Butterfly Network, Inc. — Q2 2022 Form 10-Q Summary
Business Context and Reporting Period
Butterfly Network develops handheld, whole-body ultrasound devices using its Ultrasound-on-Chip technology, together with cloud-connected software and subscription services. The company sells to healthcare systems, physicians and other providers through direct sales, distributors and eCommerce channels. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, with comparisons to the corresponding 2021 periods.
Financial Performance and Liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $19.2 million | $16.5 million | $34.8 million | $29.0 million |
| Gross profit | $10.6 million | $8.2 million | $18.9 million | $14.6 million |
| Gross margin | 55.0% | 49.8% | 54.4% | 50.5% |
| Loss from operations | $(48.5) million | $(36.7) million | $(98.0) million | $(90.4) million |
| Net loss | $(35.8) million | $(2.9) million | $(80.3) million | $(3.6) million |
| Adjusted EBITDA | $(37.8) million | $(28.5) million | $(77.8) million | $(55.0) million |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(98.2) million | $(99.9) million |
- Revenue mix: Q2 product revenue was $13.4 million, up 3.2%, while subscription revenue was $5.8 million, up 65.3%. Subscription revenue represented 30.1% of total revenue, compared with 21.2% in the prior-year quarter.
- Profitability: Gross margin improved to 55.0%, primarily from a greater mix of the lower-cost Butterfly iQ+ device and operating efficiencies. Adjusted gross margin was 58.5%.
- Operating expenses: Q2 research and development increased 35.9% to $23.2 million; sales and marketing increased 56.0% to $16.4 million; and general and administrative expense increased 12.1% to $19.4 million.
- Non-cash items: The company recorded a $12.8 million Q2 and $18.0 million year-to-date gain from changes in the fair value of warrant liabilities. Warrant liabilities were $8.3 million at June 30, 2022, versus $26.2 million at year-end 2021.
- Cash and liquidity: Cash and cash equivalents were $310.8 million at June 30, 2022, with total cash, cash equivalents and restricted cash of $317.7 million. Management expects existing cash and operating cash flows to fund operations, capital expenditures and working capital needs for at least the next twelve months.
- Debt: The filing reports no floating-rate debt and no material debt balance. The prior-year Paycheck Protection Program loan had been repaid.
- Commitments: Fixed inventory purchase commitments totaled $86.4 million, including $64.6 million payable within twelve months. Fixed lease payment obligations totaled $41.6 million, including $2.9 million payable within twelve months.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 16.4% in Q2 and 20.1% for the first six months, driven principally by subscription growth.
- Units fulfilled decreased by 406 units, or 6.3%, in Q2, reflecting lower eCommerce, distributor and direct-sales volume, partly offset by higher global health sales.
- Gross margin increased by 5.2 percentage points in Q2 and 3.9 percentage points year to date.
- Operating losses widened as investments in product development, sales capacity and marketing outpaced revenue growth. Q2 net loss increased substantially, partly because the prior-year period benefited from a much larger warrant-liability fair-value gain.
- Year-to-date general and administrative expense declined 26.0% to $38.4 million, primarily because prior-year performance-based equity vesting, CEO transition costs and related professional fees did not recur.
- Cash used in operations improved modestly by $1.7 million year to date, while cash used in investing activities declined sharply because 2021 included substantial marketable-securities purchases and sales.
- Inventories increased to $65.6 million from $36.2 million at December 31, 2021, primarily from higher raw-material balances.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal revenue, earnings or margin guidance.
- Management expects annual operating cash flow to remain negative, although individual quarters may generate positive operating cash flow. Management expects subscription mix to increase over time and believes this could support margin expansion.
- On July 28, 2022, the board approved an efficiency plan including a workforce reduction of approximately 10%. The company expects approximately $2 million of cash severance and benefits costs, substantially in the third and fourth quarters of 2022.
- COVID-19 continued to contribute to longer sales cycles, slower customer adoption and supply-chain constraints and cost increases. Management stated that semiconductor availability under its supply agreement had not been constrained.
- The company has approximately $86.4 million of non-cancellable or otherwise committed inventory purchases, including $19.3 million of accrued purchase commitments and $17.9 million of vendor advances related to a manufacturing agreement.
- Pending litigation includes a putative securities class action, a Fujifilm patent-infringement action involving the iQ and iQ+ products and software, and a stockholder derivative action. The company cannot predict the outcomes or reasonably estimate potential losses.
- Other risks include continued operating losses, dependence on customer adoption and subscription renewals, reimbursement and regulatory uncertainty, competition, intellectual-property protection, supply-chain costs, economic conditions and the ability to maintain its NYSE listing.
Most Important Facts for Investors to Verify
- Whether subscription growth and the 30.1% subscription revenue mix are sustainable and translate into improving unit economics.
- Whether the workforce reduction and other cost actions materially reduce quarterly cash burn without impairing product development or sales execution.
- The pace of inventory conversion and the risk associated with $86.4 million of purchase commitments and related vendor advances.
- Available cash runway relative to ongoing operating losses, capital expenditures and the company’s stated expectation of at least twelve months of liquidity.
- The potential financial, operational and product implications of the Fujifilm patent litigation and other pending lawsuits.
- The extent to which reported net loss and cash flow are affected by non-cash stock compensation and warrant-liability fair-value changes.