Butterfly Network, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Butterfly Network develops handheld ultrasound devices, cloud software, subscriptions and artificial intelligence tools intended to expand access to point-of-care medical imaging. The report covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The company completed its business combination with Longview Acquisition Corp. on February 12, 2021, generating approximately $589 million of gross proceeds and beginning NYSE trading under BFLY and BFLY WS in February 2021.
The company operates as a single reportable segment and sells in more than 20 countries. Its Butterfly iQ and iQ+ devices are FDA-cleared Class II medical devices, licensed in Canada and CE-marked in Europe.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $14.6 million | $10.1 million | $43.6 million | $30.6 million |
| Product revenue | $10.8 million | $8.6 million | $33.5 million | $25.8 million |
| Subscription revenue | $3.8 million | $1.5 million | $10.1 million | $4.8 million |
| Gross profit | $(5.1) million | $(69.3) million | $9.5 million | $(69.9) million |
| Gross margin | (35.0)% | (683.3)% | 21.8% | (228.5)% |
| Operating loss | $(57.0) million | $(91.8) million | $(147.4) million | $(139.4) million |
| Net loss | $(13.6) million | $(92.2) million | $(17.2) million | $(139.8) million |
| Adjusted EBITDA | $(33.5) million | $(22.6) million | $(88.5) million | $(64.2) million |
Q3 revenue increased 44.3% year over year, while nine-month revenue increased 42.4%. Subscription mix rose to 25.8% of Q3 revenue from 14.9% in the prior-year quarter. Units fulfilled increased 40.8% year over year, although e-commerce sales slowed following an August 2021 pricing adjustment.
Q3 gross loss improved substantially because the loss on product purchase commitments declined to $11.6 million from $64.0 million and product costs declined. The nine-month gross profit became positive, but operating expenses remained high. Q3 operating expenses were $51.9 million, up from $22.6 million, driven by increased research and development, sales and marketing, general and administrative spending and stock-based compensation.
Net income benefited materially from a $43.0 million non-cash gain in the fair value of warrant liabilities in Q3 and a $130.5 million gain for the nine-month period. Excluding this warrant remeasurement, the company remained significantly loss-making.
At September 30, 2021, cash and cash equivalents were $153.3 million, marketable securities were $315.1 million and restricted cash was $4.0 million. Total cash, cash equivalents and restricted cash were $157.3 million. The company reported no convertible debt or loan payable, but had $56.8 million of warrant liabilities.
For the nine months, operating cash flow was $(146.4) million, investing cash flow was $(319.8) million and financing cash flow was $563.3 million, primarily reflecting Business Combination proceeds. Management expects cash, cash equivalents and marketable securities to fund operations for at least the next twelve months, while also expecting continued annual operating cash burn and operating losses.
Material changes versus the prior comparable period
- Revenue rose $4.5 million, or 44.3%, in Q3 and $13.0 million, or 42.4%, for the nine months.
- Subscription revenue grew 149.2% in Q3 and 111.9% for the nine months, reflecting higher device adoption, subscription renewals and SaaS sales.
- Gross profit improved by $64.1 million in Q3 and $79.4 million for the nine months, principally because of lower purchase-commitment losses, lower product costs and fewer inventory write-downs.
- Operating expenses increased 129.7% in Q3 and 125.9% for the nine months. Stock-based compensation was $10.7 million in Q3 and $38.8 million for the nine months, compared with $2.4 million and $7.7 million, respectively, in the prior-year periods.
- The nine-month operating loss increased to $147.4 million despite the improved gross profit, reflecting substantially higher operating investment.
- The Business Combination converted all outstanding convertible preferred stock and convertible debt into common equity, added approximately $589 million of gross proceeds and created a dual-class structure. Class B shares carry 20 votes per share; Jonathan Rothberg and permitted transferees controlled approximately 76.2% of voting power immediately after closing.
- Cash used in operations increased from $61.1 million to $146.4 million for the nine-month period, while financing cash flow increased due to the Business Combination.
Guidance, outlook, risks and unusual items
- Management expects continued operating losses and annual negative operating cash flow while investing in research and development, sales, marketing and new markets. No specific revenue, earnings or margin guidance is provided.
- Management expects profitability and margins to improve over time through supply-chain efficiencies and a greater mix of subscription revenue, but expects near-term cost pressure from product and service investments.
- COVID-19, including the Delta variant, reduced customer purchasing activity and continued to disrupt global supply chains, component availability, lead times and costs.
- The company recorded a further $11.6 million loss on product purchase commitments in Q3. At September 30, it had a $36.4 million net vendor advance and a $19.5 million accrual related to a supply agreement; aggregate minimum inventory purchase commitments were approximately $129.5 million.
- The company had $42.9 million of future minimum operating lease payments, including approximately $27.3 million of legally binding minimum payments under a Burlington, Massachusetts lease expiring in September 2032. Total contractual obligations were $172.3 million, including $129.5 million of purchase obligations.
- Warrant liabilities were remeasured through earnings, creating significant non-cash gains and volatility. The company had 13.8 million public warrants and 6.9 million private warrants outstanding at September 30, 2021, generally exercisable at $11.50 per share.
- Disclosure controls and procedures were ineffective because of an unresolved material weakness related to accounting for public and private placement warrants. Management stated that the financial statements were fairly stated in all material respects and described ongoing remediation efforts.
- The company reported no material legal proceedings and stated that its previously disclosed risk factors had not materially changed.
Most important facts for investors to verify
- Whether revenue growth and subscription mix can continue to offset substantial operating expenses and recurring cash burn.
- The sustainability of the reported gross-margin improvement after excluding purchase-commitment losses, inventory write-downs and other unusual items.
- The remaining exposure to inventory purchase commitments, vendor advances, supply-chain disruption and potential additional losses.
- The pace and effectiveness of remediation of the material weakness in internal controls over financial reporting.
- The dilution, cash-flow and earnings effects of the outstanding public and private warrants and their fair-value accounting.
- The use and investment of the Business Combination proceeds, including the company’s projected cash runway under continued negative operating cash flow.
- The impact of the dual-class voting structure and Rothberg’s voting control on governance and shareholder influence.