Butterfly Network, Inc. — Q3 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 services. The company sells through direct sales, distributors and eCommerce channels to healthcare systems, physicians and other providers. The filing covers the three and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $19.6 million | $14.6 million | $54.4 million | $43.6 million |
| Gross profit | $11.0 million | $(5.1) million | $29.9 million | $9.5 million |
| Gross margin | 56.0% | (35.0)% | 55.0% | 21.8% |
| Operating loss | $(46.0) million | $(57.0) million | $(144.0) million | $(147.4) million |
| Net loss | $(54.7) million | $(13.6) million | $(135.0) million | $(17.2) million |
| Adjusted EBITDA | $(32.9) million | $(33.5) million | $(110.7) million | $(88.5) million |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $(140.3) million | $(146.4) million |
- Q3 product revenue was $13.2 million, up 21.3%, while software and other services revenue was $6.5 million, up 71.1%. Software and services represented 32.9% of revenue, versus 25.8% in the prior-year quarter.
- Q3 adjusted gross profit was $12.0 million and adjusted gross margin was 61.2%, compared with $7.2 million and 49.3% in Q3 2021.
- Operating expenses were $57.0 million in Q3 and $173.9 million for the nine months, including research and development, sales and marketing, and general and administrative costs.
- Cash, cash equivalents and marketable securities totaled $267.9 million at September 30, 2022, consisting of $193.3 million of cash and cash equivalents and $74.5 million of marketable securities. Restricted cash totaled $4.7 million.
- Cash, cash equivalents and restricted cash declined by $228.8 million during the first nine months to $198.0 million at September 30, 2022.
- The filing reports no floating-rate debt as of September 30, 2022. It does not identify material outstanding borrowings; the prior-year Paycheck Protection Program loan had been repaid.
- Total liabilities were $99.6 million and stockholders’ equity was $343.6 million at September 30, 2022.
Material changes versus the prior comparable period
- Revenue increased 34.2% in Q3 and 24.8% for the first nine months, driven by higher product pricing and volume, increased software subscriptions and renewals.
- Gross margin improved substantially because the prior-year periods included an $11.6 million loss on product purchase commitments and a $0.6 million inventory write-down. Product manufacturing costs also benefited from efficiencies associated with the Butterfly iQ+ device.
- Operating loss improved in Q3 but remained significant. Nine-month operating expenses increased $17.0 million, primarily from higher research and development and sales and marketing spending, partly offset by lower general and administrative expense.
- Net loss increased sharply because Q3 2021 included a $43.0 million gain from the change in fair value of warrant liabilities, while Q3 2022 included a $9.1 million loss. For the nine-month period, the warrant-related gain was $8.9 million in 2022 versus $130.5 million in 2021.
- Units fulfilled increased 2.7% year over year in Q3, or 148 units, with growth in direct sales and global health channels partly offset by lower eCommerce volume.
- On July 28, 2022, the company approved a reduction in force of approximately 10% of its workforce. It recorded $1.8 million of severance and benefits costs, with approximately $0.2 million remaining accrued at September 30.
Guidance, outlook, risks and unusual items
- Management expects existing cash, marketable securities and operating cash flows to fund operations, capital expenditures and working capital needs for at least the next twelve months, while also stating that annual operating cash flow is expected to remain negative.
- Management expects revenue mix to shift toward software and other services over time, which it believes should support margin expansion. The filing does not provide specific revenue, earnings or cash-burn guidance.
- At September 30, remaining performance obligations were $23.2 million; the company expects to recognize 70% within the next twelve months and the remaining 30% thereafter.
- Fixed inventory purchase commitments totaled $71.2 million, including $67.9 million payable within twelve months. Approximately 40% of the near-term amount is expected to be funded using vendor advances. The company also had $41.1 million of fixed lease payment obligations.
- COVID-19 continued to contribute to customer budget pressure, longer sales cycles, supply-chain constraints and higher component costs. The company reported no material COVID-related asset impairment.
- Pending litigation includes a putative securities class action, a Fujifilm patent-infringement action and a stockholder derivative action. The company cannot predict outcomes or reasonably estimate potential losses.
- One customer represented 12% of Q3 revenue and 12% of accounts receivable at September 30, 2022, creating customer-concentration exposure.
- Warrant liabilities were $17.3 million at September 30, 2022. Changes in their fair value can materially affect reported net income or loss without affecting operating cash flow.
Most important facts for investors to verify
- Whether the cash balance and marketable securities are sufficient given the company’s continuing operating losses and approximately $140 million of nine-month operating cash burn.
- Whether software and services growth, subscription renewals and the higher-margin revenue mix continue.
- Whether the workforce reduction and other cost controls produce sustained reductions in operating expenses.
- The timing and cash impact of the $71.2 million of inventory purchase commitments and the company’s ability to use vendor advances.
- The potential financial, operational and reputational effects of the pending securities, derivative and patent litigation.
- The effect of warrant-liability fair-value volatility and equity-based compensation on reported earnings and future dilution.