prices. The Company reduces the value of inventory for estimated obsolescence or lack of marketability by the difference between the cost of the affected inventory and the net realizable value.
The valuation of inventory also requires the Company to estimate excess and obsolete inventory. The Company considers new product development schedules, the effect that new products might have on the sale of existing products, product obsolescence and product merchantability, including whether older products can be re-manufactured into new products among other factors.
Losses expected to arise from firm, non-cancelable and unhedged commitments for the future purchase of inventory items are recognized unless the losses are recoverable through firm sales contracts or other means.
Other Assets - Related Party
Other assets include prepaid advances which represent amounts paid to a related party to fund leasehold improvements and other capital expenditures. Refer to Note 14 “Related Party Transactions” for further discussion about the nature of the transactions.
Security Deposits
Security deposits represent amounts paid to third parties in relation to non-cancelable leases.
Vendor Advances
Vendor advances represent amounts paid to third party vendors for future services to be received related to production of the Company’s inventory. The classification current or non-current is based on the estimated timing of inventory delivery.
Property and Equipment, net
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining lease term or the estimated useful lives of related improvements.
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Useful lives for property and equipment are as follows:
| Property and Equipment | Estimated Useful Life | |
| Software | 3 years | |
| Machinery and equipment | 3 – 5 years | |
| Furnitures and fixtures | 5 – 7 years | |
| Leasehold improvements | Lesser of estimated useful life or remaining lease term |
Expenditures for major renewals and improvements are capitalized. Expenditures for repairs and maintenance are expensed as incurred. When assets are retired or otherwise disposed of, the cost of these assets and related accumulated depreciation is eliminated from the balance sheet, and any resulting gains or losses are included in the statements of operations and comprehensive loss in the period of disposal.
Capitalized Software Development Costs
Costs to develop software internally for internal use are capitalized and recorded as capitalized software development costs on the consolidated balance sheets as a component of property and equipment, net. The Company capitalizes qualifying costs associated with internally-developed software incurred during the application development stage so long as management with the relevant authority authorizes the project, it is probable the project will be completed, and the software will be used to perform the function intended. Costs incurred during the preliminary project and post-implementation stages, including training and maintenance, are expensed as incurred. Capitalized costs are amortized on a project-by-project basis using the straight-line method over the estimated economic life of the application, which is three years, beginning when the asset is substantially ready for use. Amortization expense is classified in the consolidated statement of operations based upon the nature of the project.
Deferred Offering Costs
Offering costs, consisting of legal, accounting, printer and filing fees related to the Company’s business combination, are deferred and are offset against proceeds from the transaction upon the consummation of the business combination. In the event the transaction was terminated, all deferred offering costs would be expensed. Deferred offering costs capitalized as of December 31, 2020 and 2019 were $3.7 million and $0.0 million, respectively.
Leases
Leases are evaluated and classified as operating leases or capital leases for financial reporting purposes. Leases that meet one or more of the capital lease criteria under this guidance are recorded as capital leases. All other leases are recorded as operating leases. The Company does not have any capital leases as of December 31, 2020 or December 31, 2019. Rent expense related to the Company’s non-cancellable operating leases is recognized on a straight-line basis over the lease term. Deferred rent is recognized as the difference between the actual amount paid and the straight-line expense and is included in other liabilities in the accompanying consolidated balance sheets. The portion that is expected to be included in the statements of operations and comprehensive loss in the next 12 months is included in other current liabilities in the accompanying consolidated balance sheets.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment at least annually or whenever events or changes in business circumstances indicate that the carrying amount of assets may not be fully recoverable. Each impairment test is based on a comparison of the undiscounted cash flow to the recorded value of the asset. If the recorded value of the asset is less than the undiscounted cash flow, the asset is written down to its estimated fair value. An impairment was recorded during the year ended December 31, 2020 with regards to other assets. Refer to Note 14 “Related Party Transactions” for further discussion about the nature of the transaction. No impairments were recorded for the year ended December 31, 2019.
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Convertible Debt
The Company evaluates its convertible debt for embedded derivatives. Embedded provisions (like conversion options) are assessed under ASC Topic 815, Derivatives and Hedging to determine if they qualify as embedded derivatives that require separate accounting.
To the extent that any embedded conversion option in the convertible debt is not bifurcated as an embedded derivative, that conversion option is also evaluated under ASC Topic 470, Debt, to determine if it qualifies as a beneficial conversion feature and requires separate accounting within equity.
Debt issuance costs are recorded as a reduction to the carrying amount of the convertible debt and are amortized to interest expense using the effective interest method.
The convertible debt is classified as short-term or long-term based on the debt’s payment schedule. Specifically, to the extent any payments are due within 12 months of the balance sheet date, it is classified as short-term while any payments that are due after 12 months from the balance sheet date are classified as long-term.
Cost of Revenue
Product: Cost of revenue consists of product costs including manufacturing costs, personnel costs and benefits, duties and other applicable importing costs, packaging, warranty replacement costs, depreciation expense, fulfillment costs, payment processing fees and inventory obsolescence and write-offs.
Subscription: Cost of revenue consists of personnel costs, cloud hosting costs, amortization of internal use software and payment processing fees.
Research and Development
Research and development expenses primarily consist of personnel costs and benefits, facilities-related expenses, consulting and professional fees, fabrication services, software and other outsourcing expenses. Substantially all of the Company’s research and development expenses are related to developing new products and services and improving existing products and services. Research and development expenses are expensed as incurred.
Sales and Marketing
Sales and marketing costs primarily consist of personnel costs and benefits, third party logistics, fulfillment and outbound shipping costs, facilities-related expenses, advertising, promotional, as well as conferences, meetings and other events. Advertising expenses are expensed as incurred. For the years ended December 31, 2020 and 2019, advertising expenses were $4.7 million and $0.9 million, respectively.
General and Administrative
General and administrative expenses primarily consist of personnel costs and benefits, patent and filing fees, facilities costs, office expenses and outside services. Outside services consist of professional services, legal and other professional fees.
Net Loss per Common Share
Basic net loss per common share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration of potentially dilutive securities. Diluted net loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares plus the common equivalent shares for the period, including any dilutive effect from such shares. The Company’s diluted net loss per common share is the same as basic net loss per common share for all periods presented, since the effect of potentially dilutive securities is anti-dilutive. Refer to Note 12 “Net Loss Per Share” for further discussion.
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Convertible Preferred Stock
The Company has applied the guidance in ASC Topic 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable Securities and has therefore classified the Series A, Series B, Series C and Series D Convertible Preferred Stock (“Convertible Preferred Stock”) (Note 10) as mezzanine equity. The Convertible Preferred Stock was recorded outside of stockholders’ deficit because the Convertible Preferred Stock includes a redemption provision upon a change of control, which is a deemed liquidation event that is considered outside the Company’s control. The Convertible Preferred Stock have been recorded at their original issue price, net of issuance costs. The Company did not adjust the carrying values of the Convertible Preferred Stock to the liquidation price associated with a change of control because a change of control of the Company was not considered probable at either of the reporting dates. Subsequent adjustments to increase or decrease the carrying values to their respective liquidation prices will be made only if and when it becomes probable that such a change of control will occur.
Stock-Based Compensation
The measurement of share-based compensation expense for all stock-based payment awards, including stock options granted to employees, directors, and nonemployees, is based on the estimated fair value of the awards on the date of grant.
The Company recognizes stock-based compensation expense for stock option grants on a straight-line basis over the requisite service period of the individual grants, which is generally the vesting period, based on the estimated grant date fair values. Generally, stock options fully vest four years from the grant date and have a term of 10 years. The Company recognizes the effect of forfeiture in compensation costs based on actual forfeitures when they occur.
Prior to the adoption of ASU 2018-07, stock options granted to non-employees were accounted for based on their fair value on the measurement date. Stock options granted to non-employees were subject to periodic revaluation over their vesting terms. As a result, the charge to statements of operations and comprehensive loss for non-employee options with vesting requirements was affected in each reporting period by a change in the fair value of the option calculated under the Black-Scholes option-pricing model.
The Company during the year ended December 31, 2020 granted performance and market based option awards and performance based restricted stock units. The Company accounted for these awards according to the relevant provisions of ASC 718 - Stock Compensation. For performance awards, the Company recognizes expense using the accelerated attribution method. Refer to Note 11 “Equity Incentive Plan” for further discussion about the nature of the transactions.
Common Stock Valuations
The fair value of the shares of common stock underlying stock options has historically been determined by the Board of Directors (the “Board”), with input from management and contemporaneous third-party valuations, as there was no public market for the common stock. The Company believes that the Board has the relevant experience and expertise to determine the fair value of the Company’s common stock. Given the absence of a public trading market for the Company’s common stock, and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation, the Board exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of the Company’s common stock at each option grant date.
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In valuing the Company’s common stock for 2019, the Board determined the value using the market approach-subject company transaction method. Under this method, the Company “solved for” the total equity value which allocates a probability-weighted present value to the Series D convertible preferred stockholders consistent with the investment amount of the financing round. However, given that the date of this value estimate precedes the current valuation date by one year, it is necessary to consider adjustments to account for the impact of any progress or changes in the Company’s business since its previous valuation. The Company considered two separate trend analyses in estimating the required adjustment in the subject company transaction method, a market trend analysis of guideline public companies and venture capital rates of return. In addition, the Company also considered the expected step-up in the next equity financing round (if any) as a reasonableness test.
In valuing the Company’s common stock for 2020, the equity value of the business was determined using various valuation methods including combinations of income and market approaches with input from management. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in the Company’s industry or similar business operations as of each valuation date and is adjusted to reflect the risks inherent in its cash flows. The market-based approach considers multiples of financial metrics based on trading multiples of a selected peer group of companies in similar lines of business.
For each valuation, the equity value was then allocated to the common stock using either the option pricing method (“OPM”) or a combination of the OPM and the probability-weighted expected return method (“PWERM”), which is referred to as a Hybrid Method. The OPM allocates the overall Company value to the various share classes based on differences in liquidation preferences, participation rights, dividend policy and conversion rights, using a series of call options. The call right is valued using a Black-Scholes option pricing model. The PWERM employs additional information not used in the OPM, including various market approach calculations depending upon the likelihood of various discrete future liquidity scenarios such as completing the business combination described in Note 18 “Subsequent Events” as well as the probability of remaining a private company.
Application of this approach involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships among those assumptions could have a material impact on the valuation of the Company’s common stock as of each valuation date.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.
The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.
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Recent Accounting Pronouncements Adopted
In June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-07, Compensation — Stock Compensation (Topic 718). The amendments in this update expand the scope of Topic 718 to include share-based payments to non-employees. An entity is required to apply the requirements of Topic 718 to non-employee awards except for specific guidance related to option pricing models and the attribution of cost. For nonemployee awards that had been issued prior to adoption of ASU 2018-07 and remained outstanding subsequent to adoption, the Company utilized the adoption date fair value of the nonemployee awards as a substitute for grant date fair value for future compensation expense recognition as permitted under the transition guidance. The Company adopted such guidance on January 1, 2020 and there was no material effect of adoption on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). The amendments add and modify certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public business entities will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. ASU 2018-13 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company adopted such guidance on January 1, 2020 and there was no material effect of adoption on the consolidated financial statements.
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 current 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 FASB, the entities who have not yet issued or made available for issuance the 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 period 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 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 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, 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 period 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 consolidated financial statements and disclosures.
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In August 2018, the 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). For public entities, this guidance was effective for annual reporting periods beginning January 1, 2020, including interim periods within that annual reporting period. For the other entities, this guidance is effective for the Company for annual reporting periods beginning January 1, 2021 and interim periods beginning January 1, 2022. The Company is currently evaluating the impact that the adoption of this pronouncement will have on the Company’s consolidated financial statements and disclosures.
In December 2019, the FASB ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU is intended to simplify various aspects related to accounting for income taxes. For public entities, this guidance is effective for annual reporting periods beginning January 1, 2021, including interim periods within that annual reporting period. For other entities, this guidance is effective for annual reporting periods beginning January 1, 2022 and interim reporting periods within annual reporting period beginning January 1, 2023. The Company is currently evaluating the impact that the adoption of this pronouncement will have on the financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40). The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. This ASU also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. For public business entities, this guidance is effective for annual reporting periods beginning January 1, 2022, and interim periods within those fiscal years. For all other entities, it is effective for annual reporting periods years beginning January 1, 2024, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after January 1, 2021. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company is currently evaluating the timing and impact of the adoption of ASU 2020-06 on the Company’s consolidated financial statements and disclosures.
Note 3. 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 its revenue streams. The following table summarizes the Company’s disaggregated revenues (in thousands) for the year ended December 31:
Pattern of Recognition | 2020 | 2019 | ||||||||
| By Product Type: | ||||||||||
| Devices and accessories | Point-in-time | $ | 38,347 | $ | 25,081 | |||||
| Subscription services and other services | Over time | 7,905 | 2,502 | |||||||
| Total revenue | $ | 46,252 | $ | 27,583 | ||||||
| By Geographical Market: | ||||||||||
| United States | $ | 33,237 | $ | 23,997 | ||||||
| International | 13,015 | 3,586 | ||||||||
| Total revenue | $ | 46,252 | $ | 27,583 | ||||||
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Contract Balances
Contract balances represent amounts presented in the consolidated balance sheets when either the Company has transferred goods or services to the customer, or the customer has paid consideration to us 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):
| December 31, 2020 | December 31, 2019 | |||||||
| Accounts receivable, net | $ | 5,752 | $ | 1,951 | ||||
| Deferred revenue, current | 8,443 | 3,200 | ||||||
| Deferred revenue, non-current | 2,790 | 587 | ||||||
The Company recognizes a receivable when it has an unconditional right to payment, and payment terms are typically 30 days for all product and service sales.
The amount of revenue recognized during the years ended December 31, 2020 and 2019 that was included in the deferred revenue balance at the beginning of the period was $3.2 million and $0.2 million, respectively.
Transaction Price Allocated to Remaining Performance Obligations
On December 31, 2020, the Company had $15.4 million of remaining performance obligations. The Company expects to recognize 65% of its remaining performance obligations as revenue in fiscal year 2021, and an additional 35% in fiscal year 2022 and thereafter.
Significant Judgments
The Company makes significant judgments applying the guidance related to the determination of the timing and pattern of satisfaction of performance obligations, determination of the SSP of performance obligations, and estimation of variable consideration, such as product returns. See Note 2 “Summary of Significant Accounting Policies” for details.
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Costs of Obtaining or Fulfilling Contracts
The Company incurs incremental costs of obtaining contracts and costs of fulfilling contracts with customers. Incremental costs of obtaining contracts, which include commissions and referral fees paid to third parties as a result of obtaining contracts with customers, are capitalized to the extent that the Company expects to recover such costs. Costs of fulfilling contracts that relate specifically to a contract with a customer, and result from activities that generate the Company’s resources and enable it to satisfy its performance obligations in the contract with the customer, are capitalized to the extent that the Company expects to recover such costs. Capitalized costs are amortized in a pattern that is consistent with the Company’s transfer to the customer of the related goods and services. Such costs were not material during the years ended December 31, 2020 and 2019.
Practical Expedients and Accounting Policy Elections
In determining the transaction price of its contracts with customers, the Company estimates variable consideration using a portfolio of data from similar contracts.
As a practical expedient, the Company does not adjust transaction price for the effects of a significant financing component in contracts in which the period between when the Company transfers the promised good or service to the customer and when the customer pays for that good or service is a year or less.
The Company has made an accounting policy election to exclude all sales taxes from the transaction price of its contracts with customers. Accordingly, sales taxes collected from customers and remitted to government authorities are not included in revenue and are accounted for as a liability until they have been remitted to the respective government authority.
Note 4. 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. The fair value of the loan payable and the convertible debt using Level 2 inputs was deemed to approximate carrying value as of December 31, 2020, due to the recency of the issuance dates.
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There were no transfers between fair value measurement levels during the years ended December 31, 2020 and 2019.
The Company had $41.9 million and $78.4 million of money market funds included in cash and cash equivalents as of December 31, 2020 and 2019, respectively. These assets were valued using quoted market prices and accordingly were classified as Level 1.
Note 5. Inventories
A summary of inventories is as follows at December 31 (in thousands):
| 2020 | 2019 | |||||||
| Raw materials | $ | 7,688 | 843 | |||||
| Work-in-progress | 865 | 4,788 | ||||||
| Finished goods | 17,252 | 3,810 | ||||||
| Total inventories | $ | 25,805 | $ | 9,441 | ||||
Work-in-progress represents inventory items in intermediate stages of production by third party manufacturers. For the years ended December 31, 2020 and 2019, net realizable value inventory adjustments and excess and obsolete inventory charges were $7.1 million and $2.7 million, respectively, and were recognized in cost of revenues.
Note 6. Other Non-Current Assets
Other non-current assets consist of the following at December 31 (in thousands):
| 2020 | 2019 | |||||||
| Security deposits | $ | 1,888 | $ | 1,956 | ||||
| Deferred offering costs | 3,711 | — | ||||||
| Total other non-current assets | $ | 5,599 | $ | 1,956 | ||||
Note 7. Property and Equipment, Net
Property and equipment, net, are recorded at historical cost and consist of the following at December 31 (in thousands):
| 2020 | 2019 | |||||||
| Machinery and equipment | $ | 5,102 | $ | 4,485 | ||||
| Leasehold improvements | 4,166 | 1,424 | ||||||
| Software | 888 | 182 | ||||||
| Construction in progress | 70 | 1,311 | ||||||
| Other | 42 | 28 | ||||||
| 10,268 | 7,430 | |||||||
| Less: accumulated depreciation and amortization | (3,398 | ) | (2,105 | ) | ||||
| Property and equipment, net | $ | 6,870 | $ | 5,325 | ||||
Depreciation and amortization expense amounted to $1.3 million and $0.8 million for the years ended December 31, 2020 and 2019, respectively.
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Note 8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at December 31 (in thousands):
| 2020 | 2019 | |||||||
| Employee compensation | $ | 5,968 | $ | 2,208 | ||||
| Customer deposits | 1,171 | 1,171 | ||||||
| Accrued warranty liability | 646 | 876 | ||||||
| Non-income tax | 3,695 | 1,646 | ||||||
| Professional fees | 5,432 | 484 | ||||||
| Vendor settlements | 2,975 | — | ||||||
| Other | 1,921 | 566 | ||||||
| Total other current liabilities | $ | 21,808 | $ | 6,951 | ||||
Warranty expense activity for the years ended December 31 is as follows (in thousands):
| 2020 | 2019 | |||||||
| Balance, beginning of period | $ | 876 | $ | 133 | ||||
| Warranty provision charged to operations | 2,498 | 2,203 | ||||||
| Warranty claims | (1,548 | ) | (1,460 | ) | ||||
| Balance, end of period | $ | 1,826 | $ | 876 | ||||
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 consolidated balance sheet.
Note 9. Stockholders’ Deficit
Common stock
As of December 31, 2020 and 2019, the Company had authorized 112,000,000 shares of common stock, $0.0001 par value per share (“Common Stock”), of which a total of 6,350,083 shares and 5,720,842 shares were outstanding, respectively.
In addition, at both December 31, 2020 and 2019, the Company had authorized 25,952,123 shares of special-voting common stock, $0.0001 par value per share (“Special-Voting Common Stock”), of which none were issued or outstanding.
Dividends
Holders of the Company’s Common Stock are not entitled to receive dividends unless declared by the Board. Any such dividends would be subject to the preferential dividend rights of the holders of the Convertible Preferred Stock (see below). There have been no dividends declared to date.
Voting rights
The holders of shares of the Common Stock are entitled to 1 vote per share on all matters on which the Common shares shall be entitled to vote. The holders of shares of the Special-Voting Common Stock are entitled to 10 votes per share on all matters on which the Common Stock shall be entitled to vote. The holders of Common Stock and Special-Voting Common Stock shall vote together and not as separate classes.
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Note 10. Convertible Preferred Stock
The Company has issued four series of Convertible Preferred Stock, Series A through Series D. The following table summarizes the authorized, issued and outstanding Convertible Preferred Stock of the Company as of December 31, 2020 and December 31, 2019 (in thousands, except share and per share information):
| Class | Year of Issuance | Issuance Price Per Share | Shares Authorized, Issued and Outstanding | Total Proceeds or Exchange Value | Issuance Costs | Net Carrying Value | Initial | |||||||||||||||||||||
| Series A | 2012 | $ | 0.04 | 25,952,123 | $ | 1,038 | $ | 11 | $ | 1,027 | $ | 0.80 | ||||||||||||||||
| Series B | 2014 | 0.80 | 25,000,000 | 20,000 | 99 | 19,901 | 0.80 | |||||||||||||||||||||
| Series C | 2014 – 2015 | 3.33 | 27,948,045 | 93,067 | 246 | 92,821 | 3.33 | |||||||||||||||||||||
| Series D | 2018 | 10.27 | 24,342,746 | 250,000 | 2,812 | 247,188 | 10.27 | |||||||||||||||||||||
| 103,242,914 | ||||||||||||||||||||||||||||
The powers, preferences, rights, qualifications, limitations and restrictions of the shares of Convertible Preferred Stock are as follows:
Dividends
Dividends shall accrue to holders of the Convertible Preferred Stock at the rate of 8% of the original issue price for the applicable series of Convertible Preferred Stock, per annum subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization, payable only when, and if, declared by the Board. The right to receive dividends on Convertible Preferred Stock are not cumulative, and therefore, if not declared in any year, the right to such dividends shall terminate and shall not carry forward into the next year.
Liquidation rights
In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary or a deemed liquidation event (which includes a merger, the sale of all of the Company’s assets, or a change of control) (each a “Liquidation Event”), the holders of Convertible Preferred Stock are entitled to be paid out of the assets of the Company available for distribution to stockholders, pari passu, at a liquidation price per share equal to the greater of: (1) the Initial Liquidation Price of such Convertible Preferred Stock, plus any declared and unpaid dividends or (2) an amount that would have been payable had all the shares of Convertible Preferred Stock been converted into Common Stock. These payments will be made to or set aside prior to the holders of shares of any other class or series of capital stock that is not, by its terms, senior to the Convertible Preferred Stock.
Voting rights
The holders of shares of Convertible Preferred Stock are entitled to vote on all matters on which the holders of shares of Common Stock shall be entitled to vote.
Each holder of record of shares of Series A Convertible Preferred Stock shall be entitled to ten votes per share of Special-Voting Common Stock into which such Series A Convertible Preferred Stock are convertible, as discussed below under “Conversion,” on all matters to be voted on by the Company’s stockholders. Each holder of record of shares of Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock shall be entitled to one vote per share of Common Stock into which such Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock are convertible, as discussed below under “Conversion,” on all matters to be voted on by the Company’s stockholders. The holders of Convertible Preferred Stock and the holders of Common Stock shall vote together and not as separate classes. There shall be no series voting.
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Conversion
Each share of Series A Convertible Preferred Stock is convertible, at the option of the holder, at any time after the date of issuance of such share, into shares of Special-Voting Common Stock on a 1 to 1 conversion rate subject to customary anti-dilution adjustments and upon the issuance of additional common shares for no consideration or consideration less than the conversion price of the Series A Convertible Preferred Stock. Each share of Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock shall be convertible, at the option of the holder, at any time after the date of issuance into shares of Common Stock on a 1 to 1 conversion rate subject to customary anti-dilution adjustments and upon the issuance of additional common shares for no consideration or consideration less than the conversion price of the respective series of Convertible Preferred Stock.
Upon the earlier to occur of (i) the election of the Convertible Preferred Stock by (A) the consent or vote of the majority holders of the Convertible Preferred Stock (voting together as a single class and not as separate series, and on an as-converted basis) and (B) the consent or vote of the majority holders of Series D Convertible Preferred Stock (voting together as a single class, and on an as-converted basis) or (ii) the closing of a firm commitment underwritten initial public offering pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (the “Securities Act”), covering the offer and sale of shares of Common Stock in which the aggregate gross proceeds to the Company are at least $80,000,000 at a public offering price per share equal to at least three times the Series D Convertible Preferred Stock Conversion Price of $10.27, (X) each share of Series A Convertible Preferred Stock shall automatically be converted into shares of Special-Voting Common Stock on a 1 for 1 basis, and (Y) each share of Series B Convertible Preferred Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred Stock shall automatically be converted into Common Stock on a 1 for 1 basis.
Note 11. Equity Incentive Plan
The Company’s 2012 Employee, Director and Consultant Equity Incentive Plan (the "Plan") was adopted by its Board of Directors and stockholders in March 2012. Upon approval of the stockholders, the number of shares of Common Stock reserved for issuance under the Plan was increased by 13,506,938 during the year ended December 31, 2020. As of December 31, 2020, the number of shares of Common Stock reserved for issuance under the Plan was 33,506,938. The Plan is administered by the Board of Directors of the Company. The Board of Directors may grant stock-based awards, restricted stock and options to purchase shares either as incentive stock options or non-qualified stock options. The restricted stock and option grants are subject to certain terms and conditions, option periods and conditions, exercise rights and privileges and are fully discussed in the Plan document. As of December 31, 2020, 204,090 common shares remain available for issuance under the Plan.
Stock option activity
Each stock option grant carries varying vesting schedules whereby the options become exercisable at the participant’s sole discretion provided they are an employee, director or consultant of the Company on the applicable vesting date. Each option shall terminate not more than ten years from the date of the grant.
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A summary of the stock option activity under the Plan is presented in the table below:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2019 | 13,673,551 | 2.10 | 7.74 | 30,252 | ||||||||||||
| Granted | 1,785,056 | 4.31 | ||||||||||||||
| Exercised | (171,730 | ) | 1.89 | |||||||||||||
| Forfeited | (594,544 | ) | 2.68 | |||||||||||||
| Outstanding at December 31, 2019 | 14,692,333 | 2.35 | 6.94 | 47,820 | ||||||||||||
| Granted | 13,957,917 | 5.77 | ||||||||||||||
| Exercised | (629,241 | ) | 3.19 | |||||||||||||
| Forfeited | (2,297,410 | ) | 2.60 | |||||||||||||
| Outstanding at December 31, 2020 | 25,723,599 | 4.18 | 7.06 | 143,338 | ||||||||||||
| Options exercisable at December 31, 2019 | 9,788,082 | 1.90 | 6.39 | 36,207 | ||||||||||||
| Options exercisable at December 31, 2020 | 11,126,920 | 2.38 | 6.01 | 82,033 | ||||||||||||
| Vested and expected to vest at December 31, 2019 | 13,559,748 | 2.27 | 6.85 | 45,138 | ||||||||||||
| Vested and expected to vest at December 31, 2020 | 22,320,862 | 3.97 | 6.94 | 129,047 | ||||||||||||
The Company received cash proceeds from the exercise of stock options of $2.0 million and $0.3 million during the years ended December 31, 2020 and 2019, respectively. The total intrinsic value (the amount by which the stock price exceeds the exercise price of the option on the date of exercise) of the stock options exercised during the years ended December 31, 2020 and 2019, was $3.6 million and $0.5 million, respectively. The weighted-average grant date fair value of options granted during the year ended December 31, 2020 and 2019, was $3.27 and $2.31, respectively.
During 2020, the Company extended the post-employment exercise period with regards to 705,883 options. The incremental expense resulting from the modifications was not significant to the consolidated statement of operations and comprehensive loss.
In accordance with ASC Topic 718, the Company estimates and records the compensation cost associated with the grants described above with an offsetting entry to paid-in capital. As described in Note 2 “Summary of Significant Accounting Policies”, the Company selected the Black-Scholes option pricing model for determining the estimated fair value for service or performance-based stock-based awards. The Black-Scholes model requires the use of subjective assumptions which determine the fair value of stock-based awards. The assumptions used to value option grants to employees were as follows:
| 2020 | 2019 | ||
| Risk free interest rate | 0.4% – 1.7% | 2.3% – 2.5% | |
| Expected dividend yield | 0% | 0% | |
| Expected term | 5.9 years – 6.3 years | 6 years – 6.1 years | |
| Expected volatility | 50% | 50% |
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The assumptions used to value option grants to non-employees were as follows:
| 2020 | 2019 | ||
| Risk free interest rate | 0.4% – 1.7% | 1.5% – 2.7% | |
| Expected dividend yield | 0% | 0% | |
| Expected term | 1.1 years – 6.1 years | 8.1 years to 10 years | |
| Expected volatility | 50% | 50% |
Risk free interest rate
The risk-free interest rate for periods within the expected term of the awards is based on the U.S. Treasury yield curve in effect at the time of the grant.
Expected dividend yield
The Company has never declared or paid any cash dividends and does not expect to pay any cash dividends in the foreseeable future.
Expected term
For employee awards, the Company calculates the expected term using the “simplified” method, which is the simple average of the vesting period and the contractual term. The simplified method is applied as the Company does not have sufficient historical data to provide a reasonable basis for an estimate of the expected term. The Company calculates expected term for employee awards that take into account the effects of employee’s expected exercise and post-vesting employment termination behavior.
For non-employee awards, the expected term is determined on an award by award basis. Prior to the adoption of ASU 2018-07, the contractual term was used.
Expected volatility
As the Company has been privately held since inception, there is no specific historical or implied volatility information available.
Accordingly, the Company estimates the expected volatility on the historical stock volatility of a group of similar companies that are publicly traded over a period equivalent to the expected term of the stock-based awards. Point estimates of expected annual equity volatility were selected in the guideline companies’ historical range.
Exercise price
The exercise price is directly taken from the grant notice issued to employees and non-employees.
In 2020, the Company issued 3,270,000 option awards subject to certain service conditions, performance and market conditions. The option awards vest only upon the satisfaction of all the following conditions: services conditions, performance-based conditions, and market-based conditions. The service condition for these awards is satisfied by providing service to the Company until the other conditions below are met. The performance-based condition is satisfied upon the occurrence of a financing event as defined in the option award agreement. The market-based condition is satisfied upon the Company’s stock price reaching a specific value in connection with the financing event. The market condition is considered in the grant date fair value. The achievement of the performance condition is not deemed satisfied for the period ended December 31, 2020, as the completion of a financing event is not deemed probable until consummated. Thus, the Company has not recorded any stock-based compensation expense for these awards. Total unrecognized stock-based compensation expense as of December 31, 2020 for these awards was $10.0 million.
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Restricted stock unit activity
In 2020, the Company granted 1,825,000 restricted stock units to select employees and consultants, including a grant of 1,000,000 restricted stock units to the Chairman of the Board and significant shareholder of Butterfly. The awards are subject to certain service conditions and performance conditions. The service condition for these awards is satisfied by providing service to the Company based on the defined service period per the award agreement. The performance-based condition is satisfied upon the occurrence of a business combination event as defined in award agreement. The achievement of the performance condition is not deemed satisfied for the period ended December 31, 2020, as the completion of the business combination is not deemed probable until consummated. Thus, the Company has not recorded stock-based compensation expense for these awards. Total unrecognized stock-based compensation expense as of December 31, 2020 for these awards was $17.8 million.
The Company’s stock-based compensation expense for the periods presented was as follows (in thousands):
| 2020 | 2019 | |||||||
| Cost of revenue – Subscription | $ | 697 | $ | 15 | ||||
| Research and development | 3,869 | 3,693 | ||||||
| Sales and marketing | 2,591 | 1,041 | ||||||
| General and administrative | 3,847 | 1,289 | ||||||
| Total stock-based compensation expense | $ | 11,004 | $ | 6,038 | ||||
No related tax benefits of the stock-based compensation expense have been recognized and no related tax benefits have been realized from the exercise of stock options due to the Company’s net operating loss carryforwards.
Total unrecognized stock-based compensation expense for service based award as of December 31, 2020 and 2019 was $33.1 million and $10.6 million, respectively, which will be recognized over the remaining weighted average vesting period of 3.5 years and 3.5 years, respectively.
Note 12. Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock of the Company outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock of the Company, including Convertible Preferred Stock and outstanding stock options, 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 common stock of the Company outstanding would have been anti-dilutive. Since the Company was in a net loss position for all periods presented, basic EPS calculation excludes preferred stock as it does not participate in net losses of the Company.
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The following table presents the calculation of basic and diluted net loss per share for the Company’s common stock (in thousands, except share and per share amounts):
| 2020 | 2019 | |||||||
| Numerator: | ||||||||
| Net loss | $ | (162,745 | ) | $ | (99,697 | ) | ||
| Numerator for Basic and Dilutive EPS – Loss available to common stockholders | $ | (162,745 | ) | $ | (99,697 | ) | ||
| Denominator: | ||||||||
| Weighted-average common shares outstanding | 5,833,164 | 5,622,752 | ||||||
| Denominator for Basic and Dilutive EPS – Weighted-average common stock | 5,833,164 | 5,622,752 | ||||||
| Basic and dilutive loss per share | $ | (27.90 | ) | $ | (17.73 | ) | ||
Anti-dilutive common equivalent shares were as follows:
| 2020 | 2019 | |||||||
| Outstanding options to purchase common stock | 26,742,256 | 14,692,333 | ||||||
| Outstanding Convertible Preferred Stock (Series A through D) | 103,242,914 | 103,242,914 | ||||||
| Total anti-dilutive common equivalent shares | 129,985,170 | 117,935,247 | ||||||
Note 13. Income Taxes
Income (loss) before provision for income taxes consisted of the following (in thousands):
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Federal | $ | (162,876 | ) | $ | (98,833 | ) | ||
| Foreign | 170 | (864 | ) | |||||
| Loss before provision for income taxes | $ | (162,706 | ) | $ | (99,697 | ) | ||
The Company recorded tax provision of $0.04 million for the year ended December 31, 2020 due to foreign income. Due to the Company’s loss position domestically, the Company has not recorded a federal tax provision for the year ended December 31, 2020. Due to the Company’s overall loss position, the Company has not recorded a tax provision for the year ended December 31, 2019.
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A reconciliation of the Company’s statutory income tax rate to the Company’s effective income tax rate is as follows:
| Year Ended December 31, | ||||||||
| (In Thousands) | 2020 | 2019 | ||||||
| Income at US Statutory Rate | 21.00 | % | 21.00 | % | ||||
| State Taxes, net of Federal benefit | 3.18 | % | 3.30 | % | ||||
| Permanent Differences | (0.70 | )% | (0.44 | )% | ||||
| Tax Credits | 0.86 | % | 1.32 | % | ||||
| Foreign Rate Differential | 0.00 | % | (0.01 | )% | ||||
| Valuation Allowance | (24.35 | )% | (25.04 | )% | ||||
| Other | (0.01 | )% | (0.13 | )% | ||||
| (0.02 | )% | 0.00 | % | |||||
Net deferred tax assets as of December 31, 2020 and 2019 consisted of the following (in thousands):
| Year Ended December 31, | ||||||||
| (In Thousands) | 2020 | 2019 | ||||||
| Deferred tax assets | ||||||||
| Net operating loss carryforwards | $ | 83,058 | $ | 52,717 | ||||
| Tax Credits | 6,582 | 5,271 | ||||||
| Stock Compensation | 4,088 | 2,346 | ||||||
| Accruals & Reserves | 7,293 | 1,785 | ||||||
| Other | 853 | 154 | ||||||
| Total Deferred tax assets | $ | 101,874 | $ | 62,273 | ||||
| Valuation Allowance | (101,773 | ) | (62,157 | ) | ||||
| Total Deferred tax assets | $ | 101 | $ | 116 | ||||
| Deferred tax liabilities | ||||||||
| Depreciation | (101 | ) | (116 | ) | ||||
| Net deferred tax assets | $ | — | $ | — | ||||
As of December 31, 2020 and 2019, the Company has gross federal net operating loss (“NOL”) carryforwards of approximately $330.2 million and $205.5 million, respectively. As of December 31, 2020 and 2019, the Company has gross state NOL carryforwards of approximately $232.1 million and $166.8 million, respectively. Of the $330.2 million of federal NOL carryforwards, $73.7 million will begin to expire at various dates in 2031 and $256.5 million may be carried forward indefinitely. The state NOL carryforwards begin to expire in 2031. As of December 31, 2020, the Company also had federal and state tax credits of $6.1 million and $0.6 million, which begin to expire in 2032 and 2022, respectively.
Future realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. As of December 31, 2020 and 2019, the Company performed an evaluation to determine whether a valuation allowance was needed. The Company considered all available evidence, both positive and negative, which included the results of operations for the current and preceding years. The Company determined that it was not possible to reasonably quantify future taxable income and determined that it is more likely than not that all of the deferred tax assets will not be realized. Accordingly, the Company maintained a full valuation allowance as of December 31, 2020 and 2019.
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The utilization of NOLs and tax credit carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that have occurred previously or may occur in the future. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (“IRC”), a corporation that undergoes an ownership change may be subject to limitations on its ability to utilize its pre-change NOLs and other tax attributes otherwise available to offset future taxable income and/or tax liability. An ownership change is defined as a cumulative change of 50% or more in the ownership positions of certain stockholders during a rolling three-year period. The Company has completed a formal study to determine if any ownership changes within the meaning of IRC Section 382 and 383 have occurred and determined no ownership changes have occurred as of December 31, 2020. The Company could trigger an ownership change in future years which would restrict its ability to use its NOLs or tax credit carryforwards and could require the Company to pay federal or state income taxes earlier than would be required if such limitations were not in effect.
The Company’s valuation allowance increased by $39.6 million and $25.0 million for the years ended December 31, 2020 and 2019, respectively, due primarily to the generation of net operating losses.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which the Company operates or does business. ASC 740-10 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
The Company records uncertain tax positions as liabilities in accordance with ASC 740-10 and adjust these liabilities when the Company’s judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of December 31, 2019, and 2020, the Company has not recorded any uncertain tax positions in its financial statements.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statements of operations and comprehensive loss as required. As of December 31, 2019 and 2020, there were no significant accrued interest or penalties.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and foreign jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from December 31, 2016 to the present. Federal and state net operating losses are subject to review by taxing authorities in the year utilized.
Note 14. Related Party Transactions
The Company subleases office and laboratory spaces from 4Catalyzer (“4C”), a company under common ownership, and also leases a facility from a company that is managed and owned by members of the Rothberg family, the majority shareholders. During 2020 and 2019, the Company incurred a total of approximately $0.5 million and $0.4 million, respectively, in rent expenses to the related parties.
The Company also makes payments to 4C to prefund the acquisition of capital assets and these amounts are included in prepaid expenses and other current assets on the consolidated balance sheet. The Company reviewed the assets for impairment during the fourth quarter of fiscal 2020 as the asset is not expected to be utilized in subsequent periods. The Company recorded an impairment charge of $1.4 million during the year ended December 31, 2020. The prepaid advances were $1.5 million at December 31, 2019.
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On November 12, 2020, the Company entered into an Amended and Restated Technology Services Agreement (the “ARTSA”) by and among 4C, the Company and other participant companies controlled by the Rothberg family. Under the ARTSA, the Company and the other participant companies agreed to share certain non-core technologies, which means any technologies, information or equipment owned or otherwise controlled by the participant company that are not specifically related to the core business area of the participant and subject to certain restrictions on use. The ARTSA also provides for 4C to perform certain services for the Company and each other participant company, such as general administration, facilities, information technology, financing, legal, human resources and other services. 4C services provided to the Company are pre-funded approximately once a quarter. The Company incurred expenses of $5.1 million and $7.3 million during the years ended December 31, 2020 and 2019, respectively. These expenditures are recorded within the accompanying consolidated statements of operations and comprehensive loss and allocated to the proper operating expense caption based on the nature of the service. The amount due to 4C as of December 31, 2020 and 2019, was $0.1 million and $0.0 million, respectively, and is included in due to related parties on the Company’s consolidated balance sheets. The amounts advanced to and due from 4C as of December 31, 2020 and 2019 related to operating expenses was $0.0 million and $0.8 million, respectively, and is included in due from related parties on the Company’s consolidated balance sheets.
The ARTSA also provides for the participant companies to provide other services to each other. The Company also has transactions with other entities under common ownership, in which such entities make payments to independent third parties on behalf of the Company. As of December 31, 2020 and 2019, the Company owed $0.01 million and $0.0 million, respectively, relative to such payments made on their behalf, which are included in due to related parties in the Company’s consolidated balance sheets. In addition, the Company has transactions with these other entities under common ownership, in which payments are made by the Company to third parties on behalf of the other entities. As of December 31, 2020 and 2019, the Company’s receivable is $0.04 million and $0.0 million, respectively. All amounts are paid or received throughout the year within 30 days after the end of each month.
On November 19, 2020, Butterfly and 4C entered into the First Addendum to the ARTSA, pursuant to which Butterfly agreed to terminate its participation under the ARTSA no later than immediately prior to the effective time of the business combination described in Note 18 “Subsequent Events”.
Note 15. Loan Payable
In May 2020, the Company received loan proceeds of $4.4 million under the Paycheck Protection Program (“PPP”). The PPP loan is evidenced by a promissory note dated May 1, 2020. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The Company used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The term of the Company’s PPP loan is two years. The interest rate on the PPP loan is 1% per annum and no payments of principal or interest were due during fiscal 2020. The loan provider did not provide for a payment schedule. The PPP loan is unsecured and guaranteed by the Small Business Administration and is subject to any new guidance and new requirements released by the Department of the Treasury. Following the closing of the business combination discussed in Note 18 “Subsequent Events”, the Company repaid the loan in full in February 2021. The Company is accounting for the loan as debt.
Note 16. Convertible Debt
In 2020, the Company issued convertible debt for total gross proceeds of $50.0 million.
The convertible debt bears interest at 5% per annum. Accrued interest is not payable until the convertible debt is either redeemed or converted. To the extent the convertible debt is redeemed, the unpaid accrued interest will be paid in cash. To the extent the convertible debt is converted, the unpaid accrued interest will be converted (alongside the principal amount of the convertible debt) into the applicable shares of preferred stock of the Company.
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The convertible debt is redeemable upon the following circumstances: (1) at the Company’s election, with the approval of at least 50% of the convertible debt holders; (2) upon a change of control; or (3) upon an event of default. Upon redemption, the convertible debt is redeemed in cash for an amount equal to its outstanding principal amount plus any unpaid accrued interest.
The convertible debt is convertible upon the following circumstances: (1) the Company issues and sells shares of its preferred stock (a “Financing”); (2) an underwritten initial public offering of the Company’s common stock pursuant to a registration statement under the Securities Act (an “IPO”); (3) upon a change of control; (4) at their maturity date, which is 2 years after the initial closing of the convertible debt or (5) pursuant to a public listing through a merger, acquisition, business combination or similar transaction involving a special purpose acquisition company (“SPAC”).
Upon conversion in the event of a Financing, public listing or IPO, the outstanding principal amount and unpaid accrued interest of the convertible debt is converted into a number of shares at a conversion price equal to the lesser of (i) the price per share paid by the other purchasers of the preferred stock (upon a public listing or Qualified or Non-Qualified Financing) or common stock (upon an IPO) and (ii) a price per share obtained by dividing $1.75 billion by the Company’s fully-diluted capitalization immediately prior to the closing of the respective event (subject to equitable adjustment in the event of stock splits, stock dividends, stock combinations, reclassifications or similar events). Upon conversion in the event of a change of control or at the maturity date, the outstanding principal amount and unpaid accrued interest of the convertible debt is converted into a number of Company Series D Convertible Preferred Stock at a conversion price of $10.27 per share (subject to equitable adjustment in the event of stock splits, stock dividends, stock combinations, reclassifications or similar events).
Given that the May 2022 maturity date is more than one year away from the issuance of the convertible debt, the convertible debt is classified as a long-term obligation. Following the closing of the business combination discussed in Note 18 “Subsequent Events" the convertible debt was automatically cancelled and converted into the right to receive shares of Longview common stock.
The conversion option upon a change of control was identified as an embedded derivative within the convertible debt; however, its fair value as of the issuance date and as of December 31, 2020 was deemed to be de minimis as the occurrence of a change of control was deemed to be remote at both dates. Furthermore, there were no beneficial conversion features identified in the convertible debt.
The issuance costs related to the convertible debt were $1.5 million. The costs are included in convertible debt on the consolidated balance sheet. The issuance costs are amortized over the term of the convertible debt. The Company recorded interest expense and amortization expense for the issuance costs of $1.0 million for the year ended December 31, 2020.
Note 17. 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 the operating lease was $2.1 million and $1.9 million in 2020 and 2019, respectively.
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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: | |||||
| 2021 | $ | 1,044 | |||
| 2022 | 2,043 | ||||
| 2023 | 1,934 | ||||
| 2024 | 1,904 | ||||
| 2025 | 1,987 | ||||
| Thereafter | 7,354 | ||||
| Total future minimum rental payments | $ | 16,266 | |||
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 one to five-year periods and may contain fixed or minimum annual commitments, subject to certain provisions that allow the Company to renegotiate the commitment. The aggregate amount of minimum inventory purchase commitments as of December 31, 2020 was $169.3 million.
During 2019, the Company entered into an agreement with a certain third party manufacturing vendor. Under the 2019 agreement, as of December 31, 2019, the Company had a prepaid vendor advance, net of write-downs of approximately $46.9 million. In August 2020, the Company and the vendor qualified the manufacturing process specified in the 2019 agreement and the Company began purchasing product from the 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 $169.3 million and extend the time frame of the agreement to December 2022. The provisions of the agreement also allow the Company, once the defined cumulative purchase threshold per the agreement is reached, to pay for a portion of the subsequent inventory purchases using the vendor advance.
During the year ended December 31, 2020 the Company recognized a net loss on the vendor purchase commitment of $53.2 million in product cost of revenue. The net loss was comprised of $10.6 million, recorded as a write-down of the vendor advance and $42.6 million, accrued as a liability. During the year ended December 31, 2019 the Company recognized a net of loss on the vendor purchase commitment of $9.5 million, recorded as a write-down of the vendor advance in product cost of revenue. The Company applied the guidance in Topic 330, Inventory to determine the 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 December 31, 2020, the Company has a prepaid advance of $36.4 million, net of write-downs and an accrual of $42.6 million related to the agreement. The portion of the balances that is expected to be utilized in the next 12 months is included in current assets and current liabilities in the accompanying consolidated balance sheets.
Other Purchase Commitments:
In September 2020, the Company has renegotiated certain inventory purchase commitments with other third party manufacturing vendors and as a result certain inventory purchase commitments have been cancelled. As a result of the renegotiations, the Company has recorded the expected losses on those commitments of $6.9 million as of December 31, 2020.
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Other commitments:
The Company sponsors a 401(k) defined contribution plan covering all eligible US employees. Contributions to the 401(k) plan are discretionary. The Company did not make any matching contributions to the 401(k) plan for the years ended December 31, 2020 and 2019.
Contingencies
The Company is involved in litigation and legal matters which have arisen in the normal course of business, including but not limited to medical malpractice matters. Although the ultimate results of these matters are not currently determinable, management does not expect that they will have a material effect on the Company’s consolidated balance sheet, statements of operations and comprehensive loss, or cash flows.
On December 14, 2020, a stockholder of Longview filed a lawsuit in the Supreme Court of the State of New York, County of New York against Longview and the members of the Longview Board, styled Nair v. Longview Acquisition Corp. et al. (the “Nair Complaint”). On December 16, 2020, a second stockholder of Longview filed a lawsuit in the Supreme Court of the State of New York, County of New York against Longview, the members of its board of directors, and Butterfly, styled Lau v. Longview Acquisition Corp., et al. (the “Lau Complaint”). Both the Nair Complaint and the Lau Complaint alleged, among other things, that (i) defendants engaged in an unfair sales process and agreed to inadequate consideration in connection with the proposed transaction, and (ii) that the Registration Statement filed with the SEC on November 27, 2020 in connection with the proposed transaction is materially misleading, and sought, among other things, to enjoin the proposed transaction, 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. The parties currently are in negotiation regarding a potential attorney fee award.
The Company enters into indemnification provisions under some agreements 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 claim 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 each particular provision. To date, losses recorded in the Company’s consolidated statements of operations and comprehensive loss in connection with the indemnification provisions have not been material.
Note 18. Subsequent Events
The Company has evaluated events through March 29, 2021, for possible adjustment to or disclosure in the financial statements, which is the date on which the financial statements were available to be issued.
On January 23, 2021, our former Chief Executive Officer and member of the Board of Directors resigned from his position as Chief Executive Officer. Pursuant to the separation agreement between the former Chief Executive Officer and the Company, the former officer received cash compensation and equity-based compensation. The cash compensation includes a severance payment and an annual performance bonus payment. The equity compensation includes the acceleration of vesting of the officer’s service based options. The acceleration of 1.5 million options was pursuant to the original option award agreement in case of separation from the Company.
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On January 23, 2021, with the approval of the Board of Directors, the Company entered into a binding term sheet agreement with its current Chief Executive Officer. The agreement includes cash and equity-based compensation. The cash compensation includes an annual salary, an annual performance bonus, sign on bonuses and reimbursement of various transition expenses. The equity compensation includes (1) an option award to purchase 1,500,000 of the Company’s Common Stock and (2) a restricted stock unit award to receive 1,000,000 shares of the Company’s Common Stock.
The option award will vest based on continued service, which is over 4 years. The grant date fair value of the stock options will be recognized as stock-based compensation expense over the requisite service period. The restricted stock unit award is subject to certain service conditions and performance conditions. The service condition for this award is satisfied by providing service to the Company based on the defined service period of 4 years per the award agreement. The performance-based condition is satisfied upon the occurrence of a business combination event as defined in the award agreement. The achievement of the performance condition and the commencement of the related expense recognition event will not occur until the event is deemed probable which will occur once the business combination is consummated.
On February 11, 2021, the Company granted 400,000 restricted stock units to select employees. Each award will vest based on continued service which is generally over 4 years. The grant date fair value of the award will be recognized as stock-based compensation expense over the requisite service period.
On February 12, 2021, the Company completed a business combination with Longview Acquisition Corp (“Longview”), a Special Purpose Acquisition Company. As a result of the business combination, the Company received gross proceeds of approximately $589 million. In connection with the closing of the business combination, the Company’s outstanding Convertible Preferred Stock was automatically cancelled and converted into the right to receive shares of Longview common stock. In addition, the Company’s convertible debt was automatically cancelled and converted into the right to receive shares of Longview common stock and the Company repaid the PPP loan in full with the proceeds received from the transaction. The business combination will be accounted for as a reverse recapitalization, in accordance with U.S. GAAP. Under this method of accounting, Longview will be treated as the “acquired” company for financial reporting purposes.
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Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BFLY OPERATIONS, INC. (FORMERLY BUTTERFLY NETWORK, INC.)
The following discussion and analysis of the financial condition and results of operations of BFLY Operations, Inc. (formerly Butterfly Network, Inc.) (for purposes of this section, “Butterfly,” “we,” “us”and “our”) should be read together with Butterfly’s consolidated financial statements and the related notes to those statements contained in Exhibit 99.1 to this Amendment No. 2 to the Current Report on Form 8-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of the original Current Report on Form 8-K filed on February 16, 2021 (the “Original Form 8-K”). Actual results may differ materially from those contained in any forward-looking statements.
Overview
We are an innovative digital health business with a mission of democratizing healthcare by making medical imaging accessible to everyone around the world. Powered by our proprietary Ultrasound-on-Chip™ technology, our solution addresses the needs of point of care imaging with a unique combination of software and hardware technology. Butterfly iQ, followed by our recently launched Butterfly iQ+, is our first product powered by Butterfly’s Ultrasound-on-Chip™, and is the only ultrasound transducer that can perform “whole-body imaging” in a single handheld probe using semiconductor technology. Our Ultrasound-on-Chip™ reduces the cost of manufacturing, while our software is intended to make the product easy to use and fully integrated with the clinical workflow, accessible on a user’s smartphone, tablet, and almost any hospital computer system connected to the Internet. Through our portable proprietary, handheld solution, protected by a robust intellectual property portfolio and empowered in part by its proprietary software and Artificial Intelligence (“AI”), Butterfly aims to enable earlier detection throughout the body and remote management of health conditions around the world.
The Butterfly iQ / iQ+ is currently cleared by the U.S. Food and Drug Administration (“FDA”) and has the CE mark 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.
Butterfly is focused on driving the adoption of our handheld solution. We look to drive adoption by increasing the touchpoints with our customer, via new sales channels, as well as helping customers understand the power of point of care imaging in clinical decision making expanding its use cases and the settings where it is used. We also invest in upgrading the product. In October 2020, we launched the Butterfly iQ+, a second generation version of our handheld probe which costs less to manufacture and features lower power consumption, faster frame rates and improved interoperability. Additionally, over the course of 2020, we launched multiple new software features enabling which improve image acquisition, interpretation, and ease of use.
We are also focused on improving gross margins by focusing on operational excellence in our supply chain and expanding our customer relationships to incorporate higher margin products.
Financial Highlights
Our revenue was $46.3 million and $27.6 million for the years ended December 31, 2020 and 2019, respectively, representing a year-over-year increase of 67.7%, primarily resulting from increased volume of product and subscriptions sold, driven by increased sales and marketing investments.
We incurred net loss of $162.7 million and $99.7 million for the years ended December 31, 2020 and 2019, respectively, representing a period-over-period increase of 63.2%, primarily due to higher cost of sales from losses on purchase commitments of $60.1 million and inventory write-downs of $2.6 million. In addition, we continue to invest in scaling up our business and have increased our spending in research and development, sales and marketing and general and administrative costs.
COVID-19
In December 2019, a novel coronavirus outbreak and related disease (known as COVID-19) was identified in Wuhan, China. In March 2020 the World Health Organization declared the outbreak of COVID-19 a pandemic. We are closely monitoring the impact of COVID-19 on all aspects of our business.
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COVID-19 has disrupted, and we believe will continue to disrupt, our normal operations. There have been both positive and negative impacts, some quantifiable and others not quantifiable based on our limited historical data as an emerging growth company. Therefore, it is difficult for us to quantify the overall impact of the COVID-19 pandemic on our revenues.
In order to improve our liquidity during the COVID-19 pandemic, we obtained a loan under the Paycheck Protection Program (the “PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. We repaid the PPP loan in full in February 2021 from the proceeds of our business combination with Longview Acquisition Corp. (“Longview”).
In terms of negative impacts, the pandemic has restricted the ability of our employees to travel, demonstrate our products to our potential customers and users, and perform other sales-generating activities. It has also impacted our ability to oversee the activities of Butterfly’s third-party manufacturers and suppliers, make shipments of materials, and pursue collaborations and other business transactions. COVID-19 has also caused the temporary closure of the facilities of certain of our suppliers, manufacturers and customers, and resulted in the implementation of a temporary closure of our offices and the institution of a “work from home” policy. In addition, the COVID-19 pandemic and its economic impact have caused a financial strain on our customer base due to decreased funding and other revenue shortfalls. Reductions in budgets have resulted in delays in or decreases in the size of enterprise contracts. One noticeable and quantifiable negative impact of the COVID-19 pandemic on our sales was our inability to sell any iQ devices at industry events, which yielded sales of more than 300 units for the year ended December 31, 2019. Nevertheless, given the lack of historical trends, we are unable to precisely quantify this impact.
Conversely, given those restrictions of access to our customers and “work from home” policy, one noticeable and quantifiable positive impact on our expenses was the reduction in our travel and related expenses, which for the year ended December 31, 2020 decreased by approximately $2.4 million, or 77%, year over year.
The COVID-19 pandemic also had a short-term early positive impact on our sales. We saw a spike in orders in March and April of 2020 because point-of-care ultrasound systems, like Butterfly iQ, have been utilized in the monitoring of acute symptoms of COVID-19 in patients through the use of lung ultrasound. Studies suggest that such systems may have a role to play in the assessment of lung involvement in COVID-19. The Butterfly iQ’s lung image quality, portability and ease of disinfection has made it particularly useful in assessing patients impacted by COVID-19. Given the lack of historical trends, we are unable to precisely quantify this impact.
The estimates of the impact on our business may change based on new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact and the economic impact on local, regional, national and international markets.
Despite these headwinds, we believe our business is well-positioned to benefit from the trends, such as telemedicine, that are accelerating digital transformation of the healthcare industry as a result of the COVID-19 pandemic. For instance, we have developed a Teleguidance product that aligns with the larger industry trends to remote medicine. Additionally, we believe that our value proposition of improved patient care combined with a reduction in overall cost of service will further enhance adoption of the Butterfly solution.
We have not incurred any significant impairment losses in the carrying values of our assets as a result of the COVID-19 pandemic and we are not aware of any specific related event or circumstance that would require us to revise our estimates reflected in our consolidated financial statements contained in Exhibit 99.1 to this Amendment No. 2 to the Current Report on Form 8-K.
Recent Developments
On February 12, 2021 we completed our business combination with Longview (the “Business Combination”). The Business Combination was approved by Longview's stockholders at its special meeting held on February 12, 2021. The transaction resulted in the combined company being renamed to "Butterfly Network, Inc.," Butterfly being renamed “BFLY Operations, Inc.” and the combined 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. Additional discussion about the Business Combination is provided in Item 2.01 of the Original Form 8-K.
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Key Performance Metrics
We review the key performance measures discussed below, to evaluate 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.
| Year ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Units fulfilled | 20,208 | 12,941 | ||||||
Units fulfilled increased by 7,267, or 56.2%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to increased demand driven by our entering the Enterprise customer market in late 2019, additional investment in lead generation and international expansion.
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 subscription 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.
| Year ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Subscription Mix | 17.1 | % | 9.1 | % | ||||
Subscription mix increased by 8.0%, to 17.1% for the year ended December 31, 2020 compared to the year ended December 31, 2019, due to increased volume of device sales and the tailwinds of renewals , as well as the timing of revenue recognition for our SaaS and other subscription contracts. Revenue from such contracts is deferred and recognized over the service period.
Non-GAAP Financial Measures
We present non-GAAP financial measures in order to assist readers of our 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 Margin and Adjusted EBITDA, provide an additional tool for investors to use in comparing our financial performance over multiple periods.
Adjusted Gross Margin and Adjusted EBITDA are key performance measures that our management uses to assess our operating performance. 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 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 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 Margin and Adjusted EBITDA are not prepared in accordance with GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. When evaluating our performance, you should consider Adjusted Gross Margin and Adjusted EBITDA alongside other financial performance measures prepared in accordance with GAAP, including gross margin, operating loss, and net loss.
Adjusted Gross Margin
We calculate Adjusted Gross Margin as gross margin adjusted to exclude depreciation and amortization, non-recurring losses on purchase commitments and non-recurring inventory write-downs. Our non-recurring purchase commitments and inventory write-downs are excluded from gross margin when they are outside the normal course of operations for our business. 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 Gross Margin to gross margin, the most directly comparable financial measure calculated and presented in accordance with GAAP.
| Years ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenue | $ | 46,252 | $ | 27,583 | ||||
| Cost of revenue | 107,475 | 48,478 | ||||||
| Gross margin | $ | (61,223 | ) | $ | (20,895 | ) | ||
| Add: | ||||||||
| Depreciation and amortization | 140 | 16 | ||||||
| Loss on purchase commitments | 60,113 | 9,500 | ||||||
| Inventory write-downs | 2,570 | - | ||||||
| Adjusted gross margin | $ | 1,600 | $ | (11,379 | ) | |||
Adjusted EBITDA
We calculate Adjusted EBITDA as net loss adjusted to exclude interest income, interest expense, other expense, net, provision for income taxes, depreciation and amortization, stock based compensation, non-recurring impairment, non-recurring losses on purchase commitments and non-recurring inventory write-downs. Our non-recurring purchase commitments and inventory write-downs are excluded from EBITDA when they are outside the normal course of operations for our business. 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. The non-recurring impairment relates to other long term assets that are not expected to be utilized in subsequent periods.
The following table reconciles Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.
| Years ended December 31, | ||||||||
| (In thousands) | 2020 | 2019 | ||||||
| Net Loss | (162,745 | ) | (99,697 | ) | ||||
| Interest income | (285 | ) | (2,695 | ) | ||||
| Interest expense | 1,141 | - | ||||||
| Other expense, net | 231 | 96 | ||||||
| Provision for income taxes | 39 | - | ||||||
| Stock based compensation | 11,004 | 6,038 | ||||||
| Depreciation and amortization | 1,316 | 758 | ||||||
| Impairments | 1,390 | - | ||||||
| Loss on purchase commitments | 60,113 | 9,500 | ||||||
| Inventory write-downs | 2,570 | - | ||||||
| Adjusted EBITDA | (85,226 | ) | (86,000 | ) | ||||
Description of Certain Components of Financial Data
Revenue
Revenue consists of revenue from the sale of products such as medical devices, accessories, and related services, classified as subscription revenue on our consolidated statements of operations and comprehensive loss, which are primarily 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 shipment of the products. SaaS subscriptions and Support are generally related to stand-ready obligations and is recognized ratably over time.
Our product sales generate approximately 82.9% of our revenue, with our SaaS subscription revenue comprising the majority of the remaining 17.1%. As adoption of our devices increases through further penetration and practitioners in the Butterfly network continue to use our devices, we expect our revenue mix to shift more toward subscriptions.
Total revenue for the year ended December 31, 2020 includes a reclassification adjustment between product and subscription revenue for transactions recorded within the period that was deemed immaterial.
Cost of revenue
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 and losses on purchase commitments. We expect our cost of product revenue to increase in absolute dollars, exclusive of losses on purchase commitments and decrease as a percentage of revenues over time as we shift to new manufacturing processes and vendors that will result in greater efficiency and lower per unit costs.
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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 a natural improvement in profitability and margin expansion over time as our mix shifts increasingly towards subscriptions.
We will 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.
Total cost of revenue for the year ended December 31, 2020 includes a reclassification adjustment between product and subscription costs for transactions recorded within the period that was deemed immaterial.
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. We expect R&D spending as a percentage of revenues will increase in the near term and then fluctuate over time due to the level and timing of our new product development efforts.
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. 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, office expenses 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 increase in the near term and then fluctuate over time due to the timing and amount of these expenses. In addition, we expect to incur additional general and administrative expenses as a result of operating as a public company.
Other income (expense), net
Other income (expense), net primarily consists of foreign exchange gains or losses.
Provision for income taxes
Deferred tax assets are reduced by a valuation allowance to the extent management believes it is not more likely than not to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management makes estimates and judgments about future taxable income based on assumptions that are consistent with our plans and estimates. We recorded a full valuation allowance as of December 31, 2020 and 2019.
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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 in our consolidated financial statements included in Exhibit 99.1 to this Amendment No. 2 to the Current Report on Form 8-K.
| Year Ended December 31, | ||||||||||||||||
| 2020 | 2019 | |||||||||||||||
| (in thousands) | % of revenue | % of revenue | ||||||||||||||
| Revenue: | ||||||||||||||||
| Product | 38,347 | 82.9 | % | 25,081 | 90.9 | % | ||||||||||
| Subscription | 7,905 | 17.1 | % | 2,502 | 9.1 | % | ||||||||||
| Total revenue: | 46,252 | 100.0 | % | 27,583 | 100.0 | % | ||||||||||
| Cost of revenue: | ||||||||||||||||
| Product | 106,407 | 230.1 | % | 47,857 | 173.5 | % | ||||||||||
| Subscription | 1,068 | 2.3 | % | 621 | 2.3 | % | ||||||||||
| Total Cost of revenue: | 107,475 | 232.4 | % | 48,478 | 175.8 | % | ||||||||||
| Gross margin | (61,223 | ) | -132.4 | % | (20,895 | ) | -75.8 | % | ||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development | 49,738 | 107.5 | % | 48,934 | 177.4 | % | ||||||||||
| Sales and Marketing | 26,263 | 56.8 | % | 14,282 | 51.8 | % | ||||||||||
| General and administrative | 24,395 | 52.7 | % | 18,185 | 65.9 | % | ||||||||||
| Total operating expenses | 100,396 | 217.1 | % | 81,401 | 295.1 | % | ||||||||||
| Loss from operations | (161,619 | ) | -349.4 | % | (102,296 | ) | -370.9 | % | ||||||||
| Interest income | 285 | 0.6 | % | 2,695 | 9.8 | % | ||||||||||
| Interest exepnse | (1,141 | ) | -2.5 | % | - | 0.0 | % | |||||||||
| Other Income (expense), net | (231 | ) | -0.5 | % | (96 | ) | -0.3 | % | ||||||||
| Loss before provision for income taxes | (162,706 | ) | -351.8 | % | (99,697 | ) | -361.4 | % | ||||||||
| Provision for Income taxes | 39 | 0.1 | % | - | 0.0 | % | ||||||||||
| Net loss | (162,745 | ) | -351.9 | % | (99,697 | ) | -361.4 | % | ||||||||
Comparison of the Years Ended December 31, 2020 and 2019
Revenue
| Year ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
| Revenue: | ||||||||||||||||
| Product | 38,347 | $ | 25,081 | $ | 13,266 | 52.9 | % | |||||||||
| Subscription | 7,905 | $ | 2,502 | $ | 5,403 | 216.0 | % | |||||||||
| Total revenue: | $ | 46,252 | $ | 27,583 | $ | 18,669 | 67.7 | % | ||||||||
Total revenue increased by $18.7 million, or 67.7%, for the year ended December 31, 2020 compared to the year ended December 31, 2019.
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Product revenue increased by $13.3 million, or 52.9%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase in product revenue was primarily driven by a higher volume of Butterfly iQ probes sold, as a result our increased investment in our sales and marketing efforts.
Subscription revenue increased by $5.4 million, or 216.0%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was driven by an increased volume of our SaaS subscriptions sold in conjunction with sales of our devices.
Cost of revenue
| Year ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
| Cost of revenue: | ||||||||||||||||
| Product | 106,407 | $ | 47,857 | $ | 58,550 | 122.3 | % | |||||||||
| Subscription | 1,068 | $ | 621 | $ | 447 | 71.9 | % | |||||||||
| Total cost of revenue | $ | 107,475 | $ | 48,478 | $ | 58,997 | 121.7 | % | ||||||||
| Percentage of Revenue | 232.4 | % | 175.8 | % | ||||||||||||
Cost of product revenue increased by $58.6 million, or 122.3%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This increase was primarily driven by a $6.9 million increase in costs as a result of increased volume of devices sold, $2.6 million in non-recurring inventory write-downs and $60.1 million in purchase commitment losses for the current year, partially offset by $9.5 million in purchase commitment losses in the prior year.
During 2019, we signed a multi-year inventory supply arrangement with a certain third party manufacturing vendor. The agreement includes a vendor advance payment that was written down during the year ended December 31, 2019, resulting in a $9.5 million loss on purchase commitments. Based on the assessment of our demand forecast and agreement specific provisions, we also recognized a $53.2 million loss during the year ended December 31, 2020 related to minimum purchase commitments for inventory that that is expected to not be sold through. In addition, as a result of shift in production from the Butterfly iQ to the Butterfly iQ+, we renegotiated certain inventory purchase commitments with other third party manufacturing vendors and as a result we recognized the expected losses on those commitments of $6.9 million for the year ended December 31, 2020.
Cost of subscription revenue increased by $0.4 million, or 71.9%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This increase was primarily driven by increased cloud hosting costs.
Research and development
| Year ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
| Research and development | $ | 49,738 | $ | 48,934 | $ | 804 | 1.6 | % | ||||||||
| Percentage of Revenue | 107.5 | % | 177.4 | % | ||||||||||||
Research and development expenses increased by $0.8 million, or 1.6%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This increase was primarily driven by increased personnel costs of $7.2 million as we continue to invest in expanding our internal research capabilities. These expenses were partially offset by lower spending on consulting of $1.8 million, travel costs of $1.4 million, fabrication of $2.6 million and other research and development costs of $0.6 million.
Sales and marketing
| Year ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
| Sales and Marketing | $ | 26,263 | $ | 14,282 | $ | 11,981 | 83.9 | % | ||||||||
| Percentage of Revenue | 56.8 | % | 51.8 | % | ||||||||||||
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Sales and marketing expenses increased by $12.0 million, or 83.9%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This increase was primarily driven by higher personnel cost and benefits of $9.3 million associated with increases in sales and sales personnel and higher demand generation costs of $2.5 million due to investments made to promote sales growth.
General and administrative
| Year ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
| General and Administrative | $ | 24,395 | $ | 18,185 | $ | 6,210 | 34.2 | % | ||||||||
| Percentage of Revenue | 52.7 | % | 65.9 | % | ||||||||||||
General and administrative expenses increased by $6.2 million, or 34.2%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This increase was primarily driven by increased personnel costs of $4.8 million due to investments made to scale up our back-office support and executive functions, increased consulting and professional services of $0.9 million and an increased bad debt expense of $0.6 million.
Loss from operations
| Year ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
| Loss from operations | $ | (161,619 | ) | $ | (102,296 | ) | $ | (59,323 | ) | 58.0 | % | |||||
| Percentage of Revenue | -349.4 | % | -370.9 | % | ||||||||||||
Loss from operations increased by $59.3 million, or 58.0%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This increase was primarily a result of a gross margin decrease of $40.3 million and increases in operating expenses of $19 million. The decrease in gross margin was primarily due to losses from purchase commitments of $60.1 million in the year ended December 31, 2020, partially offset by an increase of $10.3 million in margin on products and subscription revenue items and $9.5 million in vendor advance write-downs in the prior year.
Interest income
| Year ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
| Interest income | $ | 285 | $ | 2,695 | $ | (2,410 | ) | -89.4 | % | |||||||
| Percentage of Revenue | 0.6 | % | 9.8 | % | ||||||||||||
Interest income decreased by $2.4 million, or 89.4%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This decrease was a result of a lower average balance held in money market investments.
Interest expense
| Year ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
| Interest expense | $ | (1,141 | ) | $ | - | $ | (1,141 | ) | 100.0 | % | ||||||
| Percentage of Revenue | -2.5 | % | 0.0 | % | ||||||||||||
Interest expense increased by $1.1 million, or 100.0%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This increase was driven by stated interest expense and amortization of debt issuance cost in connection with convertible notes.
Other income (expense), net
| Year ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
| Other income (expense), net | $ | (231 | ) | $ | (96 | ) | $ | (135 | ) | 141.0 | % | |||||
| Percentage of Revenue | -0.5 | % | -0.3 | % | ||||||||||||
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Other expense increased by $0.1 million, or 141.0%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This increase was driven by an increase in the aggregate of realized and unrealized foreign exchange losses of $0.1 million due to an increase in foreign currency sales.
Provision for income taxes
| Year ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
| Provision for income taxes | $ | 39 | $ | - | $ | 39 | 100.0 | % | ||||||||
Provision for income taxes increased by $0.04 million, or 100.0%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This increase was driven by income taxes in our profitable foreign subsidiaries.
As a result of our history of net operating losses, we have provided for a full valuation allowance against our deferred tax assets for assets that are not more-likely-than-not to be realized.
Net loss
| Year ended December 31, | ||||||||||||||||
| (in thousands) | 2020 | 2019 | Change | % Change | ||||||||||||
| Net Loss | $ | (162,745 | ) | $ | (99,697 | ) | $ | (63,048 | ) | 63.2 | % | |||||
| Percentage of Revenue | -351.9 | % | -361.4 | % | ||||||||||||
Net loss increased by $63.0 million, or 63.2%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This increase was primarily a result of a higher operating loss of $59.3 million and lower interest income of $2.4 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 with Longview, 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 net losses in the short term, as we continue to invest in research and development of our products and invest in the sales and marketing and expand into 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.
Cash
Our cash and cash equivalents balance as of December 31, 2020 was $60.2 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.
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Cash flows
Comparison of the period for the years ended December 31, 2020 and December 31, 2019
The following table summarizes our sources and uses of cash for the years ended December 31, 2020 and December 31, 2019:
| Year ended December 31, | ||||||||
| (in thousands) | 2020 | 2019 | ||||||
| Net cash used in operating activities | (81,700 | ) | (120,432 | ) | ||||
| Net cash used in investing activities | (2,376 | ) | (4,468 | ) | ||||
| Net cash provided by financing activities | 54,280 | 324 | ||||||
| Net decrease in cash and cash equivalents | (29,796 | ) | (124,576 | ) | ||||
Cash flows used in operating activities
Net cash flows used in operating activities represent the cash receipts and disbursements related to our activities other than investing and financing activities. We expect cash provided by financing activities will continue to be our primary source of funds to support operating needs and capital expenditures for the foreseeable future.
Net cash flows used in operating activities is derived by adjusting our net loss for:
| · | non-cash operating items such as depreciation and amortization, stock-based compensation and other non-cash income or expenses; |
| · | changes in operating assets and liabilities reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations as well as any losses on disposal of fixed assets. |
Net cash used in operating activities decreased by $38.7 million, or 32.2%, to $81.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease in net cash used in operating activities resulted from higher outstanding liabilities of $58.9 million and lower vendor advances of $50.2 million due to a spending ramp in 2019 that did not recur in 2020. The higher outstanding liabilities consisted of purchase commitments accrual of $42.6 million due to minimum purchase commitments for inventory that is expected to not be sold through, as well as higher accrued expenses and other liabilities of $7.7 million and accounts payable of $8.6 million resulting from the timing of payments. The decrease in net cash used in operating activities was also due to an increase of non-cash charges of $14.0 million. The increase of $14.0 million was primarily the result of an increase in stock-based compensation expense of $5.0 million and an increase in inventory write-downs of $4.4 million as well as an impairment charge of $1.4 million with regards to other long term assets.
The offsetting decrease resulted from an increase in net loss of $63 million on a year over year basis and increases in cash used for inventory and accounts receivable of $22.1 million and $3.2 million, respectively. The increase in cash used for inventory is due to maintaining higher levels of inventory on hand for expected sales growth in future years.
Cash flows used in investing activities
Net cash used in investing activities decreased by $2.1 million, or 46.8%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease was due to the Company’s lower spending on machinery and equipment and leasehold improvements.
Cash flows provided by financing activities
For the year ended December 31, 2020, net cash provided by financing activities was $54.3 million, reflecting net proceeds from the issuance of $47.9 million in convertible debt, proceeds received of $4.4 million under the Paycheck Protection Program and proceeds of $2 million from exercise of stock options.
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Contractual Obligations
As of December 31, 2020, our contractual obligations were as follows:
| (in thousands) | Total | < 1 year | 1-3 Years | 3-5 Years | > 5 years | |||||||||||||||
| Operating leases | 16,266 | 1,044 | 3,977 | 3,891 | 7,354 | |||||||||||||||
| Purchase obligations (1) | 169,321 | 53,040 | 106,080 | 10,201 | - | |||||||||||||||
| Total contractual obligations | 185,587 | 54,084 | 110,057 | 14,092 | 7,354 | |||||||||||||||
| (1) | Purchase obligations include all legally binding contracts and primarily relate to firm commitments for inventory purchases from key manufacturers. Our purchase obligations are primarily related to several contracts for key inventory components in our manufacturing process. Purchase orders that are not binding agreements are excluded from the table above. |
As of December 31, 2020, we owed $4.4 million under the PPP. The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. We repaid the loan in February 2021 using proceeds from the Business Combination.
In 2020, we issued convertible notes payable for total gross proceeds of $50 million. The convertible notes beared interest at 5% per annum, were mandatorily convertible to Series D Preferred stock at a conversion rate of $10.27 per share when they mature, 2 years after the initial closing of the convertible notes. In addition, the convertible notes were convertible into preferred stock or common stock upon the occurrence of certain events prescribed in the convertible note agreements. Given that the maturity date was more than one year away from the issuance of the convertible note, the convertible note are classified as a long-term obligation. As of December 31, 2020, the amount of unamortized issuance costs on the convertible note was $1.4 million. In connection with the closing of the Business Combination in February 2021, the Company’s convertible debt was automatically cancelled and converted into the right to receive shares of the combined company’s Class A common stock.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The process of preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expense during the period.
While our significant accounting policies are described in more detail in Note 2 in our consolidated financial statements contained in Exhibit 99.1 to this Amendment No. 2 to the Current Report on Form 8-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
Revenue recognition
We adopted ASC 606 on January 1, 2018. We generate revenue from the sale of products and subscriptions. Our contracts with customers often include multiple performance obligations. We identified the following performance obligations in our contracts with customers:
| · | Hardware devices and accessories; |
| · | Maintenance and support for the software that is used in connection with the hardware devices, including the right to an unspecified number of software updates as and when available; |
| · | Cloud-based software subscriptions, which represent an obligation to provide the customer with ongoing access to our hosted software applications on a continuous basis throughout the subscription period; |
| · | Implementation and integration services; and |
| · | Extended warranties. |
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We account for the warranty as an assurance type warranty. At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of revenue and as liability in accrued expenses. Factors that affect the warranty obligation include historical as well as current product failure rates, service delivery costs incurred in correcting product failures, and warranty policies and business practices.
Our contracts with customers include variable consideration in the form of refunds and credits for product returns and price concessions. We estimate variable consideration using the expected value method based on a portfolio of data from similar contracts.
Transaction price is allocated to all identified performance obligations based on relative standalone selling prices of the underlying goods or services. For most performance obligations except certain services, we have an observable standalone selling price. We use estimation techniques, which require significant judgment, to estimate the standalone selling price for goods and services for which an observable selling price is not available. Our sales of hardware devices represent a bundled sale of a good and a service that includes two performance obligations. We have an observable standalone selling price for the bundle and estimate the standalone selling price of the performance obligations within the bundle using estimation techniques that maximize the use of observable inputs.
Each unit of hardware devices and accessories is a performance obligation satisfied at a point in time, usually upon transfer of control of the good to the customer. Our services, including the cloud-based software subscriptions, extended warranties, and support and maintenance, are stand-ready obligations that are satisfied over time. We use the time elapsed (straight-line) measure of progress to recognize revenue. The implementation and integration services are performance obligations satisfied over time, and we use the costs incurred input measure of progress to recognize revenue.
Stock-based compensation
Our stock-based compensation program includes restricted stock units and stock option grants to our officers, employees and consultants. Stock options are granted at exercise prices not less than the fair market value of our common stock at the dates of grant. For purposes of restricted stock unit grants, the grant date fair value is calculated as the fair market value of the stock on the date of grant.
The fair values of stock option grants are estimated using a Black-Scholes option-pricing model. Key inputs and assumptions include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, stock price and exercise price. Many of the assumptions require significant judgment and changes in assumptions could have a significant impact in the determination of stock-based compensation expense. Key assumptions include:
| · | Risk free interest rate: The risk-free interest rate for periods within the contractual life of the awards is based on the U.S. Treasury yield curve in effect at the time of the grant. |
| · | Expected dividend yield: We have never declared or paid any cash dividends and do not expect to pay any cash dividends in the foreseeable future. |
| · | Expected term: We calculate expected term using the “simplified” method, which is the simple average of the vesting period and the contractual term. |
| · | Expected volatility: We determined expected annual equity volatility to be 50% and 50% for December 31, 2020 and 2019, respectively. |
Stock options granted generally vest one-quarter after the first year and the remainder vests in equal monthly installments over the following 36 months and have a term of 10 years.
No related tax benefits of the stock-based compensation expense have been recognized and no related tax benefits have been realized from the exercise of stock options due to our net operating loss carryforwards.
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Inventory and inventory valuation
Inventories are stated at the lower of actual cost, determined using the average cost method, or net realizable value (“NRV”). We routinely evaluate quantities and value of our inventories in light of current market conditions and market trends and record a write-down against the cost of inventories for NRV below cost. NRV is based upon an estimated average selling price reduced by the estimated costs of completion, disposal, and transportation. The determination of NRV involves numerous judgments including estimating selling prices, existing customer orders, and estimated costs of completion, disposal, and transportation. Should actual market conditions differ from our estimates, future results of operations could be materially affected. We reduce the value of our inventory for estimated obsolescence or lack of marketability by the difference between the cost of the affected inventory and the estimated market value.
The valuation of inventory also requires us to estimate excess and obsolete inventory. We periodically review the age, condition and turnover of our inventory to determine whether any inventory has become obsolete or has declined in value and incur a charge to operations for known and anticipated inventory obsolescence. We also consider the rate at which new products will be accepted in the marketplace and how quickly customers will transition from older products to newer products, including whether older products can be re-manufactured into new products. The evaluation also takes into consideration new product development schedules, the effect that new products might have on the sale of existing products, product obsolescence, product merchantability and other factors. Market conditions are subject to change and if actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which would have a negative impact on gross margin.
Losses expected to arise from firm, non-cancelable and unhedged commitments for the future purchase of inventory items are recognized unless the losses are recoverable through firm sales contracts or other means.
We capitalize manufacturing overhead expenditures as part of inventory costs. Capitalized costs primarily include management’s best estimate and allocation of the direct labor, materials costs and other overhead costs incurred related to inventory acquired or produced but not sold during the respective period.
Manufacturing overhead costs are capitalized to inventory and are recognized as cost of revenues in future periods based on our rate of inventory turnover.
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 in our consolidated financial statements contained in Exhibit 99.1 to this Amendment No. 2 to the Current Report on Form 8-K.
Emerging Growth Company
Following the Business Combination, the combined company is 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 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 herein 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 the combined company qualifies 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.
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Quantitative and Qualitative Disclosures About Market Risk
We have operations within the United States, Australia, Germany, Netherlands, United Kingdom and Taiwan and we are exposed to market risk in the ordinary course of our business further discussed in the “Risk Factors” section of the Original Form 8-K.
Interest Rate Risk
We did not have any floating rate debt as of December 31, 2020. Cash equivalents, which consistent primary of money market funds are subject to interest rate volatility and represents a market risk. 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 consolidated financial statements.
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