Butterfly Network, Inc. — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Butterfly develops handheld point-of-care ultrasound devices, cloud-based software, subscriptions, and related services. The filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. On February 12, 2021, the company completed its business combination with Longview Acquisition Corp. and began trading on the NYSE under BFLY. The transaction was accounted for as a reverse recapitalization.
- Butterfly iQ and iQ+ products were commercially available in more than 20 countries and had FDA clearance and CE marking for use by healthcare practitioners.
- The company operates as one reportable segment.
- As of March 31, 2021, the company had 164.9 million Class A shares and 26.4 million Class B shares outstanding. Class B shares carry 20 votes per share; Jonathan Rothberg controlled approximately 76.2% of combined voting power immediately after the transaction.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|
| Total revenue | $12.4 million | $8.7 million | Up 43.5% |
| Product revenue | $9.6 million | $7.2 million | Up 33.1% |
| Subscription revenue | $2.8 million | $1.5 million | Up 94.9% |
| Gross profit | $6.4 million | $(0.8) million | Improved $7.3 million |
| Gross margin | 51.6% | (9.6)% | Improved 61.2 points |
| Loss from operations | $(53.7) million | $(24.5) million | Loss increased $29.2 million |
| Net loss | $(0.7) million | $(24.4) million | Improved $23.7 million |
| Net loss per share | $(0.01) | $(4.07) | Improved |
| Adjusted EBITDA | $(26.5) million | $(21.5) million | Loss increased $5.0 million |
- Subscription mix increased to 22.9% of revenue from 16.9%, reflecting higher device-related subscriptions and renewals.
- Units fulfilled increased 35.1% to 5,013 from 3,711.
- Product cost of revenue declined 39.0%, primarily because the lower-cost iQ+ replaced the prior-generation iQ and reduced warranty costs.
- Operating expenses increased 154.1% to $60.2 million. Research and development rose 25.6% to $15.7 million, sales and marketing rose 65.8% to $9.8 million, and general and administrative expense rose 560.8% to $34.6 million.
- General and administrative expense included substantial stock-based compensation, CEO transition costs, recruiting, professional fees, and incremental public-company costs.
- The company recognized a $54.1 million gain from the change in fair value of warrant liabilities. This non-cash gain was the primary reason net loss improved despite a substantially higher operating loss.
Cash Flow, Debt, and Liquidity
| Metric | March 31, 2021 | December 31, 2020 |
|---|
| Cash and cash equivalents | $18.9 million | $60.2 million |
| Marketable securities | $526.4 million | None reported |
| Cash plus marketable securities | $545.3 million | $60.2 million |
| Total assets | $647.5 million | $147.2 million |
| Total liabilities | $211.3 million | $148.2 million |
| Convertible debt | None | $49.5 million |
| Loan payable | None | $4.4 million |
- Operating cash flow was $(63.4) million, compared with $(19.7) million in Q1 2020.
- Investing cash flow was $(528.2) million, primarily reflecting purchases of marketable securities of $691.9 million, partly offset by $165.0 million of sales.
- Financing cash flow was $550.3 million, including $548.4 million of net equity infusion proceeds, $6.3 million from option exercises, and repayment of the $4.4 million PPP loan.
- The business combination generated approximately $589 million of gross proceeds; the company stated that cash, cash equivalents, and marketable securities should fund operations for at least the next twelve months.
- The company expects to remain cash-flow negative on an annual basis and to continue incurring net losses in the near term.
Material Changes, Outlook, and Unusual Items
- The business combination materially changed the capital structure: legacy preferred stock and convertible debt converted into common stock, and the company received substantial new equity capital.
- Warrants were classified as liabilities at fair value, totaling $133.2 million at March 31, 2021. The accounting treatment produced a significant non-cash gain in Q1.
- Stock-based compensation increased to $20.3 million from $2.7 million, including expense associated with performance-based restricted stock units becoming earned upon closing of the transaction and accelerated vesting related to the former CEO’s departure.
- Management plans to use transaction proceeds to expand sales and marketing, develop products and services, enter new markets, and fund working capital and general corporate purposes.
- No specific quantitative revenue, earnings, or cash-flow guidance was provided in the filing. Management expects near-term investment and operating losses, with potential longer-term margin improvement from higher subscription mix and supply-chain efficiencies.
- COVID-19 continued to affect customer access, demonstrations, suppliers, manufacturing, shipments, enterprise budgets, and employee travel. Management also cited potential benefits from increased telemedicine and digital healthcare adoption.
Risks, Contingencies, and Commitments
- Management disclosed a material weakness in internal control over financial reporting relating to the accounting for public and private SPAC warrants. Disclosure controls were deemed ineffective as of March 31, 2021 solely due to the warrant restatement issue. Remediation efforts were ongoing, with no assurance they will be successful.
- The company had $156.1 million of minimum inventory purchase commitments and $16.1 million of future operating lease payments. It also reported a $36.4 million prepaid vendor advance and a $42.6 million accrual related to a manufacturing agreement.
- Key risks include sustained losses and negative cash flow, the need to manage rapid growth, dependence on third-party manufacturers and suppliers, regulatory requirements, competition, reimbursement and pricing uncertainty, intellectual property protection, COVID-19 effects, and the need for future financing if liquidity or growth requirements change.
- Two shareholder lawsuits challenging the business combination were voluntarily dismissed, but the parties were negotiating a potential attorneys’ fee award.
- Warrants could dilute common stock if exercised and are subject to redemption provisions. At March 31, 2021, 20.7 million warrants were outstanding.
Investor Verification Checklist
- Verify the sustainability of the 51.6% gross margin improvement and the extent to which it reflects the iQ+ product transition, warranty changes, or other non-recurring items.
- Separate recurring operating performance from the $54.1 million non-cash warrant fair-value gain and significant stock-based compensation.
- Monitor operating cash burn, inventory growth, vendor advances, and the company’s ability to fund operations without additional capital.
- Review remediation of the material weakness and any subsequent warrant-accounting restatements or control deficiencies.
- Assess execution against the company’s plans to increase subscription penetration, scale sales and marketing, and reduce manufacturing costs.
- Review the $156.1 million inventory purchase commitments, related accruals, and potential exposure to demand or supply-chain changes.
