BUTTERFLY NETWORK, INC.
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with the financial statements and
related notes included elsewhere in this Annual Report on Form 10-K. This
discussion contains forward-looking statements reflecting our current
expectations, estimates and assumptions concerning events and financial trends
that may affect our future operating results or financial position. Actual
results and the timing of events may differ materially from those contained in
these forward-looking statements due to a number of factors, including those
discussed in the sections entitled "Risk Factors" and "Cautionary Statement
Regarding Forward-Looking Statements" appearing elsewhere in this Annual Report
on Form 10-K.
Overview
We are an innovative digital health business transforming care with hand-held,
whole body ultrasound. Powered by our proprietary Ultrasound-on-Chip™
technology, our solution enables the acquisition of imaging information from an
affordable, powerful device that fits in a healthcare professional's pocket with
a unique combination of cloud-connected software and hardware technology that is
easily accessed through a mobile app.
Butterfly iQ+ is an ultrasound transducer that can perform whole-body imaging in
a single handheld probe using semiconductor technology. Our Ultrasound-on-Chip™
makes ultrasound more accessible outside of large healthcare institutions, while
our software is intended to make the product easy to use and fully integrated
with the clinical workflow, accessible on a user's smartphone, tablet, and
almost any hospital computer system connected to the Internet. Butterfly aims to
enable the delivery of imaging information anywhere at point-of-care to drive
earlier detection throughout the body and remote management of health
conditions. We market and sell the Butterfly system, which includes probes and
related accessories and software subscriptions, to healthcare systems,
physicians and healthcare providers through a direct sales force, distributors
and our eCommerce channel.
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Business Combination
On February 12, 2021 we completed the business combination with Longview (the
"Business Combination") pursuant to the terms of the Business Combination
Agreement, dated as of November 19, 2020 (the "Business Combination Agreement"),
by and among Longview Acquisition Corp. ("Longview" or "the Company"), Clay
Merger Sub, Inc. , a Delaware corporation ("Merger Sub"), and Butterfly
Network, Inc. , a Delaware corporation ("Legacy Butterfly"). The Business
Combination was approved by Longview's stockholders at its special meeting held
on February 12, 2021 . The transaction resulted in the Company being renamed to
"Butterfly Network, Inc. ," Legacy Butterfly being renamed "BFLY
Operations, Inc. " and the Company's Class A common stock and warrants to
purchase Class A common stock commencing trading on the New York Stock Exchange
("NYSE") on February 16, 2021 under the symbol "BFLY" and "BFLY WS",
respectively. As a result of the Business Combination, we received gross
proceeds of approximately $589 million .
COVID-19
The COVID-19 pandemic that began in 2020 has created significant global economic uncertainty. Uncertainty remains regarding the extent, timing and duration of the pandemic, including the emergence of new strains of the virus that may be more contagious or virulent and the extent to which the availability of vaccines and other safety measures will positively impact public health conditions. The uncertainty and potential economic volatility impact our customer base, supply chains, business practices and employees. The COVID-19 pandemic and its economic impact have caused financial strain on our customer base due to decreased funding and other revenue shortfalls. With the recent Delta and Omicron variant waves of infections, we have seen our customer base become further strained in solving immediate problems associated with the variants. As a result, some of our customers have had to shift their attention to these pressing issues, resulting in longer sales cycles and slower adoption in the near term. In addition, the issues originally brought on by COVID-19 continue to have an ongoing adverse impact on global supply chains, including ours. We have experienced constraints in availability, increasing lead times and costs required to obtain some inventory components. We have and will continue to implement operating efficiencies in our supply chain and manufacturing processes to help offset the cost increases in component parts for our device. The pandemic caused us to make modifications to our business practices, including work from home policies, establishing strict health and safety protocols for our offices specific to COVID-19 and imposing restrictions on employee travel. Our employees have resumed traveling to perform sales-generating and corporate activities, and we have opened our offices and have allowed employees at their discretion to return to our offices. We are designing and implementing a plan to allow employees to safely resume work in the office on a more regular basis. We continue to closely monitor the developments of COVID-19 for any material impact on our business. Given the uncertainty and potential economic volatility of the impact of the COVID-19 pandemic, the recent developments we have experienced may change based on new information that may emerge concerning COVID-19, the actions to contain it or address its impact and its economic impact on local, regional, national and international markets.
Key Performance Metrics
We review the key performance measures discussed below to evaluate the business and measure performance, identify trends, formulate plans and make strategic decisions. Units fulfilled
We define units fulfilled as the number of devices whereby control is transferred to a customer. We do not adjust this metric for returns as our volume of returns has historically been low. We view units fulfilled as a key indicator of the
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growth of our business. We believe that this metric is useful to investors because it presents our core growth and performance of our business period over period.
[[Image Removed: Graphic]]
Units fulfilled decreased by 839, or 11.1%, for the three months ended December
31, 2021 compared to the three months ended December 31, 2020 , primarily caused
by the positive impact of the launch of the Butterfly iQ+ and certain sales
initiatives in the prior year period and slowing sales in our e-commerce
channel. The decrease was partially offset by increased sales from our
veterinary, distributor and direct sales force channels.
Subscription Mix
We define subscription mix as a percentage of our total revenue recognized in a
reporting period that is subscription-based, consisting primarily of our
software as a service ("SaaS") offering. We view subscription mix as a key
indicator of the profitability of our business, and thus we believe that this
metric is useful to investors. Because the costs and associated expenses to
deliver our subscription offerings are lower as a percentage of sales than the
costs of sales of our products, we believe a shift towards subscription will
result in an improvement in profitability and margin expansion.
[[Image Removed: Graphic]]
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Subscription mix increased by 4.1 percentage points, to 24.1% for the three months endedDecember 31, 2021 compared to the three months endedDecember 31, 2020 . The increase was due to an increased volume of units fulfilled and corresponding licenses sold since the prior year and current year subscription renewals, as well as the timing of revenue recognition for our SaaS and other subscription contracts and the timing of units fulfilled during the quarter. Revenue from such contracts is deferred and recognized over the service period.
Non-GAAP Financial Measures
We present non-GAAP financial measures in order to assist readers of our consolidated financial statements in understanding the core operating results that our management uses to evaluate the business and for financial planning purposes. Our non-GAAP financial measures, Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA, provide an additional tool for investors to use in comparing our financial performance over multiple periods. Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA are key performance measures that our management uses to assess our operating performance. Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA facilitate internal comparisons of our operating performance on a more consistent basis. We use these performance measures for business planning purposes and forecasting. We believe that Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA enhance an investor's understanding of our financial performance as they are useful in assessing our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business. Our Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate these measures in the same manner. Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA are not prepared in accordance withU.S. GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance withU.S. GAAP. When evaluating our performance, you should consider Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA alongside other financial performance measures prepared in accordance withU.S. GAAP, including gross profit, gross margin, operating loss and net loss.
Adjusted Gross Profit and Adjusted Gross Margin
We calculate Adjusted Gross Profit as gross profit adjusted to exclude
depreciation and amortization, non-recurring changes to our warranty liability,
non-recurring losses on purchase commitments and non-recurring inventory
write-downs. We calculate Adjusted Gross Margin as gross margin adjusted to
exclude depreciation and amortization, non-recurring changes to our warranty
liability, non-recurring losses on purchase commitments and non-recurring
inventory write-downs.
Our changes in the warranty liability are excluded from gross profit and gross
margin when they are outside the normal course of operations for our business.
The non-recurring warranty liability adjustments are for changes in our warranty
policy resulting from a shift in product lines that impacted our estimate of
future warranty costs.
We also exclude from gross profit and gross margin non-recurring losses on
purchase commitments and non-recurring inventory write-downs when they are
outside the normal course of business and in the period the expenses are
incurred. The non-recurring losses on purchase commitments relate to inventory
supply agreements where the expected losses exceed the benefit of the contracts,
and the non-recurring inventory write-down adjustments are for excess and
obsolete inventory resulting from a shift in product lines.
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The following table reconciles Adjusted Gross Profit to gross profit and
Adjusted Gross Margin to gross margin, the most directly comparable financial
measures calculated and presented in accordance with
Years ended December 31,
2021 2020 2019
Revenue $ 62,565 $ 46,252 $ 27,583
Cost of revenue 45,511 107,475 48,478
Gross profit $ 17,054 $ (61,223) $ (20,895)
Gross margin 27.3% (132.4)% (75.8)%
Add:
Depreciation and amortization 536 140 16
Warranty liability policy change (560) - -
Loss on purchase commitments 13,965 60,113 9,500
Inventory write-downs 582 2,570 -
Adjusted gross profit $ 31,577 $ 1,600 $ (11,379)
Adjusted gross margin 50.5% 3.5% (41.3)%
Adjusted EBITDA
We calculate Adjusted EBITDA as net loss adjusted to exclude interest income,
interest expense, changes in the fair value of warrant liabilities, other
expense, net, provision for income taxes, stock-based compensation, depreciation
and amortization and other non-recurring items. The other non-recurring items
include costs related to our executive transition, adjustments for the warranty
liability policy changes, discretionary transaction bonuses, non-recurring
losses on purchase commitments, non-recurring inventory write-downs and other
fees incurred with the close of the Business Combination.
Our non-recurring discretionary bonuses are excluded from Adjusted EBITDA when
they are outside the normal course of operations for our business and were given
at the discretion of management due to the completion of the Business
Combination. The non-recurring costs related to the executive transition include
one-time severance and bonus payments and the recruiting expenses for our
current CEO. The non-recurring warranty liability adjustments are for changes in
our warranty policy resulting from a shift in product lines that impacted our
estimate of future warranty costs. The non-recurring losses on purchase
commitments relate to inventory supply agreements where the expected losses
exceed the benefit of the contracts and the non-recurring inventory write-down
adjustments are for excess and obsolete inventory resulting from a shift in
product lines. The non-recurring impairment relates to other long term assets
that are not expected to be utilized in subsequent periods.
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The following table reconciles Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance withU.S. GAAP: Years ended December 31, (In thousands) 2021 2020 2019 Net loss$ (32,409) $ (162,745) $ (99,697) Interest income (2,573) (285) (2,695) Interest expense 651 1,141 -
Change in fair value of warrant liabilities (161,095) -
-
Other expense, net 2,577 231 96
Provision for income taxes 121 39 -
Stock based compensation 47,798 11,004 6,038
Depreciation and amortization 2,090 1,316 758
CEO transition costs 5,398 - -Warranty liability policy change (560) -
-
Transaction bonus 1,653 - -
Impairments - 1,390 -
Loss on purchase commitments 13,965 60,113 9,500
Inventory write-downs 582 2,570 -
Adjusted EBITDA $ (121,802) $ (85,226) $ (86,000) Description of Certain Components of Financial Data
Revenue
Revenue consists of revenue from the sale of products, such as medical devices and accessories, and related services, classified as subscription revenue on our consolidated statements of operations and comprehensive loss, which are SaaS subscriptions and Support. SaaS subscriptions include licenses for teams and individuals as well as enterprise level subscriptions. For sales of products, which include the ultrasound devices and any ultrasound device accessories, revenue is recognized at a point in time upon transfer of control to the customer. SaaS subscriptions and Support are generally related to stand-ready obligations and are recognized ratably over time. Over time as adoption of our devices increases through further market penetration and as practitioners in the Butterfly network continue to use our devices, we expect our annual revenue mix to shift more toward subscriptions. The quarterly revenue mix may be impacted by the timing of device sales.
Cost of revenue
Cost of product revenue consists of product costs including manufacturing costs,
personnel costs and benefits, inbound freight, packaging, warranty replacement
costs, payment processing fees and inventory obsolescence and write-offs. We
expect our cost of product revenue to fluctuate over time due to the level of
units fulfilled in any given period and decrease as a percentage of revenues
over time as we focus on operational efficiencies in our supply chain and take
appropriate pricing actions. Additionally, we expect there will continue to be
supply constraints; our suppliers are continuing to raise prices and may
continue to raise prices in the future, which we may not be able to offset
through pricing actions and manufacturing efficiencies. In 2021, due to supply
constraints, many of our suppliers increased costs but we were largely able to
offset these costs. Furthermore, as the Company has new product releases, the
costs incurred may fluctuate as the costs of new products may be greater than
previous product releases.
Cost of subscription revenue consists of personnel costs, cloud hosting costs
and payment processing fees. Because the costs and associated expenses to
deliver our SaaS offerings are less than the costs and associated expenses of
manufacturing and selling our device, we anticipate an improvement in
profitability and margin expansion over time as our revenue mix shifts
increasingly towards subscriptions. We plan to continue to invest additional
resources into our products to expand and further develop our SaaS offerings.
The level and timing of investment in these areas could affect our cost of
subscription revenue in the future. We expect the cost of subscription revenue
to increase as a percentage of subscription
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revenue in the near term due to the investments we are making, but will continue to be lower than the cost of product revenue as a percentage of product revenue.
Loss on product purchase commitments relates to inventory supply agreements where the expected losses exceed the benefit of the contracts. We consider a variety of factors and data points when determining the existence and scope of a loss for the minimum purchase commitment. The factors and data points include Company-specific forecasts which are reliant on our limited sales history, agreement-specific provisions, macroeconomic factors and market and industry trends. Determining the loss is subjective and requires significant management judgment and estimates. Future events may differ from those assumed in our assessment, and therefore the loss may change in the future.
Research and development (R&D)
Research and development expenses primarily consist of personnel costs and benefits, facilities-related expenses, depreciation expense, consulting and professional fees, fabrication services, software and other outsourcing expenses. Most of our research and development expenses are related to developing new products and services and improving existing products and services, which we define as not having reached the point of commercialization, and improving our products and services that have been commercialized. Consulting expenses are related to general development activities and clinical/regulatory research. Fabrication services include certain third-party engineering costs, product testing and test boards. Research and development expenses are expensed as incurred. We expect to continue to make substantial investments in our product development, clinical and regulatory capabilities. Prospectively on an annual basis, we expect research and development spending to increase in absolute dollars in the near term and then fluctuate over time due to the level and timing of our product development efforts. In the near term, we expect research and development expenses as a percentage of revenue to increase on an annual basis. On a quarterly basis, we expect research and development expenses as a percentage of revenue will fluctuate given the level and timing of the product development efforts as well the amount of revenue recognized in
a
period.
Sales and marketing
Sales and marketing expenses primarily consist of personnel costs and benefits,
third party logistics, fulfillment and outbound shipping costs, digital
marketing, advertising, promotional, as well as conferences, meetings and other
events and related facilities and information technology costs. We expect our
sales and marketing expenses to increase in absolute dollars in the long term as
we continue to increase the size of our direct sales force and sales support
personnel and expand into new products and markets. We expect our sales and
marketing expenses will also increase in the near term as we promote our brand
through marketing and advertising initiatives, expand market presence and hire
additional personnel to drive penetration and generate leads. In the near term,
we expect that sales and marketing expenses as a percentage of revenues will
increase on an annual basis and then fluctuate over time as we evaluate
expansion opportunities. On a quarterly basis, we expect sales and marketing
expenses as a percentage of revenue may fluctuate given the level and timing of
the sales and marketing initiatives as well the amount of revenue recognized in
a period.
General and administrative
General and administrative expenses primarily consist of personnel costs and
benefits, insurance, patent fees, software costs, facilities costs and outside
services. Outside services consist of professional services, legal and other
professional fees. We expect our general and administrative expenses to increase
in absolute dollars in the foreseeable future. In the near term, we anticipate
general and administrative expenses as a percentage of revenue will decrease on
an annual basis. On a quarterly basis we expect it to fluctuate over time due to
the timing and amount of these expenses as well the amount of revenue recognized
in a period.
Results of Operations
We operate as a single reportable segment to reflect the way our chief operating
decision maker ("CODM") reviews and assesses the performance of the business.
The accounting policies are described in Note 2 "Summary of Significant
Accounting Policies" in our consolidated financial statements included in this
Annual Report on Form 10-K.
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Year ended December 31,
2021 2020 2019
% of % of % of
(in thousands) Dollars revenue Dollars revenue Dollars revenue Revenue: Product$ 47,868 76.5 %$ 38,347 82.9 %$ 25,081 90.9 % Subscription 14,697 23.5 % 7,905 17.1 % 2,502 9.1 %
Total revenue:$ 62,565 100.0 %$ 46,252 100.0 %$ 27,583 100.0 % Cost of revenue: Product 29,308 46.8 % 46,294 100.1 % 38,357 139.1 % Subscription 2,238 3.6 % 1,068 2.3 % 621 2.3 % Loss on product purchase commitments 13,965 22.3 % 60,113 130.0 % 9,500 34.4 %
Total cost of revenue:
$ 17,054 27.3 %$ (61,223)
(132.4) %
Operating expenses: Research and development 74,461 119.0 % 49,738 107.5 % 48,934 177.4 % Sales and marketing 49,604 79.3 % 26,263 56.8 % 14,282 51.8 % General and administrative 85,717 137.0 % 24,395 52.7 % 18,185 65.9 % Total operating expenses$ 209,782 335.3 %$ 100,396 217.1 %$ 81,401 295.1 %
Loss from operations
2,573 4.1 % 285 0.6 % 2,695 9.8 %
Interest expense (651) (1.0) % (1,141) (2.5) % - - %
Change in fair value of
warrant liabilities 161,095 257.5 % - - % - - %
Other income (expense), net (2,577) (4.1) % (231) (0.5) % (96) (0.3) %
Loss before provision for
income taxes $ (32,288) (51.6) % $ (162,706) (351.8) %
Provision for income taxes 121 0.2 % 39
0.1 % - - % Net loss$ (32,409) (51.8) %$ (162,745) (351.9) %$ (99,697) (361.4) %
Comparison of the Years Ended
Revenue
Year ended December 31,
(in thousands) 2021 2020 Change % Change
Revenue:
Product $ 47,868 $ 38,347 $ 9,521 24.8 %
Subscription 14,697 7,905 6,792 85.9 %
Total revenue: $ 62,565 $ 46,252 $ 16,313 35.3 %
Total revenue increased by
Product revenue increased by$9.5 million , or 24.8%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase in product revenue was primarily driven by a higher volume of Butterfly iQ+ probes sold, as a result of our increased investment in our sales and marketing efforts domestically and internationally. In addition, product revenue was positively impacted as we were able to sell our probes for higher prices due to a unit price increase beginning in the third quarter and reduced discounting in the contract. For the year endedDecember 31, 2020 , product revenue was positively impacted by COVID-19, as the Butterfly iQ was utilized in the monitoring of acute symptoms of COVID-19, although we are unable to measure precisely the positive impact of COVID-19 on our revenue for the year endDecember 31, 2020 . 77 Table of Contents Subscription revenue increased by$6.8 million , or 85.9%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase was driven by an increased volume of our SaaS subscriptions sold in conjunction with sales of our devices, as well as the current year subscription renewals. Cost of revenue Year ended December 31, (in thousands) 2021 2020 Change % Change Cost of revenue: Product$ 29,308 $ 46,294 $ (16,986) (36.7) % Subscription 2,238 1,068 1,170 109.6 %
Loss on product purchase commitments 13,965 60,113
(46,148) (76.8) % Total cost of revenue:$ 45,511 $ 107,475 $ (61,964) (57.7) % Percentage of revenue 72.7 % 232.4 %
Cost of product revenue decreased by$17.0 million , or 36.7%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This decrease was driven by the sale of our second generation product, the Butterfly iQ+, which is less costly to produce. The overall decrease of product cost of revenue was primarily driven by decreases in product costs of$9.2 million , a decrease in warranty expense of$1.9 million and a decrease in net realizable value inventory adjustments and excess and obsolete inventory charges of$7.7 million . The decreases were partially offset by an increase in component product costs related to global supply chain constraints of$1.2 million and an increase in royalty fees due to increased sales of the Butterfly iQ+ of$0.6 million . Cost of subscription revenue increased by$1.2 million , or 109.6%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This increase was primarily driven by increased cloud hosting costs and amortization expenses.
Loss on product purchase commitments decreased by
The decrease is primarily due to a lower purchase commitment loss based on an estimate of future excess inventory related to an agreement with a certain third-party vendor of$39.1 million . Additionally, the decrease is due to the non-recurrence of losses on purchase commitments with other third-party vendors recorded in the prior year of$7.0 million .
Research and development
Year ended December 31,
(in thousands) 2021 2020 Change %Change
Research and development
49.7 % Percentage of revenue 119.0 % 107.5 % Research and development expenses increased by$24.7 million , or 49.7%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This increase was primarily driven by increases in personnel costs including stock-based compensation expense of$19.8 million , an increase in software costs of$1.2 million and an increase in professional service fees of$3.5 million as we continue to invest in expanding our overall product development capabilities and resources. Sales and marketing Year ended December 31, (in thousands) 2021 2020 Change % Change Sales and marketing$ 49,604 $ 26,263 $ 23,341 88.9 % Percentage of revenue 79.3 % 56.8 %
Sales and marketing expenses increased by
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based compensation of $14.8 million , an increase in demand generation costs of
$4.7 million due to investments made to promote sales growth, an increase in
travel and entertainment costs of $1.1 million related to internal and external
events and an increase in professional service fees of $1.4 million to support
our sales and marketing efforts.
General and administrative
Year ended December 31,
(in thousands) 2021 2020 Change % Change
General and administrative $ 85,717 $ 24,395 $ 61,322 251.4 %
Percentage of revenue 137.0 % 52.7 %
General and administrative expenses increased by$61.3 million , or 251.4%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This increase is primarily due to an increase in stock-based compensation expense of$26.8 million due to the additional awards granted and the performance condition for certain restricted stock units being achieved upon the Closing of the Business Combination. In addition to stock-based compensation, the increase was primarily driven by increased personnel costs of$18.6 million due to investments made to scale up our back-office support and executive functions, certain costs with regards to our CEO transition, an increase in recruiting expense of$3.5 million , an increase in professional services of$6.6 million , an increase in software costs of$1.7 million and an increase in other general and administrative costs incremental to being a publicly traded company of$3.3 million . Loss from operations Year ended December 31, (in thousands) 2021 2020 Change % Change Loss from operations$ (192,728) $ (161,619) $ (31,109) 19.2 % Percentage of revenue (308.0) % (349.4) % Loss from operations increased by$31.1 million , or 19.2%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This increase was primarily a result of increases in operating expenses of$109.4 million partially offset by an increase in gross profit of$78.3 million . The increase in gross profit was primarily due to a higher volume of sales, lower cost of product revenue and lower losses on purchase commitments. Net loss Year ended December 31, (in thousands) 2021 2020 Change % Change Net loss$ (32,409) $ (162,745) $ 130,336 (80.1) % Percentage of revenue (51.8) % (351.9) %
Net loss decreased by$130.3 million , or 80.1%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . This decrease in net loss was primarily a result of the gain for the change in the fair value of the warrant liabilities of$161.1 million . The warrant liabilities were recorded as part of the Business Combination and therefore did not exist in the prior year. The gain was partially offset by the increased loss from operations of$31.1 million .
Comparison of the Years Ended
Certain items in the prior year's consolidated financial statements have been
reclassified to conform to the current year presentation reflected in the
consolidated financial statements. We reclassified the loss on product purchase
commitments that was recorded within cost of product revenue on the consolidated
statement of operations and comprehensive loss to be presented separately.
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Revenue
Year ended December 31,
(in thousands) 2020 2019 Change % Change
Revenue:
Product $ 38,347 $ 25,081 $ 13,266 52.9 %
Subscription 7,905 2,502 5,403 215.9 %
Total revenue: $ 46,252 $ 27,583 $ 18,669 67.7 %
Total revenue increased by
Product revenue increased by$13.3 million , or 52.9%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase in product revenue was primarily driven by a higher volume of Butterfly iQ probes sold, as a result of our increased investment in our sales and marketing efforts. Subscription revenue increased by$5.4 million , or 215.9%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase was driven by an increased volume of our SaaS subscriptions sold in conjunction
with
sales of our devices.
Cost of revenue
Year ended December 31,
(in thousands) 2020 2019 Change % Change
Cost of revenue:
Product $ 46,294 $ 38,357 $ 7,937 20.7 %
Subscription 1,068 621 447 72.0 %Loss on product purchase commitments 60,113 9,500
50,613 532.8 % Total cost of revenue:$ 107,475 $ 48,478 $ 58,997 121.7 % Percentage of revenue 232.4 % 175.8 % Cost of product revenue increased by$7.9 million , or 20.7%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . This increase was primarily driven by a$6.9 million increase in costs as a result of increased volume of devices sold and$2.6 million in non-recurring inventory write-downs.
Cost of subscription revenue increased by
Loss on product purchase commitments increased by$50.6 million , or 532.8%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . During 2019, we signed a multi-year inventory supply arrangement with a certain third party manufacturing vendor. The agreement includes a vendor advance payment that was written down during the year endedDecember 31, 2019 , resulting in a$9.5 million loss on purchase commitments. Based on the assessment of our demand forecast and agreement specific provisions, we also recognized a$53.2 million loss during the year endedDecember 31, 2020 related to minimum purchase commitments for inventory that is expected to not be sold through. In addition, as a result of a shift in production from the Butterfly iQ to the Butterfly iQ+, we renegotiated certain inventory purchase commitments with other third party manufacturing vendors and as a result we recognized the expected losses on those commitments of$7.0 million for the year endedDecember 31, 2020 . Research and development Year ended December 31, (in thousands) 2020 2019 Change % Change Research and development$ 49,738 $ 48,934 $ 804 1.6 % Percentage of revenue 107.5 % 177.4 % 80 Table of Contents Research and development expenses increased by$0.8 million , or 1.6%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . This increase was primarily driven by increased personnel costs of$7.2 million as we continue to invest in expanding our internal research capabilities. These expenses were partially offset by lower spending on consulting of$1.8 million , travel costs of$1.4 million , fabrication of$2.6 million and other research and development costs of$0.6 million . Sales and marketing Year ended December 31, (in thousands) 2020 2019 Change % Change Sales and marketing$ 26,263 $ 14,282 $ 11,981 83.9 % Percentage of revenue 56.8 % 51.8 %
Sales and marketing expenses increased by$12.0 million , or 83.9%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . This increase was primarily driven by higher personnel cost and benefits of$9.3 million associated with increases in sales and sales personnel and higher demand generation costs of$2.5 million due to investments made to promote
sales
growth.
General and administrative
Year ended December 31,
(in thousands) 2020 2019 Change % Change
General and administrative $ 24,395 $ 18,185 $ 6,210 34.1 %
Percentage of revenue 52.7 % 65.9 %
General and administrative expenses increased by $6.2 million , or 34.1%, for the
year ended December 31, 2020 compared to the year ended December 31, 2019 . This
increase was primarily driven by increased personnel costs of $4.8 million due
to investments made to scale up our back-office support and executive functions,
increased consulting and professional services of $0.9 million and an increased
bad debt expense of $0.6 million .
Loss from operations
Year ended December 31,
(in thousands) 2020 2019 Change % Change
Loss from operations $ (161,619) $ (102,296) $ (59,323) 58.0 %
Percentage of revenue (349.4) % (370.9) %
Loss from operations increased by $59.3 million , or 58.0%, for the year ended
December 31, 2020 compared to the year ended December 31, 2019 . This increase
was primarily a result of a gross margin decrease of $40.3 million and increases
in operating expenses of $19.0 million . The decrease in gross margin was
primarily due to losses from purchase commitments of $60.1 million in the year
ended December 31, 2020 , partially offset by an increase of $10.3 million in
margin on products and subscription revenue items and $9.5 million in vendor
advance write-downs in the prior year.
Net loss
Year ended December 31,
(in thousands) 2020 2019 Change % Change
Net loss $ (162,745) $ (99,697) $ (63,048) 63.2 %
Percentage of revenue (351.9) % (361.4) %
Net loss increased by$63.0 million , or 63.2%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . This increase was primarily a result of a higher operating loss of$59.3 million and lower interest income of$2.4 million . 81 Table of Contents
Liquidity and Capital Resources
Since our inception, our primary sources of liquidity are cash flows from operations and issuances of preferred stock and convertible notes. In addition, onFebruary 12, 2021 , we completed the Business Combination, and as a result we received gross proceeds of approximately$589 million . Our primary uses of liquidity are operating expenses, working capital requirements and capital expenditures. Cash flows from operations have been historically negative as we continue to develop new products and services and increase our sales and marketing efforts. We expect to be cash flow negative on an annual basis, although we may have quarterly results where cash flows from operations are positive. We expect to continue to incur losses from operations, as we continue to invest in research and development of our products and in sales and marketing efforts into expanding new markets and verticals as well as continued efforts in existing markets and verticals. We expect that the funds raised in connection with the Business Combination and cash flows from operations will be sufficient to meet our liquidity, capital expenditure, and anticipated working capital requirements and fund our operations for at least the next 12 months. We expect to use the funds raised in connection with the Business Combination to scale our sales and marketing capabilities, develop new products and services and for working capital and general corporate purposes. Our cash and cash equivalents balance as ofDecember 31, 2021 was$422.8 million . Our future capital requirements may vary from those currently planned and will depend on various factors, including our rate of revenue growth and the timing and extent of spending on strategic business initiatives.
We have restricted cash of
Our material cash requirements include our facility lease arrangements for office space and inventory purchase obligations. As ofDecember 31, 2021 , we had fixed lease payment obligations of$42.6 million , with$2.0 million payable within 12 months. The purchase obligations are primarily related to contracts for key inventory components in our manufacturing process. As ofDecember 31, 2021 , we had fixed purchase obligations of$116.1 million , with$62.2 million payable within 12 months. We expect to pay for approximately half of the fixed purchase obligations payable within the next twelve months using vendor advances. As ofDecember 31, 2021 , we had no obligations, assets or liabilities, which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Cash flows
The following table summarizes our sources and uses of cash for the years ended
Year ended December 31,
(in thousands) 2021 2020
2019
Net cash used in operating activities$ (189,187) $ (81,700) $ (120,432) Net cash used in investing activities (9,870) (2,376)
(4,468)
Net cash provided by financing activities 565,692 54,280
324
Net (decrease) increase in cash, cash equivalents and restricted cash$ 366,635 $ (29,796)
$ (124,576) 82 Table of Contents
Comparison of the period for the years ended
Cash flows used in operating activities
Net cash used in operating activities represents the cash receipts and disbursements related to our activities other than investing and financing activities. We expect cash provided by financing activities such as the Business Combination will continue to be our primary source of funds to support operating needs and capital expenditures for the foreseeable future. Net cash used in operating activities increased by$107.5 million , or 131.6%, for the year endedDecember 31, 2021 compared to year endedDecember 31, 2020 . The increase in net cash used in operating activities was due to a$65.6 million increase in accrued purchase commitments resulting from increased purchases of inventory components and purchase commitment losses recorded during the period. This increase was partially offset by a decrease of$12.2 million in inventories due to the costs of revenue recognized during the period. The increase in net cash used in operating activities was also due to an$10.6 million increase in prepaid expenses and other assets to be used in operations, as well as a$30.8 million increase in accounts payable and accrued expenses due to the timing of expenses and payments. Additionally, there was a$138.7 million increase in adjustments to reconcile net loss partially offset by a$130.3 million decrease in net losses. The increase in the adjustments to reconcile net loss was primarily due to the change in fair value of warrant liabilities of$161.1 million .
Cash flows used in investing activities
Net cash used in investing activities increased by$7.5 million , or 315.4%, for the year endedDecember 31, 2021 compared to year endedDecember 31, 2020 . The increase was primarily due to an increase of$5.5 million in purchases of property and equipment to support the growth and scaling of the business. The increase was also due to the investment activity for the funds received from the Business Combination.
Cash flows provided by financing activities
Net cash provided by financing activities increased by$511.4 million or 942.2%, for the year endedDecember 31, 2021 compared to year endedDecember 31, 2020 . The increase was primarily due to net proceeds from the Business Combination of$548.4 million . Additionally, the proceeds from the exercise of stock options increased by$19.7 million , which was partially offset by a$4.4 million repayment of a loan under the Paycheck Protection Program that was issued in fiscal 2020, the non-recurrence of$50.0 million of proceeds from the issuance of convertible debt in fiscal 2020 and$4.4 million of proceeds from the loan payable issued in fiscal 2020.
Comparison of the period for the years ended
Cash flows used in operating activities
Net cash used in operating activities decreased by$38.7 million , or 32.2%, to$81.7 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The decrease in net cash used in operating activities resulted from higher outstanding liabilities of$58.9 million and lower vendor advances of$50.2 million due to a spending ramp in 2019 that did not recur in 2020. The higher outstanding liabilities consisted of a purchase commitments accrual of$42.6 million due to minimum purchase commitments for inventory that could not be sold through, as well as higher accrued expenses and other liabilities of$8.7 million and accounts payable of$8.6 million resulting from the timing of payments. The decrease in net cash used in operating activities was also due to an increase of non-cash charges of$14.0 million . The increase of$14.0 million was primarily the result of an increase in stock-based compensation expense of$5.0 million and an increase in inventory write-downs of$4.4 million as well as an impairment charge of$1.4 million for other long term assets. The offsetting decrease resulted from an increase in net loss of$63.0 million on a year over year basis and increases in cash used for inventory and accounts receivable of$22.1 million and$3.2 million , respectively. The increase in cash used for inventory is due to maintaining higher levels of inventory on hand for expected sales growth in future years. 83
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Cash flows used in investing activities
Net cash used in investing activities decreased by$2.1 million , or 46.8%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The decrease was due to our lower spending on machinery and equipment and leasehold improvements.
Cash flows provided by financing activities
For the year endedDecember 31, 2020 , net cash provided by financing activities was$54.3 million , reflecting net proceeds from the issuance of$47.9 million in convertible debt, proceeds received of$4.4 million under the Paycheck Protection Program and proceeds of$2.0 million from the exercise of stock options.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). The process of preparing financial statements in conformity withU.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the period. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We evaluate our assumptions, judgments and estimates on a regular basis.
Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.
While our significant accounting policies are described in more detail in Note 2 "Summary of Significant Accounting Policies" in our consolidated financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements. Revenue recognition We generate revenue from the sale of products and subscriptions. Our contracts with customers often include multiple performance obligations. Generally, we have identified the following performance obligations can be promised in our contracts with customers:
· Hardware devices and accessories;
· Maintenance and support for the software that is used in
connection with the hardware devices, including the right to an
unspecified number of software updates as and when available;
· Cloud-based software subscriptions, which represent an obligation
to provide the customer with ongoing access to our hosted
software applications on a continuous basis throughout the
subscription period;
· Implementation and integration services; and
· Extended warranties. Transaction price is allocated to all identified performance obligations based on relative standalone selling prices of the underlying goods or services. For most performance obligations except certain services, we have an observable standalone selling price. We use estimation techniques, which require significant judgment, to estimate the standalone selling price for goods and services for which an observable selling price is not available. Our sales of hardware devices represent a bundled sale of a good and a service that includes two performance obligations. We have an observable standalone selling price for the bundle and estimate the standalone selling price of the performance obligations within the bundle using estimation techniques that maximize the
use
of observable inputs.
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Each unit of hardware devices and accessories is a performance obligation
satisfied at a point in time, usually upon transfer of control of the good to
the customer. Our services, including the cloud-based software subscriptions,
extended warranties, and support and maintenance, are stand-ready obligations
that are satisfied over time. We use the time elapsed (straight-line) measure of
progress to recognize revenue.
We account for the warranty as an assurance type warranty. At the time revenue
is recognized, an estimate of future warranty costs is recorded as a component
of cost of revenue and as liability in accrued expenses. Factors that affect the
warranty obligation include historical as well as current product failure rates,
service delivery costs incurred in correcting product failures, and warranty
policies and business practices.
Our contracts with customers include variable consideration in the form of refunds and credits for product returns and price concessions. We estimate variable consideration using the expected value method based on a portfolio of data from similar contracts.
Stock-based compensation Our stock-based compensation program includes restricted stock units and stock option grants to our employees, directors and consultants. Stock options are granted at exercise prices not less than the fair market value of our common stock at the dates of grant. For purposes of restricted stock unit grants, the grant date fair value is calculated as the fair market value of the stock on the date of grant. Stock-based compensation expense is recognized over the requisite service periods of awards, which is typically three to four years. We do not apply a forfeiture rate assumption to our awards. The fair values of stock option grants are estimated using a Black-Scholes option-pricing model. Key inputs and assumptions include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, stock price and exercise price. Many of the assumptions require significant judgment and changes in assumptions could have a significant impact in the determination of stock-based compensation expense.
No related tax benefits of the stock-based compensation expense have been recognized and no related tax benefits have been realized from the exercise of stock options due to our net operating loss carryforwards.
Inventory and inventory valuation
Inventories are stated at the lower of actual cost, determined using the average
cost method, or net realizable value ("NRV"). We routinely evaluate quantities
and value of our inventories in light of current market conditions and market
trends and record a write-down against the cost of inventories for NRV below
cost. NRV is based upon an estimated average selling price reduced by the
estimated costs of completion, disposal, and transportation. The determination
of NRV involves numerous judgments including estimating selling prices, existing
customer orders, and estimated costs of completion, disposal, and
transportation. If actual market conditions differ from our estimates, future
results of operations could be materially affected. We reduce the value of our
inventory for estimated obsolescence or lack of marketability by the difference
between the cost of the affected inventory and the estimated market value.
The valuation of inventory also requires us to estimate excess and obsolete
inventory. We periodically review the age, condition and turnover of our
inventory to determine whether any inventory has become obsolete or has declined
in value and incur a charge to operations for known and anticipated inventory
obsolescence. We also consider the rate at which new products will be accepted
in the marketplace and how quickly customers will transition from older products
to newer products, including whether older products can be re-manufactured into
new products. The evaluation also takes into consideration new product
development schedules, the effect that new products might have on the sale of
existing products, product obsolescence, product merchantability and other
factors. Market conditions are subject to change and if actual market conditions
are less favorable than those projected by management, additional inventory
write-downs may be required, which would have a negative impact on gross margin.
Losses expected to arise from firm, non-cancelable and unhedged commitments for
the future purchase of inventory items are recognized unless the losses are
recoverable through firm sales contracts or other means. We consider a variety
of
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factors and data points when determining the existence and scope of a loss for the minimum purchase commitment. The factors and data points include Company-specific forecasts which are reliant on our limited sales history, agreement-specific provisions, macroeconomic factors and market and industry trends. Determining the loss is subjective and requires significant management judgment and estimates. Future events may differ from those assumed in our assessment, and therefore the loss may change in the future. We capitalize manufacturing overhead expenditures as part of inventory costs. Capitalized costs primarily include management's best estimate and allocation of the direct labor, materials costs and other overhead costs incurred related to inventory acquired or produced but not sold during the respective period.
Manufacturing overhead costs are capitalized to inventory and are recognized as cost of revenues in future periods based on our rate of inventory turnover.
Recently Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 "Summary of Significant Accounting Policies - Recent Accounting Pronouncements Adopted" to our consolidated financial statements contained in this Annual Report on Form 10-K.
Emerging Growth Company
We were an "emerging growth company", as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). However, based on the market value of our common stock held by non-affiliates as ofJune 30, 2021 , we became a large accelerated filer and thus ceased to be an emerging growth company onDecember 31, 2021 . As a result, we were required to adopt new or revised accounting standards as required by public companies, including those standards which we had previously deferred pursuant to the JOBS Act. Additionally, we are no longer able to take advantage of the reduced regulatory and reporting requirements of emerging growth companies.
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