Butterfly Network, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Butterfly Network develops handheld ultrasound devices, cloud-based software and subscription services. The report covers the three and six months ended June 30, 2021, compared with the same 2020 periods. On February 12, 2021, the company completed its business combination with Longview Acquisition Corp.; the transaction was accounted for as a reverse recapitalization, so reported share data and post-combination financial position are not fully comparable with prior periods.
- Products include the Butterfly iQ and second-generation Butterfly iQ+ ultrasound probes.
- The company operates in one reportable segment and sells in more than 20 countries.
- Class A common stock and warrants began trading on the NYSE in February 2021.
Financial performance and liquidity
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|
| Total revenue | $16.5 million | $11.8 million | $29.0 million | $20.5 million |
| Gross profit | $8.2 million | $0.2 million | $14.6 million | $(0.7) million |
| Gross margin | 49.8% | 1.4% | 50.5% | (3.3)% |
| Loss from operations | $(36.7) million | $(23.1) million | $(90.4) million | $(47.6) million |
| Net loss | $(2.9) million | $(23.2) million | $(3.6) million | $(47.6) million |
| Adjusted EBITDA | $(28.5) million | $(20.1) million | $(55.0) million | $(41.6) million |
- Second-quarter product revenue was $13.0 million, up 30.3% year over year; subscription revenue was $3.5 million, up 94.3%.
- Subscription mix increased to 21.2% from 15.3%, supporting management’s expected shift toward higher-margin recurring revenue.
- Operating expenses increased to $44.9 million in the quarter and $105.1 million for the six-month period, driven by higher research and development, sales and marketing, personnel, professional services and public-company costs.
- The net loss reduction was substantially affected by non-cash gains from changes in the fair value of warrant liabilities: $33.5 million in the quarter and $87.6 million year to date.
Cash, debt and commitments
| Balance-sheet item | June 30, 2021 | December 31, 2020 |
|---|
| Cash and cash equivalents | $19.6 million | $60.2 million |
| Marketable securities | $489.9 million | None reported |
| Total assets | $631.3 million | $147.2 million |
| Warrant liabilities | $99.8 million | None reported |
| Convertible debt | None | $49.5 million |
| Loan payable | None | $4.4 million |
| Stockholders’ equity | $446.4 million | $(361.9) million |
- Cash, cash equivalents and marketable securities totaled approximately $509.5 million at June 30, 2021, including $4.0 million of restricted cash.
- Operating cash flow was $(99.9) million for the first six months, compared with $(39.4) million in the prior-year period.
- Investing cash flow was $(492.3) million, primarily reflecting purchases of marketable securities.
- Financing cash flow was $555.7 million, including $548.4 million of net equity infusion from the business combination and $11.7 million from option and warrant exercises.
- Management expects available cash, cash equivalents and marketable securities to fund operations for at least the next twelve months, but expects annual operating cash flow and net losses to remain negative in the near term.
- Contractual commitments included $43.2 million of operating lease obligations and $142.8 million of inventory purchase obligations. The company also reported a $27.3 million legally binding minimum commitment under a new Burlington, Massachusetts office lease, and a $4.0 million restricted-cash security deposit.
Material changes versus the prior comparable period
- Revenue increased 40.0% in the second quarter and 41.5% for the first six months, driven by higher iQ+ probe sales, international and domestic demand, subscription additions and renewals.
- Gross margin improved sharply because of lower iQ+ product costs, the absence of prior-year inventory charges and lower warranty costs.
- Operating losses widened despite stronger gross profit because operating expenses grew faster than revenue.
- General and administrative expense increased 223.5% in the quarter and 390.6% year to date, including higher stock-based compensation, recruiting, professional fees, executive transition costs and public-company expenses.
- The business combination converted all preferred stock and convertible debt into common equity, paid off significant liabilities and generated approximately $589 million of gross proceeds.
- The company repaid its $4.4 million Paycheck Protection Program loan in February 2021.
Guidance, outlook, risks and unusual items
- Management expects continued investment in research and development, sales and marketing, new products, geographic expansion and additional care settings. No specific revenue or earnings guidance was provided.
- Management expects subscription revenue to become a larger portion of the mix and believes this should support future margin expansion, although timing is uncertain.
- COVID-19 continues to create supply-chain constraints, longer lead times and higher component costs. Management reported some improvement in customer financial conditions and sales volume but cannot quantify the pandemic’s prior-year revenue effect.
- The company has recurring losses and negative operating cash flow. Liquidity depends on its post-combination capital base and the rate of future cash use.
- Warrants are classified as liabilities rather than equity, creating potentially significant earnings volatility from fair-value changes.
- The company reported a material weakness in internal control over financial reporting related to accounting for public and private placement warrants. Disclosure controls were therefore deemed ineffective as of June 30, 2021; remediation is ongoing without assurance of successful completion.
- The company is controlled by founder Jonathan Rothberg and permitted transferees through Class B shares carrying 20 votes per share; he held approximately 76.2% of combined voting power immediately after the business combination.
- Two stockholder lawsuits concerning the business combination were voluntarily dismissed, and an insignificant amount was paid to resolve attorneys’ fee requests.
Most important facts for investors to verify
- Whether revenue growth and the higher subscription mix continue after the post-combination comparison effects and COVID-19-related demand changes.
- The pace of cash burn relative to the approximately $509.5 million of cash, cash equivalents and marketable securities at quarter-end.
- Progress toward remediating the material weakness in warrant accounting and the potential effect of future warrant fair-value movements.
- Whether iQ+ manufacturing-cost improvements and supply-chain initiatives are sustainable amid purchase commitments and component constraints.
- The impact of continued operating-expense growth, stock-based compensation and executive transition costs on the path to profitability.
- Utilization of the $142.8 million of inventory purchase obligations, the related vendor advances and accrued commitments.
- Future dilution from approximately 20.7 million outstanding warrants, 17.4 million options and 3.3 million restricted stock units as of June 30, 2021.
