Butterfly Network, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Butterfly Network develops handheld, whole-body ultrasound devices using its Ultrasound-on-Chip technology, combined with cloud-connected software and services. The company sells to healthcare systems, physicians and healthcare providers through direct sales, distributors and eCommerce. The filing covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company operates as a single reportable segment.
Financial Performance and Liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $15.5 million | $15.6 million | (0.6%) |
| Product revenue | $8.8 million | $11.0 million | (19.7%) |
| Software and other services revenue | $6.6 million | $4.6 million | 45.4% |
| Gross profit | $9.1 million | $8.3 million | 9.0% |
| Gross margin | 58.7% | 53.6% | +5.1 percentage points |
| Loss from operations | $(35.0) million | $(49.5) million | Improved $14.5 million |
| Net loss | $(33.5) million | $(44.5) million | Improved $10.9 million |
| Basic and diluted loss per share | $(0.17) | $(0.22) | Improved $0.05 |
| Net cash used in operating activities | $(43.3) million | $(54.2) million | Improved $11.0 million |
- Software and other services represented 42.8% of revenue, compared with 29.3% in the prior-year quarter. Management attributes the increase to enterprise Butterfly Blueprint licenses, renewals and recognition of prior-period licenses over their service terms.
- Operating expenses were $44.1 million, down from $57.9 million. Research and development, sales and marketing, and general and administrative expenses declined primarily due to workforce reductions and tighter spending.
- Cash and cash equivalents were $193.8 million at March 31, 2023, compared with $162.6 million at December 31, 2022. Including restricted cash, total cash, cash equivalents and restricted cash was $198.4 million.
- The increase in cash principally reflected $76.5 million of proceeds from selling marketable securities, partially offset by $43.3 million of operating cash use and $1.3 million of capital expenditures.
- The company reported no floating-rate debt as of March 31, 2023. The filing does not identify conventional borrowings or funded debt; liabilities included $5.6 million of warrant liabilities and $29.4 million of operating lease liabilities.
- Management expects existing cash, cash equivalents and operating cash flows to fund operations and liquidity needs for at least the next twelve months, while also expecting negative annual operating cash flow.
Material Changes Versus the Prior Comparable Period
- Units fulfilled decreased by 1,590, or 31.1%, primarily because of lower device sales across direct, distributor and eCommerce channels.
- Product revenue declined $2.2 million, while software and other services revenue increased $2.1 million, resulting in essentially flat total revenue.
- Cost of revenue declined 11.7% to $6.4 million, with product costs falling 29.3%. Software service costs increased 88.2%, partly because of $0.8 million of additional amortization for internally developed SaaS-supporting software and higher hosting and service costs.
- In January 2023, the company implemented a reduction in force affecting approximately 25% of its workforce. It recorded $3.6 million of severance and benefit costs in Q1, with $0.7 million accrued at quarter-end.
- Other operating expenses increased to $6.4 million from $0.3 million, reflecting severance and a $2.6 million increase in litigation and other legal costs.
- Interest income increased to $1.8 million from nominal levels, reflecting higher cash balances and interest rates. The change in fair value of warrant liabilities was a $0.2 million expense in Q1 2023 versus $5.2 million of income in Q1 2022.
- Marketable securities declined from $75.3 million at December 31, 2022 to zero at March 31, 2023 following their sale.
Outlook, Risks, Contingencies and Unusual Items
- The filing provides no specific revenue, earnings or margin guidance. Management expects revenue mix to continue shifting toward software and other services as device adoption and software penetration increase, which it believes can support margin expansion over time.
- Material cash requirements included $39.8 million of fixed office-lease obligations, of which $3.8 million was payable within twelve months, and $42.4 million of inventory purchase commitments, all payable within twelve months. Approximately 35% of the near-term inventory obligations was expected to be funded using vendor advances.
- The company had a $14.3 million vendor advance asset, net of write-downs, and a $0.5 million accrued purchase commitment liability. It used $4.5 million of previously written-down vendor advances and $1.6 million of accrued purchase commitment liability during the quarter for inventory purchases.
- Pending legal matters include a putative securities class action, a Fujifilm patent-infringement action, a stockholder derivative action and other employment-related claims. The company cannot predict the outcomes or reasonably estimate potential losses.
- Risks include sustained operating losses and negative cash flow, dependence on customer adoption, competition from larger ultrasound companies, regulatory and reimbursement uncertainty, intellectual-property claims, supply commitments, potential financing needs, economic conditions and maintenance of the NYSE listing.
- Substantially all cash and cash equivalents were held with one financial institution, including balances above federally insured limits. Management reported effective disclosure controls as of March 31, 2023 and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the shift toward software revenue can continue to offset declining device volumes and support durable gross-margin expansion.
- The company’s cash-burn trajectory after the one-time marketable-securities sale and after severance and legal expenditures normalize.
- Whether the stated twelve-month liquidity assessment remains adequate given recurring losses, $42.4 million of inventory commitments and ongoing lease obligations.
- The ultimate outcomes, insurance coverage and potential financial exposure from the disclosed securities, patent and derivative litigation.
- The effect of workforce reductions on product development, sales execution, customer support and future growth.
- Potential dilution from approximately 47.3 million anti-dilutive common-equivalent shares, including options, restricted stock units and warrants.