Butterfly Network, Inc. 2023 Form 10-K Summary
Business context and reporting period
Butterfly Network is a digital health and medical-device company offering handheld, semiconductor-based whole-body ultrasound probes, cloud-connected software, subscriptions, education and professional services. Products are sold through direct sales, distributors and eCommerce channels to healthcare systems, clinicians and veterinarians in approximately 30 countries.
This filing is the Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed March 4, 2024. The filing contains limited fourth-quarter information; the principal financial statements present full-year results.
- Products in market at year-end included Butterfly iQ+ and iQ+ Vet. Butterfly iQ3 received FDA 510(k) clearance on January 4, 2024 and launched in early 2024.
- Approximately 225 employees were employed as of January 31, 2024.
- The company reported more than 145,000 unique Butterfly users to date and devices deployed across approximately 100 countries.
Key financial metrics
| ($ in millions, except per-share data) | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $65.9 | $73.4 | (10.2%) |
| Product revenue | $40.0 | $50.3 | (20.3%) |
| Software and other services revenue | $25.9 | $23.1 | 11.8% |
| Gross profit | $16.9 | $39.5 | (57.3%) |
| Gross margin | 25.6% | 53.8% | (28.2 percentage points) |
| Operating loss | $(145.6) | $(193.0) | Improved $47.4 |
| Net loss | $(133.7) | $(168.7) | Improved $35.0 |
| Basic and diluted net loss per share | $(0.65) | $(0.84) | Improved $0.19 |
| Net cash used in operating activities | $(98.8) | $(169.1) | Improved $70.3 |
Software and other services represented 39.2% of 2023 revenue versus 31.5% in 2022. Enterprise software revenue increased by $2.4 million, while individual subscriptions were flat.
- 2023 cost of revenue was $49.0 million, or 74.4% of revenue, versus $33.9 million, or 46.2%, in 2022.
- Product cost of revenue increased 51.7%, primarily because of a $21.1 million excess and obsolete inventory write-down associated with strategy and market changes.
- Research and development expense declined 36.8% to $55.6 million; sales and marketing declined 34.3% to $39.1 million; and general and administrative expense declined 36.1% to $49.6 million.
- Other operating expenses increased to $18.2 million, including $8.7 million of severance and benefits costs and $9.5 million of legal-related expenses.
- Interest income was $7.5 million, and the company reported a $4.5 million gain from the change in fair value of warrant liabilities.
Balance sheet, debt and liquidity
| ($ in millions) | December 31, 2023 | December 31, 2022 |
|---|---|---|
| Cash and cash equivalents | $134.4 | $162.6 |
| Marketable securities | — | $75.3 |
| Total assets | $304.3 | $417.6 |
| Total liabilities | $84.2 | $92.2 |
| Stockholders’ equity | $220.1 | $325.4 |
| Accumulated deficit | $(729.6) | $(595.9) |
The filing states that the company had no floating-rate debt and no material debt obligations reported as of December 31, 2023. Cash, cash equivalents and restricted cash totaled $138.7 million, including $4.0 million securing a lease letter of credit and $0.2 million restricted under a Gates Foundation agreement.
Operating cash burn improved but remained substantial. Cash used in operations was $98.8 million, while investing activities provided $70.4 million, primarily from the sale of marketable securities. Financing activities provided $0.2 million. The company stated that existing cash and operating resources should fund operations and capital requirements for at least the next 12 months, but expects to raise capital before 2026 to reach profitability.
- Contractual obligations included $31.5 million of fixed office lease payments, $15.5 million of technology-license payments and $14.8 million of inventory purchase commitments.
- Approximately $60 million of annual cash requirements remained after cost reductions, assuming no revenue growth or further expense reductions.
- Management reported approximately $170 million of annualized expense reductions over 2022 and 2023 and expects cash to last into 2026 on a conservative basis.
Material changes versus the prior comparable period
- Revenue declined 10.2% as product revenue fell 20.3%, primarily because of lower probe sales through distribution, global health and eCommerce channels and the nonrecurrence of several large 2022 sales.
- Software and other services revenue increased 11.8%, supported by subscription renewals, new subscriptions and expanded offerings.
- Gross margin fell sharply because of the $21.1 million inventory write-down and higher software-related costs.
- Operating and net losses improved largely because of workforce reductions and lower operating expenses, partly offset by severance, legal costs and inventory charges.
- The company implemented workforce reductions of approximately 10% in August 2022, 25% in January 2023 and 25% in July 2023.
- Units fulfilled declined 26.0% in the fourth quarter of 2023 versus the fourth quarter of 2022, while fourth-quarter software and other services mix increased 5.2 percentage points to 38.5%.
- The company terminated one office lease and modified another, reducing fixed lease obligations by approximately $6.0 million on a net basis.
- The company acquired $10.3 million of technology licenses during 2023 and launched or expanded initiatives involving AI, Butterfly Garden and Powered by Butterfly licensing.
Guidance, outlook, risks and unusual items
Management expects to continue investing in sales, enterprise deployments, software, education and product development. The company expects software as a percentage of revenue to remain flat or decrease in 2024 because of the iQ3 launch. Management expects to seek nondilutive financing, such as grants or debt, before potentially raising equity capital.
- The company does not provide a specific 2024 revenue, margin or profitability forecast in the filing.
- Management expects continued losses and negative operating cash flow for at least the next several years and does not know when profitability will be achieved.
- Key commercial risks include limited operating history, declining device volumes, customer adoption and retention, competition, pricing pressure and reliance on enterprise sales execution.
- Manufacturing relies significantly on TSMC for semiconductor wafers and Benchmark Electronics for assembly and testing. Minimum purchase obligations, excess inventory and supplier disruption could affect cash flow and margins.
- Medical devices and software are subject to extensive FDA and international regulatory, privacy, cybersecurity, reimbursement and quality requirements.
- The company reported a pending securities class action and stockholder derivative litigation for which the outcome and potential loss range could not be estimated. A Fujifilm patent dispute was resolved in the fourth quarter of 2023 after recognition of a $1.6 million potential loss.
- Outstanding warrants comprised approximately 13.8 million public warrants and 6.9 million private warrants, generally exercisable at $11.50 per share and expiring February 12, 2026, subject to their terms. Exercise could dilute existing stockholders.
- Dual-class voting rights give Class B holders 20 votes per share. The filing states that Jonathan Rothberg controlled approximately 77% of voting power based on the referenced ownership information.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023. The company’s auditor was not required to provide an internal-control attestation because Butterfly was not an accelerated or large accelerated filer.
Most important facts for investors to verify
- Whether the iQ3 launch produces sustained device-volume and revenue growth without causing further inventory write-downs or margin compression.
- Subscription renewal rates, enterprise software expansion, software gross margins and the durability of the increasing software revenue mix.
- Actual quarterly cash burn, remaining cash runway and the timing, structure and dilution implications of expected financing before 2026.
- Inventory levels, the $14.8 million of purchase commitments, vendor advances and exposure to TSMC and Benchmark.
- The status, cost and potential outcome of the securities class action and stockholder derivative litigation.
- Regulatory clearances, reimbursement developments, cybersecurity incidents and any product quality or recall issues.
- The potential dilution from approximately 20.7 million outstanding warrants, stock options and restricted stock units.