Butterfly Network, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Butterfly Network is a digital health company offering handheld, whole-body ultrasound devices, accessories, cloud-connected software and related services. The filing covers the quarter and six months ended June 30, 2023; results are unaudited and reported under U.S. GAAP. The company operates as one reportable segment.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $18.5 million | $19.2 million | $34.0 million | $34.8 million |
| Product revenue | $12.3 million | $13.4 million | $21.1 million | $24.4 million |
| Software and other services | $6.2 million | $5.8 million | $12.8 million | $10.3 million |
| Gross profit | $10.9 million | $10.6 million | $20.0 million | $18.9 million |
| Gross margin | 59.1% | 55.0% | 58.9% | 54.4% |
| Loss from operations | $(31.3) million | $(48.5) million | $(66.3) million | $(98.0) million |
| Net loss | $(28.7) million | $(35.8) million | $(62.2) million | $(80.3) million |
| Net loss per share | $(0.14) | $(0.18) | $(0.31) | $(0.40) |
| Operating cash flow | Not separately provided | Not separately provided | $(69.7) million | $(98.2) million |
Q2 software and services represented 33.6% of revenue, up from 30.1% in the prior-year quarter. Units fulfilled declined 12.7% year over year. Operating expenses were $42.2 million in Q2, down 28.5% from $59.0 million, reflecting workforce reductions and tighter spending. Stock-based compensation was $9.9 million in Q2 and $14.1 million for the first six months.
As of June 30, 2023, cash and cash equivalents were $166.8 million, compared with $162.6 million at December 31, 2022. Including restricted cash, total cash, cash equivalents and restricted cash were $171.2 million. Marketable securities declined from $75.3 million at year-end 2022 to zero following sales and conversion to cash. Total liabilities were $86.9 million, including $4.0 million of warrant liabilities and $28.7 million of operating lease liabilities. The filing reports no floating-rate debt and no material off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Q2 revenue declined 3.8%, as product revenue fell 8.6%, partly offset by 7.4% growth in software and services.
- Six-month revenue declined 2.4%; product revenue decreased 13.6%, while software and services increased 24.1%.
- U.S. sales increased 20.8% in Q2 and 10.6% for the six-month period, driven by subscriptions, higher average selling prices and medical school deployments. International sales declined 44.4% in Q2 and 27.8% year to date, partly due to prior-year distributor orders and Gates Foundation grant activity.
- Gross margin expanded by 4.1 percentage points in Q2 and 4.5 percentage points for the six-month period, primarily due to lower product costs and a more favorable revenue mix.
- Research and development, sales and marketing, and general and administrative expenses declined substantially because of prior workforce reductions, lower consulting and marketing costs, and tighter expense management.
- Other operating expenses increased to $2.2 million in Q2 and $8.6 million year to date, including litigation costs and severance expenses. These amounts are described as not representative of ongoing operations.
- Net cash used in operations improved by $28.5 million year over year to $69.7 million for the first six months. Investing cash flow was positive $74.0 million, largely because $76.5 million of marketable securities were sold or converted to cash.
Guidance, outlook, commentary, risks and unusual items
- Management expects existing cash, cash equivalents and operating cash flows to fund operations, working capital and capital expenditures for at least the next twelve months, while also stating that annual operating cash flows are expected to remain negative.
- The company expects revenue mix to continue shifting toward software and other services as its installed base and subscription adoption expand, which management believes can support margin expansion.
- On July 11, 2023, the board approved a strategic realignment and an additional workforce reduction of approximately 25%. Management expects this action to reduce cash use by approximately $2 million per month and generate about $5 million of cash severance and benefits charges, substantially in the third and fourth quarters of 2023.
- As of June 30, 2023, fixed office lease obligations totaled $38.9 million, including $4.0 million payable within twelve months. Inventory purchase commitments totaled $27.3 million, including $11.9 million payable within twelve months; approximately 45% of the near-term amount is expected to be funded with vendor advances.
- Inventory increased to $86.8 million from $60.0 million at year-end 2022. The company also had $5.5 million of vendor advances, net of write-downs, and $0.5 million of accrued purchase commitments.
- Pending legal matters include securities class and derivative actions, a patent infringement action brought by Fujifilm Sonosite, and employment-related claims. The company cannot predict outcomes or reasonably estimate potential losses.
- Key business risks include dependence on customer adoption, competition from larger ultrasound companies, regulatory approvals, reimbursement and pricing pressure, intellectual property protection, supply commitments, ability to maintain NYSE listing, continuing losses and the need to manage growth and liquidity.
Most important facts for investors to verify
- Whether the additional July 2023 workforce reduction produces the projected $2 million monthly cash-use reduction without impairing product development, sales execution or customer support.
- Progress toward revenue growth, particularly the conversion of the installed base into recurring software and services revenue.
- Inventory levels, utilization of vendor advances and exposure to the $27.3 million of purchase commitments.
- The pace of operating cash burn and whether $166.8 million of cash and cash equivalents remains sufficient beyond the stated twelve-month period.
- The potential financial and operational impact of the pending securities, derivative, patent and employment litigation.
- Future dilution from 17.7 million outstanding restricted stock units, 9.3 million options and 20.7 million warrants, all of which were anti-dilutive as of June 30, 2023.