Butterfly Network, Inc. — Q1 2022 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 subscription services. The company sells through direct sales, distributors and eCommerce channels to healthcare systems, physicians and other providers. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $15.6 million | $12.4 million | +25.2% |
| Product revenue | $11.0 million | $9.6 million | +14.8% |
| Subscription revenue | $4.6 million | $2.8 million | +60.1% |
| Gross profit | $8.3 million | $6.4 million | +30.0% |
| Gross margin | 53.6% | 51.6% | +2.0 percentage points |
| Loss from operations | $(49.5) million | $(53.7) million | Improved by $4.2 million |
| Net loss | $(44.5) million | $(0.7) million | Decreased by $43.8 million |
| Adjusted EBITDA | $(40.0) million | $(26.5) million | Worsened by $13.5 million |
| Cash used in operating activities | $(54.2) million | $(63.4) million | Improved by $9.2 million |
Subscription mix increased to 29.3% of revenue from 22.9%, reflecting higher subscription sales and renewals. Units fulfilled increased 1.9%, or 93 units. Adjusted gross margin was 56.3%, compared with 47.8% in the prior-year quarter.
Cash and cash equivalents were $359.9 million at March 31, 2022, with total cash, cash equivalents and restricted cash of $368.7 million. Total assets were $535.4 million and total liabilities were $122.8 million. The company reported no floating-rate debt and no significant debt obligations; liabilities included $21.1 million of warrant liabilities and $30.1 million of operating lease liabilities.
Inventory increased to $48.4 million from $36.2 million at December 31, 2021. The company had $103.8 million of minimum inventory purchase commitments, including $65.9 million payable within 12 months, and $42.1 million of fixed lease payment obligations, including $2.5 million payable within 12 months. Management expects existing cash and operating resources to fund operations for at least the next 12 months, but expects to remain cash-flow negative annually.
Material changes versus the prior comparable period
- Revenue growth was led by subscription revenue, which increased 60.1%, while product revenue increased 14.8%, partly due to prior-year price increases.
- Gross margin improved as subscription mix increased and product-cost efficiencies partially offset higher component costs, warranty expense and inventory write-offs.
- Research and development expense increased 50.3% to $23.6 million as the company expanded product development capabilities.
- Sales and marketing expense increased 55.0% to $15.2 million, primarily from higher personnel, travel and event costs.
- General and administrative expense decreased 45.0% to $19.1 million because prior-year performance-based equity compensation, CEO transition costs and certain professional fees did not recur.
- Net loss increased materially because Q1 2021 benefited from a $54.1 million non-cash gain from the change in fair value of warrant liabilities; the comparable Q1 2022 gain was $5.2 million.
- Operating cash use declined 14.5%, while investing cash use fell substantially because Q1 2021 included significant marketable-security purchases and sales. Q1 2022 investing cash use was primarily $4.5 million of property and equipment purchases.
Guidance, outlook, risks and unusual items
The filing does not provide numerical revenue, earnings or cash-flow guidance. Management expects revenue mix to shift toward subscriptions over time and anticipates continued investment in research and development, sales and marketing, and subscription offerings. Management also expects annual operating cash flow to remain negative.
- COVID-19 continues to create longer sales cycles, slower near-term adoption, customer financial strain and supply-chain uncertainty. The company reported component availability constraints, longer lead times and higher costs, although it had not experienced constraints in semiconductor chips used in its probes.
- The company received $4.8 million of Bill & Melinda Gates Foundation funding in Q1 2022. The amount was restricted cash and deferred grant funding because contractual obligations had not yet commenced.
- Outstanding warrants totaled approximately 20.7 million, with an $11.50 exercise price and expiration on February 12, 2026, subject to earlier redemption or liquidation. Their fair value was $21.1 million at March 31, 2022.
- On February 16, 2022, a putative class action was filed alleging securities-law violations concerning statements about the company’s post-business-combination business and prospects. The company cannot estimate a potential loss.
- On March 9, 2022, Fujifilm Sonosite sued, alleging that certain Butterfly probes, accessories and software infringe patents. The company cannot predict the outcome or estimate a potential loss.
- Stock-based compensation was $8.7 million in Q1 2022, and outstanding restricted stock units increased substantially during the quarter, creating potential future dilution and non-cash expense.
Important facts for investors to verify
- Whether subscription growth and the higher subscription mix continue to improve recurring revenue quality and gross margins.
- The pace of cash consumption relative to the $359.9 million cash balance and management’s stated 12-month funding assessment.
- Execution against $103.8 million of inventory purchase commitments and the related vendor advances and accrued commitments.
- The effect of supply-chain inflation, component availability, warranty costs and inventory write-offs on product margins.
- The potential financial and operational impact of the securities class action and Fujifilm patent litigation, for which no loss estimate was provided.
- Future dilution from approximately 20.7 million warrants, options and restricted stock units, as well as continuing stock-based compensation.